Trustee evidence room, existing exposure, as of 2 April 2001
Enron Corp.: what the fiscal 2000 excerpts can and cannot carry
One source, EN1: the Form 10-K filed on . No later events or evidence are used. Amounts in USD millions unless marked as shares.
The trustee's call
ABSTAINNo affirmative hold, no exit order, no new capital. Position under review.
The trustee abstains from both an affirmative HOLD and an EXIT on this packet. No new capital is committed. The existing position is formally placed under review, and the documents listed as unknowns are requested before any capital decision.
Abstaining is not a finding that the position is sound. It records that two decision-critical inputs, the size of the obligation-linked cash receipt and the Entities' capacity to pay Enron, cannot be established from these excerpts.
This call makes no forecast of Enron's share price, earnings or credit. It rests only on what the 2 April 2001 excerpts do and do not state.
Moves to HOLD only if all of these are shown
The full cash flow statement and MD&A quantify the obligation-linked receipt and the omitted rows, and the receipt is at most 2,031, so that 2000 operating cash after removing it and the working-capital release still covers reported net income of 979.
Financial statements of the Entities show resources other than Enron stock and Enron notes sufficient to meet the hedges behind the roughly 500 of revenue and the 1,200 special distribution notes.
Guarantee overlaps (R06 to R10) and the value of EOTT collateral are disclosed.
Moves to EXIT if any of these is shown
The obligation-linked receipt exceeds 2,031, so 2000 operating cash excluding it and the working-capital release falls below reported net income.
The Entities' ability to pay Enron depends mainly on Enron stock or Enron notes.
The requested documents are not provided by the trustee's review date.
The threshold above is computed: 2000 operating cash excluding working capital (3,010) less net income (979) leaves 2,031. The threshold treats the receipt as separate from the working-capital line; the excerpt does not say which line holds it. If it sits inside working capital, the test is run on the full F-6 instead.
Why, stated so it can be checked
Reported 2000 operating cash of 4,779 exceeds net income of 979, but 1,769 of the disclosed bridge is a working-capital release and 1,113 is unitemised other operating activity. Wrong if: The F-6 rows in the excerpt show different amounts.
MD&A ties part of the 2000 operating cash increase to a cash receipt for assuming a contractual obligation and gives no amount. Wrong if: The excerpt states the amount of that receipt.
The disclosed F-6 rows do not sum to reported operating cash: residuals of 61, −389 and 5 for 2000, 1999 and 1998 sit in rows omitted from the excerpt. Wrong if: The listed rows sum exactly to each year's reported total.
About 500 of 2000 revenue came from derivatives with Entities linked to a senior officer; Enron's own notes and shares are among the assets it contributed to them, and the excerpt states no other capital of the Entities. Wrong if: Note 16 in the excerpt quantifies the Entities' other resources or their ability to pay.
Contingent guarantees appear as 264, 1,863, 556 and 386 with undisclosed overlaps, so no aggregate guarantee figure can be stated. Wrong if: Note 15 in the excerpt states the overlaps or an aggregate.
From earnings to operating cash, 2000
Net income of $979m became reported operating cash of $4,779m. The gap of $3,800m is traced line by line. Working capital alone supplied 37.0% of the total, and the unitemised other line 23.3%. Operating cash is not recurring distributable cash: that figure is unknown on this packet.
Net income979Accrual earnings, the starting point.
Depreciation, depletion and amortization+855Non-cash charge added back. It recurs with the asset base, but it is not spare cash: assets wear out and capital spending was 2,381 in 2000.
Impairment of long-lived assets+326Non-cash write-down added back. It occurred in 2000 and 1999; it does not measure cash generated by operations.
Change in working capital+1,769Timing. Cash released from receivables, payables and similar balances. Prior years absorbed cash, and a release reverses if balances rebuild.
Net assets from price risk management−763Removes trading gains recorded in earnings but not yet received in cash.
Merchant investments: realized gains−104Removes gains already in earnings so the sale proceeds below are counted once.
Merchant investments: sale proceeds+1,838Cash from selling investments, classified as operating. It depends on continuing to sell assets.
Merchant investments: additions and unrealized gains−1,295Cash spent on new merchant investments plus removal of unrealized gains.
Other operating activities+1,113Not itemised in the excerpt. Its composition is unknown; the excerpt does not say whether the obligation-linked receipt sits here.
Rows omitted from the excerpt+61The excerpt omits some F-6 rows. This is the gap between the listed rows and the reported total; its composition is unknown.
Reported operating cash, 20004,779As reported on F-6. Equals listed rows 4,718 plus omitted rows.
Bars share one scale from zero to 5,000. Filled blue adds cash, outlined red subtracts, hatched is unexplained by the excerpt. EN1, Consolidated statement of cash flows, F-6, Form 10-K filed , SEC EDGAR
Earnings plus non-cash charges2,160
Working capital release1,769
Trading and merchant portfolio, net−324
Other operating activities1,113
Rows omitted from excerpt61
The most consequential disclosed uncertainty
Related-party hedges, Note 16
About $500m of recognized 2000 revenue and $1,200m of notes receivable depend on Entities whose general partner's managing member is a senior Enron officer. Enron's own notes ($200m delivered in total) and its own shares are among the assets it contributed to them. The excerpt states no other capital of the Entities, so their capacity to pay Enron is not established.
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.
EN1, Note 16, Related Party Transactions, Form 10-K filed , SEC EDGAR
A second gap sits in the cash bridge: MD&A credits part of the 2000 increase of $3,551m to cash received for assuming a contractual obligation, amount not given (register line R21).
Net income against operating cash, as reported
USD millions, zero baseline, same scale for every bar. Values as reported: EN1, F-4 and F-6, Form 10-K filed , open source. The 2000 bar includes the working-capital release and unitemised other activity shown in the bridge.
All three years, line by line
Operating cash bridge by year, USD millions
Line
2000
1999
1998
Reading
Net income
979
893
703
F-4 and F-6 agree.
Depreciation, depletion and amortization
855
870
827
Non-cash charge added back. It recurs with the asset base, but it is not spare cash: assets wear out and capital spending was 2,381 in 2000.
Impairment of long-lived assets
326
441
0
Non-cash write-down added back. It occurred in 2000 and 1999; it does not measure cash generated by operations.
Change in working capital
1,769
−1,000
−233
Timing. Cash released from receivables, payables and similar balances. Prior years absorbed cash, and a release reverses if balances rebuild.
Net assets from price risk management
−763
−395
350
Removes trading gains recorded in earnings but not yet received in cash.
Merchant investments: realized gains
−104
−756
−628
Removes gains already in earnings so the sale proceeds below are counted once.
Merchant investments: sale proceeds
1,838
2,217
1,434
Cash from selling investments, classified as operating. It depends on continuing to sell assets.
Merchant investments: additions and unrealized gains
−1,295
−827
−721
Cash spent on new merchant investments plus removal of unrealized gains.
Other operating activities
1,113
174
−97
Not itemised in the excerpt. Its composition is unknown; the excerpt does not say whether the obligation-linked receipt sits here.
Sum of listed rows
4,718
1,617
1,635
Computed.
Rows omitted from excerpt
61
−389
5
Reported total less listed rows; composition unknown.
Reported operating cash
4,779
1,228
1,640
As reported.
Capital expenditures
−2,381
−2,363
−1,905
Investing section, F-6.
Operating cash less capital spending
2,398
−1,135
−265
Computed. Not distributable cash: maintenance share of spending is not stated.
Operating cash excluding working capital
3,010
2,228
1,873
Computed.
Net cash used in investing
−4,264
−3,507
−3,965
As reported.
Operating cash less net investing
515
−2,279
−2,325
Computed. A shortfall was met from financing, which the excerpt does not show.
EN1, Consolidated statement of cash flows, F-6, Form 10-K filed , SEC EDGAR
What changed between 1999 and 2000
Operating cash rose 3,551, matching the MD&A figure. By line:
Net income +86
Depreciation, depletion and amortization −15
Impairment of long-lived assets −115
Change in working capital +2,769
Net assets from price risk management −368
Merchant investments: realized gains +652
Merchant investments: sale proceeds −379
Merchant investments: additions and unrealized gains −468
Other operating activities +939
Rows omitted from excerpt +450
Three years combined, 1998 to 2000
Net income 2,575
Operating cash 7,647
Working capital, net 536
Capital expenditures −6,649
Operating cash less capital spending 998
Operating cash less net investing −4,089
Reading desk: filing language beside its consequence
Each passage below is quoted from the filing and paired with the specific ledger or cash-flow line it changes.
All passages are shown in full below.
Cash received with an obligation
The filing says
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.
EN1, Management's discussion, liquidity, Form 10-K filed , read in the filing
Line affected
R21 Cash received for assuming a contractual obligation: amount unknown (operating cash inflow tied to an assumed obligation)
What it implies
Part of the 2000 operating cash came with a new obligation attached, so the 4,779 cannot be read as recurring cash. If the receipt exceeds 2,031, operating cash excluding the working-capital release falls below reported net income of 979.
What it does not establish
The amount, which cash-flow line holds it, or the size and term of the obligation.
Working-capital release
The filing says
Changes in components of working capital 1,769 (1,000) (233)
Net Cash Provided by Operating Activities 4,779 1,228 1,640
EN1, Consolidated statement of cash flows, F-6, Form 10-K filed , read in the filing
Line affected
2000 operating cash, working capital line: 1,769 of 4,779
What it implies
1,769 of the 2000 operating cash came from shrinking working capital, after the prior two years absorbed cash. A release of this kind reverses if balances rebuild, so this line is not recurring.
What it does not establish
Which balances moved, or whether the obligation-linked receipt is part of this line.
Related-party derivative revenue
The filing says
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.
EN1, Note 16, Related Party Transactions, Form 10-K filed , read in the filing
Line affected
R17 Revenue from change in value of those derivatives: 500 (recognized revenue (mark-to-market))
What it implies
About 500 of 2000 revenue came from marking contracts with the Entities to market. Recognized revenue is not cash, and the excerpt does not say any of it was paid.
What it does not establish
Cash received, or the net effect on the 979 net income after the stated offsets.
What Enron put into the Entities
The filing says
Enron (i) contributed to newly-formed entities (the Entities) assets valued at approximately $1.2 billion, including $150 million in Enron notes payable, 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)
EN1, Note 16, Related Party Transactions, Form 10-K filed , read in the filing
Line affected
R11 Assets Enron contributed to the Entities: 1,200 (related-party asset contribution)
What it implies
Enron's own notes and shares are among the assets standing behind the counterparty to its hedges. The excerpt states no other capital of the Entities, so their capacity to pay Enron when hedged values fall is not established.
What it does not establish
How the 1,200 was valued or what share of it is Enron stock.
Notes Enron received
The filing says
In return, Enron received economic interests in the Entities, $309 million in notes receivable, of which $259 million is recorded at Enron's carryover basis of zero, and 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.
EN1, Note 16, Related Party Transactions, Form 10-K filed , read in the filing
Line affected
R15 Special distribution notes receivable: 1,200 (related-party receivable)
What it implies
1,200 of special distribution notes have a principal that moves with what Enron owes on new derivatives, and 259 of the 309 other notes carry zero basis. The recorded value of these receivables is not stated.
What it does not establish
Year-end balances, balance-sheet presentation, or collectability.
Notional of the hedges
The filing says
In 2000, Enron entered into derivative transactions with the Entities with a combined notional amount of approximately $2.1 billion to hedge certain merchant investments and other assets.
EN1, Note 16, Related Party Transactions, Form 10-K filed , read in the filing
Line affected
R16 Derivatives with the Entities, notional: 2,100 (derivative notional)
What it implies
2,100 is a reference amount used to calculate payments. It is not cash, not a receivable, and not a ceiling on loss.
What it does not establish
Fair value, amounts owed by either side, or credit exposure.
Guarantees of affiliates' liabilities
The filing says
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.
The EOTT letters of credit and guarantees of trade obligations are secured by the assets of EOTT.
Management does not consider it likely that Enron would be required to perform or otherwise incur any losses associated with the above guarantees.
R08 Guarantees of affiliate and other liabilities: 1,863 (contingent guarantee)
What it implies
About 1,863 is contingent: a guarantee, not funded debt. Management's view that performance is unlikely is a judgment, and the only collateral named is EOTT's assets for the EOTT portion.
What it does not establish
The guaranteed parties' finances, the value of EOTT's assets, or overlap with the letter of credit guarantees.
Lease guarantees and indemnity
The filing says
Guarantees under the leases total $556 million at December 31, 2000.
Enron has also guaranteed $386 million in lease obligations for which it has been indemnified by an "Investment Grade" company.
R06 Guarantees under the leases: 556 (contingent guarantee)
What it implies
556 of lease guarantees and 386 of indemnified lease guarantees are both contingent, and their overlap is not stated, so they are not added together.
What it does not establish
Who the indemnitor is, or the value of the leased assets.
Who runs the counterparty
The filing says
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.
Management believes that the terms of the transactions with the Related Party were reasonable compared to those which could have been negotiated with unrelated third parties.
EN1, Note 16, Related Party Transactions, Form 10-K filed , read in the filing
Line affected
Note 16 lines R11 to R20, including the dark fiber sale (R19)
What it implies
Every Note 16 line depends on a counterparty whose general partner's managing member is an unnamed senior officer. Management asserts the terms were reasonable; the excerpt offers no independent evidence of price.
What it does not establish
Who the officer is, what the officer earned from the Related Party, or what approvals were given.
Exposure and uncertainty ledger
No total is computed across reported debt, undiscounted commitments, contingent guarantees, derivative notional, receivables and recognized revenue. They measure different things and the excerpts do not state their overlaps. Reported short and long-term debt is the only sum shown, because both lines are the same kind of recognized liability: $10,229m at the end of 2000 against $8,152m a year earlier, a rise of $2,077m.
reported debtAt 31 Dec 2000 (1999 comparative)Certainty: recognized
1,679reported1999: 1,001
May or may not include the Enron notes payable delivered to the Entities (R12); the excerpt does not say. Terms, rates and maturities are not in the excerpt.
Due dates, interest cost, covenants or acceleration terms; whether related-party notes are inside it.
undiscounted future commitment2001 to 2005 and later yearsCertainty: contractual commitment (undiscounted)
877computed from reported figures
Counterparties include joint venture pipelines; overlap with other notes is not stated. Minimum monthly payments; schedule 2001 91, 2002 88, 2003 89, 2004 85, 2005 77, later 447.
Present value; a recognized liability; whether payments to joint venture pipelines are related-party flows.
R05 Operating lease and related commitmentsEN1, Note 15, Commitments, Form 10-K filed , source
undiscounted future commitment2001 to 2005 and later yearsCertainty: contractual commitment (undiscounted)
764computed from reported figures
Leases carry residual value guarantees (R06); whether those sit inside these amounts is not stated. Schedule 2001 123, 2002 98, 2003 69, 2004 66, 2005 49, later 359; renewal and purchase options exist.
Present value; a recognized liability; the cost of exercising purchase options.
Contingent guarantees (not funded debt)
R06 Guarantees under the leasesEN1, Note 15, Commitments, Form 10-K filed , sourceFiling language
contingent guaranteeAt 31 Dec 2000Certainty: contingent
556reported
Relation to R05 commitments and to the indemnified lease guarantees (R10) is not stated; not additive. Payable only if lease residual values or lessee performance fall short.
Probability, timing or size of any call; the value of the leased assets.
R07 Letter of credit performance guaranteesEN1, Note 15, Commitments, Form 10-K filed , source
contingent guaranteeAt 31 Dec 2000Certainty: contingent
264reported
Includes 103 for EOTT (see R09). Called only if an unconsolidated equity affiliate fails to perform; EOTT portion secured by EOTT assets.
Likelihood of a call; collateral value; which affiliates are covered beyond EOTT.
R08 Guarantees of affiliate and other liabilitiesEN1, Note 15, Commitments, Form 10-K filed , sourceFiling language
contingent guaranteeAt 31 Dec 2000Certainty: contingent
1,863approximate
Includes 538 of EOTT trade obligations (see R09); overlap with R07 is not stated. Payable if the guaranteed parties default. Management says performance is not likely.
That any payment is due; a loss estimate; the guaranteed parties' finances; whether management's likelihood judgment holds.
R09 EOTT portion of R07 and R08EN1, Note 15, Commitments, Form 10-K filed , sourceFiling language
contingent guaranteeAt 31 Dec 2000Certainty: contingent
641computed from reported figures
A subset of R07 and R08, never added to them. Secured by the assets of EOTT.
The value of EOTT's assets relative to these obligations.
R10 Lease obligations guaranteed, with indemnityEN1, Note 15, Commitments, Form 10-K filed , sourceFiling language
contingent guaranteeAt 31 Dec 2000Certainty: contingent
386reported
Overlap with R06 is not stated; not additive. Enron is indemnified by an unnamed company described as "Investment Grade".
Who the indemnitor is or whether the indemnity would be paid.
Related-party items, Note 16
R11 Assets Enron contributed to the EntitiesEN1, Note 16, Related Party Transactions, Form 10-K filed , sourceFiling language
related-party asset contributionDuring 2000Certainty: disclosed transaction, valued by Enron
1,200approximate
Includes the 150 Enron notes in R12. In return Enron received R14, R15 and R20 for this and R13 together; the excerpt does not pair items one to one. Included 3.7 million restricted Enron shares and a right to up to 18.0 million Enron shares in March 2003, subject to conditions.
How the 1,200 was valued; what share of it is Enron's own stock; what other capital the Entities hold.
R12 Enron notes payable delivered to the EntitiesEN1, Note 16, Related Party Transactions, Form 10-K filed , sourceFiling language
related-party note payableDuring 2000Certainty: disclosed; balance-sheet line unknown
200computed from reported figures
150 within R11 plus 50 within R13; may sit inside R01 or R02, not stated. Terms not in the excerpt.
Rate, maturity, or whether these notes are counted in reported debt.
R13 Assets Enron transferred to the EntitiesEN1, Note 16, Related Party Transactions, Form 10-K filed , source
related-party asset transferDuring 2000Certainty: disclosed transaction, valued by Enron
309approximate
Includes the 50 note payable in R12. Received in return together with R11: R14, R15 and R20; not paired one to one. Included an investment holding warrants on an Enron equity method investee.
Valuation basis or the gain or loss recognized on transfer.
R14 Notes receivable from the EntitiesEN1, Note 16, Related Party Transactions, Form 10-K filed , sourceFiling language
related-party receivableDuring 2000Certainty: disclosed; carrying value partly zero, rest unknown
309reported
259 of the 309 is recorded at a carryover basis of zero; the basis of the rest is not stated. Repayment depends on the Entities.
Carrying value of the whole; collectability; maturity.
R15 Special distribution notes receivableEN1, Note 16, Related Party Transactions, Form 10-K filed , sourceFiling language
related-party receivableDuring 2000Certainty: disclosed; carrying value unknown
1,200reported
Principal changes with amounts Enron owes on new derivatives; a notes receivable balance was cut by 36 for premiums (R18). Principal is variable by contract.
Year-end balance, balance-sheet presentation, collectability, or whether it is cash.
R16 Derivatives with the Entities, notionalEN1, Note 16, Related Party Transactions, Form 10-K filed , sourceFiling language
Received together with R14 and R15 for R11 and R13. Value depends on the Entities' assets, including Enron stock.
Any amount; the excerpt gives none.
Cash flow tied to an obligation
R21 Cash received for assuming a contractual obligationEN1, Management's discussion, liquidity and capital resources, Form 10-K filed , sourceFiling language
operating cash inflow tied to an assumed obligationFiscal 2000Certainty: unknown
UnknownNot stated in the excerpt
Inside the 4,779 operating cash; which line is not stated. Cash came in with an obligation attached.
The amount, the obligation's size or term, or whether it recurs. Debt-like character is possible but not established.
Unknowns and the documents to request before committing capital
Unknown
Affects
Document to request
U1 Composition of cash-flow rows omitted from the excerpt
Bridge residuals for 2000, 1999 and 1998
Complete consolidated statement of cash flows (F-6) in the 10-K
U2 Amount, line and terms of the cash received for assuming a contractual obligation
R21; 2000 operating cash
Full MD&A liquidity section and the underlying contract or management schedule
U3 The Entities' capital, liabilities and ability to pay Enron; conditions on the March 2003 share right
R11, R14 to R17, R20
Audited financial statements and partnership agreements of the Entities, and board approval records for the transactions
U4 Whether the 200 of Enron notes delivered to the Entities are inside reported debt
R01, R02, R12
Debt footnote with a full schedule of notes payable
U5 Carrying value and presentation of the 309 and 1,200 notes receivable
R14, R15
Balance sheet detail for related-party receivables and the auditor's related-party workpaper summary
U6 Net income effect and cash settlement of the roughly 500 derivative revenue after offsets
R17; 2000 net income
Derivative and price risk management footnotes with counterparty detail
U7 Overlap among guarantees and with lease commitments; EOTT collateral value
R05 to R10
Full guarantee schedule from Note 15 and EOTT Energy Partners' latest annual report
U8 Identity of the senior officer and the controls applied to the transactions
R11 to R20
Proxy statement and board minutes approving the Related Party transactions
U9 Debt maturities and any acceleration or rating-linked provisions
R01 to R03
Long-term debt footnote and credit agreements
U10 Recurring distributable cash
Whole reconciliation
Split of capital spending into maintenance and growth, and dividend and financing detail
Named persons
No individual is named. The Related Party's general partner's managing member is described only as a senior officer of Enron; this analysis does not identify that person. The exact statement:
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.
EN1, Note 16, Related Party Transactions, Form 10-K filed , SEC EDGAR
Limits of this analysis: Does not assess whether any consolidation rule was met. Does not identify the unnamed senior officer. Does not treat this filing as evidence of any later outcome.
Sources
EN1. Enron Corp. fiscal 2000 Form 10-K. SEC EDGAR. Filed . Sections used: Consolidated income balance sheet cash flows; MD&A; Notes 15 and 16. Open the filing on SEC EDGAR.