Enron Spanned the Globe With High-Risk Projects
Deals Lost Money but Helped Hide Troubles
By James V. Grimaldi
The Washington Post
Saturday, February 16, 2002; Page A01
With operations in 20 countries, Enron Corp. set out in the early 1990s to become an international energy trailblazer, with grandiose projects and huge U.S. government-backed investments in places no other company would go.
Enron launched bold projects in poverty-ravaged countries such as Nigeria and Nicaragua. It set up huge barges -- with names like Esperanza, Margarita and El Enron -- in ports around the world to generate power for energy-starved cities.
Enron cut through a Brazilian tropical forest -- ranked one of the hemisphere's most endangered ecosystems -- to lay a gas pipeline. It broke ground on Poland's first privately owned power plant and braved India's turbulent politics to build a $3 billion plant.
After Enron went into bankruptcy protection, U.S.-backed lenders and disappointed foreign governments are surveying the damage caused by the company's international designs. As facts emerge about the foreign ventures, it appears that Enron did not earn a dime from the projects, but it used some of them in creative accounting schemes that disguised the company's true financial picture, documents and interviews show.
This week, the Overseas Private Investment Corp., which backed many of the projects, moved to stem its $1 billion Enron exposure by canceling $590 million in loans to the company, once one of its largest clients. Enron had missed deadlines for OPIC requirements in financing projects in Brazil, an OPIC spokesman said. OPIC's decision shifted more of the burden for the troubled projects from the U.S. government to Enron's creditors, lenders and partners.
Like other parts of Enron's vast operation, its international division was fueled by intense internal competition and huge financial incentives. Executives pocketed multimillion-dollar bonuses for signing international deals under a structure that based their rewards on the long-term estimated value of projects rather than their actual returns. The system encouraged executives to gamble without regard to risk, said Louis T. Wells, a Harvard Business School professor who has studied Enron's overseas investments.
Enron's international investment totaled more than $7 billion, including more than $3 billion in Latin America, $1 billion in India and $2.9 billion to develop a British water-supply and waste-treatment company. It enlisted U.S. ambassadors and secretaries of state, commerce and energy to buttonhole foreign officials. Enron cultivated international political connections, recruiting former government officials and relatives of heads of state as investors and lobbyists.
In reports to investors, the company played down or obscured what analysts and others saw as inevitable losses. But in an interview with academic researchers nine months ago, Jeffrey K. Skilling, who then was chief operating officer, conceded that Enron "had not earned compensatory rates of return" on investments in overseas power plants, waterworks and pipelines. Skilling said the projects had fueled an "acrimonious debate" among executives about the wisdom of its heavy foreign investments.
An internal investigation released this month showed that two foreign projects, in Brazil and Poland, were entangled in Enron's off-the-books partnerships, accounting devices controlled by chief financial officer Andrew S. Fastow, which shielded huge debts from investors.
The report showed that Enron engaged in an unusual transaction to add $65 million to the revenue of the Brazilian pipeline project before it had even been completed. The Polish plant was briefly sold to an insider partnership, and sold back to Enron a few months later. Those arrangements allowed Enron to present a more optimistic report to investors.
Other partnerships at the center of the Enron investigation also were involved, an Enron spokesman said this week. The Whitewing partnership had interests in the Trakya power plant in Turkey and Elektro, , a power distributor in Brazil. It also owned a controlling interest in Promigas, a natural gas pipeline operator in Colombia, and the Sarlux power plant in Italy.
Another partnership, called Ponderosa, had interests in the CEG, CEGRIO and Gaspart gas-distribution companies in Brazil, the Centragas distribution system in Colombia and the TGS gas transportation company in Argentina.
The U.S. government has been a major backer of Enron's overseas expansion. Since 1992, OPIC provided about $1.7 billion for Enron's foreign deals and promised $500 million more for projects that didn't go forward. The Export-Import Bank put about $700 million into Enron's foreign ventures. Both agencies provide financing and political-risk insurance for foreign projects undertaken by U.S. companies.
Enron already has filed a $200 million claim with OPIC in connection with its troubled power plant in Dabhol, India, which is up for sale but considered unlikely to recover Enron's full investment.
OPIC spokesman Larry Spinelli said Enron was notified Wednesday that the agency would not proceed with processing $590 million in loans. Asked if they could be resurrected as Enron attempts to restructure under bankruptcy protection, Spinelli said: "Not under these circumstances. This is over now." Enron spokesmen declined to discuss the foreign projects in detail but acknowledged trouble at certain projects.
Enron spokesman John Ambler said: "There might have been some where we paid too much. And there are others where there have been operational difficulties. But a large number of them are still good."
Skilling's videotaped interview with researchers from the University of Virginia's Darden Graduate School of Business Administration last year paints a different picture and illustrates the intense competition the foreign ventures fueled within the executive offices.
During its most aggressive period, Enron's international division was headed by Rebecca Mark and Joseph Sutton. Mark was Skilling's chief rival in the competition to replace chief executive Kenneth L. Lay. Skilling headed Enron's fast-moving, "asset-light" energy-trading business, which contrasted sharply with the plodding and highly regulated business of building pipelines and power plants overseas.
"It was sometimes an acrimonious debate, because some of these people on the asset-development [plant building] side obviously were committed to that business," Skilling said in the interview. "The people from merchant business had never absorbed much capital and were committed to the other proposition."
Skilling said the argument was finally resolved last year when Enron's British water subsidiary Azurix, a venture that Mark headed, went sour. Mark resigned from Azurix and from Enron's board after selling 1.8 million shares of stock for about $81 million.
"Azurix was in some ways -- and this is going to sound terrible -- probably good because it resolved the discussion," Skilling said. "It was absolutely clear it was not the direction to go."
By the time Enron steered away from foreign investments, many projects were in deep trouble.
The Dabhol plant, a gas-fired generation plant built with General Electric Co. and Bechtel Group Inc., was a recurring political and financial problem for Enron, which owns 65 percent of the venture.
Once rejected by the World Bank as not financially feasible, the Dabhol deal ran into trouble from the outset of negotiations. Local media reported that government officials were bribed and possibly misled about the project's terms -- allegations that Enron denies.
The effort in India ended in November when Enron restated its earnings and its stock dropped precipitously. It filed the OPIC claim in December.
Enron occasionally has glossed over a foreign project's troubles in its financial reports. Enron booked $65 million in revenue in 1999 for its Bolivia-to-Brazil pipeline with a pair of accounting tricks, energy consultant Robert McCullough said.
The pipeline, which ran through the Chiquitano tropical forest, was meant to deliver natural gas to a power plant run by Enron. Enron wanted to record profits from it by using mark-to-market calculations, an accounting trick that allows projected revenue to be booked in the current year.
But Enron was not allowed to use such a calculation because its pipeline ultimately connected to an Enron power plant. To get around that, Enron sold a 13 percent stake in the plant for $11.3 million to LJM1, one of the partnerships that Fastow controlled. That allowed Enron to book the revenue, and it did so in the last two quarters of 1999.
McCullough said that deal was all the more stunning because the pipeline had yet to deliver any gas and, therefore, had produced no revenue. In fact, the pipeline still has not produced any revenue because it has yet to be hooked up with its terminus, a power plant.
"I can't imagine how they were constructing the financial model for that mark-to-market calculation," McCullough said. "It had to be purely theoretical."
Two years later, in August 2001, Enron bought back LJM1's interest in the power plant for $14.4 million, providing the Fastow partnership a $3.1 million profit. The internal investigators questioned the value because the pipeline had been mired in cost overruns and unexpected environmental problems, particularly when pipeline builders encountered caves filled with rare bats.
Enron spokesman Keith Miceli said this week that the company hopes to hook up the pipeline to the power plant and begin using gas to generate electricity sometime next month.
Enron officials have worked to reassure hard-pressed foreign governments that the company's bankruptcy will not kill vital projects.
In Nigeria, where Enron built the first independent power plant to service Lagos, Gov. Bola Ahmed Tinubu called Enron as soon as news of the company's bankruptcy filing broke. The deal also ran into trouble when the World Bank said it was bad for Nigeria and called for the contract to be renegotiated.
Enron sold the Nigeria plant to the Arlington-based AES Corp., and now there are disputes between the companies over the deal. Enron is still in Nigeria developing other ways to generate electricity.
The Lagos governor got a reassuring letter from Enron, according to press accounts, telling him that the court filing will allow Enron to "explore various strategic, operational and financial alternatives in an orderly manner."
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Staff writers Peter Behr and Joe Stephens and researcher Lucy Shackelford contributed to this report.
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