A year already marked by accounting problems and revelations of round-trip transactions preceded restatements of 2001 income last week by Reliant Energy Inc. and subsidiary Reliant Resources Inc. However, management warned that it is still reviewing other data on the phony deals, and ultimately plan to restate revenue, fuel and cost of natural gas and purchased power expenses for 1999, 2000 and 2001.

Reliant Energy lowered its first quarter revenue to $12 billion from $13.3 billion, and Reliant Resources reduced its revenue to $8.6 billion from $9.9 billion, in restatements of their 2001 10-Q report filed with the Securities and Exchange Commission (SEC) last week.

Reliant Resources’ restatement reflected the net value rather than the gross value of its round-trip transactions, which apparently not only boosted the company’s trading volume but also its revenue for at least 2001. Reliant Resources determined that it engaged in the deals for the last three years and would reissue consolidated financial statements with Reliant Energy “as soon as practicable.” Reliant’s top two trading executives resigned following revelations about the “wash” deals, which have also forced the resignation of a top CMS Energy Corp. executive (see NGI, May 20).

Reliant Energy said the restatements had no impact on the two companies’ previously reported cash flows, operating income, net income or earnings per share. The Houston-based company and the subsidiary now are consulting with outside auditor Deloitte & Touche LLP and intend to consult with the SEC about possibly changing their accounting methods and about “other related issues.” Among other things, Reliant may present some of its future mark-to-market transactions on a net, rather than gross, basis because it believes that net reporting may be a better representation of the performance of the business.

In other news last week, former executives and traders said that Reliant Resources 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.” The top trading executives with Reliant resigned earlier this month following news that the trading unit had engaged in bogus trades to bolster power and gas volumes and revenue.

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.”

Last 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.”

The round-trip transactions also have led to at least a dozen lawsuits filed against Reliant in the past two weeks. One class action lawsuit filed last Tuesday alleges that Reliant Resources made Reliant appear more active in the market than it was, thereby making its business appear more “substantial” than it actually was. Other energy marketers have been slammed by similar lawsuits in recent days, but this one focuses on the prospectus used for Reliant Resources’ initial public offering (IPO) last year — a prospectus that detailed wholesale energy trades in 1999 that the company has already admitted were inflated.

When Reliant Energy launched Reliant Resources as an IPO, it debuted at $30 a share and became the most actively traded stock on its first day (see NGI, May 7, 2001). However, recent revelations at the company as well as related events throughout the energy sector have slammed its stock price, which hovered last week below $9. Reliant Resources has admitted using “wash” trading for about 10% of its trades over the past three years — about 139 million MWh — in order to boost its trading volumes to make it look like a larger market player than it actually was.

The lawsuit that targets the IPO was filed in U.S. District Court for the Southern District of Texas by Berger & Montague PC of Philadelphia on behalf of anyone who purchased Reliant stock “on or traceable to Reliant’s initial public offering of 52 million common shares at $30 per share on May 1, 2001.”

The round-trip transactions “were conducted solely to generate volume in order to make Reliant appear to be a bigger player in the wholesale energy market and achieve a higher ranking in the quarterly sales rankings of power traders,” the lawsuit alleges. “A high ranking indicated that Reliant was well equipped to handle large transactions, to attract more traders and to win long-term supply contracts with large utility customers. Energy traders sought out a high ranking because it made them a more desirable business partner.”

The lawsuit details that in the fourth quarter of 2001, Reliant ranked second on the list of power marketers; “without the ’round-trip’ trades, which Reliant admitted totaled 78 MM MWh in 2001, or 20% of its reported volume, it would have only ranked seventh.” The “phantom trades improperly inflated Reliant’s revenues by approximately 10%” from 1999 through 2001.

“Reliant admitted that it engaged in ’round-trip’ trades of 30 MM MWh in 1999 or approximately 26% of the 112 MM MWh reported in the Prospectus for the year ended December 31, 1999, and 30 MM MWh in 2000 or approximately 14% of the 201 MM MWh reported in the Prospectus for the year ended December 31, 2000,” said the lawsuit. “The Prospectus contained materially false and misleading representations of the volume of Reliant’s energy trading as well as Reliant’s revenues.”

Reliant, of course, is not the only energy company faced with a load of lawsuits regarding the wholesale energy transactions, but no other ones so far target IPOs. CMS, which admits involvement in many of the sham deals with various marketers, has been hit with a barrage of litigation in recent days; Dynegy has been hit with several as well. Williams and Duke Energy have also admitted to engaging in round-trip transactions — with the disclosures revealed after memos from Enron Corp. officials indicated the bankrupt company had used the trading tactic in California.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.