For Executives of Enron Unit, the Skill Was in Leaving
By NEELA BANERJEE with SHAILA K. DEWAN
The New York Times
February 15, 2002
HOUSTON - Thomas E. White served 23 years in the Army, rising to the rank of brigadier general. But it was his second career — a decade spent as a top executive of the Enron Corporation (news/quote) — that won him inclusion in the circle of businessmen whom President Bush appointed last year to run the armed services.
"Tom White is one of the most outstanding managers in corporate America," Senator Phil Gramm of Texas said in introducing him to the Armed Services Committee at a hearing on his confirmation as secretary of the Army. "He is a person that knows how to manage people and resources. And when our job is taking the money we have and building the finest army we can build with those resources, I don't have any doubt in my mind that Tom White can do an outstanding job."
Now, though, the collapse of Enron has put Mr. White's résumé in a new light. The unit he helped run in his last years at the company, Enron Energy Services — though it was presented by the company as a big money maker — turns out to have bled cash, former employees said. They describe it as a seemingly smart idea — selling electricity and natural gas supplies to big corporations in competition with the local utility — undone by poor financial assumptions, suspect accounting and lax management oversight.
Both Mr. White, who was vice chairman of the unit, and his boss, a longtime Enron executive named Lou L. Pai, rose quickly, and by the time they left Enron last summer, they seemed set for life.
Mr. White, 58, left with a $1 million severance payment after earning $5.5 million in his final year at the company. Over that time, he sold about $12 million in Enron stock.
Mr. Pai (pronounced pie), the chairman of Enron Energy Services, cashed out all his shares and options, valued at more than $270 million, before leaving the company. That was more than any other executive took away in stock before Enron collapsed. At various times, both men served on the top management committee that set Enron Corporation policy.
Yet despite earlier successes at Enron that won them big rewards and promotions, neither Mr. White nor Mr. Pai appears to have fully understood the energy services business, according to former employees and analysts. Co-workers said the two men contributed to the unit's problems through neglect of the multimillion-dollar deals the business forged, many of which were irreparable money losers.
They portray Mr. White as the charming public face of Enron Energy Services, valuable for his ability to motivate workers but indifferent to the dollars-and-cents details that would determine the unit's success.
"You would talk finances, and Tom's eyes would glaze over," said John E. Olson, director of research at the Houston brokerage firm of Sanders Harris Morris. Mr. Olson, a longtime critic of Enron, nonetheless said he regarded Mr. White as an honest executive, and co-workers described him as a strong leader.
The employees paint a picture of the reserved Mr. Pai as a canny financial theorist and devout free marketer. They say he firmly believed that selling power to big customers could be profitable, but he lacked skill in carrying out his ideas.
"Lou Pai was good at starting things," said Rudy Sutherland, a former Energy Services manager who was part of a team created to sort out a large group of contracts where claims of profitability were suspect. "He was a visionary, but he had no expertise in structuring a fiscally responsible company."
Mr. Pai declined to be interviewed for this article. His lawyers issued a statement on his behalf saying: "Mr. Pai has seen the recent E.E.S.-bashing by certain former employees. He believes the criticism to be completely unfounded. E.E.S. conducted its business with integrity and reported its financial results properly and candidly."
Mr. White did not respond to questions relayed to him through an Army spokesman. In an interview on Jan. 31, he dismissed a suggestion that Enron Energy Services was unsound. "As far as I am concerned, Enron Energy Services was a great business," he said. "We built it from nothing. There were no accounting irregularities that I was aware of."
Both Mr. White and Mr. Pai were fortunate in the timing of their departures from Enron. Government ethics rules required Mr. White to begin selling his stake in the company once he became Army secretary, responsible for the service's $81 billion budget.
As for Mr. Pai, whatever he may have known about Enron's finances, the impetus for selling his stock was a divorce in early 2000. By selling most of his equity, close acquaintances said, it was easier to split marital assets in the divorce. His former wife, Lanna Pai, received half the proceeds.
Now remarried, to a woman with whom he had maintained a decade- long relationship and had a child, Mr. Pai owns a 77,500-acre ranch in southwestern Colorado, making him among the state's largest private landowners.
He is named in a shareholder lawsuit contending that 29 top Enron executives engaged in improper insider stock sales.
Representative Henry A. Waxman of California, the ranking Democrat on the House Committee on Government Reform, has said that Mr. White should testify about his activities as an executive at Enron, but no committee has called him to do so.
When states began deregulating the power industry in the mid-90's, Enron was certain it could make money selling electricity and gas to companies more cheaply than the old-guard utilities. In 1997, it created Enron Energy Services, a pet project of Mr. Pai and of Jeffrey K. Skilling, then Enron's president.
Former Enron executives said that the men became close professionally when Mr. Pai helped Mr. Skilling develop the contracts that enabled Enron to trade natural gas and later, electricity. In 1995, with Mr. Skilling's backing, Mr. Pai became president of Enron's sprawling gas and power trading division.
With Mr. Pai and Mr. White at the helm, Enron Energy Services reported $165 million in operating profit on $4.6 billion in sales in 2000, in contrast to a loss of $68 million on sales of $1.8 billion in 1999, according to Enron's 2000 annual report.
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But the profits turned out to be illusory, according to many former employees. The business, they said, lacked the controls and the scrutiny that would have offered a realistic picture.
In many cases, the division entered into contracts that ended up losing money. Long-term contracts were based on economic forecasts about the price of power that reflected the unit's earnings targets, rather than objective data, according to an economist at Enron Energy Services.
And in the chase for big-name corporate clients — the unit's customers included Lucent Technologies (news/quote), Ocean Spray and J. C. Penney — Enron traded away the right to renegotiate contracts that turned unprofitable, Mr. Sutherland said.
Others also warned of problems at Enron Energy Services. In her August 2001 letter to Kenneth L. Lay, then Enron's chairman and chief executive, Sherron S. Watkins, a vice president for corporate development, said she was concerned about the unit's accounting practices. Enron Energy Services, she said, used "mark to market" accounting, booking the projected profits of its multimillion-dollar contracts in the year they were signed, long before the actual results could be known. Ms. Watkins described company practices today in extended testimony to a House Energy and Commerce investigations subcommittee.
In a letter to Energy Services executives dated Dec. 1, 1999, Debra A. Cash, an auditor with Arthur Andersen, said that the unit had failed to establish policies for such essential functions as "risk management, model development and use, financial accounting and reporting."
Enron has dismissed the problems at the Energy Services unit as normal for a start-up business. The division, which once employed more than 1,000 people, has laid off most of them and is now facing liquidation as part of Enron's bankruptcy filing.
Mr. White joined the Enron Corporation in mid-1990 after serving as executive assistant to Gen. Colin L. Powell, now the secretary of state, when General Powell was chairman of the Joint Chiefs of Staff. He ran the company's power plant business, proving himself by overseeing the construction of Enron's huge Tees- side power plant in England, which one former executive said was built on time and under budget.
Later, Mr. White managed the company's vast network of natural gas pipelines before teaming up with Mr. Pai in March 1998 as vice chairman of Enron Energy Services.
"Tom was viewed internally as being a very strong leader in an organization that had few leaders, though it had a lot of smart people who could get deals done," a former Enron executive said. "When he went to E.E.S, it was thought he could bring a complement really needed to Lou."
On his appointment as Army secretary last year, Mr. White joked that he and the business executives who were named secretaries of the Navy and the Air Force would serve Donald Rumsfeld, the defense secretary, as "C.E.O.'s of wholly owned subsidiaries of the Department of Defense."
Experts on Pentagon management said it was too early in Mr. White's tenure to assess his performance as Army secretary, a post they said required more political skill than business acumen.
"As complex as Enron is — as far as who did what, who does what — the Army is tougher," said Dan Goure, vice president of the Lexington Institute, a policy research group in Washington. "It's older, has lots of traditions, has more complex and incomplete paperwork. It's very difficult to manage."
Senator Gramm, whose wife, Wendy, is a member of Enron's board, maintains a high regard for Mr. White, a spokesman, Larry Neal, said. "Senator Gramm believed then that after a lifetime of military and corporate experience, General White would make an excellent secretary of the Army, and now he has," Mr. Neal said. "In the absence of substantial and honest evidence to the contrary, the senator's views are unchanged."
Mr. Pai maintained a distance from the unit's everyday workings, colleagues said. The youngest in a Chinese immigrant family sparkling with professional accomplishment, Mr. Pai received a master's degree in economics from the University of Maryland and worked as an economist for several federal agencies, including the Securities and Exchange Commission, in the 1970's. He moved to Houston in the 80's to work for Conoco (news/quote) and was hired at Enron by a friend from graduate school.
People who knew Mr. Pai at Enron say he was reserved to the point of seeming aloof. A sales manager recalled that other executives, including Mr. Skilling, scrutinized his contracts more closely than did Mr. Pai — who, he said, would sign off with a perfunctory "good deal."
During most of his time at Enron Energy Services, Mr. Pai was tangled in marital problems. In the early 1990's, he became involved with a married woman named Melanie Fewell. When Ms. Fewell divorced her husband in 1996, he described Mr. Pai in court documents as her "paramour" and employer.
Mistakes did not seem to daunt Mr. Pai. In a 1999 interview with The New York Times (news/quote), he said, "You can't sit there and punish people for trying."
But he conceded that if Energy Services miscalculated its prospects, the market would discipline it severely. "If we don't execute," he said, "we're toast." |
