Enron Troubles Only the Tip of the Iceberg?

Dealings with a related party have tarnished Enron's ENE reputation and crushed its stock, but it looks like that case is far from unique.

The battered energy trader has done business with at least 15 other related entities, according to documents supplied by lawyers for people suing Enron. Moreover, Enron's new CFO, who has been portrayed by bulls as opposing the related-party dealings of his predecessor, serves on 12 of these entities. And Enron board members are listed as having directorships and other roles at a Houston-based related entity called ES Power 3.

The extent of Enron's dealings with these companies, or the value of its holdings in them, couldn't be immediately determined. But the existence of these partnerships could feed investors' fears that Enron has billions of dollars of liabilities that don't show up on its balance sheet. If that's so, the company's financial strength and growth prospects could be much less than has generally been assumed on Wall Street, where the company was long treated with kid gloves.

Enron didn't immediately respond to questions seeking details about ES Power or about the role of the chief financial officer, Jeff McMahon, in the various entities. Enron's board members couldn't immediately be reached for comment.

Ten Long Days

Enron's previous CFO, Andrew Fastow, was replaced by McMahon Wednesday after investors criticized Fastow's role in a partnership called LJM, which had done complex hedging transactions with Enron. As details of this deal and two others emerged, Enron stock cratered.

The turmoil that resulted in Fastow's departure began two weeks ago, when Enron reported third-quarter earnings that met estimates. However, the company failed to disclose in its earnings press release a $1.2 billion charge to equity related to unwinding the LJM transactions. Since then, investors and analysts have been calling with increasing vehemence for the company to divulge full details of its business dealings with other related entities. Enron stock sank 6% Friday, meaning it has lost 56% of its value in just two weeks.

Enron's End Run? New financial chief's involvement in Enron business partners
Enron-Related Entity	Creation Date	McMahon Involved?
ECT Strategic Value Corp.	4/18/1985	Yes
JILP-LP Inc.	9/27/1995	Yes
ECT Investments Inc.	3/1/1996	Yes
Kenobe Inc.	11/8/1996	Yes
Enserco LLC	1/7/1997	Yes
Obi-1 Holdings LLC	1/7/1997	Yes
Oilfield Business Investments - 1 LLC	1/7/1997	Yes
HGK Enterprises LP Inc.	7/29/1997	Yes
ECT Eocene Enterprises III Inc.	2/20/1998	Yes
Jedi Capital II LLC	9/4/1998	Yes
E.C.T. Coal Company No. 2 LLC	12/31/1998	Yes
ES Power 3 LLC	1/7/1999	Yes
Enserco Inc.	3/25/1999	No
LJM Management LLC	7/2/1999	No
Blue Heron I LLC	9/17/1999	No
Whitewing Management LLC	2/28/2000	No
Jedi Capital II LLC	4/16/2001	No
Source: Detox

However, Enron has yet to break out a full list of related entities. The company has said nothing publicly about McMahon's participation in related entities, nor has it mentioned that its board members were directors or senior officers in ES Power 3. (Nor has it explained the extensive use of Star Wars-related names by the related-party companies.) It's not immediately clear what ES Power 3 is or does. So far, subpoenas issued by lawyers suing Enron have determined the names of senior officers of ES Power 3 and its formation date, January 1999.

Among ES Power 3's senior executives are Enron CEO Ken Lay, listed as a director, and McMahon and Fastow, listed as executive vice presidents. A raft of external directors are named as ES Power 3 directors, including Comdisco CEO Norman Blake and Ronnie Chan, chairman of the Hong Kong-based Hang Lung Group. A Comdisco spokeswoman says Blake isn't commenting on matters concerning Enron and a call to the Hang Lung group wasn't immediately returned.

Demands, Demands

Rating agencies Moody's, Fitch and S&P recently put Enron's credit rating on review for a possible downgrade after an LJM deal that led to the $1.2 billion hit to equity. Enron still has a rating three notches above investment grade. But its bonds trade with a yield generally seen on subinvestment grade, or junk, bonds, suggesting the market believes downgrades are likely.

If Enron's rating drops below investment grade, it must find cash or issue stock to pay off at least $3.4 billion in off-balance sheet obligations. In addition, many of its swap agreements contain provisions that demand immediate cash settlement if its rating goes below investment grade.

Friday, the company drew down $3 billion from credit lines to pay off commercial paper obligations. Raising cash in the CP market could be tough when investors are jittery about Enron's condition.

This week, a number of energy market players reduced exposure to Enron. However, in a Friday press release, CEO Lay said that Enron was the "market-maker of choice in wholesale gas and power markets." He added: "It is evident that our customers view Enron as the major liquidity source of the global energy markets."

McMahon reportedly objected to Fastow's role in LJM, allegedly believing it posed Fastow with a conflict of interests. But he will need to convince investors that the 12 entities he's connected to don't do the same. Enron has said that its board fully approved of the LJM deals that Fastow was involved in. Now, board members will have to comment on their own roles in a related entity.