Play hardball with troubled Enron

Don’t be in a hurry to accept the energy giant’s equity writedown offer

Sucheta Dalal

Sucheta Dalal

Call it coincidence or design. But Enron’s offer to sell its equity to Indian financial institutions at a 30 per cent discount was made on the same day that the US Securities and Exchange Commission announced an investigation into its many curious deals and accounts. The New York Times says: Enron’s problems boiled over earlier this month, when it disclosed that its shareholders’ equity, a measure of the company’s value, dropped by $1.2 billion in the last quarter because of a deal disclosed only very hazily in Enron’s regular financial statements. The SEC is looking into the company’s financial reporting, and some investors question whether Enron has overstated profits in its primary business of trading electricity and natural gas. Enron’s top brass was apparently as hazy in answering questions from analysts and the media.

As speculation mounts that Enron may go bust like the Long Term Capital Management Fund, the most pressing worry is a series of partnerships and trusts that the company created to move some of its assets and debt off its balance sheet. With names like Marlin and Osprey, the partnerships have at least $3.3 bn in outstanding bonds backed by assets. Then Enron sent shock waves by suddenly writing down $1.2 bn of assets without offering any explanations, leading to suspicion that it was hiding far more losses than it has admitted. The Street.Com based on documents in its possession says: The battered energy trader has done business with at least 15 related entities. Enron’s new chief financial officer serves on 12 of these entities and Enron board members have directorships and other roles at a Houston-based related entity called ES Power 3.

It says the extent of Enron’s dealings with these companies, or the value of its holdings in them, are unknown. But the existence of these partnerships could feed investors’ fears that Enron has billions of dollars of liabilities that don’t show up on its balance sheet. A Goldman Sachs analyst reportedly estimates that Enron may have over $ 9 bn in off-balance sheet assets which it will have to sell. They include the Dabhol Power Project where Enron claims to have invested over $ 1 bn. Is this figure exaggerated? Here is a clue.
Christopher Edmonds of Street.com (October 26), while estimating what Enron can recover form divestment of investments abroad, says that these include $390 mn in exploration and production assets in India. Isn’t this way below Enron’s claim of $ 1 bn in the power plant alone?

The international furore over Enron’s dealings should finally open the eyes of Enron’s powerful Indian apologists (academics, columnists and the establishment), who have long argued that a contract should be honoured even if it is one-sided and bankrupts the nation. We learn that the central government is pressuring FIs to consider Enron’s offer positively and end the dispute. But let’s not get carried away. The second report of the Madhav Godbole Committee has demanded a 75 per cent writedown of equity and a five-year moratorium on all loan repayments. Also, given the charges against Enron the world over, we certainly need to complete the judicial inquiry before making decisions unless, of course, Enron is prepared to write off 75 per cent of its claimed investment.

What is clear from major international publications is that Enron’s ability to influence governments is not restricted to India. The NYT writes about how Enron’s decade-long effort to persuade lawmakers to deregulate electricity markets had succeeded from California to New York. And that its ties to the Bush administration assured that its views would be heard in Washington. Its sales, profits and stock were soaring (at the beginning of this year). It goes on to say that: The company, based in Houston, dripped contempt for the regulators and consumer groups that stood between it and fully deregulated markets for electricity, water and everything else. We all know how power deregulation ended in rolling blackouts in California, steep electricity charges and a massive public agitation to reverse deregulation, and finally government intervention and litigation. Every international writer refers to Enron’s blustery arrogance something that we, who opposed the power project, have dealt with since 1994. Why, just a month ago, CEO Kenneth Lay was threatening India’s PM with sanctions. Enron promised that deregulation of power and water was a win-win situation for all — in fact it is lose-lose all the way. Investors, consumers, financiers have all lost heavily.

What does the sordid Enron saga say about US regulation and disclosure standards, and savvy fund managers and analysts? Hear it from the NYT: For years, the details of Enron’s finances have been a mystery even to Wall Street analysts whose job it is to follow the company, and to its investors. When Enron’s profits were soaring and it was creating lucrative new markets, shareholders did not seem to care about the impenetrability of its financial statements. Now they do. Yet the company seems incapable of offering straight answers to the questions investors ask. Doesn’t it sound like India? We now learn that Enron had successfully lobbied Congress last year to effectively ensure that the Commodity Futures Trading Commission would exempt its Internet-trading platform from regulation.

In its latest issue, The Economist says that Enron’s lack of transparency leaves uncomfortable room for doubt. It says: In June 2000, The Economist challenged Mr Lay to reply to accusations of arrogance, high-handedness and a propensity to push the limits of the law. His response was revealing. In his defence, he pointed to another firm unfairly maligned by critics: Drexel Burnham Lambert, an investment bank that rose from obscurity to market prominence in the junk bond boom of the 1980s. Drexel was accused of arrogance, he groused, but it was only being very aggressive. Drexel was not bailed out: Michael Milken, its star, ended up in jail, and Drexel collapsed in a heap of bad debts. In India we got more carried away than the rest of the world. Our netas and babus signed away our sovereignty through a guarantee that created a charge on national assets, architectural monuments, defence establishments, and our FIs even guaranteed foreign lenders loans to the project. Can we wake up now and correct the situation?

Writer’s e-mail: suchetadalal@yahoo.com