Message-ID: <12501297.1075851661113.JavaMail.evans@thyme> Date: Tue, 23 Oct 2001 06:05:33 -0700 (PDT) From: m..schmidt@enron.com Subject: Enron Mentions Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: quoted-printable X-From: Schmidt, Ann M. X-To: X-cc: X-bcc: X-Folder: \Dasovich, Jeff (Non-Privileged)\Dasovich, Jeff\Inbox X-Origin: DASOVICH-J X-FileName: Dasovich, Jeff (Non-Privileged).pst SEC Seeks Information on Enron Dealings With Partnerships Recently Run by F= astow The Wall Street Journal, 10/23/01 Where Did the Value Go at Enron? New York Times, 10/23/01 FRONT PAGE - FIRST SECTION: SEC probes Enron over financial dealings=20 Financial Times; Oct 23, 2001 COMPANIES & FINANCE THE AMERICAS: Group full of surprises after failing to = open up=20 Financial Times; Oct 23, 2001 Enron Discloses SEC Inquiry=20 The Washington Post, Oct 23, 2001 Enron Suffers After Unclear Disclosure, New York Times Says Bloomberg, 10/23/01 SEC asks Enron for investing data Houston Chronicle, 10/23/01 Minnesota Mining and GM Climb In a Rally That Builds Late in Day The Wall Street Journal, 10/23/01 WORLD STOCK MARKETS: Wall St bargain hunters counter earnings gloom AMERICA= S=20 Financial Times; Oct 23, 2001 Milberg Weiss Announces Class Action Suit Against Enron Corp. Business Wire, 10/22/01 Enron To Host Conference Call Tues 9:30 am EDT Dow Jones News Service, 10/22/01 Janus Had Biggest Enron Stake at End of 2nd-Quarter (Update1) Bloomberg, 10/22/01 Enron Says SEC Asks About Related-Party Transactions (Update9) Bloomberg, 10/22/01 Trusts Keeping Enron Off Balance TheStreet.com, 10/22/01 Why Enron's Writedown Unnerves Some Investors TheStreet.com, 10/22/01 SEC Seeks Information on Enron Dealings With Partnerships Recently Run by F= astow By Rebecca Smith and John R. Emshwiller Staff Reporters of The Wall Street Journal 10/23/2001 The Wall Street Journal A3 (Copyright (c) 2001, Dow Jones & Company, Inc.) Enron Corp. said it has been contacted by the Securities and Exchange Commi= ssion seeking information on the energy giant's controversial dealings with= partnerships that were set up and run until recently by its chief financia= l officer, Andrew S. Fastow.=20 Following Enron's announcement yesterday morning of the SEC inquiry, the co= mpany's stock took another big slide, falling more than 20% in New York Sto= ck Exchange trading. As of 4 p.m., Enron shares were trading at $20.65, off= $5.40, knocking about $4 billion off Enron's market capitalization. Volume= topped the Big Board's most-active list at about 36 million shares. A week= ago, Enron stock was trading at about $33 a share. Subsequently, the compa= ny announced a $1.01 billion third-quarter write-off that produced a $618 m= illion loss. Analysts also voiced concerns yesterday about possible other bad news lurki= ng amid Enron's vast and extremely complex operations. The company has deal= ings with a number of related entities. Under certain circumstances, if Enr= on's credit rating and stock price fall far enough, the company would be ob= ligated to issue tens of millions of additional shares to these entities, d= iluting the holdings of current shareholders.=20 Enron has previously acknowledged the provisions but said its business is s= trong and it feels confident that there will be no defaults.=20 In a statement, Enron Chairman and Chief Executive Kenneth Lay said the com= pany "will cooperate fully" with the SEC inquiry and "look(s) forward to th= e opportunity to put any concern about these transactions to rest." Enron h= as consistently said that it believes its dealings with the Fastow-related = partnerships were proper and properly disclosed. The company has said it pu= t billions of dollars of assets and stock into partnership-related transact= ions as a way to hedge against fluctuating market conditions.=20 The SEC inquiry came from the agency's Fort Worth, Texas, regional office. = According to a person familiar with the matter, this would indicate that th= e inquiry comes from the SEC's enforcement arm, as opposed to its corporate= -finance section. The participation of the enforcement branch would indicat= e that the agency is looking into whether there were possible violations of= securities law. However, enforcement-branch inquiries often don't produce = any allegations of wrongdoing. It also appears that the SEC hasn't yet take= n the step of launching a formal investigation, which would be a sign that = the agency believes securities laws might have been violated. The SEC decli= ned to comment.=20 Certainly, there have been questions and concerns about those partnership t= ransactions, which contributed to a $1.2 billion reduction in shareholder e= quity last week as part of Enron's efforts to unwind the deals. Mr. Fastow,= who has declined repeated interview requests, resigned from the partnershi= ps, known as LJM Cayman LP and LJM2 Co-Investment LP, in late July in the f= ace of rising conflict-of-interest concerns by Wall Street analysts and maj= or company investors.=20 Since then, internal partnership documents have shown that Mr. Fastow and p= erhaps a handful of Enron associates made millions of dollars last year in = fees and capital increases as general partner of the LJM2, the larger of th= e two partnerships.=20 Mr. Fastow's partnership arrangement caused some unhappiness inside Enron, = according to people familiar with the matter. For instance, these people sa= y, sometime after the creation of the partnerships in 1999, Enron Treasurer= Jeffrey McMahon went to company president Jeffrey Skilling and complained = about potential conflicts of interest posed by Mr. Fastow's activities. Mr.= Skilling didn't share Mr. McMahon's concern, these people say, and Mr. McM= ahon requested and received reassignment to another post.=20 Mr. Skilling resigned as Enron president and chief executive in mid-August,= citing personal reasons and the fall in Enron's stock price, which peaked = at about $90 a share last year. Mr. McMahon and Mr. Skilling haven't respon= ded to repeated interview requests.=20 Investors are also concerned about potential problems arising in Enron's de= alings with other related entities. In some cases, Enron could be required = to issue large amounts of stock to noteholders in some of the entities if c= ertain so-called double trigger provisions occur.=20 For example, last July Enron helped create the Marlin Water Trust II, which= sold $915 million in notes that are due July 15, 2003. However, Enron can = be considered in default, in advance of that date, if its stock price falls= below $34.13 for three trading days and its senior debt is downgraded to b= elow investment grade by either Moody's Investors Service or Standard & Poo= r's.=20 Currently, Enron debt is still investment-grade at both ratings agencies an= d would have to be lowered by several notches to fall into a noninvestment = grade category. Last week, Moody's put Enron on review for a possible downg= rade. However, observers believe that even if Moody's lowers Enron's rating= , the company will still be investment-grade. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 October 23, 2001 Where Did the Value Go at Enron? By FLOYD NORRIS New York Times What really went on in some of the most opaque transactions with insiders e= ver seen? Wall Street has been puzzling over that since Enron (news/quote ) released its quarterly earnings a week= ago. Yesterday shares in Enron plunged $5.40, to $20.65, after the company= said that the Securities and Exchange Commission was looking into the tran= sactions. The reaction was in some ways puzzling. Given the questions that have been = raised since the earnings announcement - some of them prominently featured = in The Wall Street Journal - it was likely that the S.E.C. would begin a pr= eliminary inquiry. Whether it will go farther than that is not clear, but if nothing else the = slide in Enron shares over the last week shows the hazards that can confron= t a company that allows word of a major reduction in its balance sheet valu= e to dribble out. Enron's shares rose 67 cents, to $33.84, last Tuesday, as= investors first reacted to the earnings announcement. But since then they = have fallen $13.19, or 39 percent. The $1.2 billion reduction in shareholders' equity was not mentioned in a n= ews release Enron issued on its quarterly earnings last Tuesday. It was bri= efly mentioned in a conference call with analysts, but many of the listener= s seem to have not noticed that, wrongly thinking Kenneth L. Lay, Enron's c= hairman and chief executive, was referring to a $1 billion write-off that w= as disclosed in the earnings release. When questions were asked in the following days, the explanations were less= than thorough. Enron explained that the reduction in shareholders' equity = was related to the termination of "structured finance vehicles" involving p= artnerships that had been controlled by the company's chief financial offic= er. "Both the debt and the equity people are looking for more clarity about how= the company goes about its business," said Ralph Pellecchia, a credit anal= yst at Fitch Investors Service. He added that the issue of the company's "c= redibility related to this transaction really seems to have a life of its o= wn." Enron declined yesterday to allow any officials to be interviewed about its= financial reports. But last night it said Mr. Lay would hold another confe= rence call with investors at 9:30 a.m. today.=20 The company's earlier disclosures regarding the partnerships baffled many a= nalysts. They referred to such things as "share settled costless collar arr= angements" and "derivative instruments which eliminated the contingent natu= re of existing restricted forward contracts." The disclosures said the comp= any entered into the transactions "to hedge certain merchant investments an= d other assets." It appears that Enron was able to report profits from them, even though the= underlying assets included investments that declined in value. The Wall St= reet Journal, citing reports the partnerships made to institutional investo= rs, has reported the partnerships did well enough to make large cash distri= butions to their investors. Enron officials in recent days have refused to = discuss the arrangements in any detail. One of the questions that the S.E.C. may look into is whether the terminati= on of those transactions should have been treated as a balance sheet item, = or whether it should have been taken as a loss that affected reported earni= ngs. An S.E.C. spokesman declined to comment. Under accounting rules, a company's transactions in its own shares cannot p= roduce profits or losses, whatever the effect on cash flow. So a company th= at sells its shares for $10 each, and buys them back at $50, or at $1, will= report no earnings effect. Enron said that the reduction to shareholders e= quity, and a related reduction in notes receivable, "is the result of Enron= 's termination of previously recorded contractual obligations to deliver En= ron shares in future periods." Stephen Moore, an analyst with Moody's Investors Service who has put Enron'= s debt on review for a possible downgrade, said that while some of the deta= ils were not clear, "Essentially, Enron's promise was that a certain amount= of Enron's shares would be worth $1 billion. The shares plummeted, and the= y were not" worth that much. Enron emphasizes its own version of earnings, which leaves out some expense= s, and directs attention away from its balance sheet, which is disclosed on= ly in S.E.C. filings, not in the earnings news release. The reduction in sh= areholders' equity would be shown only on the third-quarter balance sheet, = which has yet to be released. Earlier this year, Jeffrey Skilling, then Enron's chief executive, reacted = strongly when a questioner on a conference call challenged the failure to p= rovide balance sheet numbers when earnings were released. He called the que= stioner a common vulgarity that surprised many listeners. Mr. Skilling late= r resigned for what he said were personal reasons and Mr. Lay, the chairman= and former chief executive, took back the latter title. While Enron was riding high, its often difficult-to-understand reports were= generally seen as not being a problem. The company appeared to be the domi= nant force in the business of energy trading, and to be able to produce phe= nomenal profits. When Mr. Lay was reported as having played an important ro= le in formulating the Bush administration's energy policies, the aura was o= nly enhanced. In January, the shares traded for $84. But now, with some of the company's ventures clearly having run into proble= ms, it appears that investors are growing less willing to accept the compan= y's reports. That the partnership transactions were disclosed at all was be= cause of the involvement of the chief financial officer, and some have wond= ered if there might have been similar deals with others. Mr. Lay has promised to make the company's financial reports easier to unde= rstand, and last week's report was at first praised by some analysts for do= ing just that. In a news release yesterday, Mr. Lay said the company welcomed the S.E.C.'s= request for information. "We will cooperate fully with the S.E.C. and look= forward to the opportunity to put any concern about these transactions to = rest," he said. FRONT PAGE - FIRST SECTION: SEC probes Enron over financial dealings=20 Financial Times; Oct 23, 2001 By JULIE EARLE, JOHN LABATE and SHEILA MCNULTY Enron, the US energy giant, disclosed yesterday that the Securities and Exc= hange Commission had asked it to provide financial information at the start= of an informal inquiry.=20 The announcement follows a rapid sell-off in the stock in reaction to Enron= 's surprise revelation last week of a Dollars 1.2bn charge to equity to eli= minate the dilutive effects of closing one of its controversial financing v= ehicles.=20 In revealing the SEC call for more detailed information "regarding certain = related party transactions", Enron hopes to counter growing criticism that = it should be more transparent. "We welcome this request," said Kenneth Lay,= Enron chairman and chief executive officer. "We will co-operate fully with= the SEC and look forward to the opportunity to put any concern about these= transactions to rest."=20 The SEC probe into Enron's financial dealings is an informal one at this st= age, according to the company, and the request for documents is voluntary. = However, SEC probes often begin lightly as investigators gather information= on an issue.=20 Such a probe could turn into a formal investigation at any time. In that ca= se, regulators would be armed with subpoena powers and could demand certain= documents be handed over. The SEC would not confirm or deny the existence = of the Enron probe.=20 Mr Lay did not say which transactions the SEC was reviewing, although analy= sts believe they relate to Andrew Fastow, Enron chief financial officer, wh= o has been reported to have run a limited partnership that bought assets va= lued at hundreds of millions of dollars from Enron.=20 Analysts say the transactions, while controversial because of Mr Fastow's l= inks to the company, have been disclosed. What concerns them, however, is h= ow Enron valued the assets involved. www.ft.com/energy=20 Copyright: The Financial Times Limited COMPANIES & FINANCE THE AMERICAS: Group full of surprises after failing to = open up=20 Financial Times; Oct 23, 2001 By SHEILA MCNULTY Ronald Barone joked he would have to get plenty of rest ahead of Enron's re= sults last week, noting the US energy company's reputation for producing wh= at some analysts say is the most complicated of earnings reports.=20 The UBS Warburg analyst was, nevertheless, as ill-prepared as his peers for= the announcement of a Dollars 1.2bn charge to equity to eliminate the dilu= tive effects of closing one of its controversial financing vehicles.=20 The news overshadowed Enron's on-target 26 per cent increase in third-quart= er earnings per share, sending the stock plunging.=20 The Securities and Exchange Commission's subsequent request for more inform= ation about Enron's financial activities has reinforced analyst perceptions= that the company should have been more transparent in its reporting.=20 Curt Launer, of Credit Suisse First Boston, says expectations for more disc= losure had built up over the past two months. Kenneth Lay, Enron chairman, = had promised to be more forthcoming when he resumed the duties of chief exe= cutive following the resignation of Jeff Skilling in August.=20 While Mr Lay did improve Enron's disclosure by creating headings for new bu= siness segments and providing more detail within each of them, the Dollars = 1.2bn charge still caught the market off guard.=20 "It came as a surprise to us," said Stephen Moore, of Moody's Investors Ser= vice. "We should have been informed that it was there."=20 Mr Barone found it disturbing that Enron disclosed the charge in "a fleetin= g comment" during its conference call with analysts and did not mention it = in its nine-page news release.=20 "Despite progress in other areas, there appears to be much more work ahead = before the lingering credibility issues that have vexed this company in the= past are fully resolved," he said.=20 Enron contends that "we did disclose it in the conference call, and it was = one of the first points raised in the Q and A session (on the conference ca= ll)".=20 Mr Lay has pledged to co-operate with the SEC's request, which appears to b= e part of an informal inquiry rather than an official investigation. In the= meantime, he adds, Enron will focus on its core businesses.=20 That is something analysts say Enron has strayed too far away from. Ray Nil= es of Salomon Smith Barney says the company's core franchise - its wholesal= e business - is doing well. Most of Enron's problems have arisen from stepp= ing out of this area.=20 "They need to come clean on the financial effects of all of their off-balan= ce sheet financing," Mr Niles says. "Investors want to see clear, easy-to-u= nderstand financial information." Moody's has placed Enron's Dollars 13bn i= n debt securities on review for possible downgrade and Mr Moore believes th= ere is potential for more write-offs.=20 Enron is embroiled in a legal dispute with an Indian state electricity boar= d over a power project and is one of several energy traders facing question= s in California over accusations of a manipulation of power prices - a char= ge it denies.=20 Analysts say its UK businesses are not seeing big multiples, and Enron says= it only expects to take Dollars 200m in "goodwill" versus Dollars 5.7bn on= its books.=20 Copyright: The Financial Times Limited Enron Discloses SEC Inquiry=20 Information Request Involves Ties to Money-Losing Partnerships=20 Washington Post By Peter Behr Washington Post Staff Writer Tuesday, October 23, 2001; Page E03=20 Enron Corp. shares sank more than 20 percent yesterday after the Houston en= ergy company disclosed a Securities and Exchange Commission request for inf= ormation about Enron's ties to outside investment partnerships set up by th= e company's chief financial officer. The SEC would not comment on its action, which Enron spokesman Mark Palmer = called an "informal inquiry," not an investigation. "We welcome this reques= t," said Kenneth L. Lay, chairman and chief executive of the Houston-based = company. But the announcement jarred investors' confidence in the giant energy-tradi= ng company, already hurt by the unexpected resignation of chief executive J= effrey K. Skilling in August, and heavy losses from investments in broadban= d Internet and other technology ventures. "A lot of people threw in the towel today," said Anatol Feygin, an analyst = with J.P. Morgan in New York. The SEC request was made privately last Wednesday, the day after Enron repo= rted a $1 billion write-off of investment losses and restructuring charges = from unsuccessful technology ventures and other operations. The write-offs = left Enron with a $618 million loss in the third quarter (84 cents a share)= . The Wall Street Journal reported last week that $35 million of the write-of= f was tied to losses at limited partnerships established by Enron's chief f= inancial officer, Andrew Fastow, and run by him until July. Enron told investment analysts last week that it had repurchased 55 million= shares of its stock held by the partnerships that Fastow had directed, red= ucing shareholder equity by $1.2 billion. According to the Wall Street Journal, Fastow set up several investment part= nerships with the approval of Enron's board. The partnerships engaged in bi= llions of dollars in complex financial transactions involving Enron and mad= e major investments in power plants and other assets alongside Enron. An Enron shareholder has filed suit in Texas state court alleging that Enro= n's board violated its duty to the company by permitting the chief financia= l officer to engage in the outside transactions that allegedly earned milli= ons of dollars in fees for himself and other investors in the partnerships.= What Enron received from the relationships is not clear. Feygin said that the company had informed analysts about the limited partne= rships, which offered Enron a way to take positions in strategic but uncert= ain technology ventures without detailing the outcomes in its public financ= ial statements.=20 "In hindsight, that was an error in judgment. I don't think it was an error= in principle," the analyst said. Enron could have revealed the SEC inquiry last week but did not disclose it= until yesterday, and for many investors, that was the last straw, Feygin s= aid. The stock closed yesterday at $20.65, down $5.40, as 36 million shares chan= ged hands. Staff researcher Richard Drezen contributed to this report. Enron Suffers After Unclear Disclosure, New York Times Says 2001-10-23 06:31 (New York) Houston, Oct. 23 (Bloomberg) -- The U.S. Securities and Exchange Commission's decision to look into some Enron Corp. transactions and the company's recent decline in value show what can happen when a company lets a major reduction in its balance sheet dribble out, Floyd Norris of the New York Times reported in his column, citing analysts. Investors are concerned as to how Enron reduced shareholders' equity by $1.2 billion and why this was not mentioned in a news release the company issued with its quarterly earnings last Tuesday, the paper said. Enron Corp.'s shares fell 21 percent yesterday after the Houston-based company said the Securities and Exchange Commission requested information on partnerships run by Chief Financial Officer Andrew Fastow and other executives. Enron created partnerships and other affiliated companies to buy and sell assets such as power plants to lower the debt on its books. ``Both the debt and the equity people are looking for more clarity about how the company goes about its business,'' said Ralph Pellecchia, a credit analyst at Fitch Investors Service, according to the Times. (New York Times 10-23 1) Oct. 23, 2001 Houston Chronicle SEC asks Enron for investing data=20 Stock price declines as regulators seek details on partnerships=20 By LAURA GOLDBERG=20 Copyright 2001 Houston Chronicle=20 Shares in Enron Corp. fell almost 21 percent Monday after the company discl= osed federal securities regulators asked for details on investment partners= hips formerly run by its chief financial officer.=20 The request covers transactions between Enron and two private partnerships,= LJM Cayman and LJM2 Co-Investment, that did business with Enron.=20 The partnerships entered into complex financing and hedging arrangements wi= th Enron.=20 Enron declined to say if the SEC's request -- which it called voluntary and= said represents an "informal inquiry" -- included other issues.=20 The SEC request, made by fax Wednesday to Enron and followed up with a call= Thursday, comes as the Houston-based energy trader was already fighting to= put a series of problems behind it and regain credibility with investors a= nd analysts.=20 "It's further bad news, further question marks related to Enron in general = and this transaction specifically," Andre Meade, an analyst with Commerzban= k Securities in New York, said of the SEC request.=20 Some investors prefer to sit on the sidelines until the issue clears up, Me= ade said, adding: "The level of uncertainty with this stock has gotten pret= ty high."=20 An SEC spokesman declined comment.=20 Enron's Chief Financial Officer, Andrew Fastow, managed both of the LJM par= tnerships, according to SEC filings made by Enron last year.=20 Both partnerships are described as investment companies that primarily buy = or invest in businesses involved in energy and communications.=20 Fastow resigned his roles with the LJM partnerships in June amid criticism = and questions from some on Wall Street about a potential conflict of intere= st.=20 Investors worried Monday that Fastow's duty to Enron shareholders competed = with his duties to LJM, Meade said.=20 In a written statement Monday, Ken Lay, Enron's chairman and chief executiv= e officer, said the company welcomed the SEC's request.=20 "We will cooperate fully with the SEC and look forward to the opportunity t= o put any concern about these transactions to rest," said Lay, who reassume= d the duties of CEO after Jeff Skilling resigned unexpectedly in August.=20 Enron said its external and internal auditors and attorneys reviewed the ar= rangements, its board was fully informed of and approved the arrangements, = which were disclosed in Enron's SEC filings.=20 The issue drew renewed interest from investors and analysts after Enron rel= eased third-quarter earnings last Tuesday.=20 During the quarter, Enron took $1.01 billion in one-time charges to reflect= losses in its broadband, retail electricity and water investments.=20 The amount also included $35 million related to "early termination" of Enro= n's relationships with the LJM partnerships.=20 During a call with analysts the same day, Enron said it recorded a $1.2 bil= lion reduction to shareholder equity, or the shareholders' ownership stake = in the company, as part of the LJM termination.=20 Enron declined to answer questions Monday about the LJM entities, including= those about their relationship with Enron or Fastow's role with them.=20 The day after Enron's third-quarter earnings release, the Wall Street Journ= al ran the first of three articles highlighting the LJM partnerships, Fasto= w and Enron.=20 The Journal's Friday report said LJM2 "realized millions of dollars in prof= its in transactions it did with Enron," and that "Fastow, and possibility a= handful of partnership associates, realized more than $7 million last year= in management fees."=20 Shares in Enron, which closed last Tuesday at $33.84, ended the day Friday = at $26.05. Then Monday, shares in Enron dropped by $5.40 to close at $20.65= .=20 Anatol Feygin, an analyst with J.P. Morgan in New York, believes there were= no improprieties surrounding LJM.=20 "From inception, the LJM situation was obviously one that would raise eyebr= ows," said Feygin, adding Enron anticipated that and made sure proper legal= structures were in place.=20 The LJM entities are what's known as off-balance sheet financing vehicles, = he said. Generally, they allow a corporation to take on financial obligatio= ns without having to report them as liabilities.=20 Feygin also said it appeared Enron intended to give Fastow an "opportunity = to participate in the upside from these entities" to reward him.=20 Even though the LJM transactions have been disclosed by Enron, Meade noted = that they are complicated, difficult to follow and their implications tough= to understand.=20 In transactions detailed in an SEC filing made by Enron last year, LJM Caym= an received shares of Enron common stock and LJM2 acquired assets from Enro= n.=20 Another filing last year said LJM Cayman and/or LJM2 acquired various debt = and equity securities of certain Enron subsidiaries and affiliates.=20 Investors are also concerned about potential shareholder lawsuits as well a= s equity commitments facing Enron from two other financing vehicles called = Whitewing and Marlin, Jeff Dietert, an analyst with Simmons & Co. Internati= onal in Houston, wrote in a research note Monday.=20 If Enron should lose its current investment-grade quality debt rating, thos= e equity commitments from Whitewing and Marlin could trigger steps that wou= ld cause the value of Enron's current outstanding shares to become diluted.= =20 At least two shareholders have already sued Enron's board in state district= court, while two law firms filed suit on behalf of Enron shareholders Mond= ay in federal court seeking class-action status.=20 Carol Caole, an analyst with Prudential Securities in Houston, downgraded E= nron from a buy to a hold Monday primarily because of issues surrounding th= e credibility of Enron's management.=20 Several times over the past six months, Caole asked specific questions of s= enior Enron executives, she said. They denied problems existed, but six wee= ks to two months later it was revealed there were, indeed, issues, she said= .=20 Coale recently asked about an SEC investigation and was told there wasn't o= ne. But, she said, it turns out it's an "inquiry," not an investigation.=20 Abreast of the Market Minnesota Mining and GM Climb In a Rally That Builds Late in Day By Robert O'Brien Dow Jones Newswires 10/23/2001 The Wall Street Journal C2 (Copyright (c) 2001, Dow Jones & Company, Inc.) NEW YORK -- During yesterday's Wall Street rally, investors responded with = accommodation toward the release of third-quarter earnings results and four= th-quarter forecasts.=20 Shares of Minnesota Mining & Manufacturing added $5.22, or 5.1%, to $107.39= after the manufacturing company released third-quarter earnings, which nar= rowly edged out analysts' projections, and spoke frankly of the challenges = the company continues to face this quarter in light of economic weakness. Despite this kind of hesitation about the economy's outlook, investors grav= itated toward some of the manufacturing and capital-equipment stocks that t= end to struggle during periods of weak economic activity. Shares of General= Motors, for example, added 1.21, or 2.9%, to 42.57, Alcoa gained 1.16, or = 3.7%, to 32.83, and Fluor, an engineering and construction company, rose 1.= 79, or 4.2%, to 44.77.=20 Stock averages initially struggled for direction, reflecting some skepticis= m about the sustainability of the market's recent success, before turning f= irmly higher in the final two hours of trading. Trading levels thinned out,= as well; on the New York Stock Exchange, less than 1.1 billion shares chan= ged hands, compared with 1.2 billion shares Friday, an options-expiration s= ession.=20 Nevertheless, market averages posted impressive gains. The Dow Jones Indust= rial Average improved 172.92 points, or 1.88%, to 9377.03. The Nasdaq Compo= site Index gained 36.77 points, or 2.2%, to 1708.08.=20 "We had another one of those days where there is a lack of liquidity, so an= y moves, in either direction, just get exaggerated," Bob Basel, senior trad= er at Salomon Smith Barney, said yesterday.=20 Shares of semiconductor companies, including makers of both chips and chip-= making equipment, rose sharply after a spending forecast from Intel, the le= ading chip maker, proved less grim than some experts had anticipated. The c= ompany said its capital spending could be cut 10% to 20% in 2002 from this = year's levels; that wouldn't be as severe as some chip industry experts had= forecast.=20 Shares of Applied Materials advanced 2.22, or 6.8%, to 34.77 on Nasdaq, whi= le KLA-Tencor gained 2.74, or 7.5%, to 39.25, and Lam Research improved 1.3= 6, or 7.8%, to 18.80, all on Nasdaq. Among chip makers, Analog Devices rose= 2.57, or 7.1%, to 38.74, LSI Logic gained 89 cents, or 5.6%, to 16.83, and= Texas Instruments tacked on 1.17, or 4.2%, to 28.91. For its part, Intel r= ose 1.15, or 4.8%, to 25.30 on Nasdaq.=20 Shares of Lexmark International dropped 5.58, or 11%, to 44.77. The Lexingt= on, Ky., maker of computer printers reported third-quarter results that mat= ched Wall Street's forecasts, but warned that it continues to face sluggish= demand in the fourth quarter.=20 SBC Communications declined 2.24, or 5.1%, to 41.40. The telecommunications= service provider reported third-quarter earnings that fell short of analys= ts' forecasts, and warned that the company won't show "meaningful growth" n= ext year.=20 Citrix Systems fell 4.14, or 16%, to 21.08 on Nasdaq. Dain Rauscher reduced= its rating on the Fort Lauderdale, Fla., maker of computer networking prod= ucts, saying the company faces competitive pressures from products introduc= ed by rival vendors.=20 Jabil Circuit eased 16 cents, or 0.7%, to 22.90. The St. Petersburg, Fla., = contract electronics maker adopted a so-called shareholder rights plan, whi= ch is aimed at preventing an acquirer from gaining control of the company.= =20 EMC advanced 68 cents, or 5.9%, to 12.19. The Hopkinton, Mass., maker of da= ta-storage systems signed what was described as a multibillion-dollar enter= prise storage agreement with Dell Computer. Dell improved 50 cents, or 2.1%= , to 24.55 on Nasdaq.=20 SeaChange International advanced 88 cents, or 3.6%, to 25.03 on Nasdaq, boo= sted by an upbeat research note from Dain Rauscher, which said the Maynard,= Mass., provider of video-on-demand technology figures to have posted an up= beat quarter.=20 Lucent Technologies declined 20 cents, or 2.8%, to 6.90. UBS Warburg, in a = research note, expressed some caution about the outlook for the telecommuni= cations equipment maker's quarterly results.=20 Emerson Electric gained 1.38, or 2.8%, to 50.27, even though the St. Louis = manufacturer, which makes electronics and telecommunications products, amon= g other product lines, reduced its earnings guidance for fiscal 2001.=20 Enron lost 5.40, or 21%, to 20.65, setting a 52-week low. The Houston energ= y trader, whose stock has weakened since recent articles in The Wall Street= Journal raised questions about the company's relationship with two limited= partnerships organized by its chief financial officer, said it had receive= d a request for information on Wednesday from the Securities and Exchange C= ommission regarding some of its transactions with those partnerships. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 WORLD STOCK MARKETS: Wall St bargain hunters counter earnings gloom AMERICA= S=20 Financial Times; Oct 23, 2001 By MARY CHUNG US equities rose sharply yesterday with bargain hunting in technology stock= s countering a slew of mostly disappointing corporate earnings and more ant= hrax scares.=20 Gains accelerated late in the session as the Dow Jones Industrial Average s= urged 172.92 to close at at 9,377.03 while the S&P 500 index added 16.42 at= 1,089.90. The Nasdaq Composite rose 36.78 at 1,708.09. Volume remained lig= ht with 1.1bn trades in the NYSE.=20 Investors were upbeat in spite of a lack of positive news, suggesting under= lying strength in the market and optimism for a rebound, some analysts said= . The indices were slightly rattled after news that two postal workers in W= ashington died after suffering symptoms consistent with anthrax, but the ma= rket quickly regained its footing.=20 "The market is acting very well. It's come an awful long way in a short tim= e and had to deal with anthrax," said Alfred Goldman, chief market strategi= st at AG Edwards. "The message is that investors and consumers and the coun= try are in a recovery mode."=20 Semiconductor stocks showed strength with Intel up 4.7 per cent at Dollars = 25.30 and Advanced Micro Devices 4.2 per cent at Dollars 9.58.=20 Microsoft rose 3.9 per cent at Dollars 60.16 before the launch this week of= its Windows XP operating system. Lexmark dropped 11 per cent at Dollars 44= .77 after the company reported third-quarter results that met estimates, bu= t warned of a fourth-quarter revenue shortfall. Applied Digital Solutions g= ained 66 per cent at 58 cents after the company said it had formed a subsid= iary to develop and market its ThermoLife thermoelectric generator product = powered by body heat.=20 3M gave a lift to Dow components, up 5.1 per cent at Dollars 107.39 after t= he maker of Post-it notes said quarterly earnings beat expectations by a pe= nny a share. The company forecast fourth-quarter profit would be in line wi= th analyst estimates.=20 SBC Communications was the biggest decliner within the Dow, down 5.1 per ce= nt to Dollars 41.40 after it said earnings failed to meet Wall Street conse= nsus estimates.=20 American Express gained 3.4 per cent to Dollars 30.32 despite reporting a 6= 0 per cent drop in third-quarter earnings.=20 Dow components Citigroup and JP MorganChase tacked on 2.5 per cent and 4.2 = per cent respectively. Shares in Alcoa were up 3.7 per cent at Dollars 32.8= 3 and ExxonMobil 1.4 per cent at Dollars 41.12.=20 Enron fell 20.7 per cent at Dollars 20.65 after the energy trading company = said the Securities and Exchange Commission requested it voluntarily provid= e information regarding certain transactions.=20 In Toronto the S&P 300 composite index fell just 0.08 per cent to 6,905.21 = at the close.=20 Copyright: The Financial Times Limited Milberg Weiss Announces Class Action Suit Against Enron Corp. 10/22/2001 Business Wire (Copyright (c) 2001, Business Wire) NEW YORK--(BUSINESS WIRE)--Oct. 22, 2001--The law firm of Milberg Weiss Ber= shad Hynes & Lerach LLP announces that a class action lawsuit was filed on = October 22, 2001, on behalf of purchasers of the common stock of Enron Corp= . ("Enron" or the "Company") (NYSE:ENE) between January 18, 2000 and Octobe= r 17, 2001, inclusive. A copy of the complaint filed in this action is avai= lable from the Court, or can be viewed on Milberg Weiss' website at: http:/= /www.milberg.com/enron/=20 The action, numbered H013630, is pending in the United States District Cour= t for the Southern District of Texas, Houston Division, located at 515 Rusk= Street, Houston TX 77002, against defendants Enron, Kenneth Lay, Jeffrey K= . Skilling and Andrew Fastow. The Honorable Melinda Harmon is the Judge pre= siding over the case. The Complaint alleges that defendants violated Sections 10(b) and 20(a) of = the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder,= by issuing a series of material misrepresentations to the market between J= anuary 18, 2000 and October 17, 2001, thereby artificially inflating the pr= ice of Enron common stock. Specifically, the complaint alleges that Enron i= ssued a series of statements concerning its business, financial results and= operations which failed to disclose (i) that the Company's Broadband Servi= ces Division was experiencing declining demand for bandwidth and the Compan= y's efforts to create a trading market for bandwidth were not meeting with = success as many of the market participants were not creditworthy; (ii) that= the Company's operating results were materially overstated as result of th= e Company failing to timely write-down the value of its investments with ce= rtain limited partnerships which were managed by the Company's chief financ= ial officer; and (iii) that Enron was failing to write-down impaired assets= on a timely basis in accordance with GAAP. On October 16, 2001, Enron surp= rised the market by announcing that the Company was taking non-recurring ch= arges of $1.01 billion after-tax, or ($1.11) loss per diluted share, in the= third quarter of 2001, the period ending September 30, 2001. Subsequently,= Enron revealed that a material portion of the charge related to the unwind= ing of investments with certain limited partnerships which were controlled = by Enron's chief financial officer and that the Company would be eliminatin= g more than $1 billion in shareholder equity as a result of its unwinding o= f the investments. As this news began to be assimilated by the market, the = price of Enron common stock dropped significantly. During the Class Period,= Enron insiders disposed of over $73 million of their personally-held Enron= common stock to unsuspecting investors.=20 If you bought the common stock of Enron between January 18, 2000 and Octobe= r 17, 2001, you may, no later than December 21, 2001, request that the Cour= t appoint you as lead plaintiff. A lead plaintiff is a representative party= that acts on behalf of other class members in directing the litigation. In= order to be appointed lead plaintiff, the Court must determine that the cl= ass member's claim is typical of the claims of other class members, and tha= t the class member will adequately represent the class. Under certain circu= mstances, one or more class members may together serve as "lead plaintiff."= Your ability to share in any recovery is not, however, affected by the dec= ision whether or not to serve as a lead plaintiff. You may retain Milberg W= eiss Bershad Hynes & Lerach LLP, or other counsel of your choice, to serve = as your counsel in this action.=20 Milberg Weiss Bershad Hynes & Lerach LLP, a 190-lawyer firm with offices in= New York City, San Diego, San Francisco, Los Angeles, Boca Raton, Seattle = and Philadelphia, is active in major litigations pending in federal and sta= te courts throughout the United States. Milberg Weiss has taken a leading r= ole in many important actions on behalf of defrauded investors, consumers, = and companies, as well as victims of World War II and other human rights vi= olations, and has been responsible for more than $30 billion in aggregate r= ecoveries. The Milberg Weiss Web site (http://www.milberg.com) has more inf= ormation about the firm.=20 If you wish to discuss this action with us, or have any questions concernin= g this notice or your rights and interests with regard to the case, please = contact the following attorneys:=20 Steven G. Schulman or Samuel H. Rudman One Pennsylvania Plaza, 49th fl. New= York, NY, 10119-0165=20 Phone number: (800) 320-5081 Email: Enroncase@milbergNY.com Website: http:/= /www.milberg.com=20 William S. Lerach or Darren J. Robbins 600 West Broadway1800 One America Pl= azaSan Diego, CA 92101-3356 Phone number: (800) 449-4900 CONTACT: Milberg Weiss Bershad Hynes & Lerach LLP Steven G. Schulman or Sam= uel H. Rudman 800/320-5081 Email: Enroncase@milbergNY.com Website: http://w= ww.milberg.com or William S. Lerach or Darren J. Robbins 800/449-4900=20 19:16 EDT OCTOBER 22, 2001=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Enron To Host Conference Call Tues 9:30 am EDT 10/22/2001 Dow Jones News Service (Copyright (c) 2001, Dow Jones & Company, Inc.) HOUSTON -(Dow Jones)- Enron Corp. (ENE) will hold a conference call at 9:30= a.m. EDT Tuesday to address investor concerns, the company said in a press= release Monday.=20 Earlier Monday, a shareholder filed a derivative lawsuit against Enron alle= ging the board breached their fiduciary duties by allowing Chief Financial = Officer Andrew Fastow to create and run certain limited partnerships. Last week, Enron said it received a request for information about "certain = related party transactions" from the Securities and Exchange Commission.=20 On Oct. 16, Enron announced that it would take a $35 million charge relatin= g to the limited partnerships and revealed that the company had to repurcha= se 55 million of its shares in order to unwind its involvement in the partn= erships, thereby reducing the company's shareholder equity by $1.2 billion.= =20 Shares of Enron closed Monday at $20.65, down $5.40, or 20.7%, on New York = Stock Exchange volume of 36.4 million shares. Average daily volume is 5.8 m= illion shares. In intraday trading, the shares reached a 52-week low of $19= .67. The previous 52-week low was $24.46, reached on Sept. 27. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Janus Had Biggest Enron Stake at End of 2nd-Quarter (Update1) 2001-10-22 18:04 (New York) Janus Had Biggest Enron Stake at End of 2nd-Quarter (Update1) (Adds Stilwell shares at bottom.) Denver, Oct. 22 (Bloomberg) -- Janus Capital Corp., whose stock funds have lost more than a third of their value this year, may get another jolt from Enron Corp. As of June 30, Denver-based Janus was the biggest institutional holder of Enron, owning 42.8 million shares, or a 5.71 percent stake in the largest U.S. energy trading company, according to Thomson Financial/Carson. Enron shares have fallen 39 percent over the past four days on concern that the company's dealings with partnerships run by its chief financial officer contributed to investment losses. The Securities and Exchange Commission has asked for information on the partnerships, Enron said. Janus, which boosted its Enron stake in the past year in an effort to diversify its technology-heavy stock funds, is among a handful of firms including Putnam Investments, Alliance Capital Management, Barclays Global Investors and Fidelity Investments that owned more than 2 percent of the Houston-based company as of June 30, according to Bloomberg data. ``It was definitely a real growth darling,'' said Christine Benz, a senior analyst at Chicago-based fund tracker Morningstar Inc. ``In a year like 2000, when almost nothing was working for growth managers, Enron emerged as a story that a lot of growth managers could like.'' Fund Holdings According to Thomson Financial, 1,187 mutual funds, or 15.4 percent of all U.S. stock funds, owned a combined 207.9 million Enron shares as of June 30. Combined losses on the holdings amount to $2.7 billion since Tuesday. According to the latest available data compiled by Thomson, the biggest fund holders of Enron were: Janus Fund, with 2.15 percent; Janus Twenty Fund, with 1.19 percent; Alliance Premier Growth Fund, with 1.14 percent; American Century Ultra Fund, with 1.01 percent; Janus Mercury Fund, with 0.88 percent; Vanguard 500 Index Fund, with 0.82 percent; Fidelity Magellan Fund, with 0.73 percent; AIM Value Fund, with 0.6 percent; CREF Stock Account, with 0.58 percent; and, Putnam Investors Fund, with 0.52 percent. Janus Fund has lost 33.2 percent this year through Friday, while Janus Twenty Fund has lost 33.4 percent and Janus Mercury Fund has fallen 34 percent. A Janus spokeswoman wasn't immediately available to comment. Morningstar's Benz said she suspects Janus fund managers have already begun trimming their Enron positions. Enron shares had fallen 59 percent this year before last week's news on concerns about financial reporting and money-losing investments outside energy trading, such as trading space on broadband telecommunications networks and building water treatment plants. The stock fell $5.40, or 21 percent, to $20.65 in New York trading today. ``Anecdotal evidence that I'm hearing from the fund managers there is that they had been trimming pretty aggressively,'' said Benz. She added that it's ``difficult to make the assertion that they are in the clear.'' Janus Capital is owned by Kansas City, Missouri-based Stilwell Financial Inc., whose shares gained 73 cents today to $22.52. Stilwell shares have fallen 43 percent this year. Enron Says SEC Asks About Related-Party Transactions (Update9) 2001-10-22 18:30 (New York) Enron Says SEC Asks About Related-Party Transactions (Update9) (Adds information on conference call in 26th paragraph.) Houston, Oct. 22 (Bloomberg) -- Enron Corp.'s shares fell 21 percent after the Houston-based company said the Securities and Exchange Commission requested information on partnerships run by Chief Financial Officer Andrew Fastow and other executives. Enron, the largest energy trader, created partnerships and other affiliated companies to buy and sell assets such as power plants to lower the debt on its books. An investor sued Enron's board Wednesday, saying two partnerships cost the company $35 million and Fastow's leadership of them was a conflict of interest. Investors today said they were concerned that Enron may be forced to dismantle the affiliated companies by paying off the owners in cash or stock. Chief Executive Ken Lay said last week he may be have to ``unravel'' agreements that created the companies if Enron's debt ratings fall too far. ``We need confidence their long-term credit rating won't go below investment grade,'' said Roger Hamilton, an analyst at John Hancock's value funds, which own 600,000 Enron shares. Enron reduced shareholders' equity by $1.2 billion when it repurchased 55 million shares of two such partnerships controlled by Fastow, LJM Cayman and LMJ2 Co-Investment, the Wall Journal reported last week. Dismantling more of the affiliated companies and partnerships would cost Enron or its shareholders as much as $3 billion, Ray Niles, a Salomon Smith Barney analyst, wrote in a report to investors today. Shares Plunge Enron shares fell $5.40 to $20.65. They touched $19.67 during the day's trading, the lowest level since Jan. 15, 1998. The stock has fallen 75 percent this year amid concerns about failed investments in trading of space on fiber-optic communications networks and a water company, and the resignation of Jeff Skilling as CEO in August after seven months on the job. While Skilling said he resigned for personal reasons, investors say his departure led them to question whether the company was concealing problems, including possible liabilities from affiliated companies. On Tuesday, Enron surprised many investors when it reported a $618 million third-quarter loss, the result of writing off $1.01 billion in failed investments. Moody's Investors Service placed the company's debt on watch for possible downgrade. The company's debt is rated at investment grade by Fitch, Standard & Poor's and Moody's. The company received a faxed request for information from the SEC on Wednesday asking for information, spokesman Mark Palmer said, and will respond ``as soon as possible.'' ``We will cooperate fully with the SEC and look forward to the opportunity to put any concern about these transactions to rest,'' Lay, who is also Enron's chairman, said in a statement. Dilution Fears Enron has formed at least 18 companies to serve as financing vehicles for its projects, based on filings with the Texas secretary of state. Fastow and other Enron executives are named as the controlling partners or the board members in the companies. Some have bought Enron assets such as power plants, removing the debt for those projects from Enron's books. That allows Enron to keep cash earned from the main trading business from supporting what it views as secondary businesses, Standard & Poor's debt analyst Todd Shipman said. Enron brokers trades of electricity, natural gas and other commodities as well as owns power plants and natural-gas pipelines. Dismantling the affiliates would be costly. Whitewing Management, an affiliated company that has bought 14 Enron power plants and lists Fastow as managing director, holds 250,000 preferred shares of Enron. Enron may have to convert the preferred shares to common stock if share prices fall below a certain level and the credit rating drops below investment grade, according to company filings. That would dilute the value of common shareholders' investment. ``The concern is how many of these dilutive structures are out there?'' Shipman said. ``Investors are worried they might have to share their Enron earnings with a lot more people than they originally thought.'' Worrisome Financing Enron's auditors and attorneys reviewed the company's ``related party arrangements,'' the board approved them, and they were disclosed in SEC filings, Enron said in its statement. That hasn't eased concerns. The reduction of shareholder equity by $1.2 billion from the LJM partnerships is reason to worry about Enron's other financing vehicles, wrote Niles, the Salomon analyst. Enron also may take another $2.4 billion in losses from investments in the Dabhol power plant in India and projects in South America, he wrote. Bonds Fall Enron's 8 percent coupon bonds due in 2005 fell $34 per $1,000 face value to be offered at $1,022 today from $1,056 on Friday, traders said. Yield on the debt rose to 7.33 percent from 6.33 percent. Based on Bloomberg composite ratings, most of Enron's long- term debt is rated at BBB2 and BBB1, two or three levels above investment grade. Fastow continues to work, and Enron hasn't punished him, Palmer said. Fastow declined to be interviewed, spokeswoman Karen Denne said. SEC spokesman John Heine declined to comment on the agency's request to Enron. ``We believe everything that needed to be considered and done in connection with these transactions was considered and done,'' Lay said in the statement. Enron will hold a conference call to discuss investors' concerns at 9:30 a.m. New York time Tuesday. The call may be accessed through the ``Investors'' section of Enron's Web site at http://www.enron.com. --Russell Hubbard in the Princeton newsroom at 609-750-4651, or at rhubbard2@Bloomberg.net and Mark Johnson in the Princeton newsroom at (609) 750-4662, or mjohnson7@bloomberg.net, with reporting by Terry Flanagan/slb/alp/pjm/slb/*atr/alp/taw Trusts Keeping Enron Off Balance By Peter Eavis Senior Columnist TheStreet.com 10/22/2001 07:15 AM EDT URL: Enron (ENE:NYSE - news - commentary) stock plunged 20% last week after the = energy giant revealed that a complex financing deal caused a $1.2 billion h= it to its equity. But other big deals that have yet to receive much public = scrutiny could further damage the company's balance sheet.=20 In the spotlight last week were transactions done with investment partnersh= ips called LJM2 and LJM Cayman. An examination of the LJM2-related equity w= ritedown can be found here.=20 However, the LJM deals make up only part of Enron's sophisticated financing= arrangements. Also at issue are two large trusts that contain assets Enron= shifted from its balance sheet. These are the $1 billion Marlin Water Trus= t II and the $2.4 billion Osprey Trust, usually known as Whitewing.=20 The key risk for investors is how Enron chooses to repay these trusts if th= ey don't unwind as planned. The company may end up issuing stock to repay m= oney borrowed through the trusts. This would dilute existing shareholders. = Alternatively, Enron could resort to using cash raised through sales of on-= balance sheet assets. But this would hamper efforts to reduce debt and depr= ive the company's profitable business lines of much-needed capital.=20 Whitewing and a Prayer? Though set up by Enron, Marlin II and Whitewing are legally distinct from t= he company. Institutional investors bought notes issued by the trusts. The = $3.4 billion in proceeds from the notes flowed to Enron.=20 Both trusts are scheduled to unwind in 2003. Originally, Enron had hoped to= repay them by selling the trusts' underlying assets. This repayment method= would have had a minimal impact on Enron's balance sheet.=20 However, there's a potential problem brewing with this approach. The value = of the assets may be too low to raise sufficient funds to pay back the trus= t investors. Hence Enron's two unenviable options: issuing stock, or raisin= g cash from its own balance sheet.=20 Enron treasurer Ben Glisan concedes that assets in Marlin II won't be suffi= cient to pay it back. But he adds that proceeds from planned sales of on-ba= lance sheet assets will provide Enron with the necessary funds for Marlin I= I. When asked if Whitewing's assets are adequate for repayment, Glisan repl= ied: "We believe so."=20 In reference to the two trusts, Enron CEO Kenneth Lay said on a conference = call Tuesday: "We anticipate the sale of assets will be the primary source = of repayments."=20 Sterling Marlin TheStreet.com hasn't seen offering documentation for Whitewing; Enron didn'= t provide it when requested. But TSC has reviewed the Marlin II prospectus.= Here's how Marlin II works. Enron took water assets, primarily based in th= e U.K., off its balance sheet, and the Marlin II trust took a stake in them= . Meanwhile, Marlin II issued senior debt to investors, the proceeds of whi= ch went to Enron. The company didn't have to recognize these notes as debt = on its balance sheet, due to the structure of the trust. Marlin II replaced= a similar trust called Marlin that was set to mature at the end of this ye= ar.=20 Ideally, the aim was for Enron managers to maximize the value and profitabi= lity of the assets over the life of Marlin and Marlin II so it could sell t= hem off and pay down the trusts. To cover the risk that asset sales wouldn'= t raise enough money, Enron also pledged to issue as much new convertible p= referred stock as might be needed to pay off the notes.=20 As it happened, the water assets didn't perform well. In fact, Enron set up= Marlin II in July to succeed the original Marlin because it wanted to avoi= d paying off the first Marlin with convertible stock, or with cash from its= own balance sheet. This move risked angering the rating agencies that had = agreed not to treat Marlin as debt because of Enron's pledge to backstop it= with preferred stock. Suddenly, it seemed Enron was wriggling out of its c= ommitment to make good with stock.=20 Enron's Glisan responds that many of the investors in the first Marlin also= invested in Marlin II, illustrating that investors weren't upset by the ma= neuver.=20 Glisan says Enron almost certainly won't decide to issue stock to pay off M= arlin II. Instead, he adds, money from pending asset sales can be used to p= ay it off when it matures in July 2003. When asked if Enron might use the e= xpected $1.9 billion in proceeds from selling Portland General, the utility= based in Portland, Ore., Glisan replied: "That's a good one."=20 But using the Portland General windfall would run counter to Enron's freque= ntly stated strategy of selling off low-yielding assets and investing the p= roceeds in higher-yielding businesses. Portland General is almost certainly= a more profitable business than the U.K.'s Wessex Water, which is the domi= nant asset in Marlin II. In addition, doing so would mean Enron couldn't us= e all the Portland proceeds to pay off debt. Enron aims to get its debt-to-= total-capital ratio down to 40%, from the current 50%.=20 Maturity What about Whitewing, which matures in early 2003? Glisan lists Whitewing's= assets as: Central American gas distribution assets; turbines destined for= European power stations; interests in European power stations; and various= debt and equity participations in energy investments. Glisan says these as= sets can be sold to pay off the $2.4 billion in notes issued by the trust.= =20 But what would happen if the Whitewing assets can't fetch the necessary pri= ce? Enron could sell off more on-balance-sheet assets. But, again, this wou= ldn't help debt-reduction efforts, and it may be running short of large ass= ets that it can quickly sell.=20 Whitewing is backed with Enron convertible stock. But Enron may be reluctan= t to issue paper when its stock is so far below recent highs, and current s= hareholders may begrudge the prospect of further dilution.=20 Investors also need to keep their eyes on the early-repayment triggers of t= he trusts. In fact, the stock price-related element of the triggers has alr= eady been set off. For Whitewing, the stock has to fall below $59.78; for M= arlin II, the stock has to be under $34.13. However, something else has to = happen before the trust investors can claim their money back through asset = sales and stock issuance. Enron's credit rating must fall below investment = grade. That looks to be a long shot, since its rating is currently three no= tches above subinvestment grade. But it is something the market will watch = after Moody's said last week that it was putting Enron on review for a poss= ible downgrade.=20 Despite all the questions stemming from the trusts, Enron still seems keen = to use the structure. Last week, Barclays Capital was inviting investors to= subscribe to an Enron-related entity called the Besson Trust. This is bein= g set up to enable Enron "to monetize substantially all of its interests in= EOTT Energy Partners," an Enron affiliate that markets and transports crud= e oil. Expected proceeds from the deal are $227 million, according to the p= rospectus. Could Enron be setting up new trusts to pay off damaged old trus= ts?=20 Due to off-balance sheet financings like Marlin II and Whitewing, it's clea= r that uncertainty could weigh on Enron's battered stock for some time.=20 Why Enron's Writedown Unnerves Some Investors By Peter Eavis Senior Columnist TheStreet.com 10/22/2001 07:15 AM EDT URL: Enron is trying to improve disclosure to investors, but its decision to red= uce equity by $1.2 billion in the third quarter has created dismay and conf= usion in the market.=20 The action was disclosed in a dubiously discreet manner. More important, in= vestors are struggling to pinpoint how the shrinkage will affect Enron's ba= lance sheet, profits and earnings guidance.=20 Enron didn't provide answers to questions submitted on the equity reduction= .=20 Enron doesn't include a balance sheet in its earnings release, so the equit= y decrease couldn't be spotted in numbers supplied Tuesday. And even though= Enron did break out $1 billion in earnings charges in its release, the com= pany didn't feel it necessary to mention the equity write down anywhere in = the text.=20 Instead, the public first heard about it on a Tuesday conference call. CEO = Kenneth Lay said Enron had shrunk its equity as a result of terminating a s= o-called "structured finance arrangement." The Wall Street Journal later re= ported that Enron's counter-party in this transaction was an investment par= tnership called LJM2 Co-Investment, which has set up and run by Enron's fin= ance chief, Andrew Fastow.=20 This is what Lay said on the Tuesday call about the equity move: "In connec= tion with the early termination, shareholders' equity will be reduced appro= ximately $1.2 billion, with a corresponding significant reduction in the nu= mber of diluted shares outstanding." According to The Journal, Lay then sai= d Wednesday on another call that Enron had repurchased 55 million shares.= =20 Enron's supporters count Lay's mention of a reduction in the share count as= bullish, because it should boost earnings per share numbers in the future.= =20 But there are two possible problems with this theory.=20 First, Enron affirmed its previous earnings guidance that it expects to mak= e $2.15 per share in operating earnings next year. Critically, the company = did not say whether its guidance was given using a share count without the = 55 million shares or not. If the forecast does assume the exclusion of the = 55 million shares, the company should have upped its 2002 per-share earning= s forecast by around 6%, since that's the amount by which the share count w= ill be reduced. Enron needs to say what share count it's using in its guida= nce.=20 Second, it's almost impossible to determine where these shares were ever re= corded, casting a certain amount of doubt on Lay's assertion that the share= count will come down.=20 Why question the CEO? Well, in its 2000 annual report, Enron included some = disclosure of the 55 million shares connected with LJM2. It reads: "At Dece= mber 31, 2000, Enron had derivative instruments...on 54.8 million shares of= Enron common stock." The derivative instruments appear to be types of opti= ons, or agreements that give the counterparty the right to buy or sell stoc= k at agreed prices.=20 But these derivatives-linked shares don't show up where they should in the = annual report: in the table that breaks out the difference between the basi= c and diluted share counts. The line item in this table that shows options-= related shares totals only 43 million shares, which is close to the amount = of employee pay options that qualified for inclusion. Therefore, that numbe= r almost certainly doesn't include the 55 million LJM2-related shares. The = fact is, at least some of the 55 million derivatives-linked shares should b= e included if the derivatives were like normal options. That's because the = LJM2 derivatives appear to have been "in the money", or profitable for the = holders. Typically, all in-the-money options-based stock has to be included= in the diluted share count. And these LJM2 derivatives did appear to have = that status at the end of 2000. Back then, Enron stock was trading around $= 80, way above the average $68 level at which these derivatives made money f= or LJM2.=20 Maybe these weren't simple options and had other conditions attached that e= xcluded them from the diluted share count. That's what disclosure elsewhere= in the annual report appears to imply. Alternatively, the options were emb= edded somewhere else in the share count table or equity disclosure, though = it's hard think where.=20 Presumably, investors will get a full explanation in Enron's quarterly fina= ncial results filing with the Securities and Exchange Commission, due by th= e middle of November.