Note: This article is part of a series taken from Denise Harrison’s article March to a Different Drummer originally published in Compass Points in August 2002. Although this article was written in 2002, this discussion is timeless. In Part One, published July 1, 2016, we introduced the series. In Part Two, published July 22, we discussed some Historical Examples. Here we discuss another aspect.
Don’t follow the leader!
Enron began as a natural gas company. It saw the deregulation of energy markets as the path to future growth. As it pursued this growth, it transformed itself from its roots, natural gas, becoming an energy trading company to meet the market challenges of the deregulated environment. From trading in energy futures it jumped into paper, water (although not for long), weather futures, and finally into broadband. Enron could do no wrong in the eyes of many analysts and its corporate executives. Let’s look at the history.
Enron’s foray into trading began with hedging future energy costs to combat a turbulent energy market. The company needed to lower its exposure to fluctuating energy prices by entering the market to hedge the forward price of energy. This tactic not only lowered risk, but also generated a significant amount of cash with little capital investment-very attractive results for the capital-intensive energy company. Enron jumped into the trading business with both feet, eventually resembling a financial institution more than an energy producer. The company’s rapid growth was the envy of the industry, the envy of Wall Street growing from $4.6 billion to over $100 billion, the seventh largest company on the Fortune 500 list (2001). For six year’s running it was voted the “Most Innovative” among Fortune’s “Most Admired” companies list.
Now, let’s think about this. Moving from energy producer to a trader of energy is a jump, but sometimes a jump to an adjacent competency is required when an industry is in transition, as the energy industry is in the new deregulated environment. But to assume that this new-found trading competency transcends industry/commodity knowledge is a long shot at best. Enron was initially very profitable as it benefited from its “first mover” advantage, the first to try and understand the new playing field created by energy deregulation. Its success brought competition into the field; now to maintain its profit and growth, Enron not only traded in commodities previously unknown to its personnel, but also started playing financial games to mask the truth about its slowing growth and profitability. While corporate officers either did or did not understand what was going on, their greed and egos caused the demise of Enron. Sadly, Dynegy, Mirant, and Calpine tried to follow in Enron’s footsteps and found that they too had to grow through high risk and questionable financial transactions to keep up with Enron. This was a parade that one needed to be watching, not participating in.
Not all energy companies played in the Enron band. Duke Energy was often castigated for its conservative strategy at analyst meetings during the late 90s. Analysts like the wild ride that Enron was providing (at that time the ride was up). Duke Energy stuck to its guns and remained an energy company that used trading to reduce risk rather than to become a trading company of energy futures. It did not get caught up in the hype and the smoke-and-mirrors transactions of Enron fame. Now, after Enron’s collapse, Duke Energy’s balance sheet remains strong and its prospects for realistic profit and growth are good. Companies that aspired to follow Enron into ever riskier transactions found themselves in trouble.
We will conclude this series with “How to find the right marching beat for your company” in a future post.
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Denise Harrison is a senior consultant for the Center for Simplified Strategic Planning, Inc. She can be reached at email@example.com.
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