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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Henry Volquardsen who wrote (5254)	12/12/2001 1:14:43 PM
From: John Pitera	Read Replies (1) \| Respond to of 33421

Hi Henry, It's very possible that Enron's losses were in large part due to their broadband and telco ventures, as you point out.. It's amazing that the CEO of ENE told an investment conference in Feb of 2001 that ENE's broadband business was worth 36 Billion dollars!! CPN has been seeing a pronounced selloff, in part due to the the large business gains they recorded in dealings with ENE, as well as their interesting use of fair value hedges and hedges for future cash flows. great article in the sunday NYT Message 16774997 here is a portion of it. --------When trades are made to hedge underlying assets, they are called fair value hedges — and their gains and declines must be recorded in the income statement. But when trades are used to hedge expected cash flows, their gains or losses are recorded on the balance sheet as assets or liabilities until they are closed out. The temptation, of course, would be for a company to put on a hedge and wait to see if it rose or fell in value before deciding how to account for it. Under such a ploy, if a hedge rose in price, it would become a fair value hedge and add to profits. If it fell, it would go to the balance sheet and not hurt earnings at all. To prevent this win-win situation from occurring, said Timothy S. Lucas, technical director at the Financial Accounting Standards Board, accounting rules require trading companies to designate in advance what type of hedge each trade represents. "The rules say you can't shoot the arrow first and then paint the target where it fell," Mr. Lucas said. "And the auditors are presumably looking at that." Mr. Posoli said most trading activity involved hedges intended to protect the company's underlying assets and cash flows. Such hedges would produce gains and losses on both Calpine's income statement and balance sheet. BUT for the first nine months of 2001, Calpine's hedging activity produced only losses recorded on the balance sheet — $231 million in all — while those derivatives activities the company's management did not designate as hedges produced $113 million of gains on the income statement. Those derivative gains accounted for 10 percent of the company's gross profit. Asked why Calpine's hedging produced only losses on its balance sheet while those transactions not designated as hedges at all produced gains, Mr. Posoli said he was confident that anyone examining Calpine's books would agree that the gains recorded in income belonged there rather than on the balance sheet. He explained that the gains came from transactions with customers in areas of the country where Calpine had no underlying assets.------ EPG --El Paso Corp, sold off when it became more widely known that they were funding businesses projects with Limited Partnerships, thus keeping those debts off of the balance sheet. Message 16777395