The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (12 page)

Even with these advantages, though, the project was a high-risk venture that could well have fallen apart at any number of junctures. Wing and his 20-member team would need to line up producers to provide the huge gas supply for the plant, some 300 million cubic feet a day. Since the nearest gas fields were beneath the North Sea, they had to arrange construction of a new 140-mile pipeline. They had to find customers for the steam and electricity Teesside would produce. They had to arrange the project’s $1.3 billion in financing.
And
they had to construct a plant in a scant 29 months, a plant that was twice the size of anything Enron had ever been involved in before. Each of these factors brought its own set of complex negotiations, and any one of them could have brought the project down.

The gas-supply deal fell into place first, struck with the big oil companies that were drilling in the North Sea, which also agreed to build the pipeline. Finalizing agreements to sell Teesside’s power proved a tougher sell. ICI would buy the steam and a little of the electricity. But well into 1990, most of Teesside’s electrical capacity remained unsold. Frustrated at the lack of progress, the companies supplying the gas set a deadline: if Enron didn’t finalize the electricity sale by then, they would pull the gas contract, which would finish off Teesside before it even got off the ground. Wing and his team met the deadline by exactly four minutes, completing a big signing ceremony at 11:56
P
.
M
. on September 10, with Teesside’s new customers, four regional electric companies that also became 50 percent partners in the plant. In a press release, Lay seemed almost palpably relieved that Enron had brought Teesside to “contractual reality.” The first crisis had passed.

The next big hurdle was the financing. In any power-plant deal, the financial close is a major event. It means that the developer (in this case, Enron) will immediately be repaid the millions in expenses it has incurred to get the project off the ground. Teesside was supposed to be built largely with borrowed money: project financed, as they say in the business. Project financing allows developers to stretch their own capital by investing just a sliver of the cost of any project. Instead of looking to Enron for repayment of the debt, the lenders would instead rely on cash flows from the project, comforted by the presence of the long-term contracts for gas supply and purchase of the plant’s power and steam. Because the financing was non-recourse, Enron would have no legal obligation to cover any default. The equity investment in such financing was often split with partners, which means Enron could build and control projects in which its own money represented as little as 10 percent of the total cost. At Teesside, Enron would have to lay out an equity investment of only $150 million to buy a 50 percent interest in the $1.3 billion project.

Or at least that was the theory. In reality, the Teesside financing—the biggest such private power deal ever—had proved difficult to close. In November 1990, with all the other elements in place but the financing still cloudy, Lord Wakeham granted official approval for Teesside to be built. Enron now faced a dilemma: the entire project depended on meeting a string of tight deadlines. But if Wing started construction right away, Enron would have to foot the bill. And what if the financing
never
closed? Wing urged Houston to roll the dice. With Houston’s approval, he made a point of starting construction on the day Wakeham gave his approval. For six nerve-racking months, Enron used its own money to carry the project forward, ultimately laying out $300 million in cash toward getting Teesside built.

The financing eventually did close; Goldman Sachs took the lead in arranging the $1.3 billion loan from a syndicate of international banks. Along the way, there were plenty of ruffled feathers, hardly a surprise given who was running the show for Enron. At one point, Wing carried on an argument with a Goldman executive on the streets of London that became so animated that he finally yanked on the banker’s necktie. Lay called the next day to pass on the dismay of the top brass at Goldman Sachs. When progress inevitably bogged down, Wing assumed his old role as jam-breaker. “The time for dancing is over!” he declared to a roomful of lawyers, pounding his fist on the table. “The time for killing has begun.” In June 1991, the financing was completed.

With construction crews working round the clock, Teesside was up and running on March 27, 1993, on schedule and under budget. It proved a hefty profit center for Enron all through the 1990s. Even before Enron switched on the plant, the company was booking juicy construction and development fees to hit its quarterly earnings targets. The construction of Teesside alone generated profits of more than $100 million.

Few outside Enron knew how much risk the company had taken to build Teesside, and afterward, few cared. But long after Wing had departed, the Teesside team cut one final deal that Enron would come to regret.

To get the producers to build the new North Sea pipeline, Enron had agreed to reserve half its capacity, even though it needed only a quarter of the capacity for the gas it purchased to fuel Teesside. Wing had assumed that once the pipeline was in place, other gas buyers would crop up for the additional natural-gas production that was coming online in the North Sea, and that they would use the Enron capacity to move it from well to customer. The other possibility was that Enron itself would use the capacity, for a second gas-fired plant.

By early 1993, the buzz about Teesside had helped generate a near frenzy in Europe about gas’s rosy prospects, setting in motion what was dubbed “the dash for gas.” It was at that very moment, with prices near their peak, that Enron signed a long-term contract to take another 260 million cubic feet of gas per day, starting in 1996, from North Sea fields known as J-Block. That was enough gas to fill the rest of the pipeline capacity that Enron had reserved, giving the company twice as much as it needed for Teesside.

Here’s the most astonishing part, though: the J-Block purchase, negotiated with a consortium led by Phillips Petroleum, was a take-or-pay agreement. Despite all the problems Enron had had with take-or-pay in the United States, it had agreed to do it again in England. The company’s executives in Britain were betting, just as their U.S. colleagues had years before, that natural gas prices would continue to rise, allowing Enron to make money by either using the gas to supply a second plant or selling it to other customers.

Because the J-Block deal was negotiated by Wing’s old deputies, there are those who believe Wing—who had by then left Enron yet again—offered his tacit support of the purchase. But Wing himself later insisted that he knew nothing about it and was horrified when he heard what had been done. And in fact the agreement had required the approval of Enron’s top executives back in Houston.

As it turned out, the J-Block bet was horribly wrong and would trigger a major crisis at Enron. But that came later. In the immediate euphoria of the Teesside deal, nobody paid attention to the huge mistake the Teesside team had just made.

 • • • 

During the years he was putting together Teesside, Wing officially remained a consultant to Enron. But it was a very odd arrangement. Though he wasn’t formally an Enron employee, he was unquestionably in charge, and almost everyone he hired was brought in as an Enron executive.

Most had backgrounds much like Wing’s. His top lieutenant was his old West Point roommate, Bob Kelly, who held a doctorate in economics from Harvard. To supervise the plant’s construction, he reached into the Pentagon for another West Point grad, Brigadier General Tom White, a former Vietnam tank commander who served as General Colin Powell’s personal aide. White was assisted by a retired three-star general, Lincoln Jones.

Harvard Business School provided Wing’s second major talent pool. Mark Russ, a navy veteran, signed on after Wing swooped into Boston’s Logan Airport to recruit him during his second year. Russ recalls Wing’s bounding out of an Enron jet, dressed in cowboy boots and a sweater emblazoned with a big American flag. They talked for hours. “Mark,” Wing told him, “everyone I’ve ever hired is a millionaire.”

Working for Wing was indeed lucrative, but it was also brutal, like fighting a war. “Everyone I’ve worked with, I’ve sledgehammered a bunch of times,” he later said. “With each person, you try to find the right combination of cheerleading and ass kicking.” Wing’s team in London worked around the clock; he didn’t hesitate to call anyone at 5
A
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M
.
He held a staff meeting every morning at seven, and it wasn’t unusual for staffers to show up at those meetings in the same clothes they’d worn the night before. Ever the master negotiator, Wing was also grandly manipulative with his own staff. He’d periodically tell even trusted subordinates they were failures, strip them of their titles, or make them report to someone junior. “We were all fired at least ten times,” recalls one member of the team. Those who worked directly for Wing never quite knew where they stood. Which, of course, was the idea.

No one endured the Wing treatment, professionally and personally, quite like Rebecca Mark. Mark signed on to the development team in 1986, hired by Kelly to work in finance. She was in her early thirties at the time and married, with twin baby boys. She soon became Wing’s protégé—and his lover. As a former Enron director later observed, “That’s like putting two firecrackers together.”

For years, the two were locked in a stormy personal relationship. But at work, Wing (who also was married) treated Mark even more harshly than other subordinates. In 1988, after Mark enrolled at Harvard Business School, her husband began divorce proceedings; the split was finalized a year later. Mark had made noises about hoping Harvard would provide some distance from Wing. Yet even in school, she continued to work for him, helping develop a small power plant outside Boston during the school year and spending the summer in London, working on Teesside. In the spring of 1990, she completed the last final exam for her MBA, then jumped on a plane for England that night. Although she held the title of president and CEO of Enron Power by then, Wing sometimes treated her like a secretary, ordering her to fetch his coffee or type his letters. A member of Wing’s Teesside team says: “It was like some on-again, off-again relationship out of a novel: ‘Fight, sleep together; fight, sleep together; fight, sleep together.’ ” After one particularly brutal day, Mark collapsed in tears in a colleague’s arms. “Why does he treat me like this?” she sobbed.

Months later, after the relationship had finally ended, Mark was visiting Wing in Aspen when
another
woman with whom he was involved burst into the house to confront him. Ultimately, Wing confessed his infidelities in an extraordinary letter to his wife, Karen. In it, he listed a string of women he’d slept with during their marriage and professed shame at his indiscretions. Karen Wing and Rebecca Mark ended up commiserating with each other. Wing, meanwhile, vowed to make up for his actions. The Wings quietly divorced, and Karen received a large settlement.

But Wing and Mark’s relationship reverberated for years. In the aftermath of their affair, Wing told friends that Mark continued to hope that he would marry her; he also openly derided Mark’s contribution to Teesside. For her part, Mark confided that she felt Wing would rather see her fail than succeed without him. She also said, though, that she’d learned a great deal from Wing.

But during their future business encounters—and there were more—the bitterness between John Wing and Rebecca Mark was palpable. Their workplace affair soon entered into Enron legend and forever cast a shadow on her rapid rise.

 • • • 

In February 1990, as Teesside was becoming a reality, Ken Lay decided to tear up Wing’s old consulting agreement and give him a new one that was even more lucrative. Under Wing’s new five-year agreement, his fee rose to $600,000 a year (from $400,000), and he got a new title (chairman of Enron Power Corporation), and a new bonus: $1 million, which he would receive upon Teesside’s financial close. Most important, in exchange for a modest equity contribution, Wing also received a 3.5 percent stake in the project.

It wasn’t long, though, before Wing was dissatisfied with his new deal. By early 1991, people inside Enron were beginning to sense that Teesside was going to be a very big deal for the company’s bottom line, surely the biggest win in the company’s history. Wing returned to the United States, flush with success and determined to set fresh terms for any continuing association with Enron. “Wing got this air of invulnerability, the Midas touch,” says an Enron executive who worked closely with him. “He used to tell me, ‘I can hire anyone and turn them into a power developer.’ ”

He arranged an audience with the company’s board to state his terms. In essence, Wing was ready to demand almost total autonomy. He wanted an affirmation of his right to continue to operate out of the office at the Woodlands. (His refusal to move into Enron’s headquarters had long been a sore point.) He wanted the right to name a bloc of his own directors for Enron Power. And he wanted to take the power-development business public; one investment banker had already run numbers projecting that an Enron Power IPO would produce a public company with a market value of $1 billion or more.

This time, though, Wing’s timing was less than perfect. For despite the Teesside triumph, there were forces at Enron strongly agitating to rein him in. Despite his record for making the company money, Wing had always been viewed by many at Enron headquarters with a mixture of jealousy, fear, and distrust. He always seemed to be out for himself. He was certainly no team player; he made little effort to disguise the contempt he harbored for most of the executives who worked at other Enron divisions. The consensus at headquarters—and this very much included Ken Lay—was that Wing’s operation should move downtown so that the company could better control it. Certainly, Lay was not interested in making Wing
more
independent.

Wing and Enron were on a collision course, and the point of impact was a July 1991 board meeting, set for Old Baldy, an exclusive golf and fishing resort in Wyoming. On the afternoon the board members and select executives began arriving in Enron jets, Wing played a round of golf with a director named Jack Urquhart, an old friend from General Electric. Lay had already warned some directors what was up: Wing was talented, he told them, but he drank too much and was hard to control. Now, out on the course, Urquhart advised Wing to be conciliatory. “You’ve got to do what the CEO wants,” Urquhart told him. “Not really,” Wing responded. That evening, Wing advised his top lieutenents—Mark, Kelly, and White—that a showdown seemed imminent.