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much as $60. Electricity that was selling for $30 in late 1999 was going for $1,500 a year later. And EnronOnline, which was standing in the middle of every deal, had to cover the capital costs of both sides of each transaction. The “float” Enron needed to keep EnronOnline going was soaring. By the end of the first quarter of 2001, Enron was having to borrow quarter, the company borrowed another $1.2 billion, a move that brought its long-term debt load to $9.7 billion. Cash flow from operations was a negative $464 million. In addition, its exposure to California utilities was enormous. By early 2001, Enron was owed tens of millions of dollarsperhaps even hundreds of millions, the company wouldn’t say exactly how muchby California electric after his report on Enron was made public, Parry’s phone was ringing. It was an Enron official, who immediately began berating him for daring to question Enron’s profitability and business model. Gagliardi and Parry were analysts at John S. Herold, Inc., a Connecticutbased investment research firm, and they’d been following Enron for several years. They’d followed Azurix, Enron’s expensive abortion in the water business. They’d been briefed on the broadband business. In the preceding few years, they’d gone to almost every analysts’ conference that Enron had held. They knewand had spoken withmany of Enron’s leaders. But Gagliardi, Parry, and their fellow analysts at Herold, including the company president, Art Smith, were wary. The Enron story was getting old and the Energy, all of which had jumped into energy trading to capture some of the trading business that was being gobbled up by Enron. More important, those companies’ trading businesses appeared to be growing faster and adding more profits to their respective bottom lines than Enron’s. Gagliardi and his peers were “particularly concerned about the sustainability of ENE’s [ENE was Enron’s trading symbol on the New York Stock Exchange] above average revenue growth with competitors nipping at their heels.” Enron was not worth the $126 per share that Jeff Skilling had touted just a few weeks earlier at the analysts’ meeting in Houston. Nor was it worth the $73 per share that it was commanding at that time, said the Herold analysts. Given its falling profitability and the fact that other trading firms were gar companies that could not pay their bills. Enron’s derivatives positions, particularly the ones that appear to be related to California, also soared. In 1999, Enron had less than $800 million worth of liabilities related to energy marketing firms, the firms that were selling electricity into the California market. By the end of 2000, that total had grown to $6.1 billion. By playing the California market, Enron made itself a political target and accelerated the ruin of its finances. Lou Gagliardi and John Parry didn’t expect to be praised. They knew someone from Enron would be calling, and calling soon.They didn’t have to wait long. On February 21, 2001, just a few hours company’s numbers just weren’t adding up. If business was so great, why were Enron’s profit margins shrinking? Enron “is a force to be reckoned with in international power and trading,” wrote Gagliardi, Smith, and Parry, in the report issued that day. But they pointed out that Enron’s profits from its trading business were falling dramatically. In 1995, the analysts estimated that Enron’s profits from its trading businessas measured by earnings before interest, taxes, depreciation, and amortizationwere 6.5 percent. By 2000, that percentage had fallen to 2.7 percent. The Herold analysts blamed Enron’s falling profitability on energy companies like Houston-based El Paso Corporation, Dynegy, and Duke nering lower valuations, Enron’s stock was actually worth. no more than $53.20 per share, they said. “We admit that Herold remains an `old economy’ valuation fan: we make no apologies, we like hard assets,” wrote Gagliardi and the others. Enron was a “premier energy trader” but, they said, “we suspect its shares have been levitated by a touch of ‘irrational exuberance’ in a perhaps frothy market.” The Herold report was the first time any major Wall Street research or investment banking firm had dared question Enron’s valuation. It was the first time a major research firm had dared to doubt Enron’s story. And it did so at a time when almost every other Wall Street analyst was cheering and Enron was near the peak of its popularity.A Fortune 6 THE TEXAS OBSERVER 9/27/02