With embattled CFO Andrew Fastow and other corporate executives joining him, Chairman Kenneth Lay attempted to answer yet again the growing list of questions that are swirling around Enron Corp.’s third quarter announcement of equity reductions and related-party transactions. However, it seemed in the end that listeners were still hungry for more information on the Houston-based company’s balance sheet, as well as its plans to stop the slide in stock prices.
After rising slightly following the one-hour conference call, Enron’s stock fell again on Tuesday 4.19%, losing 86 cents to rest at $19.79. The stock has lost almost 80% of its share value in less than a year, and much of the drop has come in the past few weeks. In the last year, it has been as high as $84.87.
Sounding clearly concerned, Lay reiterated that Enron was cooperating fully with a request by the U.S. Securities and Exchange Commission (SEC), which is questioning — not investigating — some related-party transactions of the company (see Daily GPI, Oct. 23; Oct. 22). “We welcome this request and we are cooperating fully with the SEC,” said Lay. As he said in a statement on Monday, “we believe everything that needed to be considered and done was considered and done.”
The chairman and also CEO said the company is “going forward in this environment, and we are very much in a disciplined mode. Projects continue to move ahead.” However, because of the recent bad press reports and speculation surrounding the company’s business practices, Lay committed to have more conference calls “on a regular basis for a while,” and said that answers to frequently asked questions would be posted on the company’s web site beginning Tuesday. “There are a lot of rumors getting out…a lot of speculation getting out. It is doing a lot of damage to us, and we want to get the facts out.”
Lay explained that some of the most recent rumors related to the third quarter conference call last week, where he offered information that the company would have a $1.2 billion reduction in shareholder equity. That information normally would have been filed “in mid-November” when the company was expecting to release its balance sheets for the quarter. He said that report will “clearly spell out” what the reduction is. The 10-K is expected to be filed on November 13.
The chairman further explained that other questions, regarding Enron’s related-party transactions, revolve around an established structured finance vehicle to “mitigate volatility with certain energy merchant investments,” including short-term investments such as technology upgrades and construction. However, he said that “in conjunction with the termination of some of these vehicles, we adjusted” the equity, which ended some of the obligations of the company. The termination equated to 62 million shares of Enron stock, and Lay said the “obligation to issue shares in the future on [those obligations] no longer exists.”
Lay then turned the call over to CFO Fastow to discuss Enron’s current liquidity position, noting with his introduction that Enron continues “to have the highest faith in Andy, and I think he’s doing an outstanding job as CFO.” He also took issue with reports questioning Fastow’s character, which he said were unfounded. Fastow, 39, was named CFO in 1998 and executive vice president in 1999.
Previously, Fastow was a managing director with Enron Capital & Trade Resources (ECT). He joined ECT in 1990 to develop the company’s funding business, providing and managing the debt and equity capital required for ECT’s third-party finance business, as well as for ECT’s physical and financial acquisitions and investments. In 1996, Fastow led the development of Enron’s retail energy business.
Fastow’s involvement on two related-party transactions with Enron and companies he set up and managed until last June — LJM Cayman and LJM2 Co-Investment — appeared to have set off the most recent controversy and resulting lawsuits. Lay said that he had “heard investor concerns” about Enron’s partnership with the LJM entities, and said, “LJM is no longer a related-party instrument. In the third quarter, we terminated the related-party transactions.”
To “unwind” itself from the partnership, Enron took a $35 million charge as part of its quarterly earnings, and also took an equity reduction of $1.2 billion along with a corresponding reduction in notes receivable. The obligation equaled 62 million shares, which will not be factored into quarterly results, Lay said. He also apologized for the confusion associated with the reduction.
Turning the call over to his CFO, Fastow said Enron “expects to continue to have sufficient liquidity for normal continuing operations,” answering calls about Enron’s ability to raise money. He said Enron currently has commitments from bank loans to use uncommitted lines of credit, and all total, about “$1.5 billion of liquidity sources available today.”
The CFO said that Enron’s policy under its committed lines of credit remains in effect, and in addition to the unused $1.5 billion in liquidity sources, Enron also will gain about $600 million from asset sales by the end of this month. By the end of 2002, Enron also will pick up almost $1.9 billion in its Portland General Electric sale to Northwest Natural, he said (see Daily GPI, Oct. 9).
With respect to credit ratings, Fastow said both Standard & Poors and Fitch have retained their AAA ratings on Enron. He added that the company is now working with Moody’s to “address specific questions” the ratings service has, since it indicated it was considering downgrading Enron following the third quarter earnings release. “I understand the credit rating is critical to capital markets,” said Fastow, and he said the company would work to ensure that its rating remained solid for both shareholders and the company.
The call was soon turned over to a barrage of phoned in questions from investors and analysts, who, for the most part, were sympathetic to the recent adverse news stories, but also critical of Enron’s lack of clear communication regarding its operations.
Answering each question as well as he could with regard to pending litigation, Lay for the most part retained his composure until Richard Grubman, managing director of Highfield Capital Management, asked for more explanation of Enron’s dealings with its water subsidiary Azurix and its trust structure. Grubman, who manages a Boston-based hedging fund, had gotten into an argument with former Enron CEO Jeffrey Skilling last spring, in a contentious discussion where Skilling called Grubman “an asshole” (see Daily GPI, April 18).
Grubman questioned how Enron reconciled the value of the water assets held by an off-balance sheet transaction held by its Marlin II trust, another complex arrangement within the Azurix holdings that were included in the third quarter writedown. Following an explanation about the Azurix arrangement by Lay that Grubman apparently considered inadequate, he again asked Lay to provide him with more detail. Lay shut off his call.
“I know you want to drive the stock price down, and you’ve done a good job,” Lay told Grubman. “Let’s move on.” Grubman, answering said, ” I think everyone understands why you want to move on.” But Lay interrupted him, “you won’t accept our answer. Move on. Next caller.” With that, the call was interrupted.
But Grubman’s questions were among several by investors and analysts questioning Enron’s business practices. Throughout, Lay remained steadfast to answering questions as best he could.
David Fleischer of Goldman Sachs & Co. didn’t have a question, but may have spoken for the listening audience when he offered some advice to Lay and Enron. “With all due respect, what you’re hearing from others is that the company’s credibility has been severely questioned, and there is a need for much more disclosure.” Fleischer said, “There is an appearance that you are hiding something that you don’t want to disclose…maybe there is something that may be questionable, [but] you need to do everything in your power to explain to investors and demonstrate to investors that you are above board.”
Fleischer added, “I urge you to have daily conference calls or almost daily conference calls…it’s absolutely critical to the company. I, for one, find the disclosure is not complete and is not complete enough for me to understand and to explain the intricacies of those transactions. You are now in a position where you need to give us a lot more information.”
Lay, who acknowledged the limits of what could be disclosed while there are pending “lawsuits and potential lawsuits,” said, “We are trying to be as transparent as we can. We are not hiding anything. We have scrubbed and rescrubbed and rescrubbed in the last few months more than we have in a long, long time. [In the third quarter release], we broke things out in more segments, offered more operating data. We are sorry for the misunderstanding on the $1.2 billion equity reduction, but we made the decision to put it out at the same time as the earnings. My commitment is to get everything out there and make sure that the analysts and the shareholders know what’s going on there.”
Analyst John Olson of Sanders Morris, who said it was “important in terms of credibility,” asked for specific detail on Fastow’s involvement and oversight by Enron as general partner in the LJM deals. “How closely was he monitored and what kind of review was imposed on the general partner?”
Lay responded that the “SEC is going to come in and look at this and we welcome it and it will finally put issues to rest. I prefer Andy not get into too much detail [of his relationship] with LJM and Enron,” but he said safeguards had been put in place by the Enron board of directors to ensure there was a process where Enron’s and shareholder’s interests “would be paramount” before any projects were put in place. “It was strictly discretionary, but it had to have Enron’s best interests before [anything] was put in there.”
Following the call, analyst Curt Launer of Credit Suisse First Boston said that he expects to see the “issues and inquiries that surround Enron for some time.” Ultimately, however, the analyst expects the business units to gain value again, resulting in a “significant” recovery next year.
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