Enron Taps $3 Billion From Bank Lines
In Pre-Emptive Move to Ensure Liquidity
By JOHN R. EMSHWILLER, REBECCA SMITH and JATHON SAPSFORD
Staff Reporters of THE WALL STREET JOURNAL
October 26, 2001
Enron Corp. drew down about $3 billion, the bulk of its available bank credit lines, in a bid to restore confidence in its financial strength and liquidity.
Enron will use part of the money to offer to redeem about $1.85 billion of outstanding commercial paper -- short-term corporate IOUs -- according to a person familiar with the matter, with the remainder providing the energy concern with a cash cushion. Some observers believe the move is a pre-emptive step by Enron to ensure that it had adequate liquidity should its access to bank lines be interrupted. The person also said Enron was talking to its banks about a new, multibillion-dollar credit line.
Enron insists its business operation and financial condition remain strong. But, "when the market is reacting as irrationally as it has been the last few days, we thought that cash was better than a commitment from a bank," said an Enron spokesman. In a statement, the company's new chief financial officer, Jeff McMahon, said that by drawing down the bank lines, "we are making it clear that Enron has the support of its banks and more than adequate liquidity to assure our customers that we can fulfill our commitments."
The move underscored the tumultuous conditions that have been sweeping over the Houston energy-trading concern in the past 10 days. Enron is the nation's largest energy trader and is a principal in nearly one-quarter of all electricity and natural-gas trades. Thursday, for example, Enron was involved in about $4 billion of deals through its EnronOnline unit.
Since early last week, Enron's share price has plummeted 50%. Last week, it reported a $618 million third-quarter loss and a reduction in shareholder equity of $1.2 billion. It also disclosed that the Securities and Exchange Commission is conducting an inquiry into billions of dollars of transactions it did with entities connected to its former chief financial officer, Andrew S. Fastow, who was replaced Wednesday.
The draw-down of the credit facilities came as one rating agency, Fitch, put Enron on review for a possible downgrade, while another, Standard & Poor's, changed Enron's credit outlook to negative from stable. Moody's Investors Service already has said it is looking at a possible downgrade of Enron. In order to fall below investment grade, Enron's credit rating would have to fall several notches.
If that were to happen, however, a host of bad consequences could follow. Together with the sharp decline in its stock price, a noninvestment-grade rating would throw the company into default on obligations involving billions of dollars of borrowings. In that event, Enron could be forced to issue millions of shares of stock to holders of that debt, diluting the value of existing shares. At 4 p.m. Thursday in New York Stock Exchange composite trading, Enron was down six cents at $16.35.
Liquidity is a key issue for Enron, which handles energy-trading volumes more than triple its next-biggest competitor, American Electric Power Co. Enron's EnronOnline Internet-based trading platform has transacted more than $884 billion of trades since it was created in November 1999.
The company's wildly successful wholesale unit has been dragged down by underperforming assets elsewhere in the company, chiefly the approximately $6.5 billion of international assets such as its Dabhol power project in India. Raising cash and retiring debt largely is a timing issue. The cash needs of its trading operation are immediate; it takes time to sell assets, particularly in today's slower economy.
The company also is suffering from a string of disclosure controversies that have damaged its credibility, particularly in connection with its dealings with Mr. Fastow, the former chief financial officer. Internal documents related to one of the Fastow partnerships disclose that Enron also did as much as hundreds of millions of dollars of business with an entity connected to another company official, who has since left Enron. While Enron disclosed its Fastow-related transactions in SEC filings, a computerized search of the SEC's database of public filings produced no reference to this other employee-related entity known as Chewco.
Chewco was established in 1997 "with approximately $400 million in capital commitments" to buy an interest in Enron assets, according to one of the partnerships documents. The document didn't further specify what assets were purchased, and it didn't disclose the financial impact of the transactions for either Chewco or Enron. Chewco was being run by Michael Kopper, a managing director in Enron's Global Equity Markets Group, according to the document.
Enron, which has maintained that its complex financial transactions with employee-related entities were legal and properly disclosed, didn't have any comment regarding its dealings with Chewco.
Mr. Kopper, who Enron says left the company this year to focus on helping to run the Fastow-related partnerships, didn't return phone calls. A person at his office in Houston Thursday said Mr. Kopper was traveling. In response to questions about Chewco, an Enron spokesman would say only that "Michael Kopper was never an executive officer of Enron." Mr. Fastow repeatedly has declined interview requests. He severed his relationships with the partnerships in July.
This statement is an apparent reference to SEC disclosure regulations regarding related-party transactions. Under SEC rule S-K, a company has to report any transaction that exceeds $60,000 and involves "any director or executive officer." By contrast, Mr. Fastow, as CFO, would have fallen into that category, but Mr. Kopper, as managing director of a business unit, presumably wouldn't have.
However, reporting guidance issued by the Financial Accounting Standards Board seems to have a broader definition, one that might include Mr. Kopper. According to FAS Statement 57, a related-party transaction involves a "material" piece of business between the company and a member of management. The statement defines management as directors, top officers, vice presidents in charge of major business units and "other persons who perform similar policy-making functions. Persons without formal titles may also be members of management."
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