Prepared and presented by Phoenix
The company’s success was based on artificially inflated profits, dubious accounting practices, and – some say – fraud.
•In 1985 Enron was born from the merger of Houston Natural Gas and InterNorth.
•Started trading futures in Gas Contracts.
•Soon got the control of over 25% of the all Gas business.
“Mid 1980s: Enron business entirely in the USA, focused on gas pipelines and power”
•Entered into the derivatives business. •Began trading in commodities like steel, coal, weather risk etc. •By 2000, even stepped into the dot.com business.
“2001: Enron trading in hundreds of commodities Interests in: USA, South America, Europe, Asia and Australia”
•Entered into the derivatives business. •Began trading in commodities like steel, coal, weather risk etc. •By 2000, even stepped into the dot.com business.
“2001: Enron trading in hundreds of commodities Interests in: USA, South America, Europe, Asia and Australia”
•Global energy crises by late 90s. •In India, lost the Dabhol Power project, in which Enron had committed $2.9bn. •Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal. •Enron delivered smoothly growing earnings (but not cash flows).
•Global energy crises by late 90s.
•In India, lost the Dabhol Power project, in which Enron had committed $2.9bn. •Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal. •Enron delivered smoothly growing earnings (but not cash flows).
•Global energy crises by late 90s.
•In India, lost the Dabhol Power project, in which Enron had committed $2.9bn.
•Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal. •Enron delivered smoothly growing earnings (but not cash flows).
•Global energy crises by late 90s.
•In India, lost the Dabhol Power project, in which Enron had committed $2.9bn.
•Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal.
•Enron delivered smoothly growing earnings (but not cash flows).
•Global energy crises by late 90s.
•In India, lost the Dabhol Power project, in which Enron had committed $2.9bn.
•Beginning of Dot.Com bubble crises and fallout of blockbuster internet deal.
•Enron delivered smoothly growing earnings (but not cash flows).
•Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading companies
•During 2000, Enron’s derivatives-related assets increased from $2.2bln to $12bln and derivates-related liabilities increased from $1.8bln to $10.5bln •Enron’s top management gave it’s managers a blank order to “just do it”
•Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading companies
•During 2000, Enron’s derivatives-related assets increased from $2.2bln to $12bln and derivatesrelated liabilities increased from $1.8bln to $10.5bln
•Enron’s top management gave it’s managers a blank order to “just do it”
•Enron was a trading company, yet was given very high PE of 70 as compared to PE of 20, given to other trading companies •During 2000, Enron’s derivatives-related assets increased from $2.2bln to $12bln and derivates-related liabilities increased from $1.8bln to $10.5bln
•Enron’s top management gave it’s managers a blank order to “just do it”
•May, 2001 – Mr. Baxter, the Vice Chairman resigns.
•14th Aug, 2001 – Jeff Skilling resigned as CEO. •Stock had already fallen to $30 from $90 in Feb, 2001. •Oct, 2001 – Moody’s downgraded Enron’s debt.
•8th Nov, 2001 – Told investors that they were restating earnings for past 4 and ¾ years. •By end of Nov, 2001 stock reached $0.3 falling from its peak price $90 in just 8 months. •2nd Dec, 2001 – Filed Bankruptcy.
ENRON
Producer
Energy producer fears warm weather. Pays Enron to hedge against the collapse of demand and prices due to warm weather.
Consumers
Electricity company fears cold weather. Pays Enron to hedge against rise in price and demand due to cold weather.
Profits
Enron, as market maker, profits by taking commission on hedge in both eventualities.
“Kenneth Lay himself had strong personal ties to two Republican Presidents” Total donations during 1989-2001 amounted $1,133,981 ($1.1mn)
SENATE
HOUSE OF REPS
4
ENRON
5
3
Special Purpose Entity (SPE)
Account In Profit
2 1 Partnership
1. Enron sets up partnership using stock as funding 2. Partnership sets up SPE 3. SPE agrees contract to pay Enron if its investment declines in value 4. Payment made as investment declines 5. Payment posted as profit, even though it is Enron’s own money
“”
A huge hole had opened in the accounts. -BBC
4 3 2 1 0 -1 -2 3 6 9 months months months Year 1998 1999 2000 2001
Negative Cash Flows: 1st three quarters in 1999, 2000 & 2001
•Sherron Watkins, an Enron vice-president, wrote an anonymous letter to Kenneth Lay setting out her fears of an impending scandal. •Fearing the predictable collapse she ordered Enron's lawyers to conduct an investigation into the partnerships. •Mr. Lay was also moving to reassure the markets. He was doing all he could to "restore investor confidence" he told staff and shareholders.
•But amid the selling, Mr. Lay himself joined the crowd as he exercised options on 83,000 shares worth almost $2m.
•Andersen executives including chief Enron auditor David Duncan, decided to consult lawyers over whether or not the partnerships were legal.
•Andersen told Enron that it had no other choice but to change the way it was accounting for its special partnerships. •At some point after this, staff in Andersen’s Houston office began shredding documents relating to Enron.
•Arthur Andersen was one of the world’s five leading accounting firms.
•Legal examination of Sherron Watkins's concerns concluded that the partnerships in question, Raptor and Condor, had been approved by Andersen. •Was paid $52mn in 2000, the majority for non-audit related consulting services.
Enron’s Accounts: The Company announced the restated figures
Year 1997
Reported Income $105m
Revised Income $77m
True debt restated by Up $771m
True equity restated by Down $258m
1998
1999
$733m
$893m
$600m
$645m
Up $561m
Up $685m
Down $391m
Down $710m
2000
$979m
$880m
Up $628m
Down $754m
Reported and revised income, debt and shareholder equity 1997-2000 following special partnership revelations.
In spite of all help, failed to save
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Enron
I take responsibility for what happened at Enron, both good and bad. But I cannot take responsibility for criminal conduct that I was unaware of. -Kenneth Lay
J P Morgan: $900m
Citigroup: $800m Credit Lyonnais: $250m Bank of Tokyo Mitsubishi: $248m Chubb Corp: $220m Canadian Imperial Bank: $215m
Sumitomo Mitsui Corp: $210m
Nikko Cordial: $207m Principal Financial Group: $171m Abbey National: $164m National Australia Bank: $104m Duke Energy Corp: $100m
Some 25 further companies have declared Enron exposure totaling an estimated $1bn. Total global investment exposure of at least $4bn
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Laid-off and retired 4000 employees from the company lost most of their life savings, which was in company stock.