Enron Corp. reported Wednesday that the U.S. Securities and Exchange Commission (SEC) has launched a formal investigation into “certain of the matters that were the subject of recent press reports and that previously were the subject of an informal inquiry” — all centered on the company’s related-party transactions.

The revelation came at the end of the first day in 10 that Enron finally gained some ground in the stock market, recovering $2.74/share to close at $13.90 — a 25% hike. Enron’s stock was the second-most active on the New York Stock Exchange and third-biggest gainer by percentage, but rumors escalated that the rise in part could be related to Enron’s possible takeover as it seeks new investment lines to fund its global businesses.

In announcing the formal SEC inquiry, Enron announced it would “examine and take appropriate actions with respect to transactions” between the company and its related-party transactions. Along with reviewing the transactions, a special committee has been charged to communicate with the SEC and to recommend “any other actions it deems appropriate.”

In a written statement, Enron Chairman Kenneth L. Lay said, “I have asked the board to take this action to address fully and forthrightly investors’ questions and concerns. Responding to the SEC offers us an additional opportunity to achieve this same goal for investors, and we will cooperate fully. We will also make every appropriate public disclosure during the course of the SEC’s investigation.”

In light of the SEC inquiry, the Enron board elected to the board William Powers Jr., dean of the University of Texas School of Law in Austin, and also appointed him to chair the special committee to review the related-party transactions. Powers will be joined on the committee by independent directors Frank Savage, CEO of Savage Holdings LLC, Paulo Ferraz Pereira, executive vice president of the Brazilian-owned investment bank Group Bozano and Herbert S. Winokur Jr., CEO of Capricorn Holdings Inc.

Powers currently holds the John Jeffers Research Chair in Law and the Hines H. Baker and Thelma Kelley Baker Chair in Law at the UT School of Law, where he teaches torts, products liability, jurisprudence, legal process, civil procedure and contracts. The Enron special committee also has retained William. R. McLucas, a partner in the law firm of Wilmer, Cutler & Pickering as counsel. McLucas is the former head of the Division of Enforcement at the SEC. Wilmer, Cutler also has retained Deloitte & Touche to provide independent accounting advice.

Enron did not comment on any takeover or investment rumors, but potential buyers are said to include General Electric Co.’s GE Capital, Berkshire Hathaway Inc. and Royal Dutch/Shell Petroleum Co. — and energy analysts, meanwhile, have begun calculating the company’s net asset value.

At the heart of the controversy that triggered Enron’s 49% stock devaluation in October alone are the affiliated companies that it has long used to buy short-term assets, such as constructing power plants and paying for technology updates. The off-sheet balance transactions, which led to Enron taking a $1.2 billion writedown for the third quarter and ultimately to replace CFO Andrew Fastow, are rumored to be part of the reason CEO Jeffrey Skilling abruptly left the company in August (see Daily GPI, Oct. 17; Aug. 15). The transactions also have triggered in inquiry by the SEC, which is asking Enron about two partnerships, LJM Cayman and LJM2 Co-Investment, which were run by Fastow.

In 1998, the SEC apparently questioned another Enron affiliate, Joint Energy Development Investments LP, or Jedi II, asking the company to “either explain or cross reference to discussion” a better description of Jedi II. It was listed in the 1998 Enron annual report as an “unconsolidated affiliate” in which Enron owned 50%. However, SEC did not confirm whether it had done an inquiry of Jedi II. The Texas secretary of state records indicate that Fastow, Enron Treasurer Ben Gilsan, current Enron President Greg Whalley and several other Enron executives are currently officers or partners of Jedi II. Enron has disclosed that Enron employees who are listed as officers of affiliates receive no compensation for their roles and represent the interests of the company.

Now that the stock price — at least for the moment — appears to have leveled off, investment analysts are examining the company in a new light. Merrill Lynch energy analyst Donato J. Eassey on Wednesday released a report on Enron’s Net Asset Value (NAV), noting that it was “more than warranted” because of the energy trader’s current situation. Using the off-balance sheet financing that is available, Eassey estimates the company’s NAV to be $16-$24/share.

“We estimate that the on-balance sheet assets are worth nearly $11 billion,” according to the note. “Total balance sheet debt is estimated to be about $13.8 billion, and we think the off-balance sheet debt stands at $3.4 billion.” On June 30, 2001, Enron “had $847 million of cash and was in a net positive position of $306 million. Thus, our estimates below could prove to be conservative or aggressive subject to their current cash balance and net trading position.”

The NAV estimate by Merrill Lynch uses $34 billion to $38.6 billion of assets less the $18.2 billion of obligations, which “equates to a range of $13.8 billion to $20.4 billion or $16.24-$24 per share” based on 850 million estimated diluted shares.

“Once the dust settles and some semblance of credibility returns, we do think Enron should ultimately return to a more traditional profit/earnings valuation,” said the note. Enron’s valuation, therefore, “looks like $24.70-$31.50.” Merrill Lynch gave Enron a “near term accumulate rating, but noted that “Enron should be considered for high-risk profile investors as much uncertainty remains.”

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