Former executives and traders said that Reliant Resources Inc. apparently brokered a complex fiber-optic network swap in March 2001 to help Enron Corp. and Global Crossing Ltd. sidestep some accounting rules, according to an article in the New York Times. The plan by Enron and Global Crossing, which are both in Chapter 11, was to disguise a $17 million loan to Global Crossing by Enron, and to book revenue for the companies. Enron and Reliant both declined comment on the details, although Reliant acknowledged that it completed a deal with Global Crossing.

Enron apparently booked a $5 million profit from the transaction, but it is not clear how much Global Crossing received. For playing the middleman, Reliant was expected to receive the equivalent of about $300,000, according to the newspaper. Reliant’s payment was in the form of “dozens of network-access swaps, in which Enron agreed to take losses while Reliant was assured of profits, the executives said.” Along with the payment to Reliant, “the goal for both companies, they said, was to bolster the market’s trading volumes.”

UtiliCorp United (now Aquila Inc.), Enron, El Paso Corp. and Reliant were the largest network traders, but were mostly trading among themselves at a “lackluster” pace, the newspaper said. A former Enron executive said the deal “met both companies’ needs: to spread it out over time and to book more trades.” Last week, the top trading executives with Reliant resigned following news that the trading unit had engaged in bogus trades to bolster power and gas volumes and revenue (see Daily GPI, May 17).

Unnamed executives told the Times that the transaction was started in late 2000 and completed in March 2001 as a way to impress Wall Street and to move up the companies’ stock prices. Investigators from the Securities and Exchange Commission (SEC) and other agencies now are expanding their investigation of Global Crossing’s network trading activities beyond the 15 deals that were the original focus, according to sources.

“Reliant’s role indicates the extent to which energy companies, whose natural gas pipelines are often overlaid with fiber optic communications networks, began trading network-access rights — a market that eventually collapsed under a glut of fiber optic capacity,” according to the newspaper report.

Initially, the companies asked El Paso Corp. to act as the broker, the Times said. “That meant Enron would sell to El Paso, which would then sell to Global Crossing and then Global Crossing would sell back other services to El Paso and then on to Enron,” in a process called “sleaving.” The three companies attempted to complete the transaction by the end of the third quarter of 2000, but the agreement broke down just days before the end of the quarter. The deal was revived in the fourth quarter of 2000, but again broke down. When the transaction was completed, Reliant had replaced El Paso as the middleman.

El Paso spokeswoman Norma Dunn said Enron had presented the deal to El Paso, but said “it didn’t meet our business criteria. So we didn’t do the deal.”

As completed, the transaction gave Global Crossing a high-interest $17 million loan from Enron through Reliant. The loan was not expected to appear on the Global Crossing balance sheet because it had been structured as part of a fiber optic transaction. “Enron then began engaging in scores of losing broadband trades with Reliant in order to pay that company for its middleman role,” sources told the Times. A former Enron executive told the newspaper that the transaction’s goal was obvious: both companies were trying to show profit and revenue growth. “Everyone was over-reporting their numbers back then. We were on the Wall Street treadmill.”

On Monday, fixed-income research service “Gimme Credit” suggested that investors avoid bonds of Reliant Energy and its subsidiaries until they can sort out the significance of “wash” trades to the industry. Carol Levenson, the director of research, said Reliant Resources has an “urgent” need to conduct a major refinancing, and reported she is “skeptical” that management can return to the debt markets between Labor Day and Dec. 31, 2002 to term out $2.5-$3 billion of debt.

“There seems to be no Plan B should these miracles not occur on schedule,” Levenson reported She said she also is wondering whether Reliant Energy will be able to complete its spinoff of Reliant Resources by this summer. “Despite the fact there was a regulatory impetus for separating the company’s unregulated businesses, we wonder whether REI can simply cut RRI adrift amid its current troubles,” she said. “So far there have been no rating actions on REI, but it too has delayed the release of its 10-Q and it is already the subject of shareholder lawsuits.”

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