“Enron Ascending: The Forgotten Years” (Book Review)

Bradley has tackled a vast and dynamic energy landscape through the big prism of Enron. He was wise to include necessary contexts for 15 chapters of markets and personalities. Navigating FERC deregulation orders over a decade was a fearsome writing task, done well. Pipeline and power plant deals at home and abroad; solar, wind, and other alternative energies, the list goes on. Politics in Austin, Washington, DC, and foreign capitals. Enron was everywhere.

Robert L. Bradley Jr. has written a very important book about Houston’s most controversial company. This is the first of a two-volume corporate biography chronicling the rise, fall, and aftermath of Enron; his tetralogy has already produced a book on worldview (Capitalism at Work: 2009) and prehistory (Edison to Enron: 2011).

Few observers have been as ideally located to chronicle this modern-day version of a Greek tragedy. Enron Ascending: The Forgotten Years 1984–1996 is a 700-page morality tale of how Enron originally reached its critical mass. The final volume will cover Enron’s explosive bankruptcy, the ensuing trials, and the post-Enron world.

If the past is prologue, then Bradley has captured the early years with a well written brio. This reviewer was a Wall Street securities analyst who covered Enron from beginning to end and knew the players and the play. I thought I knew all of the stories, warts and all.

Not so. Bradley has unearthed many interesting episodes from an insider’s viewpoint. After all, he was Ken Lay’s speechwriter, among other Enron roles during his 16 years there. And he documents the fact how this uber-optimistic CEO took chances that few other natural gas heads did from the very beginning.

Bradley provides both color and context to illuminate the formation and development of Enron. The early days were marked by the July, 1985 merger between Omaha-based InterNorth and Houston Natural Gas (HNG) to form a $10 billion energy conglomerate operating mainly in interstate and Texas natural gas pipeline markets. These years were marked by merger difficulties, a trading scandal; an overleveraged balance sheet, and necessary asset stripping.

All of this occurred during a sweeping restructuring of the natural gas markets. The 1980s deregulation agenda involved freeing gas prices, and forcing pipelines to become pure transporters, and not merchants. Righting massive overregulation in the Eighties and Nineties also created a litigation battleground. Pipelines were forced to break enormous contracts with producers, which spawned bankruptcies and mergers of convenience—and considerable attorney enrichment.

In such tumult, Enron could not cover its dividend in three of its first five years of existence. As matters stood, with the benefit of hindsight, its acquisitions and merger were entirely pragmatic, the ends justified the means. Asset sales were mandatory, given rating agency mandates. Management turnover was considerable. Many of the reliable old guard were cashiered.

Merging three exploration and production subsidiaries ($2 billion of assets), for instance, was a helter-skelter affair, mainly losing money, until the arrival of Forrest Hoglund in 1987 and the 1989 IPO (initial public offering) of the company now known as EOG Resources. Ironically, after having been given short shrift by its former parent, EOG became one of the most successful producers in the industry.

InterNorth’s pipelines became the anchor assets, owing to their access to huge Canadian volumes, and the ability to wheel spot-gas volumes around the country. This all was magnified by pipeline rates designed to yield superb profitability on volumes above those agreed to in the underlying rate cases with federal regulators. Much less came from the original Houston Pipe Line, the anchor asset of the storied HNG.

In these formative years, there was little rhetoric about Enron’s later successes in natural gas and power marketing, largely because there was precious little to talk about. Marketing subsidiaries were embryonic in the early 1980s, and evolved via rulemakings into growing importance by the end of a deregulated decade. But Enron differentiated itself early on with a strong ideological commitment to gas-industry restructuring. This in turn was the primary contribution of Ken Lay, originally an Exxon economist, who was brought into HNG in June, 1984, and thence to the CEO role in the newly merged Enron one year later.

Ken had a trifecta of Washington experience (Department of Interior; Federal Power Commission, the predecessor to today’s FERC; and the Pentagon); pipeline and corporate development responsibilities (Florida Gas Company and Transco Energy) and E&P exposure (Transco). A very effective speaker, he was a prime motivator not only for the Enron rank and file, but particularly for Wall Street, which loved his message of profiting from change and the benefits of natural gas in a free market.

Lay’s optimistic convictions permeated the company from the beginning. Enron made big leveraged bets on restructured markets, and when the time came, Enron Capital & Trade was ready with an overwhelming force strategy. Matters worked beyond everyone’s wildest expectations. That will be more clearly described in Bradley’s forthcoming book.

During the first decade of his tenure, Lay was down to earth and (in this observer’s eyes) unspoiled by his tremendous success. A self-made man, he was comfortable with similar success stories. In those early years, Enron did over $3 billion of debt financing with another self-made man, Michael Milken (Drexel Burnham), who largely refinanced Enron’s entire balance sheet.

It was commonly known on Wall Street that Lay loved leverage, invested in stocks on margin, and deftly played Wall Street managers. Enron’s investor relations efforts were second to none.

Enron posited 15% annual earnings growth rates, for which Wall Street would pay premium valuations. For most of the 1990’s, its stock delivered 35%+ average annual total returns. Lay and his very friendly Board of Directors heavily endowed employees with loads of stock. (Usually 10%-15% of the company shares were optioned.)

Management thus became hyper-focused on the stock price as a measure of success: even the elevators had stock-price monitors.

Unfortunately, Enron’s trees did not grow to the sky. Lay and his minions began to ride some very dangerous edges, and crossed the lines that ultimately led to the 2001 bankruptcy and numerous convictions. Make no mistake, it was both optimism and the can’t-fail culture that he created which led to the decline and fall. Innovation was ballyhooed to Wall Street, but rarely worked, and was buried by aggressive accounting.

Bradley has tackled a vast and dynamic energy landscape through the big prism of Enron. He was wise to include brief backgrounders for the reader, providing necessary contexts for 15 chapters of markets and personalities. Navigating FERC deregulation orders over a decade was a fearsome writing task, done well. Pipeline and power plant deals at home and abroad; solar, wind, and other alternative energies, the list goes on. Politics in Austin, Washington, DC and foreign capitals. Enron was everywhere.

Houston, Enron’s headquarters, has many intersections in Bradley’s chronology. In 1990, Ken Lay was tasked by elder Bush with the city’s hosting of the Economic Summit of Industrialized Countries. Five years later, Lay pleasantly surprised Mayor Bob Lanier by taking on the seemingly impossible task of saving professional sports in Houston. The come-from-behind referendum vote to keep the Astros with a new taxpayer-subsidized stadium (remember Enron Field?) and revitalizing downtown was all part of Ken Lay’s plan to make Enron the world’s leading energy company.

The late Bob McNair is part of the forgotten Enron story too. In the 1980s, Enron was the major investor in McNair’s first gas-fired plant producing power and steam, which became phenomenally successful. And a decade later, Enron purchased McNair’s Cogen Technologies, Inc. in whole for $1.1 billion in Enron stock, which McNair quickly turned into cash to fund what several years later became a new NFL franchise.

There are a few glitches in Bradley’s telling. For instance, The lovely Anne Lamkin Kinder would be surprised to read that she was married to Bill Morgan rather than Rich Kinder. But these are trifles in the scheme of things. Energy readers will cotton to this book quite easily; the general reader may be more interested in all the good vignettes and events that are so well depicted in Robert Bradley’s Enron Ascending.

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John Olson is one of the few heroes of the Enron saga. He was only one of seventeen investment analysts that did not recommend ENE (Enron’s stock symbol). After he criticized Enron for its lack of transparency in print, Enron CEO Ken Lay wrote to Olson’s boss, Don Sanders: “John Olson has been wrong about Enron for over 10 years and is still wrong, But at least he is consistant (sic).”

After receiving an MBA. from the Wharton School of Finance, University of Pennsylvania in 1966, Olson covered the oil, gas and electric power industries for Merrill Lynch, Drexel Burhnam Lambert, First Boston, and Sanders Morris Harris Group. When Enron Enron fell in late 2001, he testified before Congress and was the subject of numerous profiles, including by the New York Times and Washington Post. The latter profile, “The Market Scholars’ Star Turn,” is classic reading.