Smart Money,
In response to your question:
Brief background & Comment:
HOUSTON, Nov 14 (Reuters) - Enron Corp. (nyse: ENE - news - people) Chairman and Chief Executive Ken Lay confessed on Wednesday to a series of misjudgments and errors that pushed the nation's biggest energy trader to the brink of collapse and forced it to accept a humbling buyout by smaller rival Dynegy Inc. (nyse: DYN - news - people)
In a stunning mea culpa to analysts and investors, Lay admitted that Enron had made bad investments, overburdened itself with debt and conducted deals that led to conflicts of interest now under U.S. regulatory investigation.
"We fully understand and regret that the combination of these events has resulted in the complete loss of investor confidence. We are fully committed to fixing the problems," he said.
Lay's act of atonement came after Enron said he had decided to waive his right to a $60 million golden parachute as part of Dynegy's planned buyout, following a tense exchange with employees about his severance package on Tuesday.
Enron agreed on Friday to be taken over by Dynegy for about $9 billion in stock after investor unease over its murky off-balance sheet deals drove its stock price down to $7 last week from a high of $90.56 in August 2000.
"In hindsight we made some very bad investments in non-core businesses," Lay said in a 90-minute conference call.
Many of those investments, such as an ill-fated venture into the water services business and a power plant project in India that became mired in a payments dispute, performed below Enron's worst expectations, Lay said.
"The negative impact of these investments have been exacerbated through the extensive use of debt capital both on and off the balance sheet," Lay said.
Comment: The fact that Mr. Lay had singled out the India Power Plant Project (Dabhol) as “performed below Enron's worst expectations” hi-lites the magnitude of the problem and the significance the CEO attached to it. Dabhol’s sole customer owed them between $280 and $300 million and was chewing up cash-flow big time since the shut down of phase II last summer. Getting rid of this albatross at a reasonable market price (Total offered $3 billion) is in my view of more immediate significance than resolution of the pipeline controversy with Dynegy and the USB/Enron “lease w/option to buy” deal for the wholesale trading operations. The more immediate impact of selling Dabhol is getting Enron equity back from their 65% ownership, stemming the cash flow drain and using excess cash from the deal to reduce DIP financing ($1.5 billion, initially) from $800 million (current estimate) Or have a quick pay off of same.
A brief overview of my perspectives on the Enron Scandal, follows:
The Collapse of Enron Stock & Bond Prices are the direct result of a media Spin Machine run amok!
INVESTORS - Insiders, Outsiders, Politicians, conservatives, liberals, Enron, Enron management, the President’s mother-in-law, Senator Gramm and wife Wendy, rich people, poor people, employees, ex-employees and others too numerous to mention - have all been VICTIMIZED by irresponsible research, analysis and reporting of events prior to, during and continuing, as I write.
A brief recapitulation of events that lead to Chapter 11, Protection by Enron:
The following information was compiled from research and analysis of filings to the SEC, Company Press releases, Internet message boards, mass media, etc.
The road to Chap 11 began with accounting changes which were announced by ENRON in December, 2000 to go into effect January 1, 2001. The changes were transitioned into the quarterly reports culminating in highly significant changes announced in the third quarter of 2001, ending Sept 30th. The accounting changes incorporated in the third quarter reduced stock holder’s equity by $1.2 Billion to $9,598,000,000. & revealed significant off-balance-sheet debt. Earnings reported in prior years were restated and lowered as a result of the changes in accounting which sought to place off balance sheet information on the balance sheet in an attempt to make financial information more transparent and comprehensible. Besides coming into compliance with more strict accounting principles/guidelines, the purpose was to facilitate the disposition of none-core assets (which had been announced in Dec. 2000).
October 16, 2001 –Enron - Amplified explanations of accounting changes contained in the 3Q/01, filing.
“Non-recurring charges totaling $1.01 billion after-tax, or $(1.11) loss per diluted share, were recognized for the third quarter of 2001. The total net loss for the quarter, including non-recurring items, was $(618) million, or ($0.84) per diluted share.” Note: It is interesting to observe that while the per diluted share loss of ($0.84) was reported by Enron in filings to the SEC; leading financial ‘news’ companys reported and continue to report earnings for the quarter as $0.43. The disparity of $1.27 (3Q/01) between the reported Earnings Per Share (EPS) is NOT Enron’s fault. Enron’s reported losses reflected recurring earnings and included non-recurring items; the misleading numbers provided by financial analysts reflect recurring earnings only. This practice is widespread and needs to be investigated and changed by law.
(IMO) These filings by ENRON to the SEC provided the catalysts which lead to the Credit/Debt Rating down-grades. This I think marked the beginning of the “RUN” on ENRON.
The downgrades triggered certain mechanisms in transactional agreements which contained ‘call’ provisions (for full payment, on demand) in the event(s) that ENRON’s credit/debt ratings dropped below certain levels and/or if ENRON’s stock price dropped below certain levels ( $28 - $45) if memory serves correctly). At Nov 29, 2001 a source thought to be reliable reported that Enron faced approximately $3.9 billion in accelerated debt payments as a result of the credit rating downgrades. How much accelerated debt payment became due, or could have become due, on demand because the stock price had dropped below triggering thresh-holds is not known.
This is what Mr. Lay said: “After a thorough review of our businesses, we have decided to take these charges to clear away issues that have clouded the performance and earnings potential of our core energy businesses,” said Lay.”
enron.com
Comment: Despite all the publicity to the contrary, I think Mr. Lay attempted to make the books more transparent as he has stated. Further, he hired attorney’s to investigate the allegations made by Ms. Watkins and appointed a Credit committee to investigate financial matters with regard to debt and Risk Management. His efforts (IMO), were rewarded by Credit/Debt downgrades which triggered contractual clauses leading to a surge of Creditor demands for payment in full which the Company could not comply. An avalanche of adverse publicity and the Creditor Demands forced Enron into Chapter 11 Protection. After the failed attempt to merge with Dynegy, this was the only avenue left to save the Company, preserve stock holders equity and eventually pay off Enron creditors in an orderly, court supervised manner.
The trading halt placed on Enron (ENE) by the NYSE on Jan 10, 2002 created yet another obstacle to Enron investors. When the ‘halt’ was initiated by NYSE Enron (ENE) stock price had already recovered from $0.25 on Nov 30, 2001 to $.067, the last quoted price on the NYSE. Investors could not buy or sell the issue until Enron assumed a new symbol ENRNQ and began trading on the OTC: Pink Sheets. ENRNQ opened on the pink sheets @ $0.50 on Jan 15, 2002 and quickly dropped to $0.22 (all time low) before price recovery began to exert itself. During the ensuing days positive momentum developed and the price climbed to $0.57 on Jan 18th before profit taking reversed momentum and ENRNQ closed @ $0.51.
On Jan 22nd the price fluctuated betwee $0.39 - $0.53, closing @ $0.43. On Jan 23 continued down; Open @ $0.41, High for the day, hit a Low of $0.33 followed by a Close of $0.34. Each time the issue has attempted price recover more negative news emerges to reverse positive momentum. Yesterday, President Bush relayed his mother-in-law story and Senator Gramm & wife reported their significant losses.
Bush more than once was quoted as saying the stock was worthless. Those comments likely knocked $0.05 or $0.06 off the price and temporarily halted positive momentum and money-flow into the ENRNQ.
Money flow and other indicators have resumed positive characteristics today. With adverse news appearing almost daily it is amazing to me that the issue is showing the strength now being demonstrated.
Trading on the Pink Sheets has created yet another obstacle for potential buyers of Enron (ENRNQ),
Because it is now regarded as extremely risky ‘penny stock’ many brokerage firms will NOT accept BUY orders. They will allow customers to liquidate their positions. Many investors who sold in December for tax reasons and wished to reestablish old positions as the 30 day Wash Rule expired, learned they could NOT Buy the stock. Some have transferred accounts to brokerage firms that do accept OTC & Pink Sheet securities, others have simply opened new accounts. The resulting confusion has allowed a sell-side bias to develop because of the difficulties involved in getting BUY orders accepted.
Value Investors & Bargain hunters tend to focus on fundamental values as they have been reported.
At September 30, 2001, the following financials were provided by Enron to the SEC in their quarterly report:
Company data a/o 9/30/01
Book Value (MRQ) $ 11.40
Shares Outstanding 743.91 million
Total Assets 61,783,000,000.
Total Liabilities 52,185,000,000.
Goodwill (3,500,000,000.)
Stock Holders Equity 9,598,000,000.
Comment:
Ken Lay has been compared to Bin Laden on CNBC (Jan 23, 2002) (Guest on Kramer & show)
The media has focused on Mr. Lays selling stock because of Insider knowledge while proclaiming the Company was healthy. Mr. Lay was exercising profitable stock options which was and is a large part of his compensation. The media fail to point out that Mr. Lay has almost 3 million Enron shares owned either directly on in trust, and many of the shares sold were to repay loans collateralized by Enron stock which was falling in price. In January of 2001 at a price of $84., 3 million shares was worth approximately $250 million At todays (Jan 23, 2002) Close of $0.34, Mr. Lays almost 3 million shares of ENRNQ were worth approximately $1,020,000.00 an almost ¼ dollar capital loss in the past 12 months. No one that I am aware of has lost more on Enron than Mr. Lay himself. He has more reasons, personal & professional to restore investor confidence in Enron than anyone else in the universe. I am saddened to see him resign. He built the Company having served as CEO since 1986 (except for 6 months – last year)
The bottom line: If my analysis is accurate, the much larger and more tragic effect may be ‘lessons learned’ by other CEO’s who are undoubtedly observing the Enron nightmare. They may opt to cover up mistakes and/or admit to no wrong doing. They may logically and rationally conclude that the penalties for telling the truth are far too harsh!
Lessons learned by employees and other investors may be to investigate before dumping assets in a panic and to practice a posture of presumed Innocence until proven guilty. The other lesson for investors may be to read the fine print before investing in anything!
A point to Ponder: Enron(ENE) hit a high of $84.06 on January 2, 2001 and plummeted to $0.25 on November 30, 2001. It sold at its 2001 median price of $42.00 on August 14, 2001.
Who is the victim, the man who bought 10k shares of what was assumed to be an investment grade stock on August 14th at a cost of $420,000.00 based on third party recommendations or yours truly who after extensive research and analysis gambled $4200.00 to purchase 10k highly speculative shares of Enron(ENRNQ)? Perhaps time will provide the answer!
I would be remiss if I did not include the following:
The guilty, the alleged guilty, and other parties (wittingly or unwittingly) who may have contributed to
this national fiasco includes; but, is not limited to:
1. Enron management
2. Financial Analysts
3. The legal profession
4. The Accounting profession
5. Banking Profession
6. Market Makers & Specialists
7. Companies that compile & report financial information
8. Mass Internet portals which report financial, business, & economic data & information.
9. Financial News Networks
10. The SEC & other government regulatory bodies
11. The Congress, the courts & the executive office of the President
12. Investors who make investment decisions without performing appropriate Due Diligence (DD)
13. Ex-employees
14. Others, to numerous to enumerate
Note: In the brilliance of the Global Spotlight VICTIMS claim they have been deceived, mislead, misinformed and lied to. Even if some of the allegations are true, it behooves us to find out who did what and when. If it is later determined that the Company did act in good faith to preserve stock holders equity
with prudent actions while confronting adverse financial reversals escalating beyond their control; one might conclude that Enron is also a VICTIM of this national financial Armageddon. Such a revelation, should it occur, will provide no solace to those who have already relinquished their equity at fire sale prices. While it may be too late to redress alleged wrongs which caused these losses, it is not too late to take a reality check and evaluate alternative possible outcomes. If the Company emerges from Chapter 11 and if stock holders’ equity remains a positive number, those who sold in panic will be worse off than if they had done nothing. With all that has occurred since filing for Chapter 11 on December 2, 2001; there is NO question in my mind that Enron will emerge from Chapter 11 and will continue to conduct business. Questions I have: “Who will own it?” and, “ Will the Creditors get the whole enchilada or will there be a residual of equity left over for stockholders?”
AFTERMATH: The biggest tragedy of the Enron debacle may yet unfold. Media inspired ‘fear’ has replaced thoughtful analysis as a reason to Sell a stock or bond issue. (IMO)The media lead, feeding frenzy contributed significantly to the debt downgrades, the aborted shot-gun wedding of Enron & Dynegy, and the almost complete collapse of Stock & Bond prices of Enron. Investor and public confidence has been severely eroded and unless a thorough public venting of the entire situation is immediately forthcoming, this spark could ignite into flames which may engulf the entire national economy.
The pain for shareholders may not be over. For example:
(According to Press reports) “The White House said Jenna Welch, Laura Bush's mother, bought 200 shares of Enron on Sept. 21, 1999, for $40.90 a share, for a total investment of $8,180. She sold her holdings on Dec. 4, two days after the company declared bankruptcy, for 42 cents a share, meaning her investment had plummeted to $84.” Her Capital Loss is $8096.
Tax consequences of this transaction vary.
1) If the account is in a 401k or IRA, the losses are not only not deductible; but, when she withdraws the remaining $84.00 from the tax-deferred account she will be required to pay income tax on the amount withdrawn during the year of withdrawal. So after losing almost 99% of her investment she now has the dubious distinction of paying income tax on the remaining 1% of her investment. No kidding folks, that’s how it really works.
2)If the investment is outside a tax-deferred or sheltered account, Ms. Welch may use the Capital Loss of $8096. to offset other capital gains and/or deduct up to a maximum of $3,000.00 per year until the entire loss has been deducted.
Comment: A possible benefit which may derive from the Enron debacle is that public attention may be focused on the downside of 401k, IRA and other tax-deferred retirement plans. The unintended consequences of these type federal statutes is that they incorrectly assume that assets will grow over time(without being taxed) and in retirement the plan beneficiary will be in a lower tax bracket when withdrawals are likely to occur. The Enron debacle provides a prima-facie example of the opposite.
SargeK |
