Natural Gas Major

The new mission remained tied to natural gas. But with Teesside under way, the vision went international. What would prove to be Ken Lay’s most memorable vision was “to become the world’s first natural gas major, the most innovative and reliable provider of clean energy worldwide for a better environment.”⁴

Along the way, Enron declared itself “America’s leading natural gas company” (1992), then, a few years later, “the largest full-service natural gas company in the world.” Energy consultant Dale Steffes listed Enron as one of the “‘Seven Brothers’ of Natural Gas,” the others being Tenneco, British Gas, Gas de France, Ruhrgas (Germany), Nova (Canada), and Gazprom (Russia). Steffes’s term was a play on Anthony Sampson’s book title The Seven Sisters, which referred to the top seven international oil companies.

In early 1995, Enron ended its five-year quest by declaring itself the world’s first natural gas major. In a congratulatory note to employees, Lay and Richard Kinder gave the following (ten) reasons:

• The largest natural gas company in the largest natural gas market in the world;
• The most creative force, with the best people in energy worldwide;
• The operator of the largest natural gas pipeline system in the world outside of Gazprom in Russia;
• The leading and most reliable marketer of natural gas in the competitive world;
• The world leader in providing physical and financial natural gas products;
• A leader in restructuring the electricity industry in the United States, trading more electrons than any independent marketer, and generating significant electricity in both the United States and the United Kingdom;
• The most profitable independent producer of natural gas in the United States;
• The developer of more natural gas-fired, independent power plants than any company in the world;
• The owner and operator of energy facilities in 15 countries, with projects under advanced stages of development in 12 additional countries;
• Providing consistent compound annual earnings per share growth, having achieved 20 percent annually since 1990.

Absent from this list was mention of compressed natural gas for vehicles, an opportunity Enron had touted just a few years before. Transportation accounted for one-fourth of all energy usage in the United States, and Lay had wanted in. As a matter of fact, Enron tried to breach petroleum’s wall by jump-starting an NGV market in Houston, with other major urban centers to follow. But the Houston project bled money, and the math did not work for more attempts.⁵ Gasoline and diesel, reformulated with oxygenates for better environmental performance (an alternative of which Enron was a part), won on the merits.

Still, Ken Lay and Enron had filled the largest natural gas niche. Unshackled from past regulation, and now benefitting on net from federal policies, natural gas was fertile ground for electricity generation. Whereas gas accounted for about 5 percent of new capacity in this market in the early 1980s, it now claimed 60 percent.⁶ That was both the result of Enron’s activism and a continuing opportunity.

Ken Lay’s natural gas vision was a bit forced—and too confining for Enron itself. Money making, not fuel absolutism, was the real mission. Rebecca Mark’s “market-led approach” to international development—defined as “finding solutions to a country’s energy needs rather than selling a specific fuel or pushing a specific project”—resulted in several oil-fired power plants.⁷

Enron’s coal play several years later would also testify to profits over fuel type. Assuring a newly hired coal executive that Enron was serious despite its green environmental image, CEO Jeff Skilling said: “Mike, we are a green energy company, but the green stands for money.” Such deviations, even ironies, were ameliorated by Enron’s third energy vision, the widest yet.

“The World’s Leading Energy Company”

Ken Lay characterized Enron as not only the first natural gas major but also an “international ‘energy major’.” And with electricity a big new focus, as well as renewable energy, not to mention oil plays here and there, a broader vision was necessary. Lay wanted a new mission as ambitious as, or even more ambitious than, his previous one. Employee suggestions were invited, although the CEO really didn’t need much help.

The 1995 annual report announced Enron’s third vision: “Become the World’s LEADING Energy Company—creating innovative and efficient energy solutions for growing economies and a better environment worldwide.” Enron’s new tagline for communicating that message was “Creating Energy Solutions Worldwide.”

The new vision, Ken Lay and Rich Kinder emphasized, did not necessarily mean being the largest or most profitable energy company. It meant “providing leadership in creating the best energy solutions for customers on a worldwide basis.” Enron, in other words, would be “the first company that customers would think of and come to for their energy needs, however complex.”

What Enron had done with natural gas would now be done with energy, broadly considered. The finest workforce just needed time, resources, and direction to achieve this boldest-yet vision. Explained Ken and Rich:

Ambitious? You Bet. Achievable? Yes. Because we believe you are the most talented and creative work force in the world and that no company is better positioned to take advantage of the opportunities that exist in our industry today than is your company.

Lay wanted Enron to be the company that the competition studied and emulated. And with this mission, Ken Lay needed employee and stockholder buy-in to make the grand vision seem possible, even inevitable.

Enron 2000

Soon after the new vision was announced, Ken Lay unveiled a “vision within a vision,” described as “our first ‘way-station’ or ‘check point’ on the road to becoming ‘the world’s leading energy company’ in the 21st century.” Lay’s gambit put positive packaging around the fact that much uncertainty surrounded Enron’s ability to consistently best its high earnings growth.

Enron had a unique success story by the numbers. The 1995 annual report summarized the “outstanding” financial statistics since 1985—“unsurpassed in the industry”—as the foundation for Enron 2000:

• Net income (before extraordinary losses) increasing almost fourfold to $520 million;
• Earnings per share (from continuing operations before extraordinary losses) increasing more than fivefold to $2.07 in 1995;
• Market capitalization increasing fourfold to $10 billion;
• Average return on equity increasing to 17 percent (from 6 percent); and
• Debt-to-capitalization falling to 40 percent (from 73 percent).

Replicating this success quarter by quarter, year by year, however, was worrisome for management. The earnings bar from mark-to-market accounting; international issues such as the underwater J-Block contract in the United Kingdom; India’s idled Dabhol plant; and the bad clean-fuels bet (MTBE) hung over Enron’s growth story.⁸ Even the earnings engine Enron Capital & Trade Resources (ECT) was “losing steam,” recalled Jeff Skilling: Strong volumes were accompanied by falling profit margins, the extent of which Enron would not make public.⁹

ENE was a momentum stock with a virtually uninterrupted growth story. The Street’s expectations had to be reoriented longer term. Specifically, 15 percent earnings growth for eight years running had to be promised not for 1996 or even 1997, but as an average out to year 2000.

Enron 2000 was highlighted in the 1995 annual report: “We intend to realize net income in excess of $1 billion in the year 2000, which would approximately double 1995 net income and result in a compound annual earnings growth rate of approximately 15 percent over the five-year period.” Enron had doubled its income in the past 10 years; now the target was in 5.¹⁰

Enron 2000 sought to assure the Street that “Enron is a growth company, even more so than an energy company.” Extending 8 years of 15 percent annual growth to 13 years was being pledged.

ESOP-laden employees were targeted with talk of a doubled stock price and greater career opportunities as part of the five-year plan.¹¹ A celebratory all-employee meeting, looking back and then ahead, was held at the Hyatt Regency’s spacious ballroom. A commemorative gift was provided to everyone. That was the Ken Lay way.

The rollout included a presentation in Enron’s 50th-floor boardroom by Ken Lay to local analysts and money managers on how Enron planned to double itself over the next five years. “The presentation was quite good and quite smooth, as most Enron road shows went,” remembered John Olson, then with Merrill Lynch. “But it did gloss over some of the more mundane realities that hobbled the story.”

It was time for questions from the approximately 20 guests. Most queries were soft and easily handled. But one question from Olson was probing, albeit obvious to real students of the company: If half of the projected earnings was coming from hard-asset businesses growing at 5 percent annually, then ECT must be projected at 25 percent. “Was that doable?” Olson asked Lay.

“Ken was usually affable and polite, but not that day,” remembered Olson. “He had a way of turning red, and I could see the veins in his head start to bulge, so I sensed a blowup was coming.” Without Kinder in the room (did he want to be?), Lay answered in we-did-it-and-will-do-it-again generalities. As the group departed, Lay turned to Olson “with some indignation and sneered that I ‘really didn’t get the message’, and that I ‘didn’t understand Enron’s great potential’.”

But Olson the outlier was just doing his job: to objectively assess the state and prospects of the company for the general investor—“what I had been taught by my much better mentors.” John Olson was not in the quid-pro-quo, conflict-of-interest business of helping the investment banking side get business from a convenient valuation. Yet Enron was all hardball. “Lay wanted Strong Buy recommendations from every analyst,” remembered Olson. “If you didn’t go along, he made sure that no investment banking fees went to your firm.”

Coming out of the Enron 2000 pitch, Olson held out with a Hold—not a Strong Buy as some 15 other investment analysts rated the company. “That didn’t sit well with Ken, because he knew that Merrill Lynch had tremendous buying power in its client base.”¹²

Enron and Olson had, in fact, been going at it since at least 1990—and would continue to bump heads for the rest of Enron’s solvent life. “Ken tried to get me fired three different times,” remembered Olson. “The first was at First Boston in 1990, which prompted my move to Goldman Sachs; the second in April 1998 at Merrill Lynch, which felt that $45 million-plus of investment banking fees were a lot more important than a simple analyst—and so this analyst was ‘whacked’.” The third would be just several months before Enron’s implosion when Olson was at Sanders Morris Harris.¹³

“If a stock price rises arithmetically, management’s ego rises exponentially.” John Olson’s Maxim on Management would be part of his post-Enron talks at business conferences and at business schools. But his doubts had many times been greeted by a rising ENE and skepticism from the consensus—and derision inside the walls of Enron.

ENE rose by a fourth in 1995—and would climb 15 percent in 1996. That inspired another quotation used by Olson in his presentations: “Markets can remain irrational longer than you can remain solvent.”¹⁴

“We are not using pie-in-the-sky assumptions to achieve Enron 2000,” insisted Rich Kinder. He was right on a few things but not on others. Already planned selldowns of EOG, Northern Border, and EOTT were assumed and doable. But international projects, such as India Phase I and II and Qatar’s massive LNG, were projected to be operational and profitable by 2000), and they would not be. That was pie in the sky. So, too, was the big political-capitalism bet that retail gas and electricity would become a major profit center. (As it turned out, Enron’s reported year-2000 earnings of $979 million were lowered the next year to $847 million, and the bankruptcy examiner slashed the final accounting to $42 million. Other Enron 2000 goals would also be eviscerated.)

Trust us, we can replicate our outstanding past was the real pitch of Enron 2000. But what new, large earnings generator would be created? The most important by far was a new profit center within ECT—retail electricity marketing. But that sure thing was hardly certain. MOA on the state level for electricity, Kinder admitted, “puts enormous pressure on us at the corporate level but particularly on ECT to develop the right regulatory and political game plan to make this succeed.” Political Enron would be even more so in the next years, as discussed in the Epilogue.

Corporate Culture

Ken Lay’s strategy for superior performance and company greatness revolved around the workforce. “With the support of employees,” he emphasized, “Enron can achieve its goals and vision to become the world’s leading energy company.”

Enron’s corporate culture was progressive. Time off for special needs; portable health care and retirement plans; a voluntary employee assistance program for personal problems; paid vacation and sick leave; a country-club-like health facility; on-site nursing services; on-site subsidized dining; proactive training programs (including college tuition reimbursement) and an emphasis toward advancement; generous severance agreements in the event of layoffs.²⁰

“At the end of a hard day,” Lay summarized, “I want employees to feel they’ve been fairly paid and are sharing in the success and upside of the company.” But more than this, “I want them to know their efforts are recognized and appreciated.” Supervisors who do not commend good work “are neglecting what I consider to be a fundamental component of management and leadership.”

Enron’s industry-leading compensation and perks were designed to attract and retain superior intellectual capital.²¹ Lay praised Enron’s unit-specific compensation systems relative to the oil majors’ “hierarchical, one-size-fits-all compensation system that has been part of their culture.” Merit pay, skill-based pay, pay for performance permeated the whole corporation, although it was pursued most ardently by Jeff Skilling at EGS/ECT (with decidedly mixed results).

In 1996, Lay proudly pointed to double-digit annual growth in average overall compensation for Enron employees, compared to the annual inflation rate of 3 percent. The result was that “virtually all Enron employees have significantly improved their standard of living during this [five-year] period.” Employee stock ownership was a major contributor to this result.

“It really takes a unique compensation system to compete against the investment bankers or the entrepreneurs that are developing projects,” Lay explained, pointing to ECT and to Enron Development, in particular. “I have been very satisfied with the results of Enron’s compensation program to date [1996],” he added. “We have lost very few of our key developers, traders, or executives we wanted to keep.” Lay pointed to Forrest Hoglund, who two years before garnered $19 million in total compensation, mostly from exercising stock options, to out-earn even the CEOs of the major oil companies. Lay also boasted about the increased percentage of his workforce with advanced degrees: 14 percent in 1995 compared to 4 percent a decade earlier.

An employee survey released in late 1996 rated Enron relatively high in relation to large successful companies (all surveyed by Watson Wyatt & Company) in general satisfaction. Safety was considered a core asset. Enron had a strong sense of urgency, with stockholder welfare foremost. Compensation and benefits were highly ranked—with greater satisfaction levels than in Enron’s last such survey in 1992. Enron’s senior management was trusted and respected for future success, too.

There were some negatives, which a letter to employees from Ken Lay and Jeff Skilling (Rich Kinder had announced his departure) described as “unsatisfactory” and “unacceptable.” Open communication (what Enron promoted as “facts are friendly”) was the major negative. “We made little progress since 1992 to improve the quality of communications across Enron,” Lay and Skilling wrote. “Many of you are still uncomfortable about openly voicing your opinions, and many of you believe that your managers and supervisors do not listen to your suggestions, much less act upon them.” The significance of this employee feedback would be appreciated only in retrospect.

The other problem concerned workload, no doubt emanating from the Skilling side. “While, in most cases, you feel that you are treated with respect and dignity, there is growing concern about job security, workloads, and the impact of cost cutting on work quality which can affect what we deliver to our customers.”

Lay and Skilling promised urgent action on the weaknesses “until we get it right.” The missive ended:

There is a lot that is good at Enron, and most of our competitors would be delighted with our survey results. However, good is not enough at Enron. We want to be outstanding in everything we do. We will continue to lead our industry in innovation and financial performance, but also in the way that we treat our employees and customers. Our goal is to excel in each of these categories. Our future depends on it and we ask your commitment to make it happen.

Corporate Ethics

Enron had high ethical standards—except when it did not. Desperate times required desperate measures to meet earnings expectations and trigger performance awards. “Our employee base and management team,” after all, as stated in Enron’s 1995 annual report, “have strong incentives to see the company succeed through their collective ownership of Enron common stock.”

Short-term profit maximization, particularly at year-end—all to strengthen ENE—created extraordinary moments when what was legal was okay. Gaming the accounting rules or stretching the tax regulations were old hat at Enron by the mid-1990s. And later in the decade, this mentality found a new opportunity—gaming California’s electricity regulations for extraordinary profits.²² But what might be technically legal in the Golden State was not so in the court of public opinion, and even the judiciary gave more weight to fraudulent intent than regulatory punctilio (as US jurisprudence says courts should). Enron’s massive paper profits proved uncollectable when Enron most needed the cash flow.²³

Seeking and acquiring special government favor (called rent-seeking in the jargon of political economy) was legal and thus ethical at Enron. Had not iconic free-market economist Milton Friedman himself declared that the social responsibility of business was to make a profit? Enron’s profit centers were government dependent for the most part. The company’s free-market situations were fewer, but Ken Lay, in particular, interpreted regulation that was merely procompetition to be promarket—and none more so than MOA of interstate energy assets.

Then there was nepotism, part of the Great Man syndrome. This problem existed at Ken Lay’s Enron from the beginning, as discussed later in this chapter.

Enron’s major initiative beginning in 1996 was to become the nation’s leading provider of electricity and natural gas to the homes and places of business. Electricity retailing, in particular, a $200 billion market, was the bet behind Enron 2000: the promise to double the size and profitability of the company in five years.²⁴

As part of a national branding campaign to make itself a household name, Enron enlarged its community-affairs effort and redoubled its “green” energy image. Likable, soulful Ken Lay himself would be the voice of Enron, spending more time giving speeches and working with outside constituencies to boost the image of Enron and of ENE as a momentum stock.

In mid-1996, Enron Business published “a Message from Chairman & CEO Ken Lay” to the Enron community, including shareholders. “Corporate Citizenship: A Priority in the Enron Workplace” alleged the “moral obligation” of corporations to “employees, customers, and shareholders” to “share their success with others in the community.”

“As Enron continues to expand its businesses globally, the responsibilities of corporate citizenship will expand as well,” Lay stated. The effort began with good customer relations that produced value for shareholders. But customers too, Lay said, must see their Enron counterparts as “dedicated, caring professionals who have high ethical and moral standards—a company they want to do business with for a long time.” To that end, “every transaction we undertake should be a win-win for all parties.”

The same must be true internationally, he continued. “For example, our success in bringing back the Dabhol power project back on line is due primarily to the hard work of many employees, underscoring, once again, the commitment we have to our customers and partners.” (In fact, Dabhol, back under construction, would not profitably sell electricity in Enron’s lifetime.)

Grants to education and the environment in 1996 of $5.7 million underscored Enron’s stakeholder commitments. “Our employees are aware that the business decisions they make can have a significant social and global impact in the areas where Enron operates,” Lay closed. “So by striving to create energy solutions that promote a better environment for everyone, and by sharing some of their success with the community, our employees the world over are bolstering Enron’s reputation as a responsible corporate citizen.”

Ken Lay’s views on corporate citizenship were also reflected in a business ethics essay in which he characterized Enron as a heroic enterprise, citing

our role in helping to bring competition and customer choice to two traditionally public-utility industries, natural gas and electricity. Our effort has run the gamut from initiating fundamental regulatory reform to developing new products to meet consumer demand in the ensuing restructured industry.

In fact, Enron’s do-goodism was about political correctness and rent-seeking, not only about real wealth creation, part of a quite nonheroic finale.²⁵

Internally, Lay stressed employee empowerment and trust in a knowledge-driven business. “Our vision and values stress honesty, openness, excellence, and reward,” he wrote. “The result is a dedicated, even passionate, workforce that we believe sets the industry standard.”

Lay also believed that heroic Enron could find “profitable solutions … to social problems” and practice “strategic philanthropy.” The former included Enron’s being “part of the solution to global climate change by making a market for carbon dioxide air emission permits.” The latter meant deploying not-for-profit activity in ways that blended with Enron’s for-profit entrepreneurship. Both initiatives would prove empty for Enron: The required government intervention never activated CO₂ emission permits, and Enron’s venture into urban philanthropy (Enron Investment Partners) was a bust.

“Enron Corp. believes in conducting its business affairs in accordance with the highest ethical standards,” began a letter dated November 30, 1995, from Ken Lay to Enron’s business partners. The annual (anti) conflict-of-interest missive continued:

Enron expects each of its vendors and contractors to maintain adequate records that document its work relationship with Enron. Enron’s auditing department will routinely conduct business ethics compliance audits of certain vendors and contractors with whom Enron does business. Your recognition of our ethical standards allows Enron employees to work with you via arm’s length transactions and avoids potentially embarrassing and unethical situations.²⁶

The letter reminded vendors that “employees of Enron and its subsidiaries are required to comply with Enron’s Business Ethics Policy which requires an employee to conduct himself/herself in a manner which is not detrimental to the best interest of Enron or which could bring to the employee financial gain separately derived as a direct consequence of his/her employment at Enron.” Yet slightly more than one year later, Andy Fastow would set up the sale of Zond wind properties to a group secretly funded by himself, ushering in a new era of conflicts of interest that would lead Enron to unanticipated insolvency.

Accolades

Enron was media hungry—for good news only. Ken Lay despaired of bad press and did not forget his contrarians. ENE, a momentum stock, was pumped by regular press releases announcing project beginnings, advances, and conclusions (if positive). Rule-breaker Enron had a lot of novel dealings, and the financial numbers looked strong.

The hard work of public affairs paid off in 1996 when Fortune magazine’s annual survey of top US public corporations ranked Enron first in innovation. Old and new corporate icons Rubbermaid and Intel were second and third, respectively. For two years, Enron had been voted the most-admired energy company; now a new streak was started with a most impressive category. “America’s Most Innovative Company” became a new tag line at Enron for years to come.

In March 1997, Fortune again ranked Enron first in innovation among 431 rated companies across 49 industries. (Mirage Resorts was second and Intel, again, third.) Enron was ranked the 21st-best company overall (up from 22 the year before) by the more than 13,000 experts choosing the top 10 companies in their field using eight criteria (listed in this chapter’s Conclusion).

Among energy companies, Enron was ranked first, followed by Shell Oil (at 30), Mobil third (40), and Exxon fourth (44). Among pipeline companies, Enron was first for the second year, ahead of Williams, PanEnergy, and Sonat.

Enron was “a very different kind of power company,” Fortune‘s Brian O’Reilly explained in an accompanying article. Ken Lay was the star. “I was trained as an economist, loved free markets, and was convinced that government regulation was causing most of the problems in the gas industry,” stated Enron’s architect. Lay “viewed that national map of gas pipelines differently than just about everybody” by “pushing deregulation” [really mandatory open access], O’Reilly wrote. Explained Lay: “We changed the concept of how the natural gas industry was run—new products, new services, new kinds of contracts, new ways of pricing.”

O’Reilly was impressed: “Gadgets, patents, doodads? At Enron, not a one. Nonetheless, Ken Lay has turned Enron into the most innovative power company in the country.”²⁷

Rich Kinder might caution against self-aggrandizement, invoking such locutions as not smoking one’s own dope or drinking one’s own whiskey. But the media, even the outside world, was increasingly imbibing Enron.

Nepotism

Did conflicts of interest apply to Ken Lay, the one employee who did not report to another Enron employee but only to the board of directors? Not quite; from the beginning, as noted in chapter 1, Ken Lay directed company business to his sister Sharon’s travel agency. (Lay was also a part owner of this business in its early years.) Lay’s number two at Houston Natural Gas, Jim Walzel, thought this highly inappropriate. Nothing like that was proposed or slipped through the cracks under Robert Herring or M. D. Matthews at the old Houston Natural Gas, much less their predecessors Frank Smith and Bus Wimberly.

And there would be more. Ken’s son Mark Lay cut deals with Enron between his two employment stints there, earning three proxy statement mentions. Daughter Elizabeth Lay would later work at Enron (at Azurix, the water subsidiary) but not have a proxy event.

To Ken Lay, business was personal, and the personal was business. “Since he was personally willing to devote 100% of his time, energy, and life to his employer, he felt that the distinction between his employer’s assets and his own was a relatively meaningless distinction,” remembered one confidant.

Travel Agency in the Park (TAP) offered volume savings for the company. Like her brother, Sharon Lay was smart, diligent, and congenial. Her company, in the estimation of many, provided “good service” to Enron. TAP scored well in audits and rebated part of its volume savings to Enron.

But the type of employees and business units that Enron fostered did not like to be told what to do in such areas. Some found deficiencies with TAP and made their own travel plans, even surreptitiously. For a company priding itself on open markets and competition, this was reason enough to leave things decentralized—if not formally brought in house or (competitively) outsourced to a firm or firms. Perhaps domestic and international travel arrangements would be sourced differently, for example.

But Ken Lay expected Enron to go to one place—a family place. Wasn’t it his prerogative as a chairman adding so much value for employees and shareholders? Scale economies were cited, with TAP negotiating volume discounts with hometown Continental Airlines, for example.

Enter Jim Barnhart, the self-described “ad man,” as in administration man. A Florida Gas Company veteran under Jack Bowen, Selby Sullivan, and then Ken Lay, Barnhart rejoined Lay when HNG purchased Florida Gas in 1984. “I was the head janitor, the head copy maker, the head mail boy, the head security guard,” remembered the affable Barnhart. He was responsible for all building matters at 1400 Smith and other locales, as well as transportation (Enron jets, notably), and records administration—20 or more functions in all.

Barnhart’s jurisdiction included corporate travel, which was pushed to Sharon Lay. Some years later, the law department determined that the relationship between the CEO and vendor had become “a proxy deal” under the Securities and Exchange Commission (SEC) guidelines, reportable under “Certain Transactions” in Enron’s Notice of Annual Meeting of Stockholders.

Nobody wanted this disclosure, so the travel contract was put out to bid. Jim Barnhart hired the former head of the Travel Agents Association as a consultant to devise a specification sheet and to compile a bid list to solicit offers.

Major players, such as American Express, stood ready with their own economies of scale, if not economies of scope. Another option was to just decentralize travel, so that different Enron units decided what was best for them. Individual employees, too, might have a relationship or other connection that allowed them to get a good deal. (Online travel reservations were not yet in place, although hometown Continental Airlines’ System 1 was part of TAP’s service.)

Sharon Lay was worried—and told her brother about it during their Sunday night dinners at Ken’s house in River Oaks. Barnhart began to hear things. He visited with Lay, only to be assured that things would be okay.

Bids were submitted. With apples and oranges, Barnhart passed the “hot potato” to Enron internal audit, whose decision came in a management committee meeting. The winner was … Travel Agency in the Park. Barnhart was a bit surprised; his cursory examination had led him to expect a new travel vendor for Enron.

Legal returned to Barnhart the next year asking for a new bid-out on the travel contract. As Barnhart recounted:

I said “Bullshit! What are you talking about?” They said, “Oh yes. We’ve got to put out this proxy every year.” I said, “It’s a multiyear deal.” They said, “No, it’s a one-year deal.”

I said, “I’ll guarantee you it is a five-year deal.” And by the time I went home that day, it was a five-year deal. I got it past [my] retirement [in 1996].²⁸

In 1996, TAP earned approximately $1.6 million in commissions from Enron, as well as additional sums from third parties doing business with Enron, such as the Vinson & Elkins and Andrews & Kurth law firms. The Great Man knew about and appreciated their business.

Mark Lay was smart and cordial. He was a good guy, more reserved than stuffy. He had attended UCLA, where he had been part of the debate team and graduated magna cum laude and Phi Beta Kappa.

In 1990, after short stints with Drexel Burnham Lambert and Credit Suisse First Boston, Mark joined the company where his father was chairman and CEO. Enron was a great gig, and Mark caught a wave at Enron Finance, where Gene Humphrey was devising new approaches to fund natural gas production to contract supply for Enron’s long-term sales contracts. Mark even made Enron’s 1990 Annual Report, a staged hallway work shot with his discerning master and erstwhile critic, Lou Pai.

After two years working on oil- and gas-production payments and otherwise learning the business, Mark left Enron to join AIG. As vice president of trading, he marketed crude oil, natural gas, and petroleum products, both physical and financial. After AIG, Mark went out on his own with different stakes in the fast-paced gas business. It was here that a potential conflict of interest occurred, one that was reportable as an Enron proxy item (the first of three for him).

In April 1994, Bruin Interests LLC, founded and 48 percent owned by Mark Lay, entered into a master storage agreement with Houston Pipe Line Company to inject and withdraw natural gas on an interruptible basis from the Bammel storage field, the largest such facility in the United States. (Firm capacity was reserved by Entex, the local gas distributor supplied by HPL.)

Bruin’s deal aimed to inject during the low-demand months, when prices were relatively low, and withdraw during the high-demand months, when prices typically peaked. The injection was up to eight billion cubic feet during the April–August period, with withdrawal from December 1994 through January 1995.

A supplement to Enron’s 1994 proxy statement announced the pending transaction. After detailing the payment terms and contract rights of the two parties, Enron stated that the transaction was “comparable to those available to unaffiliated third parties.”

The next year, the proxy summary announced a renewal of the interruptible arrangement, this time with an injection fee (around $0.16/MMBtu) and transportation fee payable to HPL by Bruin. A minimum payment protected HPL by acting as a reservation fee. The quantity was six Bcf versus eight the year before.

HPL had never done such a deal in the 30-year history of Bammel, and the first was with the son of the chairman. The proxy statement added: “The Master Agreement and the initial confirmation were subsequently assigned by Bruin to a third party; HPL consented to such assignment.” In other words, Mark Lay’s company planned to assign the deal to another party—the one that had come up with the idea to arbitrage interruptible capacity.

Normally, the actual user of storage (the third party) would have arranged the deal with HPL. But evidently an entry fee was needed for getting inside Enron. Otherwise, it would have to be concluded that two cuts of profit outside of Enron still resulted in more money for Enron than if Skilling’s own maestros had arbitraged the gas.

Enron’s lawyers took it from there in the second go-around. “HPL believes that the terms of the existing Master Agreement are comparable to those available to unaffiliated third parties, and HPL does not intend to engage in or permit any affiliate to engage in any transactions with Bruin except on terms that HPL believes are comparable to those available to unaffiliated third parties,” the proxy read.

“Nobody but Ken Lay’s son or brother-in-law could have made a deal like that,” one HPL official stated years later. “That’s the only time we ever leased out Bammel.” The scuttlebutt was that Jeff Skilling okayed the deal to curry favor with Mark’s father; Lou Pai was nonplussed. A number of Enron insiders held their noses on this one, beginning with the proxy’s introduction of Mark’s deal as occurring “in the ordinary course of its business….”

Another proxy matter involving Mark was reported in 1996 (the third straight year he was a subject of disclosure). “In January 1996, ECT, United Media Corporation (‘UMC’) and certain other individuals, including Mark K. Lay, entered into a feasibility agreement providing for the performance by UMC and ECT of a feasibility study relating to the fixed price purchase and sale of certain paper products.” ECT advanced $300,000, with an option to double this amount for work.

Enron’s UMC contract included third-party outreach with potential paper suppliers. Should the project proceed to commercialization, UMC would receive an equity interest of up to 49 percent. “ECT has been informed that, if the project proceeds, Mark K. Lay would own 20% of UMC’s interest in the project.” Four months later, this deal was cancelled, which was followed by another contract from ECT for Bruin Interests (Mark Lay et al.) to study the iron carbide business.

The next year, another event concerning the chairman’s son was reported. “In May, 1997, Mark K. Lay and certain other individuals … who were formerly officers, directors, and/or shareholders of Paper & Print Management Corporation entered into employment agreements with ECT for the development within ECT of a clearinghouse for the purchase and sale of finished paper products,” the proxy read. In return for “certain intangible property rights,” ECT agreed to “reimburse PPMC $1,005,257.85 in expenses that were incurred by PPMC to a third party in conjunction with PPMC’s prior business.” In other words, lots of present money traded for the potential of profit.

Additionally, Mark received a three-year employment contract guaranteeing $750,000, with $100,000 up front. Enron’s newest vice president had a minimum base salary and bonus per year of $150,000 and $100,000. Stock options were provided as well.

Was the retirement of debt and a sweet employment agreement a bailout for the chairman’s son? Maybe so but maybe not, in that ECT wanted to go in the same direction. The establishment of long-term forward markets for pulp and paper products was innovative and made money—and seemingly provided a happy ending. But Enron would have to invest considerable sums in the process, leaving the verdict in doubt from the perspective of opportunity costs.