From today's NYT:
nytimes.com
September 9, 2001
MARKET WATCH
A Self-Inflicted Wound Aggravates Angst Over Enron
By ALEX BERENSON
Something is rotten with the state of Enron.
Or so Wall Street suspects. On Jan. 1,
shares in Enron (news/quote), the giant
energy trading company in Houston, stood
at $83.13. On Friday, Enron closed at
$31.57, down 9.7 percent for the week
and 62 percent for the year. The slide has
destroyed more than $38 billion in
shareholder value.
In part, the company's problems are
beyond its control, a result of the collapse
in natural gas prices this year and investor
fears of a coming glut in electricity. But the
deepest wound at Enron is self-inflicted.
Heavy insider selling, indecipherable accounting practices and a stream of
executive departures have combined to create a growing credibility gap
between the company and Wall Street.
"The stock is trading under a cloud," says James S. Chanos, the president of
Kynikos Associates, a hedge fund in New York. Mr. Chanos began betting
against Enron early this year and says he thinks that the company's shares
remain overvalued.
Enron's problems came to a head on Aug. 14, when it announced that
Jeffrey K. Skilling, the chief executive, had quit for personal reasons.
With his resignation, Mr. Skilling joined a half-dozen other top Enron
managers who have decided this year to pursue other opportunities. Still, the
news came as a surprise because Mr. Skilling was named to his post only in
February.
Under the best of circumstances, the unexpected departure of a chief
executive rattles Wall Street. But hard-headed investors can usually comfort
themselves by toting up the sales and profits that the dearly departed
pooh-bah has left behind. Executives come and go, but numbers are forever.
Unfortunately, Enron's books offer investors little succor. The complexity of
the company's businesses and the way it reports its results make
understanding Enron's financial statements essentially impossible.
Over the last decade, Enron has transformed itself from a simple natural gas
pipeline company into the world's largest trader of electricity and gas. Last
year, about three-quarters of the company's cash flow came out of the
company's wholesale services division, which includes its trading operations.
But Enron keeps to itself the details of the trades it makes. Are they
short-term or long-term? Is the company hedged, or does it make
"directional bets" on the prices of the commodities it trades?
The answers are crucial, because they determine how much risk Enron has
taken to make its money. Big profits are nice. Big profits that come from big,
risky trades are a recipe for big, unexpected write-offs.
Enron also makes a habit of selling assets and securities to closely related
companies in "related party" transactions. The company says that the deals
are comparable to those it makes with independent buyers and that they
have been approved by its board and outside auditors.
But related-party deals can provide a convenient way for public companies
to shift losses to private affiliates. And Enron's disclosure about its
related-party deals, including billions of dollars in asset swaps with a
partnership that until recently was controlled by the company's chief financial
officer, is notably sketchy.
In the good old days, like last year, companies could get away with the
unlikeliest of accounting gimmicks, as long as their revenue and profit
numbers looked good. But Wall Street has become more demanding, as
Enron is learning to its chagrin.
Mark Palmer, a spokesman for Enron, says the company is aware of
investors' concerns. "We've got credibility issues on the street, no question,"
Mr. Palmer says. "We're looking at a lot of ways to give our investors more
information."
Sooner would be better than later. |
