Enron Reissues Financial Reports
Enron Corp. on Thursday reissued its financial statements for the last four years, shaving nearly $600 million in profit from what it previously reported.
The action was designed to clear nagging questions about the Houston-based energy concern’s finances stemming from a series of controversial partnerships. Those questions have accelerated a free fall in the value of Enron shares and have forced it to seek new financing and enter into merger talks with rival Dynegy Inc.
However, the action still left analysts wondering whether further negative disclosures might be coming.
Analysts saw the restatement also as an effort to disclose negative news now, while it is negotiating to be acquired by Houston-based Dynegy.
Both companies confirmed merger talks Thursday. Some analysts suggested the deal has problems and could pose new risks for Dynegy.
Enron also said that it fired Ben Glisan, its treasurer, and Kristina Mourdant, an attorney with the company. Both executives had a financial interest in at least one of the partnerships. In October, Enron replaced Chief Financial Officer Andrew Fastow because of his involvement in the partnerships.
The restatement comes amid a probe by federal regulators into the relationship between several senior Enron executives and a series of partnerships created by the energy concern.
“A massive restatement like this doesn’t look good. But since Enron was already under such scrutiny, it’s really not much of a surprise,” said Christopher Ellinghaus, an analyst with Williams Capital in New York.
“This would be very bad news if it had come out after a merger was announced,” Ellinghaus added.
Enron shares fell 64 cents Thursday to close at $8.41, its lowest finish since 1992 and less than 10% of the nearly $90 high the company hit Aug. 23, 2000. Dynegy shares rose $3.50 to $36.50. Both trade on the New York Stock Exchange. .
Analysts said Enron ran into trouble with its strategy to create partnerships to purchase assets such as fiber-optic lines that Enron wanted to move off its books.
Although many companies have used similar techniques to improve their balance sheets, the deals are almost always with third parties and private investors rather than company executives. The involvement of executives as investors in these ventures raises the perception of a conflict of interest, said Brian Youngberg, an analyst with Edward Jones in St. Louis.
The Securities and Exchange Commission had asked for information about the financial transactions between Enron and the partnerships, which were approved by Enron lawyers and directors.
In essence, the partnerships reduced borrowings Enron listed on its balance sheet. They protected its credit rating, helping it to obtain favorable interest rates on its corporate borrowings.
However, after reviewing its accounting for three of the ventures, Enron said in an SEC filing Thursday that it should have included the financial performance of those businesses in its consolidated balance sheet.
The filing included a restatement of Enron financial statements for 1997 through 2000 and the first three quarters of 2001. It said its previous financial documents “should not be relied upon.”
Enron’s new assessment of its financial condition slashed its total net income for that nearly four-year period by $586 million, or about 20%, to $2.3 billion. The biggest change was a $250-million reduction in net income for 1999.
The Enron-Dynegy merger talks involve a stock swap valuing Enron at about $10 a share, or about $8 billion, according to sources familiar with the negotiations. ChevronTexaco Corp., which owns nearly 27% of Dynegy, would pour $1.5 billion in cash into Enron up front, with $1 billion to follow at the close of the transaction.
Dynegy would assume $12.8 billion in Enron debt, which does not include the off-balance-sheet partnerships, the sources said.
Enron Chairman and Chief Executive Kenneth L. Lay would remain on the board of the merged company but would not have day-to-day responsibilities, the sources said.
Dynegy Chairman and Chief Executive Chuck Watson would assume those jobs at the combined company, and Dynegy President Stephen Bergstrom would become president, they said.
There is no guarantee that an agreement will be reached, and if it is, such a merger would face a lengthy and difficult review by federal regulators. The potential merger would have its problems, some analysts said.
Dynegy risks losing Enron’s most important asset, its energy traders, who can easily migrate to other energy trading firms in the Houston area, said Andre Meade, head of U.S. utilities research for Commerzbank Securities.
Dynegy, like Enron, needs a good credit rating and the ability to sell assets and issue stock to conduct its trading businesses, said Carol Levenson, an analyst with Gimmecredit.com. A thumbs-down by the stock market could seriously jeopardize Dynegy’s financial flexibility, she said.
Although Enron management has repeatedly emphasized that its core energy trading and marketing business remains sound, the company’s severe cash crunch has hurt. Enron’s online trading operation has lost business in recent days.