Rebecca Mark's Exit Leaves Azurix Treading Deep Water

August 28, 2000

Page One Feature
Rebecca Mark's Exit Leaves Azurix Treading Deep Water
By REBECCA SMITH and AARON LUCCHETTI
Staff Reporters of THE WALL STREET JOURNAL

Four years ago, Rebecca Mark and Jeffrey Skilling were running neck-and-neck at Enron Corp., both of them rising stars equally likely to lead the Houston energy colossus one day.

Both were in their early 40s with M.B.A.s from Harvard University, and both headed divisions deemed critical to Enron. Ms. Mark, one of the highest-profile woman executives in America, directed the company's international division. She had just snatched a multibillion-dollar power project in India from the jaws of political defeat. A glamorous figure not afraid to tramp through the jungle or take a tough line with bureaucrats to get her way, she had pulled off other big-ticket projects, including a 1,100-mile natural-gas pipeline from Bolivia to Brazil.

Mark Resigns as Head of Azurix, Gives Up Seat on Enron's Board (Aug. 25)

No less tenacious, Mr. Skilling was the brains behind Enron's burgeoning commodities-trading business, which was seeking to place the company at the commanding heights of markets ranging from electricity to wood pulp to natural gas.

Today, Mr. Skilling, 47 years old, stands triumphant at Enron as its president and heir apparent to Chairman Kenneth Lay. Ms. Mark, 46, is gone. Their respective fates stand as testimony to the effectiveness of their competing business strategies.

Mr. Skilling believed that Enron should own an asset for as long as it took to learn the secrets of a given business and that it must be willing to sell the asset if a better opportunity for the money arose. Ms. Mark pursued a more traditional and capital-intensive approach that involved buying or building "big iron," the generating facilities, pipeline networks and distribution companies that form the backbone of the global energy system. While Mr. Skilling saw command of information as enough to ensure Enron's primacy in volatile and fast-moving markets, Ms. Mark argued that a well-placed, permanent physical presence was equally critical.

Two years ago, Ms. Mark got a chance to prove the primacy of her point of view when Enron staked $1 billion on creating a global water company called Azurix Corp. and put her in charge. The idea was to establish a beachhead as governments from Argentina to the United Kingdom began privatizing the heavily regulated water business. But almost from the start, Ms. Mark's initiative -- critically dependent on making speedy investments in a politically sensitive sector -- stumbled. Despite a successful initial public offering in June 1999 that raked in $695 million, Houston-based Azurix has fallen short of analysts' earnings estimates since the fourth quarter last year. Its stock price, which started out at $19, now hovers below $5. On Friday, Ms. Mark resigned from her position as chairman and chief executive of Azurix and simultaneously stepped down from Enron's board.

"A lot of capital has been chewed up," says Mr. Lay, who has worked with Ms. Mark for 18 years and whose company remains by far Azurix's biggest investor. "I think it's best for Rebecca to start afresh." Ms. Mark didn't respond to requests for an interview.

Mr. Skilling has moved from one victory to another, spearheading what has become the biggest generator of profits for Enron. Started as a traditional gas-pipeline company 15 years ago, Enron has lately morphed into the largest trader of gas and electricity in North America and a formidable manager of risk, its own and others', in markets for an array of products. It has in essence invented markets for trading such nontraditional commodities as unused capacity in fiber-optic telecommunications lines and weather derivatives -- which allow, say, an aluminum smelter to bet on future rainfall that might influence its power costs. Its Web-based trading business, EnronOnline, has handled transactions with a nominal value totaling $125 billion since it was started last November, and Enron has either been the buyer or seller in all of them. Such trading activities contributed the lion's share of Enron's $289 million in second-quarter earnings, up 30% from a year earlier.

They also generate a much bigger rate of return while tying up less capital than do the kind of traditional infrastructure projects pursued by Ms. Mark. While Azurix's stock has dropped 45% since the start of 2000, Enron's shares have nearly doubled, and its price-to-earnings ratio, a proxy for the value investors place on a company's profits, is a lofty 61. "We will tie up capital only where there are high rates of return," says Mr. Skilling, whose new office in a 40-story tower Enron is constructing in Houston will be at the heart of its vast trading operation. Enron's multifaceted trading business, he adds, gives "us a once-in-a-lifetime opportunity to establish a position to last for the next 100 years."

That's what Ms. Mark thought, too, when Mr. Lay gave her the go-ahead to set up Azurix. Mr. Lay had always backed her as a potential leader, even keeping her on the payroll while she attended Harvard as a single mother with twin sons. With seven years of experience pounding the turf for Enron in developing countries, Ms. Mark believed governments were ready to embrace private capital as a solution to fixing their troubled water systems, just as they had done by privatizing their electricity grids and phone companies. "Water is the commodity of the next century. That's what she'd say," says John Garrison, who succeeded Ms. Mark as chief executive of Azurix.

Knowing that she had to show results quickly, Ms. Mark in short order bought water companies or concessions in Britain, Argentina and Mexico and formed a Brazilian joint venture. But nearly from the start, things went wrong.

In Argentina, one of the water concessions had such faulty billing systems that Azurix couldn't collect from most of its customers. Then, the company was accused of selling inadequately treated water in the city of Bahia Blanca, an oil-refining center, after local residents complained that the water had a bad taste and odor. Azurix didn't fare any better in Britain. There, regulators ordered Azurix unit Wessex Water PLC and other water companies to reduce rates on the grounds they were making excessive profits. Though that move had been expected, what wasn't was the ensuing tide of analysts' criticism that the company had overpaid for its biggest asset.

Ms. Mark, who had promised investors that Azurix would have $10 billion in assets within a few years, shifted gears. Taking a page from Mr. Skilling's book, she trumpeted the creation of a U.S. water market in which the liquid could be traded throughout the arid West.

But here, too, the odds for quick success were against Azurix. At eight pounds a gallon, water is slow to move where it doesn't want to go. The system of pipes and canals needed to move it throughout the West is incomplete. There is no federal order, comparable to what exists in the natural-gas and electricity industries, forcing those who own the pipes to make unused capacity available to others. And unlike electrons, all water droplets are not equal. Water from lowland river deltas must be treated for different impurities than water flowing from mountain snowmelt.

Moreover, water, mundane as it seems, stirs political emotions. In that regard, Ms. Mark's earlier successes may have made her overconfident, say colleagues. At India's Dhobal power project, Ms. Mark had surmounted a stiff challenge from Hindu nationalists opposed to the project and had even persuaded them to let her expand its size, and hence its profitability. In Bolivia, Ms. Mark had cajoled local politicians running what had been the only true socialist state in South America to let Enron in effect control the sale of the country's natural gas to its biggest customer and neighbor, Brazil.

But these formidable skills didn't seem to make any difference in the Western U.S. Bill Turner, a top natural-resources adviser to the New Mexico governor, says it was clear to him that Azurix overestimated its power to break the skein of interests involving water and underestimated the impact of laws restricting its sale or transfer. Nor, he adds, did Azurix understand how emotional water can be. "As Mark Twain said, 'Whiskey's for drinking and water's for fighting,' " Mr. Turner says.

As Azurix's stock price fell and the money it had available for new investments dried up, Enron began to get itchy. Mr. Skilling, who in 1997 became Enron's president and was a member of Azurix's board, felt the water business, where Enron was up against bigger, well-established players such as Vivendi of France, was too capital-intensive and too slow to move to meet his performance benchmarks. Azurix insiders say privately, though, that a less aggressive, more patient owner would have served both companies better.

Since Ms. Mark had started Azurix, other Enron initiatives had produced much bigger profits. One was the sale of energy services to big companies such as IBM Corp. and Chase Manhattan Bank. In these deals, Enron typically supplies electricity to all of the customer's facilities for a predetermined price. It, in turn, makes its money by finding cheaper power through its trading desk and by replacing old heating and ventilation equipment at the client's facilities, which generates savings that Enron and the customer split.

Others were its EnronOnline trading venture and its bandwidth business, which many analysts tout as the biggest future contributor to Enron's earnings -- bigger even than energy. The bandwidth business is also a perfect example of Mr. Skilling's strategic vision.

Enron got into bandwidth by accident. In 1997, it bought Portland General Corp., an Oregon electric utility, with an eye toward California's soon-to-be opened electricity market. The idea was to get an intimate understanding of the utility business in a way that would help position Enron as an insider in the incipient U.S. deregulation wave. But the market in California was changing rapidly, and soon, Enron decided it really didn't need power plants to be a major player in California. So it put the business up for sale -- except for one part.

Portland General was building a fiber-optic loop around Portland. Mr. Lay -- a close friend of Texas Gov. George W. Bush and a big Republican Party supporter -- and Mr. Skilling saw the potential for expanding the idea to a much grander scale. Within two years, they had patched together a coast-to-coast fiber-optic network. The next step was to create a new business of trading unused capacity on not only its own network, but also on those of its competitors. Nowadays, Enron buys and sells bandwidth linking dozens of cities in the U.S., Europe and Asia and generated about $150 million in revenue last quarter from the business. It also has teamed up with the Blockbuster unit of Viacom Corp. to electronically deliver movies on demand to U.S. households, beginning in a few cities later this year.

Ray Niles, energy analyst at Citicorp's Salomon Smith Barney unit, says he reckons Enron will learn the nitty-gritty of the broadband business by owning its network and will eventually sell it when a more profitable use for that capital emerges. "Five years from now, I doubt they'll own a single strand of fiber," says Mr. Niles.

Indeed, the company always is looking for ways to create what Mr. Skilling calls "high-velocity capital."

Officially, Enron says it is "reviewing" its options for what to do with Azurix. But one other significant Azurix shareholder has little doubt what will come next. Ms. Mark is "a very dynamic person, a fixer," says Jason Selch, analyst at Wanger Asset Management, Chicago, which owns about 1% of Azurix stock. "For the last six to nine months, Azurix has been broken. Now that she's left, it means Enron has decided the thing can't be fixed."

That doesn't mean Ms. Mark herself has thrown in the towel. In an unusual move, Azurix has released Ms. Mark from a big chunk of a noncompete clause in her contract. While she is forbidden to compete for water-services contracts, she is free to build up a water-storage business or a trading business, even in the online arena. Some Azurix insiders expect her to put together an investment group to buy Water2Water.com, Azurix's version of EnronOnline that trades exclusively in water.

A sale of Azurix, or the piecemeal disposal of its assets, wouldn't surprise Daniel Rappaport, chairman of the New York Mercantile Exchange, where Enron is one of the biggest customers. "Enron is the consummate trader," says Mr. Rappaport. "They know the cardinal rule of trading, which is cut your losses."

Write to Rebecca Smith at rebecca.smith@wsj.com and Aaron Lucchetti at aaron.lucchetti@wsj.com