On January 25, 2002, after agreeing to testify before Congressional committees in February 2002 after being subpoenaed regarding his knowledge and evidence of the scandal at Enron, Baxter was found dead in his black Mercedes-Benz S500 in Sugar Land, Texas, with a self-inflicted gunshot wound. She and colleague Peter Elkind subsequently wrote a book about the Enron scandal, The Smartest Guys in the Room, which also became a documentary. But describing what Enron does isnt easy, because what it does is mind-numbingly complex. Enron has told analysts that it plans to sell between $2 billion and $4 billion of assets over the next 12 months. John is a frequent speaker on divorce-related topics and is well-respected among his peers in the legal community. Enrons feet of clay were uncovered a year ago by operators of hedge funds and investors looking for overpriced stocks to bet against. 16. That's why, he says, Enron's cash flow will be up dramatically, while debt will be "way down, way down" when the company publishes its full year-end results, which are due out soon. Those four humbling words became the key to unlocking the secrets Enron Corporation had stored up before its collapse last December. Even quantitatively minded Wall Streeters who scrutinize the company for a living think so. . That's more than 2 1/2 times the multiple of a competitor like Duke Energy, more than twice that of the S&P 500, and about on a par with new-economy sex symbol Cisco Systems. Wall Street is a far less glitzy place, but theres still such a thing as an It Stock. Right now, that title belongs to Enron, the Houston energy giant. Factset: FactSet Research Systems Inc. 2018. Enron has told analysts that it plans to sell between $2 billion and $4 billion of assets over the next 12 months. Im somewhat afraid of it, admits one portfolio manager. 2021 But it was not until mid-October, after Enrons carefully hedged admissions of several unexpected and ill-explained financial setbacks, that the mainstream press began to take notice. under which this service is provided to you. Party Name. In 1990 around 80% of its revenues came from the regulated gas-pipeline business. "Do you have a year?" She quoted Houston securities analyst John Olson, an Enron doubter: Theyre not very forthcoming about how they make their money. Its very difficult for us on Wall Street with as little information as we have, says Fleischer, who is a big bull. During this period, Enron issued a net $3.9 billion in debt, bringing its total debt up to a net $13 billion at the end of September and its debt-to-capital ratio up to 50%, vs. 39% at the. Skilling has told analysts that its new businesses will generate a return on invested capital of about 25% over the long run. (The same is true for Enron's competitors, but "wholesale operations" are usually a smaller part of their business, and they trade at far lower multiples.) In the first nine months of 2000, the company generated just $100 million in cash. In 2004, he pled guilty to two counts of securities fraud, and was sentenced to six years in federal prison. In any event, some analysts seem to like the fact that Enron has some discretion over the results it reports in this area. But $22 billion seems like a high valuation for a business that reported $408 million of revenues and $60 million of losses in 2000. Before the congressional hearings, before Arthur Andersen was indicted, before the SEC and the DOJ got involved, FORTUNE's Bethany McLean asked whether a company that traded at 55 times earnings should be so opaque. In any event, some analysts seem to like the fact that Enron has some discretion over the results it reports in this area. Its used by average taxpayers every day when they attempt to figure out their net worth. And as Long Term Capital taught us, the best-laid hedges, even those designed by geniuses, can go disastrously wrong. All content of the Dow Jones branded indices S&P Dow Jones Indices LLC 2018 Trying to get a good grip on Enrons risk profile is challenging, says Shipman. In its 1999 annual report the company wrote that the use of financial instruments by Enrons businesses may expose Enron to market and credit risks resulting from adverse changes in commodity and equity prices, interest rates, and foreign exchange rates.. Nor does Enron make life easy for those who measure the health of a business by its cash flow from operations. The numbers just didnt add up, says Barbara Shook, a reporter with Energy Intelligence Group, who questioned Enrons claims of success a few years ago. 2023 Fortune Media IP Limited. But Enron says that extrapolating from its financial statements is misleading. Then a young Fortune writer, Bethany McLean, wrote an article posing a simple question - how, exactly, does Enron make its money? In early 2001, Bethany McLean, at the time a reporter for Fortunemagazine, asked the question in an article: "How does Enron make its money?" McLean's reporting, and the reporting of others,. CEO Jeff Skilling calls Enron a logistics company that ties together supply and demand for a given commodity and figures out the most cost-effective way to transport that commodity to its destination. Not all analysts are so aggressive. Is a business community property in California divorce? Enrons results from that part of its business tend to be quite volatileprofits fell from $325 million in the second quarter of 1999 to $55 million in the second quarter of 2000. Actually, analysts don't seem to have a clue what's in Assets and Investments or, more to the point, what sort of earnings it will generate. Details are hard to come by because Enron keeps many of the specifics confidential for what it terms "competitive reasons." The Enron collapse of 2001 occurred when Enron, a company that had previously been wildly successful in the stock market, declared bankruptcy. Thats good, because Enron will need plenty of cash to fund its new, high-cost initiatives: namely, the high-cost buildout of its broadband operations. The cookie is used to store the user consent for the cookies in the category "Performance". In many ways, Enron was an innovator, but the press needs fewer pop designations like that one and better reporting on what the innovations are and whether they are working. Privacy Policy. Regardless of their size, news staffs can make choices and set priorities for investing in in-depth coverage on companies and business trends that matter most. What's clear is that Enron isn't the company it was a decade ago. Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors. Without having access to each and every one of Enron's contracts and its minute-by-minute activities, there isn't any way to independently answer critical questions about the company. In early 2001, Bethany McLean, at the time a reporter for Fortune magazine, asked the question in an article: "How does Enron make its money?" McLean's reporting, and the reporting of others, led to inquiries that were put to the Enron management. Bethany Lee McLean (born December 12, 1970) is an American journalist and contributing editor for Vanity Fair magazine. At the least, these sorts of hard-to-predict earnings are usually assigned a lower multiple. The off-balance sheet arrangements, (2). Analyzing Enron can be deeply frustrating. bethany mclean how does enron make its money. That's about the same rate of return you get on far less risky U.S. Treasuries. This business involves building power plants around the world, operating them, selling off pieces of them, "invest[ing] in debt and equity securities of energy and communications-related business," as Enron's filings note, and other things. Brown senior power strategist. Nor at the moment is Enron's profitability close to that of brokerages (which, in fairness, do tend to be more leveraged). getting enough information to confirm his doubts. Indeed, First Call says that 13 of Enron's 18 analysts rate the stock a buy. asks Ralph Pellecchia, Fitch's credit analyst, in response to the same question. NEW YORK (FORTUNE) -- In Hollywood parlance, the "It Girl" is someone who commands the spotlight at any given moment -- you know, like Jennifer Lopez or Kate Hudson. To skeptics, the lack of clarity raises a red flag about Enron's pricey stock. Details are hard to come by because Enron keeps many of the specifics confidential for what it terms "competitive reasons." Cable News Network. Its profits rose every year; its stock price surged ever u In a footnote to its 1999 financials, Enron notes that it booked pretax gains from sales of merchant assets and investments totaling $756 million, $628 million, and $136 million in 1999, 1998, and 1997. For instance, Enron says the global market for broadband and storage services will expand from $155 billion in 2001 to somewhere around $383 billion in 2004. In the end, it boils down to a question of faith. Mark-to-market (MTM or M2M) or fair value accounting is accounting for the fair value of an asset or liability based on the current market price, or the price for similar assets and liabilities, or based on another objectively assessed fair value. Perhaps most promising is its Enron Energy Services business, which manages all the energy needs of big commercial and industrial companies. The company also blames short-sellers for talking down Enron. But Enron has been steadily selling off its old-economy iron and steel assets and expanding into new areas. Start with a pretty straightforward question: How exactly does Enron make its money? Jeffrey Keith Skilling (born November 25, 1953) is a convicted American felon best known as the CEO of Enron Corporation during the Enron scandal. . We also use third-party cookies that help us analyze and understand how you use this website. "If it doesn't meet earnings, [the stock] could implode.". During this period, Enron issued a net $3.9 billion in debt, bringing its total debt up to a net $13 billion at the end of September and its debt-to-capital ratio up to 50%, vs. 39% at the end of 1999. To skeptics, the lack of clarity raises a red flag about Enrons pricey stock. Is mark-to-market the same as fair value? In the first nine months of 2000, the company generated just $100 million in cash. All rights reserved. This is because the net worth of most individuals is based on fluctuating assets, such as stocks and even real estate. In its 1999 annual report the company wrote that "the use of financial instruments by Enron's businesses may expose Enron to market and credit risks resulting from adverse changes in commodity and equity prices, interest rates, and foreign exchange rates.". "The ability to develop a somewhat predictable model of this business for the future is mostly an exercise in futility," wrote Bear Stearns analyst Robert Winters in a recent report. We don't want to tell anyone where we're making money.". In its 1999 annual report the company wrote that "the use of financial instruments by Enron's businesses may expose Enron to market and credit risks resulting from adverse changes in commodity and equity prices, interest rates, and foreign exchange rates.". "Even a modest market share and thin margins provide excellent potential here," writes Ed Tirello, a Deutsche Bank Alex. Indeed, Enron dismisses criticism as ignorance or as sour grapes on the part of analysts who failed to win its investment-banking business. How exactly does Enron make its money? writer Bethany McLean asked. (FORTUNE Magazine) In Hollywood parlance, the "It Girl" is someone who commands the spotlight at any given moment--you know, like Jennifer Lopez or Kate Hudson. and/or its affiliates. What's clear is that Enron isn't the company it was a decade ago. It also dismisses any comparison to a securities firm. That's about the same rate of return you get on far less risky U.S. Treasuries. While Enrons revenue was soaring from mid-2000 to 2001, the profit it was making on each trade was shrinking, the report noted. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. "Trying to get a good grip on Enron's risk profile is challenging," says Shipman. It also dismisses any comparison to a securities firm. "Enron is a big black box," gripes another analyst. But describing what Enron does isn't easy, because what it does is mind-numbingly complex. Jim Foster of Platts energy publications is another observer who smelled something funny about Enron long before the rest of us figured it out. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. Donec gravida mi a condimentum rutrum. Case Type. So why is Enron trading at such a huge multiple? 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