Message-ID: <29221017.1075860836207.JavaMail.evans@thyme> Date: Wed, 28 Nov 2001 09:52:46 -0800 (PST) From: wms@kainon.com To: kenneth_lay@enron.com Subject: Enron Is History, Says History per the WSJ Page A19 Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: wms @ENRON X-To: 'Kenneth_Lay@enron.com' X-cc: X-bcc: X-Folder: \Kenneth_Lay_Mar2002\Lay, Kenneth\Inbox X-Origin: Lay-K X-FileName: klay (Non-Privileged).pst Hello again. Out of all of the stuff in the media, this is the most informative of all we have seen. Very well said. We wish all the best for those effected and Houston as we move through this. When the dust clears, Enron will be remembered as a pioneer and great corporate citizen. Best, Mark W. Mark Shirley, CPA 281.374.6700x230 www.kainon.com Enron Is History, Says History By HOLMAN W. JENKINS JR. November 28, 2001 Business World Back in the mid-1980s, a pipeline executive called Ken Lay was fishing around for a name for his company, produced by a merger of Houston Natural Gas and Omaha-based InterNorth. He consulted with consultants, politicked with politicians, and came up with a moniker. The company would be called "Enteron." Three weeks later, fed up with the wisecracks from a press that had looked up the dictionary definition of "enteron" (n. the intestine), he changed the company's name again. Henceforth it would be known as Enron. A columnist less devoted to high standards of decorum might be tempted to extend the metaphor of the company's misbegotten name. In recent weeks, after all, we've seen Enron's stock collapse over indigestible accounting and the emergence of dealings between the company and its senior officers that exude an odor of genuine malfeasance. The evidence is far from clear, but for the sake of Mr. Lay's reputation one hopes these missteps will prove one more case of a company fooling itself rather than setting out deliberately to defraud the markets. Enron grew to be much more than a pipeline hauler of natural gas, becoming the pre-eminent trader and marketer of all kinds of energy contracts and a vocal proponent of deregulation. Now, all but overnight, it's kaput, just waiting to find out if its fate will be bankruptcy or absorption by an erstwhile rival. We cannot help be put in mind of another commodity wunderkind in the 1970s, Phibro (short for Philipp Brothers). Hard to believe, but Phibro was once a name that made grown men quiver on Wall Street. Fattened by trading profits from the great commodity inflation of the 1970s, which some mistook for a permanent new age of scarcity, it scooped up the Street's oldest partnership, Salomon Brothers, tucking it into its back pocket and renaming the combined firm Phibro-Salomon. Here was a powerhouse of unlimited potential, investors told themselves. Flash ahead to California's electricity meltdown earlier this year. Enron saw its revenues quadruple partly as a result of the inflated prices being quoted in the California market. Many foresaw a new scarcity megatrend, but there was no true energy shortage. Posted prices on the California power exchange may have skyrocketed, but the effective price was zero dollars and zero cents, because the utilities had no cash to pay and politicians were thumbing their noses at piles of IOUs. When prices are zero, suppliers take a hike -- that's what economics teaches. But once the state government started pumping its own cash into the market, the phony posted prices plummeted and supplies became plentiful again. Now California is swimming in power and nobody talks about an "energy crisis" anymore. You can date the loss of investor confidence in Enron almost exactly to the moment when the California fiasco began to repair itself. Fortune Magazine put the inaugural nail in Enron's coffin in March, noting that the company's growing dependence on trading had turned it into an oil-patch version of Goldman Sachs. Goldman's stock sells at a price-earnings multiple of 17, reflecting investors' well-founded distrust of trading earnings to be reproduced reliably year after year. So why, the magazine asked, was Enron awarded a multiple of 60-plus? Mmm... Enron did yeoman service as a champion of deregulation. Boss Ken Lay, a believer in technology and the power of markets, was a true visionary, to the point of annoying people who didn't care for his air of being a man on the right side of history. The moldering pipeline he took over would certainly have been an also-ran if he had not thrown Enron headlong into trading and marketing. But deregulation doesn't confer permanent advantage on anybody. A deregulated environment favors constant innovation and a continual upsetting of plans and strategies. Add the fact that, despite the California bubble, there is no reason to believe energy prices won't continue their long-term relative decline as technology advances more quickly than the depletion of conventional resources. Add also the likelihood that information technology will continue to lower the barriers to entry to Enron's trading business, which means more competition and shrinking margins. Enron begins to look a lot like Phibro. The great commodity-trading machine was already running down by 1981, when it bought Salomon and Wall Street was swooning. Inflation was being quelled by Paul Volcker. The products that Phibro traders bought and sold were increasingly being traded transparently on electronic exchanges. "Four or five years ago, they used to be able to take other companies to the cleaners, because they knew where the market was and others didn't," a trader explained. "With everyone knowing, within a few cents, where the price of any product was, Phibro's ability to make a profit off its superior knowledge disappeared." Not only is this true of Enron, but of its would-be bottom fisher, Dynegy, run by Mr. Lay's Houston homeboy, Chuck Watson. Dynegy's proposed takeover of its former nemesis was hanging by a negotiation yesterday. While Enron in recent years was selling hard assets and concentrating on electronic market-making, Mr. Watson was doing the opposite. His big play in the Enron deal is to get his hands on the original HNG-InterNorth pipeline, now known as Northern Natural Gas. By having both feet planted in the real business, he claims his firm will be able to make a profitable sideline out of trading despite growing competition and transparency. We'll see. Dynegy and Enron were born at the same time, and of the same motive. Dynegy was originally created by six pipeline companies, a Washington law firm and Morgan Stanley to take advantage of new opportunities in deregulated natural gas. But the gnats are already circling. Gas producers who have claimed for years that the duo control too much of their fate now insist they shouldn't be allowed to merge. Don't listen to the fussbudgets. If this was a business in need of trustbusting, Enron wouldn't have been resorting to funny accounting to make its earnings. As Merrill Lynch's Donato Eassey has pointed out, wholesale margins have been steadily thinning as trading becomes more transparent and competitive. Wishful accounting has time and again proved the last refuge of companies whose dearly held "visions" were not panning out. Enron prided itself on being realistic and adaptive, but it failed to see that its own beliefs about the world needed overhauling. ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- -------- "It ain't what you don't know that gets you in trouble; it's what you know for sure that ain't so." -Mark Twain K A I N O N G R O U P Consulting + Staffing + Recruiting