Army Secretary's Enron Role Probed
Touted for His Business Expertise, White Oversaw Energy Conservation Unit
By Ellen Nakashima and Peter Behr
Washington Post Staff Writers
Monday, February 18, 2002; Page A18
As an Enron Corp. division vice chairman, Thomas E. White was responsible for the nuts-and-bolts performance of big energy-management contracts with an impressive roster of customers, ranging from J.C. Penney Co. to the Archdiocese of Chicago.
How well White did that job has now become an issue in the aftermath of Enron's collapse, as investigators try to determine whether White's unit, Enron Energy Services (EES), contributed to the massive misstatement of Enron's profits over the past four years.
White, who retired in 1990 from the Army as a brigadier general, returned to the Pentagon last year as President Bush's choice as secretary of the Army -- an appointment for which his business expertise was highly touted. Now he and others who worked at EES are answering investigators' questions about the unit's operations.
White has declined to discuss publicly his 11-year executive career at Enron. "I have fully cooperated with investigators on the subject of Enron and will continue to do so," he told a reporter last week.
One source of concern is whether White violated his Senate ethics agreement to sever all financial ties to Enron when he elected to receive an annuity payment, part of which came from Enron. Sen. Carl M. Levin (D-Mich.) has asked the Office of Government Ethics to look into the issue.
As vice chairman of EES -- a job for which he was paid $5.5 million in salary and bonus his last year -- White oversaw energy conservation investments Enron planned to make at customers' facilities to reduce electricity and gas usage. Since EES was responsible for furnishing its customers' power needs, the lower the energy costs at these facilities, the higher the profit Enron would make.
Some clients and former Enron employees say EES performed well on this score. Others say EES lacked the will or the ability to complete the conservation projects on time. But in Enron's accounting practices, these forecasted energy savings were a key to the revenue and profit figures that EES reported to the public, Enron documents say.
Formed in 1997, EES grew quickly, according to Enron's financial statements, emerging as one of the company's hot new ventures. In 2000, it produced a pre-tax operating profit of $103 million on revenue of $4.6 billion, the company reported.
However, EES was not really profitable in 2000, according to Enron Vice President Sherron Watkins.
Watkins testified before Congress last week that EES was made to appear profitable that year by counting financial trading gains from one of the Raptor partnerships created by then-chief financial officer Andrew S. Fastow. "It was very important to Enron that we announce that Enron Energy Services was profitable in 2000," Watkins told Congress.
The Raptor transactions violated accounting rules and should not have been counted, according to a report of a special investigation by a committee of Enron's board that was released two weeks ago.
Former employees say EES lost money initially on many of its contracts, deliberately bidding low to gain the business.
Margaret Ceconi, a former employee who sent an e-mail to Enron's board in August warning of huge losses at EES, wrote: "It became obvious that EES had been doing deals for two years and was losing money on almost all the deals they had booked."
Enron, for example, took an $8 million loss on an energy-services contract with shopping center owner Simon Property Group Inc., Ceconi said. A spokesman for Simon Property declined to comment on the contract. Enron officials have said the facts will emerge as investigators work.
Eli Lilly and Co., the Indianapolis pharmaceutical manufacturer, signed a $1.3 billion contract in February 2001 turning all its energy requirements over to Enron for 15 years. But Enron paid Eli Lilly $50 million upfront to win the deal, according to a former senior executive of Enron.
Eli Lilly spokesman Ed West confirmed that Enron had made an advance payment but would not disclose the amount for business confidentiality reasons. "We looked at it as Enron backing up their words with cash," he said.
Such upfront payments were not unusual, said Glenn Dickson, a former EES director of asset operations. "It was fairly common on the really big deals to pay the customer, to lose money, in effect, on the contract, whether you were paying the customer or losing money because you were charging less than it really cost."
What made it all work, Dickson said, was a form of accounting in which the company counted future projected earnings as current income. "It was huge amounts of money that covered up those cash outlays," he said.
He said that EES even had to pay its parent corporation interest -- he recalls a 16 percent rate -- on such payments. "The former management [EES chairman Lou Pai and White] didn't worry that the internal charge for capital was 16 percent," he said.
How Enron handled the Lilly agreement on its books was not immediately known.
Enron sometimes would create an off-balance-sheet entity -- a private corporation or partnership -- to manage the contract, according to an in-house EES training document. But such contracts were reported as pluses in Enron's financial statements because the company would estimate the profit it expected to receive over the length of the contract and report part of that estimate as current income each year.
The approach, called fair value accounting, is permitted as long as the long-term estimates of results are realistic, accountants say.
EES could make money if it used its trading know-how to buy energy at bargain prices. But EES's success in the deal also depended on installing energy-saving equipment and technology -- light bulbs, motors and meters -- to reduce a customer's energy use. And that was White's part of the operation.
EES's contract staff did good work, "but when the customer actually bought the product, when it came to delivering, they [EES] had a tough time doing it," said Houston energy consultant Art Gelber, whose 50-employee firm provides many of the same services that EES did and competed against Enron on a small scale.
"The infrastructure wasn't in place to get the projects installed," said Dickson, the former EES manager. The result was "we fell behind in being able to put the projects in the ground to meet the earnings projections." There was also no real way to prove if money was being saved, he said.
Some clients say that EES did what it said it would do. In the Chicago archdiocese, EES surveyed about 2,000 buildings -- parishes, rectories, schools -- and worked out the cost of recommended repairs. The construction phase began about three years ago, said Ray Martin, the archdiocese's construction manager. Apart from one project that ran four months late, the rest were completed on time, he said. The archdiocese is now saving $1.9 million a year in energy, facilities director Greg Veith said, adding, "We were very satisfied."
Though the asset or demand side of EES -- White's part of EES -- was relatively small compared with the commodity portion -- about $200 million compared with $2.3 billion -- it was seen as a big growth area.
"That was a huge focus for the future because it is what differentiated us from any other energy provider," Dickson said. "Nobody had taken it to the level we had of trying to do integrated management of both the supply and the demand."
Annual reports gave glowing reports of contracts signed. In its 1999 annual report, Enron said EES surpassed its goals when it signed contracts representing $8.5 billion of customers' future energy expenditures. In 2000, EES expected to double its total contract volume to more than $16 billion.
"So many big deals were being booked, but no one really made sense of the physical execution," said a former EES executive who asked not to be named. "Tom White ran around, shook hands, met high-level clients and just kind of coasted."
He said that White and his team treated contract fulfillment cavalierly. "This is a very, very complex series of individual efficiency upgrades that have to be managed," he said. "That angers me -- the systematic failure of not realizing you had a supply chain issue. You needed to back off and just grow the business."
But another former executive said White was recruited to Enron precisely because of his expertise, developed in the military and in his early Enron career, in "building things, making things work right and bringing things to completion and operating them. Because of his military background, White was a good manager of operations and logistics functions."
Tony Spruiell, a former EES vice president of risk management, said he held White in high regard. "I respected him because he listened to people who knew something about industry, organizational redesign and all the things industry has been working on for the last 10 years," he said. "While Tom hadn't worked in that area, he was smart enough to listen to people who had."
Enron, which is trying to resolve its debts in bankruptcy court and re-emerge as a smaller company, hopes to keep managing some of the EES contracts, but others have been abandoned.
The allegations that White was out of the loop at Enron, hardly recommend him as a leader of the "transformation" that Defense Secretary Donald H. Rumsfeld envisions for the Army, said Ronald J. Gilson, a professor of law and business at Stanford University.
"You can't really have it both ways," Gilson said. "He was either active in running the business or he wasn't. If he wasn't, then he's been saying something really different about his role."
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