By Ann de Rouffignac
HOUSTON, Oct. 23, 2001 Enron Corp. officials insisted the company is making adequate disclosures about complex off balance sheet financings during a conference call Tuesday, but Wall Street analysts pressed for more details.
CEO Kenneth Lay’s comments and handling of analyst questions didn’t prevent further weakening of the stock. Shares inched down another 4% to $19.79 from $20.65 Monday. The stock is down more than 40% since last week.
Analysts asked for more information the balance sheet partnership that caused a third quarter $1.2 billion equity write-down last week. The company did not disclose the write-down in the earnings statement but mentioned it briefly in a conference call following the earnings release.
The disclosure prompted more uncertainty about the financial impact of other partnerships and trusts that Enron formed. In particular, the write-down generated questions about partnerships named Marlin, Osprey, LJM, and Whitewing. The Securities and Exchange Commission also initiated an investigation into the financial relationship of Enron with the partnerships.
The partnerships or trusts were formed in 1997 and 1998 when Enron was investing in several areas at the same time, Enron officials explained. Enron had the choice expanding the balance sheet with more debt or redeploying capital from other structures, Lay said.
They chose the latter assuming that they could always sell the assets in the structures to pay the notes when they came due or raise capital some other way, he said. Enron officials claimed proceeds from sale of assets will be adequate to cover the almost $3.5 billion in notes that are coming due in the next few years from these partnerships.
But analysts were not satisfied with the level of detail revealed. Many asked for details about the off balance sheet ‘structures,’ eliciting a sharp rebuke from Lay during one exchange. Richard Grubman of Highfields Capital Management said he didn’t understand the relationship between the partnership assets and those of Enron affiliates such as Azurix, the water company.
Grubman also asked if Enron had reserved for what he perceived as $1 billion of potential liability from one of the so-called “financing arrangements.” Lay accused Grubman of “monopolizing” the conversation and wanting to drive the company stock price down.
He instructed the conference call operator to go to the next caller. Enron executives said the structures were appropriate and properly disclosed in the footnotes to filings at the SEC.
“What you are hearing is that the company’s credibility is severely questioned,” said David Fleischer, analyst with Goldman Sachs & Co., New York. “There is an appearance you are hiding something or maybe something is going on under the surface that is questionable.”
Fleischer asked Enron executives to have more conference calls and even invite the outside auditors to answer questions. He said he was particularly dismayed Enron executives suggested analysts read the footnotes to the SEC filings to find out about the off balance sheet transactions.
“The disclosure in the footnotes is not enough for me to understand and explain the intricacies of the transactions. It’s not enough to say they are disclosed in the footnotes,” said Fleischer. “You need to give us more.”
John Olson, Sanders Morris Harris, Houston, asked for the financial statements of the off balance sheet partnerships. Another analyst stated he just wanted to see Enron’s balance sheet closer to when earnings are released rather than months later. Lay responded Enron would consider all the requests.