March 9, 2002

Enron Sought to Raise Cash Two Years Ago

By DAVID BARBOZA

HOUSTON, March 8 Less than two years ago, amid some of the earliest signs that the Enron Corporation (news/quote) was beginning to falter, the company failed to complete a deal to sell the bulk of its international energy holdings for about $7 billion to a group composed primarily of wealthy Middle Eastern investors, according to individuals involved with the negotiations.

The deal, which was being negotiated at a time when Enron was desperate for cash, would have helped reduce the company's sizable debt and perhaps even prevented it from later going bankrupt, former executives contend. But at the last minute, in the summer of 2000, negotiations broke down after a crucial foreign backer of the proposed transaction was hospitalized with kidney problems.

Enron had been negotiating to sell a majority of its foreign holdings to a group of investors that was led by Amin Badr el- Din, a special adviser to Sheik Zayed bin Sultan al-Nahayan, the longtime president of the United Arab Emirates, according to former Enron executives. The investors came from the United Arab Emirates, Saudi Arabia and Europe.

The effort to sell the company's international assets, known as Project Summer by insiders at Enron, was being made at a time when shares of Enron were near their peak, driven by expectations on Wall Street that the company would abandon most of its scattered international projects to rely almost exclusively on energy trading while building up a new business delivering broadband communication services.

But even though investors were enthusiastic about Enron's stock, some former executives and analysts now say the company was growing increasingly worried about its mounting debt and a looming cash shortage, and it was hoping to unload a collection of troubled and often poorly performing foreign assets.

"This coincided with rumors that they were going to eliminate their dividend," said Carol Coale, an analyst at Prudential Securities. "In hindsight, these were early signs of a cash crunch."

Former high-level executives at Enron, who spoke only on condition they not be named, said that once Enron determined that the complicated deal could not be revived by the end of 2000 to meet its cash needs, the deal was terminated.

The company then turned to a group of top Enron executives, who tried to sell smaller pieces of Enron's international holdings to raise enough cash to strengthen the balance sheet and buoy the credit rating.

When that failed as well, company executives gave the task of improving the company's finances to Andrew S. Fastow, the chief financial officer who was dismissed last October for profiting from a group of complex partnerships that helped bring down the company. In late 2000, Mr. Fastow began selling foreign assets to a variety of off-balance-sheet partnerships as a temporary measure to improve the company's cash holdings at the end of the year, former executives say.

"It's now clear Fastow's tricky partnerships were bailing out the company," one former high-level executive said. "These big transactions take six to nine months to do, minimum. Fastow would close this in two to three weeks; his people didn't have to do due diligence."

Enron declined to comment this week on the aborted deal and a spokesman for Mr. Fastow also declined to comment. Dr. Amin could not be reached.

But the effort to sell the assets, and the scramble within Enron afterward, are clear signs that as early as 2000, the company's finances were becoming shaky.

"During most of 2000, Enron was bleeding money," said Bala Dharan, a professor of accounting at Rice University in Houston. "In the fourth quarter they produced just enough cash flow to end up good. I never understood how they went from negative cash flow for three quarters, then all of a sudden positive in the fourth quarter."

Former Enron executives said that Jeffrey K. Skilling, the former chief executive, was intimately involved in the effort to sell the international assets and to prevent cash flow shortages. Mr. Skilling was not available for comment.

Mr. Skilling, who led the effort to transform Enron away from its hard assets to focus on trading, hoped to package a majority of its non-European assets and sell them to a group of investors for $6 billion to $8 billion in cash, the former executives said.

The Enron international management team and thousands of employees were expected to become part of a new global energy company, led by Joseph W. Sutton, the company's vice chairman and the former head of international operations. Enron would have maintained a stake in the new company, perhaps as much as 25 percent. Mr. Sutton, who left Enron in November 2000, shortly after the international deal collapsed, declined to comment this week.

The proposed deal involved the sale, or partial sale, of most of Enron's large international holdings, power plants and utilities in India, Turkey and Japan; a host of oil and gas reserves; ships and terminal rights to liquefied natural gas; nearly everything in the Caribbean and South America, including big utility holdings in Brazil; and the Gaza power plant, as well as Enron's interest in the Dolphin Gas Project, a multibillion-dollar effort to ship natural gas from Qatar to markets in the Middle East.

The deal initially broke down after Sheik Zayed came to the United States in the summer of 2000 for a kidney transplant and treatment on a fractured hip. The sheik needed to approve the deal, executives said, because investors close to the royal families in the United Arab Emirates had raised most of the money.

Each of the foreign assets had a different set of ownership rules, banking covenants and legal restrictions. There were heated debates, inside and outside of Enron, about which holdings would be included in the package.

"It was a monstrously complex deal," one former Enron executive said. "But this would have been the largest transaction of its type ever done in the global energy business."


Copyright 2002 The New York Times Company