Enron's November 19, 2001 Bank Presentation

On November 19, 2001, the same day Enron filed its third quarter financial statements, senior Enron executives met with certain of Enron's bankers at the Waldorf Astoria in New York City. Enron's objectives for the meeting were to restore creditor confidence, relieve its liquidity crisis and discuss its proposed merger with Dynegy, Inc. ("Dynegy") .21 During this meeting, Enron informed its bankers that while the debt reflected on its third quarter 2001 balance sheet under GAAP was $12.978 billion,

'⁹ 10-Q for 3Q/2001, supra note 9.

zo Id. The debt consisted of $6.434 billion of short-term debt and $6.544 billion of long-term debt.

zi The proposed merger was ultimately abandoned by Dynegy, allegedly because of undisclosed liabilities of Enron. Enron sued Dynegy in this Bankruptcy Case (Adversary Proceeding No. 01-03626) (Docket No. 1) on the Petition Date, seeking more than $10 billion in damages arising from Dynegy's alleged breach of contract for wrongful termination of the merger. On August 15, 2002, the parties announced they had settled the litigation. By motion dated August 19, 2002, Enron and its wholly owned subsidiary CGNN Holding Company, Inc. ("CGNN"), among others, sought approval of the settlement with Dynegy (Docket No. 5902). The settlement involved releases as between the Enron Parties (as defined in the settlement agreement) and the Dynegy parties and the payment of $25 million to Enron (pursuant to an escrow agreement). The settlement also provided for the release of $63 million, including accrued interest, from an escrow account to CGNN. The Court approved the settlement by Order dated and entered August 29, 2002. An appeal has been taken from the Order approving the settlement.

Enron's "debt" (as set forth in the presentation) was $38.094 billion. 22 Thus, as Enron noted, $25.116 billion of debt was "off balance sheet," or in some cases, on the balance sheet as a liability, but classified as something other than debt. Approximately $13 billion of this $25.116 billion of additional "debt" was incurred through structured finance transactions involving the use of SPEs. The Bank Presentation 23 divided the additional "debt" into the following eight categories: FAS 140 Transactions;²⁴ Minority Interest Financings;²⁵ Commodity Transactions with Financial Institutions;²⁶ Share

22 Enron Corp. PowerPoint Bank Presentation, Waldorf Astoria, New York, N.Y., Nov. 19, 2001 (the "Bank Presentation"), at 42 [EC I6320BOI62606-ECI6320BO162677].

23 The Bank Presentation is discussed in this Report because the Examiner believes it is useful in order to place the Examiner's investigation of the various SPEs in the overall context of Enron's financial affairs. The Examiner has formed no opinion concerning the appropriateness of prior management's classification or categorization of Enron's indebtedness in the Bank Presentation. Accordingly, references to "debt" should not infer that such obligations are or are not properly classified as debt under GAAP.

24 These transactions were structured finance transactions that were intended to comply with Financial Accounting Standard 125, "Accounting for Transactions and Servicing of Financial Assets and Extinguishment of Liabilities," which is the accounting standard that governed securitization of financial assets. FAS 125 was replaced by FAS 140 effective April 1, 2001 and effective for certain disclosures for periods ending after December 15, 2000. This Report will discuss several FAS 125 and FAS 140 transactions, all referred to hereafter as FAS 140 Transactions.

25 It appears that in these transactions Enron or an affiliate would form a majority-owned subsidiary entity that was consolidated for financial accounting purposes with Enron. The remaining minority interest in the consolidated subsidiary was owned by another entity that was not consolidated for financial accounting purposes with Enron, but that contributed cash to the consolidated subsidiary in exchange for its minority interest in the subsidiary and held no assets other than that minority interest. Of the cash contributed to the consolidated subsidiary, 3% represented funding that was characterized as equity and the remaining 97% was borrowed from third party lenders. The shares of the subsidiary sold to the minority interest shareholder would contain a provision requiring distributions to the shareholder. The consolidated Enron subsidiary in turn loaned the funds received from the minority interest shareholder to other Enroncontrolled entities that were consolidated for financial statement purposes with Enron. Because these intercompany loans represented indebtedness of one consolidated entity to another, they were not shown as loans on Enron's consolidated financial statements, but rather reflected in "minority interests" in Enron's balance sheet. The Examiner has not concluded his investigation of these transactions.

26 These so-called "prepay" transactions involved what the Counsel and Chief Investigator of the Permanent Subcommittee on Investigations of the Senate Governmental Affairs Committee has characterized as loans from J.P. Morgan Chase Bank ("JPMorgan") and Citibank, N.A. ("Citibank") to Enron, but the transactions were structured as prepaid forward contracts for the future delivery of natural gas, crude oil or electric power. See The Role of Financial Institutions In Enron's Collapse, Hearing before the Permanent Subcomm. on Investigations, Senate Comm. on Governmental Affairs, 107th Cong. (July 23, 2002) (statement of Robert Roach, Chief Investigator) (the "Financial Institutions Hearing") (available at http://www.senate.gov/-gov affairs/072302roachindex.htm). The Examiner has not concluded his investigation of these transactions. One such prepay, known as the "Mahonia" transaction, is the subject of litigation. JPMorgan Chase v. Liberty Mut. Ins. Co., No. 01-CV-11523 (S.D.N.Y. Filed Dec.

Trusts ;^Z7 Equity Forward Contracts ;^Z8 Structured Assets ;29 Unconsolidated Affiliates;^3o and Leases, as shown in the following table:

Category of Additional "Debt"	Amount at 9/30/01 in billions
FAS 140 Transactions	$2.087
Minority Interest Financin s	$1.690
Commodit Transactions with Financial Institutions	$4.822
Share Trusts	$3.352
Equity Forward Contracts	$.304
Structured Asset	$1.532
Subtotal	$13.787
Unconsolidated Affiliates	$10.733
Leases	$.596
Total	$25.116

18, 2001). JP Morgan Chase ("JPMC"), on behalf of Mahonia Limited and Mahonia Natural Gas Limited, sued eleven insurance companies that issued almost $2 billion in surety bonds guaranteeing certain obligations of Enron Natural Gas Marketing Corp. and Enron North America Corp. ("ENA") under forward sales contracts with the Mahonia entities. In December of 2001, shortly before the litigation was filed and around the time Enron filed bankruptcy, JPMC demanded approximately $1.2 billion from the insurers, who declined to make payment. The insurers denied, among other things, that they would ever have issued the bonds had they known the "Mahonia" transactions were simply disguised loans to Enron.

27 These transactions involved the issuance of preferred stock by Enron to a trust. Enron entered into agreements that provided for the sale of the preferred stock (or the common stock into which it was convertible) to satisfy indebtedness incurred by entities that were not consolidated with Enron. The agreements also provided that if the proceeds of the sale of the initial stock were not sufficient to satisfy that indebtedness, subject to certain limitations, Enron would issue additional stock to be sold for that purpose. The agreements also provided for cash settlement of Enron's obligations in certain circumstances. See 10-Q for 3Q/2001, supra note 9, at Notes 2 and 8 for a description of these obligations. The Examiner has not concluded his investigation of these transactions.

²⁸ Under a typical equity forward contract, an issuer will sell equity securities to a counterparty for cash equal to the current price and agree to repurchase the same number of equity securities from the counterparty in the future for the original price plus a premium. Enron internal documents indicate that on September 30, 2000, Enron had obligations to Credit Suisse First Boston ("CSFB") and Lehman Brothers Inc. for "Enron Equity Forward Purchase Settlements" aggregating $304 million maturing from December 31, 2001 through March 12, 2002 [EC0352OA0190481-ECO352OA0190491]. The Examiner has not concluded his investigation of these transactions.

29 The Destec Transaction is an example of what Enron classified as a "structured asset" transaction in the Bank Presentation. See infra Section III.K.

so This represents the amount of debt owed by entities that Enron does not consolidate, but accounts for under the equity method of accounting, such as Azurix Corp. (water system), Dabhol Power Company (power plant in India) and certain investment partnerships. According to Enron internal documents reviewed by the Examiner's counsel, much of this debt was nonrecourse to Enron, but if the unconsolidated equity affiliate was unable to pay the debt, Enron's investment would be lost.