After getting the word that EES needed to close another deal by the end of the quarter to make its numbers, one senior executive recalls persuading a customer to sign a simple commodity agreement while putting the more lucrative outsourcing agreement on hold. “I knew I had to get creative,” he says. “To get deals done, we just said, ‘Shit, we’re going to have to talk these guys into doing part of the deal, so we’ll do the second piece later.’ The quarter was riding on it.” This same executive recalls an instance where he closed a deal that had a total contract value of $500 million, only to see Enron issue a press release claiming the contract was worth $1.3 billion. “You don’t know what to do in that case,” he said. “Do you beat on Lou Pai’s door and say, ‘What are you smoking?’ ”
EES would presumably have to pay the real cost for fulfilling its contracts someday. But the sales team, which was paid up front, wasn’t worried about what would happen five years down the road. One senior sales executive used to joke about how he’d close deals, then “throw them over the fence” to let the back-office staff worry about actually making them work. “People would say to me: ‘Hey, it’s not your problem,’ ” recalls Ceconi. “ ‘You’re not going to be around. Why do you care?’ ”
• • •
Here, though, may have been the biggest problem of all: once Enron had the contracts, it had to start fulfilling the terms. Partly, that meant selling power to big companies at cut-rate prices. But it also meant that Enron had to start implementing all those energy efficiencies, hiring all those maintenance workers, changing all those lightbulbs, and paying all those bills. This was a massive undertaking. At its peak EES was managing 28,000 different sites all across the United States and Europe.
Lacking that kind of management expertise, Enron decided to go out and buy it. EES made a string of acquisitions of energy-management and facilities companies, assembling a massive energy-maintenance operation, and becoming the biggest HVAC (heating, ventilation, air conditioning) contractor in the country. Even though this expertise was desperately needed, the company’s culture remained as contemptuous as ever of people who had to manage and execute; Enron’s fast trackers dismissed these acquisitions as “butt-crack businesses.” One Enron analyst scouting for new purchases even had a cap made up, reading Butt-Crack Acquisition Team.
One Enron employee assigned to the operations side spent time researching whether the company could buy financial instruments to hedge the possibility of rising labor costs. That was the Enron way of dealing with labor costs. Meanwhile, promised energy-saving projects were never started, unpaid utility bills piled up, and EES tried to wiggle out of provisions it had agreed to that were either too difficult to perform or too expensive.
Take the California public universities’ contracts, which required EES to bill the university system for energy use on each of their 31 campuses. According to David DeMauro, a Cal State administrator who helped manage the schools’ deal with EES, Enron routinely made major billing errors and submitted its bills late. In fact, says DeMauro, from the very first month that the contract went into effect, EES never got it right. “There were no situations,” he says, “where the bills were either on time or correct. People either didn’t get the bills or they got incorrect bills. We went all four years without receiving timely or accurate bills. We figured a company like this could do something as easy as turning out timely, accurate bills. They were never able to do so.”
“The problem was so widespread over our campuses,” says DeMauro, “we decided that our strategy would be that we would not pay Enron until they could deliver us an accurate bill. We probably went five or six months without paying Enron at all. I would guess our accounts payable was approaching $40 million or so.”
Enron never delivered the energy-efficiency projects it had promised, either, says DeMauro. The one constant in dealing with Enron, he says: “People we worked with were always making promises that weren’t kept.”
Enron also had a contract with the giant HMO Kaiser Permanente to handle utility bills for hundreds of facilities in several states. But EES habitually paid the wrong amounts and ran up late fees as well. At one point, while Enron tried to straighten the mess out, boxes of unpaid Kaiser bills stacked up in EES’s offices.
EES’s cash management was so poor that it took months to invoice customers for reimbursement of utility bills it had already paid. “We were basically paying their utility bills and giving them loans,” says an Enron managing director who studied the situation. According to EES executives, the float was costing the business more than $50 million a year.
“How are we actually going to do all this shit that we’re selling?” an EES back-office manager named Glenn Dickson recalls asking. “The approach was, ‘Let’s sell it—and we’ll figure out everything else later.’ They touted themselves as a risk-management company, but they never asked what could go wrong. It was a free-for-all—a chaotic, fucking free-for-all.”
Yet Skilling remained oblivious. At an employee meeting held in February 2000, the Enron president told the assembled staffers that “EES has turned the corner.” Then, later in the meeting, he added almost off-handedly, “The next challenge in this business is going to be execution. This stuff sells. Now we have to actually get out there and do something for the customers. That’s the easy part.” For Skilling, like everyone else at Enron, customer service was little more than an afterthought.
Arthur Andersen had been warning Enron executives about EES’s management problems. In an April 26, 1999, memo to the EES board, which included Skilling, Pai, and Fastow, the auditing firm noted “significant deficiency in the internal control structure of the company,” problems that included “few defined accounting policies and procedures . . . to ensure account balances and transactions were properly reported in a timely manner.” At year-end, according to an Enron accounting executive, EES’s Andersen auditors were so concerned they were threatening to take the extraordinary step of giving the division a “qualified” accounting opinion.
A few months later, in response to Andersen’s complaint, a special team was assigned to look into EES’s problems. Nobody at the top of Enron expected them to find anything serious.
• • •
And then there was the other big enchilada: broadband.
This, too, was a business that might seem, at first glance, to be a surprising choice for Jeff Skilling’s Enron, and not just because it had nothing to do with energy. For a man who liked to think of himself as on the cutting edge of American business, Skilling was pretty much a Luddite. During his years at Enron, he never learned to surf the Internet. He stubbornly refused to use e-mail; his secretary printed out the messages he received. Though he had two computer terminals on his desk, he used them only to track stock and commodity prices. “He didn’t even know how to turn them on,” his secretary told people.
But of course anyone who remembers the Internet mania of the late 1990s will understand perfectly why Skilling touted broadband as the Next Big Thing for Enron. Internet stocks had taken off; companies would go public in the morning and have a $100 share price by 4 P.M., when the market closed. Valuations were so high they bore no relation to profits or revenues—which, for many Internet companies, were non-existent. If Skilling was going to get Enron an Internet-style valuation—and there was nothing he wanted more—he’d have to convince Wall Street that Enron was becoming, at least in part, an Internet company. He may not have known how to surf the Web, but the relationship between the Internet and the stock market was something he understood all too well.
• • •
The part of the company that became Enron Broadband began life as an afterthought: it was a tiny start-up inside Portland General, called FirstPoint Communications. When Skilling learned in 1996 that the Oregon utility had just launched a telecommunications business that was laying fiber-optic cable around Portland, he was distinctly unenthusiastic. He gave the business zero value, and his intention was to sell the operation o
r shut it down once Enron completed the Portland General acquisition.
Portland General was one of several utilities that had jumped into the tele-
com business with the idea of using their existing right-of-way to lay a fiber network—a system of glass strands that acts as an underground highway for moving Internet data at high speeds. Joe Hirko, Portland General’s CFO, had taken over the small telecom business in 1997. Following the merger, Skilling remained skeptical. But after a group of trusted Enron deputies came back excited from a scouting trip to Portland, he authorized Hirko to spend up to $20 million to expand his network.
Then, of course, he began to see what happened to the stocks of Internet companies. He also had a second reason for changing his mind: Enron’s traders had gotten enthused about the idea of trading bandwidth—capacity on the fiber-optic networks that Enron and others were building. It made at least theoretical sense: Internet data moved along fiber networks that crisscrossed the coun-
try, just like natural gas and electricity. Why couldn’t Enron trade bandwidth capacity in the same way it traded natural gas?
Suddenly, Hirko’s little telecom business was starting to look like a knock-
off of the power-trading business—only better. According to Skilling’s back-
of-the-envelope calculation—“horseshoes and hand grenades,” he liked to call it—Enron’s market value would increase by $20 for every dollar the company invested in a broadband venture. Thus, a $1 billion investment would add $20 billion in market capitalization. Whether the business would bring in cash or profits (and how long that might take)—those were different issues. If broadband could quickly get him another $20 billion in market cap, he was all for it. “I’ve always believed there’s no such thing as a free lunch,” he later told associates, “but this looks like a free lunch. I’ve never seen economics like these numbers.”
In the summer of 1999, Skilling flew west and met with the employees of the new division in the lobby of their start-up offices above the beer vats at a popular restaurant in a historic building in downtown Portland. (Internet companies all had to have funky quarters; it was part of the ethos.) Skilling told Hirko’s staff that he had great news: they were about to become a core business for Enron. This meant two things. First, Enron was prepared to spend up to $1 billion to build the business. Second, it meant that its center of gravity would inevitably shift to Houston. “We’re all going to make a lot of money together,” Skilling happily declared.
But the Enron president didn’t get the exultant reaction he’d expected. Hirko’s troops were looking for an even quicker payoff. They had stakes in the broadband subsidiary and had been hoping Skilling was going to announce that Enron planned to spin them off through one of those hot tech IPOs. Skilling’s announcement meant they’d end up with shares of Enron stock instead. There was another issue, too: none of them wanted to move to Houston.
Back in Texas, however, the word quickly spread: broadband was Skilling’s new “it” business. The klieg-light syndrome immediately kicked in. Tracy Smith, the Portland division’s marketing director, recalls arriving in Houston, where she began spending much of her time, and finding dozens of new employees, none of whom had any experience in technology or telecommunications. “Whole groups from other business units, with 20 people, would transfer in,” says Smith. “You’d ask them what they were going to do, and they’d say, ‘I don’t know.’ It was their job to figure out what they should do. They’d come up with minibusiness plans.”
The Portland staff soon grew to 300. Enron moved them from their cool offices above the brewery to more expensive digs in a downtown office tower. But because so much of the business was being conducted in Houston, many of the employees didn’t spend much time in their new offices. An Enron jet began a regular shuttle service to Texas, leaving Oregon Monday morning and returning Friday afternoon.
There was another big sign of how much Skilling was making broadband his own. In mid-1999, he asked Ken Rice to leave his top job at ECT—which had been renamed Enron North America—and run this new business instead. Worried that the engineers and the rest of the Portland staff would bolt, Skilling also wanted to keep Hirko on in Portland, with an informal arrangement that he and Rice serve as co-CEOs.
Rice wasn’t enthusiastic about the idea. A skilled deal maker for many years, Rice by then was 41 years old. He was rich, and he was tired, and he was in the throes of a midlife crisis. His relationship with Amanda Martin, which was finally over, had taken a toll. Martin and her husband had divorced in 1997, and that year Rice had filed to end his own marriage, too. But he delayed the suit after discovering that his wife was pregnant with their fourth child, and the Rices later reconciled. In the midst of it all, he’d entered counseling and begun taking antidepressants. Unwilling to keep working long hours, he’d also found other distractions: he was planning a vacation home in Telluride, Colorado; he’d started cutting out early to spend time with his kids; and he’d developed a fascination with racing Ferraris and expensive motorcycles. These were his passions now, not Enron.
Rice didn’t like the awkward co-CEO arrangement either. But Skilling pleaded with him. So much was at stake: he was desperate to plant a trusted ECT hand in this new broadband business. Skilling promised to make Rice an offer he couldn’t refuse. “You know I’m going to take care of you,” he told Rice. “Just make it work.”
Rice finally relented—and Skilling did take care of him. The following February, his amended contract was approved by the Enron board. Rice received a base salary of $420,000. He would get a cash bonus of $1.75 million. And he received a stunning package of almost 1.8 million stock options, which he’d be free to cash in unusually early. Some 346,154 of the options would vest immediately, another 771,154 in just a year, and 425,000 more in just two years.
Running Enron’s broadband business would add tens of millions to his fortune. Still, Rice came to regret having given in to Skilling’s pleas. Accepting the job, he later privately confided, “was probably the biggest mistake I could have made.”
• • •
It didn’t take the new broadband employees long to learn what it meant to work for Enron. Dozens of them who lived out of town were put up in corporate apartments, at $3,500 a month each. A midlevel salesman on a business trip to Los Angeles rented the penthouse suite at one of the most expensive hotels in town. Small tech companies were acquired, consultants were retained, reports were commissioned, parties were thrown. “No expense was spared,” recalls Tracy Smith. “It was just the Enron culture.”
Because she was new to Enron, Smith was struck by things that most Enron employees had long since taken for granted. The abrasive, cutthroat culture. The condescension toward anyone who didn’t work at Enron. And always, the obsession with the stock price at every level of the company. “Everywhere you looked, the stock ticker was going,” said Smith. “In the lobby of the building. In the lobby on your floor. It was on the screen of your computer. Everybody was focused on the stock price. You couldn’t get away from it. When the stock wasn’t doing well, the mood changed.”
By late 1999, Skilling thought Enron had the makings of a hot new business. Its foundation would be the sophisticated cross-country fiber-optic system it was building; they dubbed it the Enron Intelligent Network. Enron claimed that its system would transform the Internet by providing bandwidth and switching capacity to distribute TV-quality video and other content rapidly and at a reasonable price. And it had other plans, too. It would create a market in bandwidth trading, which it believed it could launch, then take to critical mass in the span of just two years. Finally, Enron had a team working to develop content, to figure out how to send high-quality entertainment and other video over the Internet with no delay.
In late 1999, Skilling began making plans to unveil this vision to Wall Street. He had laid the groundwork with a flurry of press releases, announcing an assortment of minor acquisitions, alliances, and developments. In December, Enron
announced that it had executed the first bandwidth forward trade, with Global Crossing. “This is Day One of a potentially enormous market,” Skilling told a Houston reporter.
The big splash was to come at Enron’s analysts’ meeting, scheduled for January 2000. The business was set to debut with a brand new name. Up until then, the business had been known as Enron Communications. The new name was Enron Broadband. It conveyed exactly the right message. “Wall Street was into broadband,” says marketing director Smith, recalling the thought process be-
hind the new name, “and if we put broadband into our name, that would mean everything.”
And for a little while, it did.
CHAPTER 13
“An Unnatural Act”
Enron’s top executives may well have believed their own rhetoric about the company’s two big new businesses—that they would one day be huge and successful and generate billions in real profits. And that, in turn, might allow the company to wean itself from the machinations it so depended on to book earnings and impress Wall Street. But in the here and now, EES and broadband had exactly the opposite effect: because they chewed up so much capital while generating so little cash, their existence made the company even more dependent on Andy Fastow.
In his two years as corporate-finance czar, Fastow had employed creative forms of financial chicanery to dress up Enron’s financial statements. He’d also figured out how to use his power—and his closest associates—to secretly line his own pockets. Now he established new ways to accomplish both of those ends, on a far larger scale, at once.
His mechanism was a private equity fund—a series of funds, actually—that Fastow named LJM and that he ran even while serving as Enron’s CFO. The name signaled how important they were to him. His earlier entities, JEDI and Chewco, were named after Star Wars characters; the letters LJM were the first initials of Andy’s wife and two sons: Lea, Jeffrey, and Matthew.
The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron Page 32