1. Pre-Enron period.
In 1930 Northern Natural Gas Company was found in Omaha, Nebraska. Three years later Northern served more then 160 communities in five states. After the redeveloping the Redfield storage field in 1954 the number of communities increased to 349.
In 1979 a holding company InterNorth Inc.Ā was formed in Omaha, and Northern Natural Gas became its leading subsidiary. In 1985 reorganized company bought the smaller company Houston Natural Gas. Six months later energy economist Kenneth Lay, the CEO of HNG, became the chairman and CEO of newly-merged company, which soon was renamed to “Enron”¯.
2. Enron fast growth.
Kenneth Lay, new Enron’s CEO, believed that natural gas was the mail solution to energy problems in the USA. He rejected coal due to contribution of coal industry to global warming. The Chernobyl disaster in 1986 made him very skeptical as for nuclear energy.Ā Permanent political instability on Middle East drew to oil price fluctuations. That is why Lay “wanted the company to become the premier natural gas pipeline in North America”¯ (Boje, 2002).
Analytics defined the stages of Enron development according to Lay’s plans:
“ 1985 To become the premier natural gas pipeline in North America.
1990 To become the world’s first natural gas major.
1995 To become the world’s leading energy company.
2001 To become the world’s leading company”¯ (Steffy & Levy, 2002)
3. Country leader.
In 1985 pipeline companies monopolized the market of natural gas in the USA. Only pipeline companies can buy natural gas from its producers and sell it to the customers. This issue became the subject of market deregulation and in the end of 1985 Federal Energy Regulatory Commission forced pipeline companies to become more open-access transporters. However from 1985 to 1990 the most part of Enron’s revenues came from pipeline business.
Meanwhile the market of natural gas remained deregulated. That is why Enron began to build and to develop new separate business to produce, transport, buy and sell natural gas.
The great Enron “know-how”¯ on the gas market was the long-termed contacts. Enron together with Gas Bank allowed wholesalers and producers to avoid price risk locking the long-term contracts with the fixed price. Futures markets allow buyers and sellers to avoid entering the open market. Enron worked on the same principle, selling tomorrow’s gas at a today’s price with a profit for the company.
4. Industry leader.
At the beginning of 1990 Enron started the world expansion.Ā The company built or started building the power plants in South America, Europe and Asia. It bought the pipeline in South Africa in 1992. In 1993 Enron started its own power plant in the United Kingdom. “It was the world’s largest gas-fired heat and power facility, and the second largest project financing ever completed in the United Kingdom”¯ (Sharp, 2006)
At its height Enron controlled a quarter of gas business in the USA, at the same time company created new markets of energy-related products.
Enron moved its gas experience into other commodities including coal and steal. Company offered hedging services against the price movements, including the influence of weather changes.
5. World leader.
More and more the ambitions of Kenneth Lay grew. In 1995 he declared: “We don’t necessarily meant to be the largest or the most profitable ”“ at least not now. We just aim to be the leader in all the businesses we are in worldwide”¯.
The transformation of natural gas company into world energy giant was watched by investors and energy markets.
Analytics all over the world called Enron the best example of “old economics”¯ company transformed into technological “new economics”¯ firm.
6. Enron scandal.
In 1999 Enrononline was started. Enron began to trade in internet with buyers and sellers all over the word. The turnover was huge, but the profit was questionable.Ā It is believed that about that time the company began accounting fraud. It was very important to keep the company credit rating and high stock price. That is why 2000 annual report of Enron reported global revenues of $100bn. meantime the energy crisis in California forced the rating agencies and banks intently analyze the Enron reports. In December 2001 Enron admitted the concealing of the losses and inflation of profits and filed for bankruptcy protection. The stock price felt from $90 to pennies.
Arthur Andersen LLP, the accounting, auditing, and consultancy partner of Enron, was found guilty in accounting fraud and had to stop its activity.
Shareholders and employees of Enron received limited returns, but they lost billions in pensions and stock prices.
After the Enron scandal appeared new regulations and legislation of financial reporting.
The collapse of Enron is the greatest bankruptcy in the history of the USA.