Enron Ascending

Chapter 5Recovery: 1988–1989

Ken Lay had made big bets in precarious markets. At HNG, he had richly bid to win Transwestern Pipeline and then Florida Gas Transmission, overpaying somewhere between $100 million and $200 million (10–20 percent of the purchase price). Lay then had InterNorth overpay for HNG by at least $5 per share, or about $150 million. Although pushing that imprudence was arguably his fiduciary duty as the seller in the transaction, it was also driven by his desire to remove a pending shareholder suit. In a further act of pain avoidance, he then bought out Irwin Jacobs and Leucadia at a shareholder cost of $200 million.

Roughly $500 million—or about one-eighth of Enron’s total debt of $4 billion entering into 1988—was attributable to Lay’s aggressiveness, even hubris. And then came Valhalla’s $142 million oil-trading loss ($85 million, after-tax), which could have been far worse. If not for some deft cleanup, Ken Lay’s career might have taken a new turn in 1987 and changed business history.

As 1988 dawned, capital spending was down to a maintenance level of $185 million, about two-thirds of 1985’s actual. ENE’s dividend was frozen, as were the salaries for Enron’s top 60 corporate officers. A hiring freeze was in effect for major parts of the corporation. But greater efficiency was the good news amid the bad. From the time of the merger, pipeline cost per unit of gas delivered was down one-fourth, which included a reduction in field personnel of 23 percent. ...