Existing Enron exposure: the call is EXIT

Why: falsifiable statements

Each statement can be checked against EN1. If one fails, the call should be re-examined.

1. T1. 2000 operating cash of 4,779 exceeds net income of 979 by 3,800. Falsified if: The F-6 values for 2000 differ from these, or the subtraction is wrong.
2. T2. Working capital (1,769) and merchant asset sale proceeds (1,838) together supply 3,607 of the 2000 operating cash; the excerpt shows neither as recurring, and the working capital line was (1,000) in 1999. Falsified if: The complete F-6 and MD&A show these inflows to be recurring operating cash.
3. T3. Removing those two lines leaves 1,172 of 2000 operating cash, and removing the unitemized other operating line as well leaves 59. Read with care: the three merchant asset lines net to 439, because purchases and unrealized gains offset the sale proceeds. Falsified if: The other operating line is itemized and shown to be recurring.
4. T4. Approximately 500 million of 2000 revenue came from derivatives with entities whose general partner's managing member is a senior officer of Enron, and the excerpt gives no financial statements for those entities. Falsified if: The 10-K elsewhere discloses the Entities' assets, liabilities and capacity to pay.
5. T5. Contingent guarantees are disclosed in four classes (556, 264, 1,863 and 386 million) with overlap not stated, so no single total is supportable. Falsified if: A guarantee schedule shows the classes are distinct and collateral covers them.

What would turn the call to HOLD

• The complete F-6 and a schedule for other operating activities show that, after removing working capital release and asset sale proceeds, recurring operating cash is at or above net income across 1998 to 2000.
• Audited statements of the Entities show capacity to settle the notes receivable and derivatives that does not rest on the value of Enron stock.
• The contract behind the MD&A cash receipt is disclosed with amount and terms, and its future obligation is recorded and sized.
• A guarantee schedule shows overlaps, collateral and no terms that would accelerate payment on a credit event.

Conditions

• Applies to existing exposure as of 2001-04-02 using EN1 excerpts only.
• Orderly exit: the record does not set timing or price; those depend on mandate and market conditions outside this packet.
• Different exposure classes are kept separate; only same-class reported debt is subtotalled.

Earnings to operating cash bridge, 2000

Operating cash is traced line by line from net income. The shown lines do not add to the reported total because the excerpt omits some rows; the difference is shown as a residual, not assigned to any line.

MD&A states operating cash increased by 3,551 million in 2000; the F-6 totals give 4,779 less 1,228, which is 3,551. The two agree.

Net cash provided by operating activities increased $3,551 million in 2000, primarily reflecting decreases in working capital, positive operating results and a receipt of cash associated with the assumption of a contractual obligation.

Three reported years

Operating cash less capital expenditures is shown only as a reference line. Neither it nor reported operating cash is a measure of recurring distributable cash.

Net income and operating cash by reported year

Filing language and what it means for a ledger line

Every clause below is quoted from EN1 with its implication for one ledger line. With scripting on, a reading desk lets you set any clause beside its line; the full list stays here either way.

1. MD&A cash increase

   Net cash provided by operating activities increased $3,551 million in 2000, primarily reflecting decreases in working capital, positive operating results and a receipt of cash associated with the assumption of a contractual obligation.

   Implication for L10, Cash received for assuming a contractual obligation (amount unknown): MD&A names working capital and a cash receipt for assuming an obligation as drivers of the 3,551 increase. Cash received for taking on an obligation is paid for by later performance or payment, so that part of 4,779 is not recurring distributable cash. Its amount is not disclosed.

   EN1 MD&A, liquidity and capital resources, SEC EDGAR, filed 2001-04-02. Form 10-K on SEC EDGAR

2. Who the counterparty is

   In 2000 and 1999, Enron entered into transactions with limited partnerships (the Related Party) whose general partner's managing member is a senior officer of Enron.

   Implication for L18, Revenue recognized on derivatives with the Entities (500 million): The Entities' general partner is managed by a senior officer of Enron, named nowhere in the excerpt. Management's view that terms were reasonable is the only price evidence in this packet; no third party price test is shown.

   EN1 Note 16, Related Party Transactions, SEC EDGAR, filed 2001-04-02. Form 10-K on SEC EDGAR

3. What funds the Entities

   3.7 million restricted shares of outstanding Enron common stock and the right to receive up to 18.0 million shares of outstanding Enron common stock in March 2003 (subject to certain conditions)

   Implication for L13, Enron common stock contributed and right to receive shares (amount unknown): Enron's own shares and a share right are among the assets backing counterparties that owe Enron. The dollar value of that stock is not stated, so the trustee cannot tell how far the Entities' capacity rests on Enron's share price.

   EN1 Note 16, Related Party Transactions, SEC EDGAR, filed 2001-04-02. Form 10-K on SEC EDGAR

4. Notes receivable

   a special distribution from the Entities in the form of $1.2 billion in notes receivable, subject to changes in the principal for amounts payable by Enron in connection with the execution of additional derivative instruments.

   Implication for L16, Special distribution notes receivable from the Entities (1,200 million): A 1.2 billion receivable whose principal moves with what Enron owes on new derivatives. It is a claim on the Entities, not cash, and its year-end balance is not stated.

   EN1 Note 16, Related Party Transactions, SEC EDGAR, filed 2001-04-02. Form 10-K on SEC EDGAR

5. Derivative revenue

   Enron recognized revenues of approximately $500 million related to the subsequent change in the market value of these derivatives, which offset market value changes of certain merchant investments and price risk management activities.

   Implication for L18, Revenue recognized on derivatives with the Entities (500 million): Approximately 500 million of revenue was recognized from value changes on derivatives with the Entities. Recognized revenue is not cash received, and the 2.1 billion notional is a reference amount, not money owed.

   EN1 Note 16, Related Party Transactions, SEC EDGAR, filed 2001-04-02. Form 10-K on SEC EDGAR

6. Zero basis notes

   $309 million in notes receivable, of which $259 million is recorded at Enron's carryover basis of zero

   Implication for L15, Notes receivable from the Entities (309 million): Of 309 million of notes received, 259 million carries a zero book basis, so the face amount overstates what is on Enron's books by an amount the excerpt only partly states.

   EN1 Note 16, Related Party Transactions, SEC EDGAR, filed 2001-04-02. Form 10-K on SEC EDGAR

7. Guarantees of others

   In addition, Enron is a guarantor on certain liabilities of unconsolidated equity affiliates and other companies totaling approximately $1,863 million at December 31, 2000, including $538 million related to EOTT trade obligations.

   Implication for L08, Guarantees of liabilities of unconsolidated equity affiliates and other companies (1,863 million): Approximately 1,863 million of other companies' liabilities is guaranteed. This is contingent, not funded debt, and the excerpt does not say which liabilities or how they overlap other guarantees.

   EN1 Note 15, Commitments, SEC EDGAR, filed 2001-04-02. Form 10-K on SEC EDGAR

8. Management on guarantees

   Management does not consider it likely that Enron would be required to perform or otherwise incur any losses associated with the above guarantees.

   Implication for L08, Guarantees of liabilities of unconsolidated equity affiliates and other companies (1,863 million): This is management's likelihood judgement, not evidence about the guaranteed parties' finances. It reduces nothing in the ledger amounts.

   EN1 Note 15, Commitments, SEC EDGAR, filed 2001-04-02. Form 10-K on SEC EDGAR

9. Transportation payments

   the estimated aggregate amounts of such required future payments were $91 million, $88 million, $89 million, $85 million and $77 million for 2001 through 2005, respectively, and $447 million for later years.

   Implication for L04, Firm transportation obligations (877 million): 877 million of undiscounted future payments. This is a commitment schedule, not reported debt, and is not discounted to present value.

   EN1 Note 15, Commitments, SEC EDGAR, filed 2001-04-02. Form 10-K on SEC EDGAR

10. Dark fiber sale

    Enron sold a portion of its dark fiber inventory to the Related Party in exchange for $30 million cash and a $70 million note receivable that was subsequently repaid. Enron recognized gross margin of $67 million on the sale.

    Implication for L19, Dark fiber sale to the Related Party (67 million): 67 million of gross margin on a sale to the Related Party. The note was stated as repaid, but the source of the repayment cash is not given.

    EN1 Note 16, Related Party Transactions, SEC EDGAR, filed 2001-04-02. Form 10-K on SEC EDGAR

Exposure and uncertainty ledger

One row per item visible in the excerpts. Reported debt, undiscounted commitments, contingent guarantees, derivative notional, receivables and recognized revenue are different kinds of amount. Only same-class reported debt is subtotalled: short-term plus long-term debt at 2000-12-31 is 10,229 million (1999: 8,152). No other total is drawn.

Unknown inputs and documents to request before committing capital

Not established by this record

• Any event after 2001-04-02.
• The identity of the unnamed senior officer.
• Whether any consolidation or accounting rule was or was not followed.
• A combined total of debt, commitments, guarantees, notional and receivables; they are different kinds of amount.

The excerpts name no individual. The only person referenced is unnamed; this record does not identify that person.

Sources

• EN1: Enron Corp. fiscal 2000 Form 10-K, SEC EDGAR, dated 2001-04-02. Sections used: Consolidated income balance sheet cash flows; MD&A; Notes 15 and 16. Open the filing on SEC EDGAR.