The Story of the Enron Europe Company - Essay Example

and Section Enron Europe Located at London’s exclusive Grosvenor Place, the headquarters for Enron Europe -- the parent corporation’s continental holding company -- featured nearly 30 million dollars worth of the very latest and most sophisticated telecommunications equipment, state-of-the-art catering and health club equipment, luxury executive furniture and business suites, and copious amounts of commissioned artwork. Emblematic of the company’s spectacular fall from grace, the auction of the aforementioned materials was, in early 2002, the largest in U.K. history (“Auction”). At its height, Enron Europe controlled over 400 companies on the continent (Dey) and billions of dollars in energy contracts. Pre-collapse, the company’s business throughout Europe was growing rapidly, with ‘per day’ natural gas and power volumes more than doubling from 1999 to 2000. The only pan-European energy player, Enron leveraged its cross-border capabilities to aid in ‘liberalizing’ continental markets. In total, Enron’s European power volumes increased to 50 million MWh in 2000, up from 7 MWh the previous year. The company was an active player in Britain, France, Germany and Switzerland. In Spain, Enron planned to develop a 1,200-magawatt plant to take advantage of the country’s quickly growing energy demands (Barreveld 14). Those plans were never realized, and the unfinished plant’s physical assets were later auctioned off (“Top Bid”). In short, before the financial realities brought about by extremely creative interpretations of accounting and auditing rules caught up with it, the company was well on its way to becoming a major factor in European energy markets. On November 30, 2001 Enron Europe filed in British courts for protection from creditors. It was then placed under the control of PricewaterhouseCoopers as administrator (Rich 1). At the time, the accounting firm estimated that creditors might receive 20 – 25 percent of the total debt, though advising that the aggregate value of Enron’s European assets remained unclear. The expected recovery was between $750 million and $1 billion, after the projected sale of assets (Lambert). At the time the administrator was appointed, Enron Europe only had $20 million in the bank, a grossly inadequate amount to pay an estimated $300 million annual wage responsibility (Dey). Among the first acts of the administrator was to seek a buyer for Enron’s metals-trading unit, London-based Enron Metals Limited, which had been one of the most significant traders on the London Metals Exchange. On January 29, 2002 the unit was purchased by Stamford, CT-based Sempra Energy Trading for $145 million (“Timeline”). The new business entity was renamed Sempra Metals Limited and continued to be based in London. While not placed in administration, Enron’s Wessex Water utility unit in Britain was part of the fire sale resulting from the bankruptcy. It was sold to YTL Power, a Malaysian energy group, for $1.8 billion. The bid triumphed over a competing offer from a consortium led by Royal Bank of Scotland and Abbey National. The proceeds from the sale satisfied almost all the debts of the Enron subsidiary, Azurix, which controlled Wessex Water, but left very little for Enron creditors. The Azurix business entity was phased out, with its debts paid off. The former Enron subsidiary paid nearly $3 billion for Wessex Water in 1998. The company’s outstanding bonds held a value of around $1.7 billion just before the bankruptcy. (“UK Water Firm”). Enron’s single biggest European asset, Britain’s Teesside Power Limited, was taken over by U.S. agricultural giant Cargill and investment bank Goldman Sachs, the two controlling a respective 70/30 percent share (Harrington). In February 2008, the power plant was purchased by French merger partners, Gaz de France and Suez for a reported $300 million. Teesside is currently Europe’s largest combined cycle gas turbine plant and can fulfill up to 3 percent of the U.K.s electricity needs (Milner). In the latest transaction involving former Enron European properties, the distressed debt division of Germany’s Deutsche Bank acquired Teesside Gas Transportation for approximately $50 million in late March. Enron had originally purchased the gas pipeline business at the same time as the power station. It controls the rights to the 250-mile Central Area Transmission pipeline network until 2018 and marketing rights in the North Sea, as well as handling about 12 percent of the U.K.’s gas. The sale proceeds will go to Enron’s creditors. The bank already owns a gas processing plant in the vicinity, and is expected to combine operations (Dey). In Sardinia, Italy, Enron Dutch Holdings B.V. once owned a 45 percent share in Sarlux, the worlds largest gasification facility. The plant was ordered in 1996, and completed in 2000. Originally a joint venture between Italian refiner Sara and Enron, the project was completed by a business consortium including Snamprogetti SpA (Milan) and GE Power Systems. The plant is utilized in conjunction with the Saras Oil Refinery in Sarroch, which is the second largest European refinery. In June 2006 Saras, which previously held a 55 percent share in the plant, was given full control when it exercised a call option on the Enron Dutch portion (“Saras”). Elektrocieplownia Nowa Sarzyna S.A., previously a wholly owned Enron subsidiary in Poland, constructed a $120 million power plant in Nowa Sarzyna in the late 1990s. It was the first gas power plant built in the country as a ‘green field’ project, producing lower amounts of emissions then conventional power plants. Construction began in 1998, and the power plant commenced operations in June 2000 (“Elektrocieplownia Nowa Sarzyna”). After Enron’s bankruptcy, the plant was transferred to Prisma Energy International Inc. in the quarterly period ending December 31, 2004 (“Securities and Exchange Commission”). The plant is now owned by Houston-based energy giant AEI, Inc. No discussion regarding Enron’s business dealings in Europe would be complete without mentioning Rebecca Mark, now Rebecca Mark-Jusbasche, one of the most infamous figures in the Enron drama. She was among the few to escape from the debacle relatively unscathed. She was flatteringly described in a New York Times article thusly: “Globe-trotting in stiletto heels and a miniskirt, Rebecca Mark was Enrons flashy ambassador abroad” (Murphy). Mark was continually subject to criticism from other Enron executives for her expensive use of chartered jets and other uses of funds judged to be frivolous. Since Mark was paid according to the estimated value of a given business deal, fiscal responsibility was predictably not a primary concern when generating new business. Depicted as a “media darling,” Mark headed various international business development divisions within Enron and was once considered a serious contender for the CEO slot post-Ken Lay. She was voted twice to Fortune magazines annual index of the most powerful women in business, and was invited to become a member of the powerful Council of Foreign Relations as well as to attend the World Economic Forum in Davos, Switzerland for five consecutive years (Hawn 1). Best known for her leading role the disastrous decision to build a power plant at Dahbol, India (which cost the company an estimated $900 million), she was forced to resign in August 2000 while chief executive of Azurix, an Enron water subsidiary. Reportedly, the subsidiary suffered through a disastrous 69 percent decline in its second-quarter net income (“Company News”). Cashing in her shares shortly after leaving the company, Mark pocketed $82.5 million. After the company became insolvent, as part of a $13 million settlement with shareholders, Mark paid $5.2 million. She later cooperated with a Senate committee investigating Enron’s international deals (Murphy). Although Enron’s 2001 bankruptcy was a huge international business story, and sent ripples all around the globe, economically the collapse had relatively little impact outside of the United States. The company’s European assets passed unto new owners with minimal economic disruption (Armour 417). However, even before the extent of the company’s troubles were out in the open, continental governing bodies, such as the European Commission, were holding high level meetings focused on shoring up the existing regulations that controlled corporate accounting principles, audits, and auditors. The goal was to prevent an Enron-like financial meltdown in any European company. These efforts, while they might have had some positive impact, did not ultimately attain the stated goal. Dubbed “Europe’s Enron” Italian dairy producer Parmalat, $18 billion in debt, filed for bankruptcy in 2003. It was the largest bankruptcy in European history. Parmalat’s new management team sued its creditors, among them Citigroup, Inc., for failing to take the necessary steps to prevent the company’s bankruptcy under the previous leadership. Calisto Tanzi, the company’s former chief executive, went on trial in Rome, Italy on March 14. He is charged with fraudulent bankruptcy for allegedly hiding the burgeoning debt of a firm, which he guided to become one of the world’s biggest food companies from humble beginnings as a small family business trading in salami. Judges are tasked with wading through an estimated 10 million pages of documents to decide if Tanzi and his top executives consistently and deliberately misstated the amount of company debt on the books (Kington). On April 15, New Jersey court judge Jonathan Harris dismissed Parmalat’s conspiracy, fraud, racketeering and unjust enrichment charges against Citigroup. However, a hearing for a trial on charges of aiding and abetting is set for May 5 (Marcus). In another legal venue, it was announced on April 22 that Parmalat will seek more than $16 billion in damages from Citigroup as part of the ongoing fraudulent bankruptcy criminal trial being held in Parma, Italy (“Italy”). In the wake of the Parmalat bankruptcy, early in 2004 European Union internal market commissioner Frits Bolkestein forcefully advocated for tighter accounting standards in member states, asking for “quick implementation” (Taub). The new rules, revealed in March 2004 incorporated closer state examination of auditing firms, more stringent standards regarding auditing ethics and independence, harsher penalties for malpractice and greater global cooperation between monitoring agencies. At the core of the stratagem was the implementation, from Jan. 1, 2005, of IAS (the new International Accounting Standards), which enhanced accounting disclosure, in conjunction with the Transparency Directive (“After Parmalat”). The Transparency Directive created a framework for companies throughout Europe to adopt uniform standards of information disclosure. Its primary objective is to identify business information that is required to be disclosed on a periodic basis, and the way in which such disclosures should occur (“Transparency Directive”). With greater transparency across the EU capital markets and improved financial reporting, the new rules are designed to prevent the occurrence of another Parmalat-like scandal. The Directive took effect in the U.K. from January 20, 2007 (“RNS”). A less publicized European accounting scandal involved Amsterdam-based Royal Ahold, a major international supermarket operator. In 2003 it came to light that executives at Ahold’s American subsidiary, U.S. Foodservices, had inflated suppliers’ promotional rebate. After having to restate earnings by more than $800 million due to the problem, Ahold’s share prices plummeted and it teetered at the brink of bankruptcy. In 2007, U.S. Foodservices was sold for $7.1 billion to private equity firms Clayton, Dubilier & Rice Inc. and Kohlberg Kravis Roberts & Co., ending the transatlantic partnership (Tse). The two scandals did much to dispel the European belief that Enron-like scandals were problems unique to the United States, and that, “it couldn’t happen here.” The aforementioned tightening of accounting and auditing standards were put in place to assure that no similar events of that magnitude would occur again. Currently, though, not satisfied with the improved transparency and reporting, members of the European Parliament (MEP) are calling for increased accountability from the privately run International Accounting Standards Board, by having it placed under the control of a democratically-elected government oversight entity (Fine). In the years since its 2001 collapse, Enron has become a worldwide symbol of corporate greed and corruption. Although the company’s collapse was not as damaging economically in Europe, it initiated a movement to ensure greater accountability and transparency in business transactions across the continent. Apparently, the lessons of Enron were not completely absorbed, as the two noted major accounting scandals revealed. Enron-related aftershocks continue to appear in European news, albeit at an infrequent pace. On February 22, three disgraced British bankers were sentenced by a Houston judge to 37 months imprisonment for their part in a fraudulent $7.3 million deal with Enron in 2000. The “NatWest Three,” David Bermingham, Gary Mulgrew and Giles Darby will serve their time at Allenwood prison in Pennsylvania. The three were extradited to the U.S. from Britain, causing a mild firestorm of complaint about American “judicial overreach.” Some British officials continue to protest the lowered extradition hurdles with the U.S. (Clark). Enron Creditors Recovery Corp. announced on April 1 that it would pay an additional $1 billion to creditors, bringing its payout total up to $14.56 billion. It is the company’s 21st monetary distribution since November 2004 (“$1 billion”) On April 24 it was announced that that United States Bankruptcy Court for the Southern District of New York approved Enron Creditors Recovery Corp.s $1.66 billion settlement with Citigroup in connection with the ‘MegaClaims’ litigation. Enron Creditors Recovery Corp. filed the litigation in 2003 against eleven global banks (“Court Approves”). Among the banks involved in the suit are several located in Europe -- The Royal Bank of Scotland, Credit Suisse, Barclays and UBS A.G. (“Litigation Overview”). In conclusion, Enron continues to be a cautionary tale for companies all around the globe. It remains to be seen whether increased financial scrutiny abetted, by U.S. legislation like the Sarbanes-Oxley Act of 2002, will be a long-term solution to the ongoing problem of enforcing existing accounting and auditing standards. In Europe, business leaders hope that the steps taken to improve corporate accountability will be sufficient to avoid another Parmalat, a story that is still unfolding. Works Cited “After Parmalat: the policy implications.” European Commission: SMN 33 Apr. 2004. 25 Apr. 2008 . Armour, John and Joseph McCahery, eds. After Enron: Improving Corporate Law And Modernising Securities Regulation in Europe and the US. Oxford: Hart Pub, 2006. Barreveld, Dirk J. The Enron Collapse: Creative Accounting, Wrong Economics Or Criminal Acts? Bloomington, IN: iUniverse, 2002. 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Murphy, Kate. “10 Enron Players: Where They Landed After the Fall.” New York Times 29 Jan. 2006. 26 Apr. 2008 . Rich, Jennifer L. and Saritha Rai. “Enron’s Collapse: The Holdings; Questions Surround Assets Abroad.” New York Times 30 Nov. 2001. 25 Apr. 2008 . “RNS and the new Transparency Directive.” London Stock Exchange 11 Dec. 2006. 25 Apr. 2006 . “Saras Gains Control of Sarlux IGCC Plant.” HighBeam Research - News brief from Gasification News 15 Jun. 2006. 26 Apr. 2008 . Securities and Exchange Commission. File No. 70-10200. Certificate of Notification (Rule 24) By Enron Corp. 1 Mar. 2005. 26 Apr. 2008 . Taub, Stephen. “EU: New Accounting Rules On the Way.” CFO.com 22 Jan. 2004. 24 Apr 2008 , “Timeline: Enrons rise and fall.” Financial Times 12 Feb. 2002. 25 Apr. 2008 . “Transparency Directive.” HM Treasury: EU financial services. 25 Apr. 2008 . Tse, Tomoeh Murakami and Krissah Williams. “Royal Ahold Sells U.S. Foodservice to Private- Equity Firms.” WashingtonPost.com 3 May 2007. 25 Apr. 2008 . Read More