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The Rise and Fall of Enron
The New York Times- 11/02/01 The Enron Debacle Business Week- 11/02/01 Derivatives Danger? Business Week- 11/02/01 Commentary: Enron's Clout Won't Sway the SEC Business Week- 11/02/01 AFL-CIO, Amalgamated Bank Call on Enron to Redirect the Mission of Newly Cr= eated Special Committee: Outside Directors Must Adopt Independent Role PR Newswire- 11/02/01 Williams CEO Sees Validation Of Co's Bandwidth Model Dow Jones Energy Service- 11/02/01 USA: Enron shares plunge after S&P credit rating cut. Reuters English News Service- 11/02/01 Goldman Declines Enron's Request for Loan Amid Credit Concerns Bloomberg- 11/02/01 POWER POINTS: Time For A Bronx Miracle In Houston Dow Jones Energy Service- 11/02/01 Enron Says It Remains 'Biggest' Player In EU Gas, Power Dow Jones Energy Service- 11/02/01 USA: UPDATE 1-Enron shares fall as investor concerns linger. Reuters English News Service- 11/02/01 Editorial Desk; Section A The Rise and Fall of Enron 11/02/2001 The New York Times Page 24, Column 1 c. 2001 New York Times Company Earlier this year, most companies would have loved to have Enron's problems= . Californians resented the energy trading company's huge profits during th= eir energy crisis, and Democrats in Washington raised questions about Enron= 's influence within the White House and about the cozy relationship between= Enron's chairman, Kenneth Lay, and Vice President Dick Cheney. Nobody seem= ed better positioned to thrive during the Bush presidency than this Houston= -based apostle of deregulation.=20 Wall Street was impressed with Enron's strategy of swooping into formerly r= egulated markets to broker contracts for natural gas, electricity or unused= telecom bandwidth. The company was celebrated as a paragon of American ing= enuity, a stodgy gas pipeline company that had reinvented itself as a high-= tech clearinghouse in an ever-expanding roster of markets. Enron's push to = force utilities into the Internet age with its online trading systems, at a= seemingly handsome profit, became an epic tale of the dot-com revolution. It now appears that Enron's tale may be more cautionary than epic. Enron en= vy has crashed, along with the company's stock price, as serious questions = emerge about its bookkeeping. Enron disclosed earlier this month that $1.2 = billion in market value had vanished as a result of a controversial deal it= entered into with private partnerships run by its chief financial officer,= Andrew Fastow.=20 Most alarming was Enron's reluctance to shed light on management's wheeling= and dealing. ''Related-party transactions,'' as the accountants call them,= are fraught with conflicts of interest. Though much remains to be learned = about these transactions, their scope and lack of transparency suggest that= Enron may have in effect created its own private hedge fund to assume some= of the risk and mask the losses of its complex trading. The extent to whic= h company insiders profited from the partnerships is not yet clear.=20 Enron has scrambled to dampen Wall Street's concerns, acknowledging its cre= dibility problem while insisting on the health of its core businesses. On W= ednesday it brought in William Powers, the dean of the University of Texas = School of Law, to review the transactions. The Securities and Exchange Comm= ission has launched its own formal investigation. Mr. Fastow was forced to = resign, following Jeffrey Skilling, the man credited with driving Enron int= o new cutting-edge businesses, out the door.=20 Enron's former admirers on Wall Street, mindful of recent scandals involvin= g high-profile companies doctoring their earnings, and of the spectacular c= ollapse of the Long-Term Capital Management hedge fund in 1998, are alarmed= . Carole Coale of Prudential Securities summed up the prevailing sentiment = when she told The Times: ''The bottom line is, it's really difficult to rec= ommend an investment when management does not disclose facts.'' Analysts, a= s well as the media, are not entirely blameless. Enron did mention, albeit = in passing, the troubling related-party deals as early as March 2000. But f= ew analysts bothered to raise questions at a time when the company's revenu= es, profits and stock price were soaring.=20 Harvey Pitt, the new Securities and Exchange Commissioner, must pursue the = Enron inquiry aggressively in order to assure investors that he will be as = vigilant as his predecessor, Arthur Levitt, when it comes to protecting the= integrity of financial markets. Indeed, even if Enron is cleared of any wr= ongdoing and regains some of its past luster, as it well might, the company= that preaches the merits of self-regulating marketplaces has reminded us a= ll of the need for a strong regulator on Wall Street. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 NOVEMBER 12, 2001=20 FINANCE=20 Business Week The Enron Debacle Byzantine deals have shattered the energy outfit's credibility Executives at high-flying Enron Corp. (ENE ) never seemed overly concerned = with how the rest of the world viewed their business practices. Earlier thi= s year, the California Attorney General had to get a court order to collect= documents in an industrywide investigation into energy price fixing. And w= hen an analyst challenged former CEO Jeffrey K. Skilling in a conference ca= ll to produce Enron's balance sheet, Skilling called him an "ass----." Stil= l, even some Enron executives worried that the company had gone too far wit= h two complex partnerships set up in 1999 to buy company assets and hedge i= nvestments. With Enron's then-chief financial officer acting as general man= ager of the partnerships and in a position to personally benefit from their= investments, the potential for a conflict of interest and backlash from in= vestors seemed overwhelming. "Internally, everybody said this is not a good= idea," says a source close to the company. But no one could have predicted such a jaw-dropping outcome for the nation'= s largest and most innovative energy trader. Since Oct. 16, when Enron reve= aled a $35 million charge to earnings to reflect losses on those partnershi= ps and was forced to knock $1.2 billion off its shareholders' equity, the c= ompany's stock has plunged 60%. The Securities & Exchange Commission is inv= estigating Enron's accounting for its partnerships and whether it properly = disclosed them to investors. Suddenly the company, which brought high-tech and complex finance to energy= trading, is essentially trying to avoid a run on the bank. Moody's Investo= rs Service has already downgraded the company's debt. Enron says it is meet= ing with credit agencies to calm their fears, and analysts say Enron is wor= king on a turnaround plan that would likely include accelerating asset sale= s, issuing shares, and obtaining new credit lines. Enron's board has set up= a special committee to look into its controversial partnerships. But analy= sts also worry that Enron's trading partners could pull the plug if they lo= se confidence that it can honor its trades. "ON CRACK?" Inside Enron, once-cocky employees are reeling. They were still= puzzling over the abrupt Aug. 14 departure of CEO Skilling when the compan= y announced on Oct. 24 that CFO Andrew S. Fastow, architect of the controve= rsial private LJM investments--which got their name from the first initials= of his wife and children--was removed from his post and on leave. In a ten= se meeting held at a Houston hotel after the latest financial disclosures, = soft-spoken Chairman and CEO Kenneth L. Lay faced 1,600 employees, with ano= ther 5,000 hooked up via the Web. One irate worker asked if he was "on crac= k." Lay, an economist by training, turned over day-to-day management in 199= 7. Until Skilling quit, citing personal reasons unrelated to Enron, Lay was= talking about retirement, sources say. Now he is facing his biggest fight = ever. "Ken is looking at a 30-year career of accomplishment going down in f= lames. This is just awful," says one friend. On the surface, at least, Enron's off-balance-sheet maneuvering hardly seem= s the stuff that would crater a company. Amazingly, sources close to Enron = claim that one rationale for Fastow's deals was to save an estimated $30 mi= llion a year in investment-banking fees. Fastow's involvement in the partne= rships, which bought assets from Enron, including stakes in telecom and ene= rgy, was supposed to make the deals simpler for the investment bankers and = thus cheaper. They were also meant, according to sources close to the compa= ny, to hedge Enron's investments in potentially risky assets while allowing= it to maintain some control over them. Enron says Fastow made money for hi= mself on some of the deals, but insiders insist there were less controversi= al ways to enrich him if that were the aim. Fastow did not return calls see= king comment. Lay, who declined to comment for this story, has said that th= e partnerships were properly vetted by Enron's attorneys and internal and e= xternal auditors and were approved by its board. A source familiar with Enr= on agrees: "We had the best lawyers in the world saying, `It looks fine."' But whatever Enron's reasons for creating the LJM partnerships, the problem= s were compounded by scanty disclosure. The deals were first revealed in a = 1999 proxy, raising concerns from investors and analysts. By this summer, w= hen Enron's stock was falling and its bets in broadband were souring, compl= aints about LJM grew louder. So in June, Fastow pulled out of the partnersh= ips. When the write-offs came, Enron enraged analysts and investors further= by failing to disclose the hit to equity in its third-quarter earnings pre= ss release. Instead, Lay mentioned it in a conference call with analysts. "= We found it disconcerting that the company waited to disclose the additiona= l $1.2 billion charge to equity in a fleeting comment in the middle of its = conference call," says UBS Warburg analyst Ronald Barone. BAD BETS. Still, Enron's credibility did not vanish overnight. Analysts hav= e been lobbying for years for more information about how and where Enron ma= kes its money in its often byzantine trading business. While the company's = revenues were soaring from $9.2 billion in 1995 to $100.8 billion in 2000 a= nd its stock was returning 500% during the same six-year period, Enron's ag= gressive, even arrogant managers could ignore Wall Street's complaints with= impunity. But after its stock price collapsed this year (chart), the compa= ny's attitude and operational missteps quickly caught up. And there was ple= nty to worry about. The company's $3 billion power plant in India wasn't pa= ying its bills amid a political controversy; its highly ballyhooed business= for trading high-speed communications capacity was crippled by the telecom= industry meltdown; and its calamitous foray into the water business with A= zurix Corp. has already cost Enron at least $574 million in write-offs. These bad bets and the expensive LJM shock have investors worried about wha= t else might be lurking at Enron. Many aren't sticking around to find out. = "I think the lack of disclosure on their financial engineering killed the c= redibility of the management team," says Richard A. Giesen, who manages the= Munder Power Plus fund, which dumped its Enron shares about a month ago. It's not clear just how many off-balance-sheet financing vehicles Enron has= used over time. Some were created years ago to finance oil and gas produce= rs. Analysts and sources close to the deals say there's no particular risk = in these to Enron shareholders. Other interconnected entities, such as Whit= ewing, Osprey, Atlantic Water Trust, and Marlin Water Trust, were a way to = get assets no longer central to Enron's strategy off its balance sheet, fre= eing capital and credit for the core energy business and ventures like broa= dband (table). To entice institutional investors such as pension funds and insurers into t= hese deals, Enron promised to kick in equity if asset sales weren't enough = to cover debt. Such "mandatory equity" deals have been used by at least a h= alf-dozen others in the energy and telecom industries, including El Paso (E= PG), Williams, and Dominion, says Standard & Poor's director Todd A. Shipma= n. "Nobody's going to find anything that's particularly unique or below boa= rd" in such deals, says one investment banker specializing in the energy bu= siness. Worst case, which Shipman considers unlikely, Enron could be on the hook fo= r about $3 billion in its mandatory-equity deals. That could mean diluting = its shares by more than 25% at today's prices. Analyst John E. Olson at San= ders Morris Harris Inc. (SMHG ) figures a 9% dilution is more likely. Even = if this $3 billion in debt were included on Enron's balance sheet now, the = debt-to-capital ratio would climb to 54% from about 49% at the end of June.= Such a change would pressure Enron's credit rating but not push it below i= nvestment grade, says Shipman. HUGE HIT. Fastow's LJM, a private equity fund, was a different kind of anim= al, according to sources familiar with the arrangements. It bought energy a= nd other assets from Enron, which booked gains and losses on those deals. L= JM was also involved in complex hedging that was supposed to reduce the vol= atility of some of Enron's investments, including stakes in high-tech and t= elecom businesses and an interest in New Power Co., which markets power to = consumers. When Enron terminated these deals in September, it took the $1.2= billion hit to equity. But the more immediate question is whether trading partners will stick with= the company. The first place that might show up is in Enron's highly succe= ssful online platform, which trades everything from gas and electricity to = weather derivatives. To reassure its partners, Enron is scrambling to shore= up its liquidity. It has already tapped $3 billion in credit lines and is = trying to arrange another $1 billion. Shipman says he has seen no signs of = massive customer defections or drastically worsened credit terms. Still, ri= val traders are wary. "We certainly have taken a closer look at Enron in th= e last week to 10 days and will continue to manage the credit risk, but we'= re still doing business with the company as usual," says Keith G. Stamm, CE= O of power and gas trader Aquila Inc. (ILA ) "SPEEDING TRAIN." Still, with the stock battered and rating agencies consid= ering further downgrades, that could rapidly change. In recent days, the un= certainty about Enron's future has reduced investors' appetite for Enron de= bt. "No one wants to speculate on the direction or their likelihood of surv= ival," says a credit-derivatives salesperson. "It's really difficult to get= in front of a speeding train." Even if Lay can calm his trading partners, he and his management team face = a much tougher task of restoring their credibility on Wall Street. With the= stock now hovering around $14--down from a high of $90 in August, 2000--so= me even believe that Enron could be a takeover target for the likes of GE C= apital or Royal Dutch/Shell Group. (RD ) Both declined to comment. Would En= ron sell? One source close to the company says Enron has talked about possi= ble mergers and strategic alliances in the past with Royal Dutch/Shell, amo= ng others. "If they're really worried about liquidity, they might take the = easy way out," he says. If Enron does pull through this crisis, some suspect it will be a humbler, = more risk-averse place. The company that once believed it could expand its = trading and logistics empire to all manner of commodities--from advertising= space to steel--will be forced to scale back its grandiose visions. That's= something some investors applaud. "The company should focus on its strengt= hs," says William N. Adams, senior energy analyst at Banc of America Capita= l Management, a major shareholder. But that's a far less exciting place tha= n Enron's energy cowboys ever hoped to roam.=20 By Stephanie Anderson Forest and Wendy Zellner in Dallas, with Heather Timm= ons in New York NOVEMBER 12, 2001=20 FINANCE=20 Business Week Derivatives Danger? Lately, owners of Enron's (ENE) equity, bonds, and loans have been struggli= ng to understand how exposed the company is to risks of losses that they di= dn't know about before. Now, as a fuller picture of Enron's entanglements w= ith partnerships begins to emerge, investors have something else to worry a= bout: credit default swaps, known as CDSs for short. That's financial marketspeak for insurance on bonds and bank loans. Their o= wners pay a premium for coverage that reimburses them for any losses they h= ave if their investments go bad. The CDS market has existed only for about = two years, but it's growing fast. Goldman, Sachs & Co. (GS ) and others est= imate that bonds and loans with a face value of between $1 trillion and $1.= 5 trillion are covered. Not surprisingly, big banks with hefty balance shee= ts such as J.P. Morgan Chase (JPM ), Merrill Lynch (MER ), and Deutsche Ba= nk (DB ) dominate the market. Enron, however, is a player--and the only significant one that isn't also a= bank. Competitors say that although Enron has issued only between $500 mil= lion and $700 million worth of CDSs so far this year, it had ambitious plan= s to offer them online. "They don't belong in this market," says one trader= . "They don't understand the implications." Enron did not return calls seek= ing comment. Of course, neither Enron nor others will have to pay out unless the loans a= nd bonds they're insuring turn bad. Trouble is, this year is potentially a = doozie for losses on corporate debt. Corporate defaults could reach a recor= d of $100 billion, says Standard & Poor's, like BusinessWeek a unit of The = McGraw-Hill Companies. Regulators say shaky bank loans hit a record $193 bi= llion by early October. If Enron has insured any of the bad debt, it might have to take charges for= losses if they exceed the premiums it has been getting. With all that has = been happening in recent weeks, that's the last thing it needs.=20 By Heather Timmons in New York NOVEMBER 12, 2001=20 FINANCE=20 By Mike McNamee Commentary: Enron's Clout Won't Sway the SEC=20 For Securities & Exchange Commission Chairman Harvey L. Pitt, the SEC's inv= estigation into Enron Corp. (ENE) could hardly have come at a worse time. T= he future of Pitt's ambitious agenda of reforms in securities regulation co= uld depend on how well he handles this case. Enron's political clout and close ties to President George W. Bush create r= eal risks for the SEC. Enron CEO Kenneth L. Lay is a longtime Bush backer, = and the company was the biggest corporate contributor to the President's ca= mpaign. A Bush appointee, Pitt is attempting a delicate balancing act. He h= as made it clear he wants to speed up the SEC's enforcement, in part by rew= arding companies that cooperate with probes. But he insists the SEC will st= ill come down hard on true corporate miscreants--and knows that any signs o= f let-up could jeopardize the rest of his reform agenda. Enter the Enron probe. The fine shadings of securities enforcement--where m= ost cases are settled by negotiated penalties, not court-imposed fines--oft= en make it hard for outsiders to tell whether the SEC is being tough or len= ient. But Pitt must go out of his way to make it clear that the Enron case = is handled by the book--getting the same strict scrutiny from the SEC as an= y other, less connected company. For now, top SEC aides say that's happening. The SEC Enforcement Div. in Wa= shington is looking into whether Enron adequately disclosed to shareholders= the risks of its complex deals with Andrew S. Fastow, the company's former= chief financial officer. Agency insiders say Pitt and his fellow commissio= ners will be briefed on the case as it proceeds. But they insist Pitt hasn'= t heard from the White House or Enron's other political allies. TOP LOBBYIST. Enron's connections are numerous. Besides Lay's links to Bush= , an Enron director, Wendy Lee Gramm, is the wife of Texas Senator Phil Gra= mm, top Republican on the Senate Banking Committee. And Enron spreads its l= obbying budget--$2.13 million in 2000--across both parties. Just this year = it hired four lobbying firms with Democratic roots. Enron says it lobbies h= eavily because it operates in regulated industries. It notes that electric = utilities outspend it 35 to 1. On Oct. 31, a special committee of Enron's board hired William R. McLucas, = former SEC enforcement director, to represent it. McLucas should know that = any attempt to muscle the stock cops is likely to backfire. Pitt, who joine= d the SEC out of law school in 1968, "remembers how the [Nixon-era] SEC tai= nted itself by turning a blind eye to [fugitive financier] Robert Vesco," s= ays an agency veteran. Pitt has too much riding on the Enron probe to let i= ts connections sway his judgment.=20 McNamee covers finance in Washington. AFL-CIO, Amalgamated Bank Call on Enron to Redirect the Mission of Newly Cr= eated Special Committee: Outside Directors Must Adopt Independent Role 11/02/2001 PR Newswire (Copyright © 2001, PR Newswire) WASHINGTON, Nov. 2 /PRNewswire/ -- In a shareholder letter sent today to th= e Board of Directors of the Enron Corporation (NYSE: ENE), the AFL-CIO and = the Amalgamated Bank called on Enron to expand the mission of its newly cre= ated Special Committee and for Enron's Board to adopt a package of reforms = designed to restore investor confidence in the battered energy firm. Americ= a's working families are significant shareholders of Enron stock through th= eir pension, health and welfare benefit funds.=20 Among other suggestions, the letter urges the Board to expand the Special C= ommittee's mandate to: * Examine all transactions with entities in which En= ron employees=20 or directors have an interest=20 * Adopt procedures for reviewing insider participation in investments=20 * Commence an extraordinary review of executive compensation=20 * Adopt a stricter definition of director independence and disclose=20 director conflicts of interest "The Special Committee's mandate is far too narrow to address the current c= risis," said Richard Trumka, Secretary-Treasurer of the AFL-CIO. "In light = of Enron's recent balance sheet write-downs, share price decline, and credi= t rating deterioration, the Special Committee must be forward looking and c= onsider sweeping governance reform measures," he explained.=20 "In this time of crisis, outside directors must reform Enron's traditional = lack of transparency and communicate directly with shareholders," said Gabr= iel Caprio, President and CEO of the Amalgamated Bank. "This is particularl= y important since several outside directors have apparent conflicts of inte= rest that compromise their objectivity," he added.=20 AFL-CIO affiliate unions sponsor benefit funds with over $400 billion in as= sets and hold an estimated 3.1 million Enron shares. The AFL-CIO is joined = in its call for reform by the Amalgamated Bank, the trustee of the LongView= Funds which hold 251,304 shares of Enron. The Amalgamated Bank's Longview = Funds are collective investment trusts that manage equity assets on behalf = of workers' benefit funds.=20 A copy of the letter sent to Enron's Board of Directors is available by con= tacting the AFL-CIO Office of Investment at 202-637-3900 or online at http:= //www.shareholdervalue.org .=20 MAKE YOUR OPINION COUNT - Click Here=20 http://tbutton.prnewswire.com/prn/11690X92872585 /CONTACT: Lane Windham, +1-202-637-5018, or Bill Patterson, +1-202-637-3900= , both of AFL-CIO/ 13:39 EST=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Williams CEO Sees Validation Of Co's Bandwidth Model 11/02/2001 Dow Jones Energy Service (Copyright © 2001, Dow Jones & Company, Inc.) HOUSTON -(Dow Jones)- At the beginning of the year, two telecommunications = units born of energy companies seemed to symbolize the different ways to se= ll bandwidth.=20 Enron Corp. (ENE) was viewed as the hot pioneer blazing a trail for selling= telecommunications network capacity as a commodity like natural gas or ele= ctricity. On the other hand, Williams Communications Group (WCG) seemed to promote th= e old-fashioned method that telecommunications companies have used for maki= ng long-term agreements.=20 On Thursday, WCG reported third-quarter earnings of $22.6 million before ta= xes and interest. WCG Chairman and Chief Executive Howard Janzen told Dow J= ones Newswires that the earnings validated Williams' model of a bandwidth c= ompany being a provider of services, not a trader of commodities.=20 "I think bandwidth trading has its place," Janzen said. "It's developing re= latively slowly. The reality is (that) bandwidth is not a commodity except = for lower-capacity services and on certain routes with large amounts of cap= acity."=20 Enron reported an $80 million third-quarter loss for its Broadband Services= unit.=20 As Janzen views it, bandwidth is defined by the technology used to provide = it.=20 "The bandwidth we'll sell five years from now will be different from what w= e're selling today because of changes in technology," he said.=20 After taxes and interest, Williams reported a loss of $272.7 million on rev= enue of $297.8 million in the third quarter. An extraordinary gain of $223.= 7 million from the repurchase of senior redeemable notes in the open market= enabled Williams to post the positive result before taxes and interest.=20 In the same period a year ago, Williams reported a net loss of $150.5 milli= on on revenue of $209 million.=20 Williams also announced Thursday that it has agreed to buy the assets of Co= reExpress, a company which operated on Williams' network. CoreExpress guara= ntees data delivery over multiple networks and developed software to monito= r quality of service over multiple networks.=20 Terms of the agreement weren't disclosed. The deal won't close until undisc= losed conditions are met.=20 Williams also announced a 20-year agreement valued at $267 million to provi= de bandwidth to Boeing Co.=20 -By Erwin Seba, Dow Jones Newswires, 713-547-9214 erwin.seba@dowjones.com Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 USA: Enron shares plunge after S&P credit rating cut. 11/02/2001 Reuters English News Service (C) Reuters Limited 2001. NEW YORK, Nov 2 (Reuters) - Shares of Enron Corp. dropped more than 8 perce= nt in early trade on Friday, as the stock took a new plunge in a two-week f= ree-fall, a day after its credit rating was cut for the second time this we= ek.=20 Enron was down 89 cents, or 7.4 percent, to $11.10 on the New York Stock Ex= change, after briefly slipping to $10.95, a price it also touched briefly o= n Tuesday and last closed at in July 1992. Enron, the nation's largest energy trader, lined up $1 billion of new credi= t on Thursday in a bid to restore investor confidence. Even so, Standard & = Poor's cut Enron's credit rating after stock markets closed on Thursday, sa= ying it could do so again if the situation worsens.=20 Enron has been rocked by a stock slide that has slashed two-thirds of its s= hare price since Oct. 16, when the company reported a $1 billion charge tha= t was caused, in part, by dealings linked to a chief financial officer who = was subsequently ousted.=20 Houston-based Enron is facing an investigation by the U.S. Securities and E= xchange Commission into those dealings. At issue are off-balance sheet deal= s with limited partnerships, run by then-CFO Andrew Fastow, which contribut= ed to a $1.2 billion reduction in shareholder equity. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Goldman Declines Enron's Request for Loan Amid Credit Concerns 2001-11-02 11:22 (New York) Goldman Declines Enron's Request for Loan Amid Credit Concerns New York, Nov. 2 (Bloomberg) -- Goldman Sachs Group Inc. refused to participate in a $1 billion loan to Enron Corp. because it was unwilling to risk its capital on a client with falling credit ratings that has been using its investment-banking services less often, according to people familiar with matter. Enron Chief Executive Kenneth Lay asked for the line of credit after meeting with bankers from Goldman, J.P. Morgan Chase & Co. and Citigroup Inc. last month to discuss ways to alleviate a cash crunch. J.P. Morgan and Citigroup agreed to lend on the condition that the Houston-based energy trader pledge two pipelines as collateral. Goldman's refusal highlights its reluctance to provide credit lines to all but its top fee-paying clients. By not lending to Enron, the firm also is able to advise companies that want to buy Enron or some of its assets, or make a bid of its own. For Enron, the decision makes it harder to resist the demands of its existing lenders, who made the company give up collateral and pay higher interest rates to get its new loan. ``People smell resistance to Enron,'' said Glenn Reynolds, an analyst with CreditSights.com, an independent research firm. ``The balance of power is the with the banks now.'' Kathleen Baum, a spokeswoman for Goldman, said the firm had ``a long history of putting its capital to work for clients.'' She wouldn't comment on the firm's relationship with Enron. Karen Denne, a spokeswoman for Enron, said, ``I won't confirm who we have had talks with.'' Shut Out Enron needed the $1 billion secured loan to supplement cash reserves and help the company pay off existing debt. Yesterday, Standard & Poor's cut Enron's long-term credit rating to ``BBB,'' the second-lowest investment grade rating, from ``BBB+.'' The SEC is investigating partnerships run by former Chief Financial Officer Andrew Fastow that bought and sold Enron shares and assets. Those trades cost Enron $35 million. The company also lost $1.2 billion in shareholder equity. Enron's dealings with the partnerships have shut it out of commercial-paper markets, where corporations borrow money for days or weeks. Lenders are concerned that the company may have further losses from its trading business. A week ago Enron tapped $3 billion in credit lines, arranged by J.P. Morgan and Citibank, to pay off $2.2 billion in commercial paper it has outstanding. Already loaded down with Enron debt, J.P. Morgan and Citibank forced Enron to pay as much as 2.5 percentage points more than the London interbank offered rate, or Libor, on its new loan, according to the people familiar with the matter. That's about five times the spread Enron is paying on its existing lines, according to Bloomberg data. The extra yield wasn't sufficient incentive for Goldman to lend. Securities firms such as Goldman are required to value lending commitments at market prices, exposing them to potential losses from declines in loan prices. Banks such as J.P. Morgan and Citibank are allowed to carry the assets at full value. Falling Prices Enron's existing loans have already fallen to between 80 and 90 cents on the dollar since the company drew them down, according to traders. The company's 6.4 percent coupon notes due in 2006 fell as much as 6 cents on the dollar today, with price indications between 68 and 73 cents, traders said. Yesterday, traders bid for the bonds at 74 cents and offered to sell them at 77 cents Goldman has been getting less investment-banking business from Enron. The No. 3 U.S. securities firm by capital hasn't arranged a bond sale for Enron since 1995, and Enron hasn't picked Goldman to advise on an acquisition or sale since at least 1993, according to Bloomberg data. The firm is a dealer on Enron's $3 billion commercial paper program and has arranged six of the company's 15 preferred share sales. Without a steady flow of investment banking fees, Goldman is reluctant to make loans that tie up capital in a business that is less profitable than advising on mergers or underwriting securities. Among clients the firm has turned down: Ford Motor Co., the second-largest automaker, and Vodafone Group Plc, Europe's largest cellular phone company. Goldman did extend $2 billion in credit to AT&T Corp. as part of a $25 billion credit facility last year. The largest U.S. long- distance phone company is one of the firm's most lucrative clients, however, paying out more than $100 million in investment- banking fees during the past five years. After refusing to lend to Enron, Goldman is unlikely to advise the energy trader on any of its planned $2.1 billion in asset sales, the people familiar said. J.P. Morgan is advising Enron on the sale of its Azurix North American water business and may be retained, along with Citigroup's Salomon Smith Barney unit, to look at other disposals and a possible sale of the whole company, the people said. Goldman, which has an energy trading business of its own, may already be advising potential buyers of Enron's businesses, or lining up a bid of its own, Reynolds said. ``We may well see Goldman pop up on the other side, which would explain its reticence to lend,'' he said. POWER POINTS: Time For A Bronx Miracle In Houston By Mark Golden 11/02/2001 Dow Jones Energy Service (Copyright © 2001, Dow Jones & Company, Inc.) A Dow Jones Newswires Column=20 NEW YORK -(Dow Jones)- With two outs in the bottom of the ninth and down by= two runs with one man on, Enron Corp. (ENE) needs nothing less than a home= run just to stay in the game. This is the home run Enron must come up with: Full disclosure of the assets= and liabilities of those troubled partnerships that have been kept off the= ir balance sheet, and proof the corporation can cover the difference. It's = what stockholders, bondholders and trading partners have been demanding, bu= t time is running out, and Enron hasn't produced.=20 "We're going to get to that number soon and tell people. We have to do that= ," said a source at Enron, who didn't know how quickly the disclosure would= come or whether it would be independently audited. "In this environment, w= e are going to be absolutely sure that it's accurate."=20 Enron has about $3.3 billion in debt on the two key partnerships payable in= 2003. The company will sell the assets in those partnerships and, in a wor= se case scenario, will face a $1 billion shortfall that could be covered by= selling stock and other company assets, Enron has said. The company hopes = that when the time comes to issue new stock, shares will be trading closer = to $20 than their current $11.=20 Investors, however, aren't acting as if they're reassured. Part of the trou= ble, analysts with credit-rating firm Standard & Poor's said Friday morning= , is that until Enron sells the assets, nobody knows for sure what they're = worth or how deep the partnerships are in the hole.=20 S&P is confident that Enron can raise enough capital to fill that hole, pro= vided its trading partners in key energy markets continue to business with = the company.=20 Credit Derivative Fizzle=20 To see the pickle the world's premier energy franchise is in, one needs to = look no further than its credit derivatives trading desk. That relatively n= ew and innovative operation was getting off the ground nicely, but the desk= hasn't been able to transact for three weeks, since the value of Enron's s= tock and bonds began to plummet, according to another Enron employee.=20 Enron didn't respond to a request for comment, but the Enron Credit divisio= n in Europe said in a release that lines are "constrained" as the market co= ntinues to evaluate the company's credit position.=20 Until recently, customers would buy a credit derivative from Enron to cover= its exposure to bankruptcy by a third company. A big supplier to a financi= ally troubled company like Xerox Corp. (XRX) or Lucent Technologies (LU), f= or example, might pay Enron $1 million a year for a payout of, say, $10 mil= lion in the event of a bankruptcy.=20 But you wouldn't pay the premium on your insurance unless you were sure tha= t the insurance company could pay your claims. Likewise, with Enron's credi= tworthiness in doubt, there's no reason to pay a lot of money just to excha= nge Lucent risk for Enron risk.=20 The same holds true, though less obviously, for Enron's core business of en= ergy trading. Some utilities, large industrial companies and other energy t= rading companies could see their profits ruined if natural gas prices - alr= eady on the rise at $3 per million British thermal units - shoot to $10 thi= s winter as they did last winter.=20 To guard against that risk, companies buy contracts now for delivery this w= inter at set prices. If a company wants to lock in winter gas at $3, should= it turn to Enron? If gas were to rise to $10 in January and Enron couldn't= deliver, Enron's counterparty paid a good price for no protection. And if = Enron failed in a $10 gas market, that would send hundreds of companies scr= ambling for supplies. Gas could go to $20 in a heartbeat.=20 Leading Role An Asset=20 Enron does have a man on base. The company is so important to energy market= participants that they desperately want Enron to survive. And any company = that moves to lock Enron out of the market now could regret doing so if Enr= on survives as the big dog.=20 Enron's trading partners have a pretty consistent position at this point: T= hey are continuing to trade with Enron, but are avoiding long-term deals th= at increase their exposure to the company. The only acceptable long-term de= als are those that offset deals done earlier. Unless and until a bill goes = unpaid, they'll keep delivering.=20 Enron, like the rest of the U.S. energy industry, paid its bills for Septem= ber gas deliveries on Oct. 20 and for its September electricity deliveries = on Oct. 25. Its next power and gas bills come due in the third week of Nove= mber.=20 That means trading companies generally have just seven weeks of receivables= at risk before Enron's creditworthiness faces another test. In exchange fo= r taking on that small risk, they keep the great market maker in business.= =20 Lenders Show Concerns=20 Lenders, whether through holding Enron bonds or providing loans, don't have= the same luxury as energy trading companies that are keeping deals on a sh= ort leash. Lenders supply cash up front and for longer periods of time, usu= ally years.=20 Outside of long-term commitments, what worries the banks, which presumably = got a good look at Enron's books? If Enron is now unable to make the big be= ts with long-term energy deals that have kept it profitable for years, can = it service all of its liabilities, known and unknown? If it has to sell pro= fitable assets like pipelines and power plants, or otherwise put those asse= ts at risk, will lower earnings be enough to pay rising credit costs? What = happens if its greatest asset - its traders - leave in droves to work elsew= here?=20 If Enron is to have a chance, it needs energy trading profits to keep rolli= ng in so that it can continue to service its debt. So far this year, tradin= g and other wholesale operations have accounted for $2.2 billion out of $2.= 4 billion in net recurring income before interest and taxes. By comparison,= Enron has made $617 million in interest payments so far this year.=20 J.P. Morgan Chase & Co. (JPM) and Citigroup Inc. (C) unit Salomon Smith Bar= ney, at least, don't show much confidence Enron can do it. When they agreed= to provide Enron with a $1 billion line of credit, they did so only after = Enron posted valuable gas pipelines as collateral.=20 Bond traders - the most sophisticated investors in the world - make their m= oney by understanding the probabilities. They're trading Enron debt at leve= ls typically associated with distressed companies.=20 The lenders have chalked up their runs. Shareholders have ratcheted up the = pressure.=20 Enron, now, must step up to the plate.=20 -By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.co= m Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Enron Says It Remains 'Biggest' Player In EU Gas, Power 11/02/2001 Dow Jones Energy Service (Copyright © 2001, Dow Jones & Company, Inc.) LONDON -(Dow Jones)- Enron Corp. (ENE) said in a statement Friday that it r= emains the "the biggest buyer and seller of gas and power in Europe," and t= hat its EnronOnline platform "continues to be the key trading platform in E= urope."=20 The company issued the statement in response to widespread rumors that seve= ral companies have ceased trading gas and power with Enron since its share = price took a nosedive last week. In the statement, Enron added that worldwide transactions in the power and = gas markets were averaging $3 billion to $4 billion a day, up from a 30-day= average of $2.5 billion at close of business Friday, Oct. 26.=20 Enron has been on the defensive after announcing a third-quarter loss of $6= 18 million two weeks ago, followed by news that it took a $1.2 billion equi= ty write-down, based partly on transactions involving a handful of its own = officers.=20 On Wednesday, Enron disclosed that the SEC elevated its inquiry into Enron'= s alleged related-party transactions to a formal probe.=20 Enron Corp. secured $1 billion in new credit lines this week, but the deal = did not appease credit-rating agency Standard & Poor's Ratings Group, which= lowered its rating on Enron's long-term debt by one notch to triple-B from= triple-B-plus and short-term debt to single-A-3 from single-A-2. Moody's I= nvestors Service Inc. had issued debt downgrades earlier this week.=20 However, European industry sources reiterated Friday that several companies= have ceased trading U.K. gas and power with Enron altogether, based on con= cerns about the company's overall credit position.=20 -By Sarah Spikes and Germana Canzi, Dow Jones Newswires; +44-(0)20-7842-934= 5; sarah.spikes@dowjones.com Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 USA: UPDATE 1-Enron shares fall as investor concerns linger. By Janet McGurty 11/02/2001 Reuters English News Service (C) Reuters Limited 2001. NEW YORK, Nov 2 (Reuters) - Shares in Enron Corp., the U.S. energy trading = giant facing a federal probe into its dealings, declined on Friday amid lin= gering investor concern about management credibility and the outcome of pen= ding lawsuits.=20 Shares of Enron were off 62 cents, or 5.2 percent, at $11.37 in early after= noon trade on the New York Stock Exchange, recouping some losses after plun= ging briefly to $10.95, a closing price last seen in July 1992 and touched = in intraday trade on Tuesday. Enron debt due in 2006 declined about another 6 points, and was trading at = about 65 cents on the dollar. The bonds were trading at about $1.01 two wee= ks ago, before Enron announced on Oct. 16 a $1 billion charge, caused in pa= rt by dealings linked to partnerships run until recently by a chief financi= al officer who was ousted last week, and that form part of the federal prob= e.=20 "There remain several fundamental issues that we believe need to be address= ed before the clouds can clear above Enron's skies," said Ronald Barone of = brokerage UBS Warburg.=20 Apart from the probe by the Securities and Exchange Commission, Barone said= concerns include "the evolving state of the company's balance sheet, manag= ement credibility and ultimate outcome of shareholder lawsuits."=20 A handful of law firms have sued Enron, saying it overstated operating resu= lts, failed to write down assets on a timely basis and concealed investment= s that might require the company to issue large amounts of shares to cover = loses.=20 Enron's woes have put it under intense investor scrutiny, with the company = losing about $17 billion in market capitalization in the past two weeks. Th= e AFL-CIO union umbrella urged Enron on Friday to review executive compensa= tion and adopt procedures for insider investments, among other recommendati= ons.=20 AFL-CIO affiliate unions sponsor benefit funds that hold an estimated 3.1 m= illion Enron shares.=20 PREMIUM PLAYER IN RISK MANAGEMENT=20 Shares also plunged on Friday - they have fallen about two-thirds in the pa= st two weeks - after Standard & Poor's cut Enron's credit rating late Thurs= day, the second cut this week.=20 Although S&P said another rate cut could ensue if Enron's situation worsens= , a team of S&P analysts told investors on a conference call on Friday they= were confident they were aware of all the company's financial obligations.= =20 Enron has been criticized for providing scant details about its dealings, l= eading to concerns about the riskiness of its obligations.=20 "Enron is a premium player in the risk management area," said Ronald Barone= , a member of the S&P team who is not related to UBS's Barone.=20 The S&P analysts said they were using about $1.5 billion as the amount of o= ff-balance sheet items, about half the $3 billion calculated in past years,= because of a change in reporting international energy assets, which no lon= ger puts non-recourse debt onto the balance sheet in places like India and = South America.=20 The S&P analysts also said they felt Enron's move to secure a $1 billion li= ne of additional credit earlier this week sent out Enron's clear commitment= to credit quality.=20 They also said it seemed reasonable to expect a long-term solution to fix E= nron's hard to understand balance sheet would assume an infusion of long-te= rm equity as well as asset sales.=20 The S&P ratings team also said it was closely monitoring Enron's trading pa= rtners for a change in their credit stance toward Enron and, to date, have = seen no significant change.=20 But they cautioned that could change at any time and that was the reason fo= r putting Enron on the credit watch listing.=20 Enron Chairman and Chief Executive Officer Ken Lay, who has been criticized= for not providing the public enough details on Enron, was a no-show at a b= usiness conference in Houston where he had been scheduled to speak on Frida= y morning.=20 Enron executive Robert Bradley, who declined to respond to questions from R= euters after his speech, said he had been sent to replace Lay because "Ken = is better at putting out fires at Enron." Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09
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