Erasing Enron

Enron’s story may finally be drawing to a close. Jeffrey Skilling has finally been indicted and the company’s creditors have begun receiving ballots to vote on a plan of reorganisation. By Paul Lyon

The moment many Enron creditors had been waiting forcame last month: JeffreySkilling, Enron’s former chief executive, was formally indicted of securitiesfraud, insider trading and other crimes (see box p. 50). What’s more, Enron’sonce powerful business could soon be pared down to two independent components – aUS pipeline business (CrossCountry Energy) and a collection of internationalpower plant assets and other energy assets (Prisma Energy International) thathave failed to attract decent bids.

Enron’s approximately 24,000 creditors are voting on the plan, and a finalconfirmation hearing is scheduled for April 20, 2004. Once the plan is confirmed,Enron can work toward distributing equity in the companies, and Enron as we knowit will disappear – its near-worthless stock will be cancelled and thenew companies will become independent entities that could be publicly tradedon the New York Stock Exchange. Stephen Cooper, Enron’s interim chief executive,is hopeful that the plan will be effective by year-end.

New York’s Bankruptcy Judge Arthur Gonzalez has provisionally approvedthe reorganisation plan, but the next step is to secure creditor approval. Theplan proposes paying most creditors about 20% of the $66.4 billion they are owed – with30% of the payment in cash and the remainder in stock of the two new companies.

CrossCountry Energy has been tipped as being the more likely of the two companiesto enjoy success. Ironically it resembles the Enron of the mid 1980s – beforethe company ditched its ‘unfashionable’ focus on pipelines and triedits hand at energy trading. CrossCountry holds Enron’s interests in TranswesternPipeline Company, Citrus Corporation and Northern Plains Natural Gas Company.In total, the gas pipeline businesses have approximately 8.5 billion cubic feetper day (bcf/d) of capacity and 9,900 miles of pipeline.

Creditor worries
But analysts detect a less stable future for Prisma, which comprises a group of 19 pipelines and power generation and distribution assets in 14 countries. Enron had initially tried to sell its interests in the collection of companies – mostly located in the Caribbean and Latin America – but decided to bundle the companies under one umbrella because it decided they were worth more collectively than separately, according to Enron spokesman John Ambler.

Some analysts, speaking on condition of anonymity, hinted that some creditors were likely to vote against the reorganisation plan due to fears that Prisma could cause more problems than it will solve. Prisma’s assets include some names that were once hidden in Enron’s notorious off-the-books partnerships that contributed to the company’s bankruptcy. Cuiaba, a pipeline and power business in Brazil, Bolivia and Argentina, for example, has been noted in the federal government’s criminal case against Skilling and former Enron finance chief Andrew Fastow.

According to the US Securities & Exchange Commission (SEC) Enron entered into fraudulent transactions involving Cuiaba with LJM – a company that Enron used to manipulate its financial results. The SEC alleges that Skilling and others used LJM to move Cuiaba – a poorly performing asset – temporarily off Enron’s balance sheet. When no true third-party buyer could be found, Skilling and others caused Enron to ‘sell’ a portion of Enron’s interest in the Cuiaba project to LJM for $11.3 million, the SEC alleges. LJM agreed to ‘buy’ this interest only because Skilling, Fastow and others, in an undisclosed side deal, agreed that Enron would buy back the interest, if necessary, at a profit to LJM.

Following Skilling’s indictment, the SEC was vocal in its condemnation of the Cuiaba project, as well as other fraudulent schemes. “In this scandal, as in others, we are by now all too familiar with executives who bask in the attention that follows the appearance of corporate success, but who then shout their ignorance when the appearance gives way to the reality of corruption,” said SEC enforcement division director Stephen Cutler. “Let there be no mistake that today’s enforcement action against Mr. Skillingplaces accountability exactly where it belongs.”

Asset sales
Although some creditors may be worried about the potential fallout from mismanaged Prisma assets, they have been assured that part of their cash will come from the $271 million sale of Mariner Energy, an Enron-controlled upstream oil and gas exploration company in the Gulf of Mexico, to Washington-based Carlyle Group, the New York-based investment company.

The deal, approved by Judge Gonzalez last month, is a leveraged management buyout backed by energy fund Riverstone Holdings – an affiliate of Carlyle Group. The sale follows an aborted auction effort by Enron in 2002, which failed to muster a bid higher than Mariner’s $193 million of debt.

Mariner now plans to drill five wells by the end of 2004, with Enron to receive 10% of any net present value created over $30 million, on top of the purchase.

And, following approval from Judge Gonzalez, Enron has also managed to sell its Portland General Electric utility in Oregon for $1.2 billion cash – and the assumption of $1.1 billion of debt – to a new company backed by Texas Pacific Group and several Oregon partners, including former Oregon governor Neil Goldschmidt. Texas Pacific Group is a Fort Worth, Texas-based investment firm whose investors include a number of large public and private pension funds,banks and insurance companies.

Settling disputes
And Enron can also be encouraged by the fact that one of the most prolonged disputes related to its alleged frauds has just been settled. Last month, Royal Bank of Canada (RBC) settled an 18-month dispute with Netherlands-based Rabobank relating to a $517 million swap transaction. As a result, RBC’s first-quarter profit for 2004 will be will be reduced by C$74 in million tax, although the bank refused to divulge details of the settlement. “The settlement will allow us to put this matter behind us without the further expense and distraction of continued litigation,” says Paul Wilson, a spokesman for RBC Capital Markets, the bank’s corporate and investment banking division.

The dispute arose in June 2002 when Rabobank filed a suit in a New York state court, refusing to take responsibility for a loan linked to Enron. RBC lent $517 million to a trust affiliated with Enron in late 2000 and then hedged its exposure through the use of a total-return swap (TRS) with Rabobank. A TRS is a form of credit derivative, whereby a counterparty transfers its credit exposure on an asset to another counterparty, which in exchange receives a premium equal to the cost of holding the specified asset on its balance sheet. RBC argued that this deal made the Dutch bank liable to repay the loan if Enron did not, but Rabobank refused to honour the transaction, arguing that RBC knew Enron was a ‘corrupt organisation’ in danger of imploding.

In August last year RBC reached a settlement agreement with Enron and the Enron creditors’ committee resolving certain aspects of the transaction. RBC received a payment valued at around $195 million plus interest.

And numerous lawsuits are still pending. In January for example, The University of California (UC) filed complaints in the US District Court for the Southern District Court of Texas in Houston, adding the Royal Bank of Canada (RBC) and two prominent law firms to a growing list of defendants accused of securities fraud in connection with the Enron debacle. UC was named as lead plaintiff in the shareholders’ class action lawsuit against Enron executives and Arthur Andersen in February 2002. The federal university says its Enron-related losses totalled $144.9 million, based on 2.2 million Enron shares purchased (see Energy Risk, February, p.8).

Enron still has many problems to iron out before it can begin to emerge from Chapter 11 bankruptcy, but perhaps now an end is finally in sight to the Enron affair.

Indicting Skilling

Jeffrey Skilling, the former chief executive of Enron, was last month finally charged by the US Securities and Exchange Commission (SEC) with directing a wide-ranging scheme to manipulate the company’s earnings. Skilling pleaded not guilty to 42 counts of securities fraud, insider trading and other crimes at a federal court in Houston. If convicted, he could face up to 325 years in prison and hundreds of millions of dollars in fines and restitution. Skilling was freed by the Houston court on a $5 million bond. The 57-page indictment lists a series of schemes stemming from the California energy crisis to off-balance-sheet partnerships. For example, the SEC’s complaint alleges that Skilling manipulated reported earnings through improper use of reserves. The SEC says that by early 2001, Enron Wholesale’s undisclosed reserve accounts contained over $1 billion in earnings and that Skilling and others improperly used hundreds of millions of dollars of these reserves to ensure that analysts’ expectations were met. Among other complaints, the financial watchdog also alleges that from April 2000 to September 2001, Skilling sold over one million shares of Enron stock, which generated unlawful proceeds of approximately $63 million. The SEC also alleges that Skilling and others fraudulently promoted Enron Broadband Services at Enron’s January 20, 2000 corporate analyst conference and manufactured earnings from the resulting increase in Enron’s stock price. At the analyst conference, Skilling and others knowingly made false and misleading statements about the status of EBS’s broadband network, EBS’s proprietary “network control software,” and the ‘conservative’ value – $30 billion – of EBS’s business, the SEC alleges. In reality, EBS had neither the broadband network that Skilling claimed, nor the critical proprietary network control software to run it. Skilling and others – prior to the analyst conference – constructed and approved a scheme that allowed Enron to recognise approximately $85 million in earnings from the increase in the value of its stock. “ Skilling embraced the sophisticated fraud underlying Enron’s false reported financial results,” says SEC deputy director Linda Chatman Thomsen. “To do otherwise would have discredited his much publicised business initiatives.” Despite the scale of the alleged frauds, some lawyers have questioned whether prosecutors will be able to prove their case against Skilling. It may be possible to demonstrate that Enron was riddled with fraud, but it could be harder to prove that Skilling was directly involved in the schemes, some lawyers argue, adding that if the SEC had a stronger case against Skilling, they would have indicted him sooner. And for that matter, it remains to be seen whether the SEC will even charge former chairman Kenneth Lay.