Top executives and directors at many of the large power companies
that California officials accuse of profiteering from the energy crisis
have collected tens and even hundreds of millions of dollars through
Beginning early last year, these executives exercised options and sold
stock for huge gains at two, three and even 10 times the level of prior
years, according to a study by The Times of trading data supplied by
First Call/Thomson Financial and federal regulatory filings.
Most of the energy companies would not discuss specific trades by
executives, but said that granting stock options is a standard practice
used to compensate top managers and other key players.
In selling in the last year, the executives have demonstrated a knack
for timing the transactions near the top of the market, a logical
strategy, executive-pay experts said. Indeed, many of these companies'
shares have fallen since the bulk of the stock sales.
But critics say it is the energy crisis in California and the West
that has driven up corporate profits at these companies--including AES
Corp. of Virginia, Duke Energy Corp. of North Carolina and Houston-based
energy concerns Enron Corp. and El Paso Corp. The crisis created a bull
market for publicly traded power companies--and made the shares held by
the executives especially lucrative.
Enron Chairman Kenneth L. Lay netted $123 million in option
transactions last year, according to a filing with the Securities and
Exchange Commission. That was nearly three times his gains the previous
year and nearly 10 times what he made in 1998.
Lay has made additional gains this year. He has cashed in options and
sold shares to net nearly $23 million since November, while holding on to
50,000 additional shares with a market value of $2.5 million, according
to First Call/Thomson Financial data.
Meanwhile, Jeffrey K. Skilling, Enron's chief executive, netted more
than $62 million last year in options gains.
Other executives are exercising options for huge gains but then
holding on to the shares. Roger W. Sant, chairman of AES, bought 436,500
shares in the Arlington, Va.-based company Oct. 26, paying $1.62 a share
and producing a paper gain of more than $21.5 million at the time of the
But some also cashed out large holdings acquired over years. For
example, Robert Hemphill Jr., a longtime AES executive who now serves on
its board of directors, has sold $50 million of the company's stock in
the last 13 months.
David Arledge, a director of El Paso Corp. and former executive at a
company acquired by the Houston natural gas firm, has sold nearly $27
million in stock since Nov. 1.
Cashing in when an industry is hot is typical of corporate executives
in the U.S., said Graef Crystal, a Las Vegas-based expert on executive
compensation. But when an individual's transactions approach or cross the
hundred-million-dollar level, he said, the gains become unusual.
California officeholders and policymakers expressed outrage but not
surprise at the transactions.
"It is part of a pattern of smart trading by these guys," said state
Sen. Debra Bowen (D-Marina del Rey), who chairs the Senate Energy,
Utilities and Communications Committee. "The mentality is to get
everything that you can and then ride out the bust.
"I think they are figuring that by this time next year the party will
be over and they will be left sitting in a room with plastic cups
half-filled with stale beer," Bowen said.
Said Loretta Lynch, president of the California Public Utilities
Commission: "It stands to reason that if the companies are making
exorbitant profits, then the individuals who run the companies are also
making exorbitant profits."
Government Agencies Investigating Firms
Indeed, the stock sales have taken place against a backdrop of
acrimony between state officials and the power companies.
Last month, Lynch told The Times that state investigators have
uncovered evidence that a "cartel" of power companies shut down plants
for unnecessary maintenance to create shortages and thus increase prices
and profits. Lynch did not name the companies.
State and federal agencies are investigating the actions of several of
the big energy companies, seeking to verify charges that they have
conspired to boost prices by limiting construction of power plants, in
one case, or by limiting the amount of natural gas available in the
power-hungry California market.
Executives at firms not accused of price gouging also have cashed in.
Ann B. Curtis, chief financial officer of Calpine Corp., a San
Jose-based power plant builder and generator, has netted more than $10
million in option transactions in the last year. That compares with a
total of $5 million in the four previous years.
Some analysts say the transactions are to be expected, considering the
changing nature of the power industry.
"Unlike at the old-line utilities where insiders rarely sell, we've
grown accustomed to insider sales at the diversified power producers,"
said Paul Elliott, a First Call/Thomson Financial analyst. "I'm not
convinced that these sales raise any red flags at this point."
Although no one is saying that any of the stock trades were illegal,
critics link the value of the transactions to the profits streaming out
"The generators have no shame," said Steve Maviglio, a spokesman for
California Gov. Gray Davis. "It speaks to how there has been a massive
transfer of wealth from California and the West to Texas and the
In reporting record financial results for the first quarter of this
year, Enron said it posted a 281% increase in revenue to $50.1 billion
and a 20% increase in net income to $406 million.
The company did not break out numbers for its California business but
did note that it sold nearly twice as much electricity in North America
compared with a year earlier, and that sales of natural gas had risen by
Lay, the Enron chairman, "has given himself very generous stock
options over the years," compensation expert Crystal said.
"You might think of him as a farmer who has planted thousands of acres
of stock options. Now he is harvesting a bumper crop. What he is
harvesting is the hard-earned paychecks of California workers and
Mark Palmer, an Enron spokesman, declined to talk about executives'
stock trading activity.
"All Enron employees are shareholders. How they decide to use that as
a form of compensation is completely up to them," Palmer said. "Mr. Lay
is not going to talk about his compensation."
A spokesman for AES also declined to talk about stock sales by its
Other companies were more willing to discuss such sales.
"Many of these people have a lot of stock, and this [is] an
opportunity to diversify their personal portfolios at an opportune time
when Duke's stock is up," said Terry Francisco, a spokesman for Duke
Francisco said many of the sellers at Duke continue to hold large
amounts of the company's stock. That also holds true for executives of
the other firms.
Calpine Chief Executive Peter Cartwright, for example, sold nearly $20
million in his company's shares since May 2000, when wholesale
electricity prices started rising and the state's energy crisis took
root. His remaining holdings have a market value of more than $400
million, according to SEC filings.
'Getting Out While the Getting Is Good'?
El Paso spokeswoman Norma Dunn noted that Arledge, one of the largest
sellers, was CEO of Coastal Corp., a company acquired by El Paso, and
chose to sell some of his holdings after the merger.
One factor in the heavy sales of energy company shares is that
executives at these companies may be reading the changing marketplace and
seeing increased political pressure to rein in energy prices, analysts
"They may feel that this power game is not going to go on forever, so
they are getting out while the getting is good," said David Moreland, a
benefits consultant with CMG Consulting Inc. in San Jose.
Much of the executives' gains stem from the common practice of
granting low-priced options to management. At Calpine, for example, both
Curtis and Cartwright gained millions of dollars selling shares purchased
from the company at just 7 cents and $1.07 a share and then sold for more
than $40 a share.
Companies grant these options as an incentive for management to
increase the investment value of shareholders. They provide for giant
payoffs without the company having to fork out cash.
Yet there is a cost to the company, analyst Crystal said. The deals
increase the number of shares outstanding, incrementally diminishing the
holdings of other investors.
When the option tab hits tens of millions of dollars or more, the
company is in essence handing the money to executives rather than using
it to expand the company, Crystal said.
"This is not the tooth fairy," he said.
Here are some energy executives who have recently cashed out large
numbers of options: