Prior to Fastow’s appointment as CFO, Enron used a publicly traded subsidiary, Enron Global Power and Pipelines, to raise off-balance-sheet debt. But Fastow preferred private partnerships for this purpose; partnerships, he said, were “much more” cost-effective and flexible.
Explained the CFO: “You can get together with one or two investors and craft a particular structure to meet your and their objectives, which is very difficult if you have a public entity [where] you might have to go with shareholder votes and amendments of charters and the like.” For that reason, Enron bought back the publicly traded shares of Enron Global Power and Pipelines in late 1997 and turned to private partnerships instead.
What’s more, the “flexibility” that Fastow alluded to might have had at least something to do with Enron’s ability to keep information out of the public eye. Indeed, not until its most recent 10-Q, filed last November 19, did Enron make clear to anyone but the rating agencies and, apparently, its auditor why exactly two partnerships were primarily responsible for converting the $3.9 billion in off-balance-sheet debt into Enron’s own obligations, triggering the downgrade in its credit rating to junk status. One such affiliate, a partnership called Whitewing, invested in another, called Osprey, that acquired energy-related assets and other investments. Osprey was financed with $2.4 billion in debt that, it turns out, Enron backed with preferred stock that was convertible to 50 million Enron common shares. According to the disclosure, Enron had agreed to issue more if needed to retire the debt, and if that weren’t sufficient, it would be “liable for the shortfall.”
A similar tale is told through the 10-Q concerning a partnership called Marlin, which helped finance Enron’s unconsolidated subsidiary, the Atlantic Water Trust. Enron’s obligation for $915 million that financed the trust, as was finally made public through the disclosure, would arise if the company experienced a downgrade below investment grade by any of the three major credit-rating agencies. And that’s exactly what happened. With that, the real nature as well as extent of at least some of Enron’s most pressing off-balance-sheet obligations became clear.
So Much For Intangibles
The nature of Enron’s financial maneuvers became clearer in its November 8-K filing, which provided at least an inkling of what the company’s true liabilities might be. Here the company disclosed the first in what it belatedly acknowledged was a series of accounting glitches. Confidence in the company’s finances steadily evaporated, and Enron filed for bankruptcy on December 2. As this article went to press, Enron was sustained only by $1.5 billion in emergency debtor-in-possession financing from its primary lenders, J.P. Morgan Chase and Citibank.
At this point, any hope for Enron’s resurrection rests on what remains of its assets after its debts are satisfied. Its valuable Northern Natural Gas pipeline has been captured by rival Dynegy Inc., as a consolation prize for Dynegy’s failed takeover of Enron. But it may be difficult to sell the power assets and other tangible assets that Enron worked so hard to securitize. And it’s hard to value what remains of its intangibles, such as its online trading system. (At press time, Enron announced it was selling its energy-trading business to UBS Warburg AG.)