Enron Hid Billions In Loans as Hedges

NEW YORK -- Along with the debt it spirited away in partnerships, Enron hid billions in loans in plain sight.

The company took advantage of accounting rules to count large loans from Wall Street firms as financial hedges instead of debt on its balance sheet, according to accountants and industry analysts. The effect was to mask its weakening financial condition.

Records held by Arthur Andersen, Enron's longtime auditor, and people close to the transactions show that Enron received $3.9 billion worth of such loans from 1992 through 2001, including at least $2.5 billion in the three years before the company declared bankruptcy. Those loans were in addition to the $8 billion to $10 billion in long-term and short-term debt that the company disclosed in its financial reports in those last three years.

Partly because of the way the loans were accounted for, the company reported a surge in its hedging activity, accomplished using financial contracts called derivatives, during its last few years. When pressed about the increase by skeptical analysts, Enron officials said the numbers reflected hedges for commodities trades, not new financing, the analysts said.

"They'd always tell us, 'Don't worry about that, it's just hedging activity,'" said John Olson, research director at Sanders Morris Harris.

Enron's accounting treatment conformed to existing recommendations from the Financial Accounting Standards Board, the nation's accounting rulemaker, said Timothy Lucas, director of research and technical activities at the accounting board. But the group will soon reveal a new recommendation, he said, requiring that such transactions be accounted for as loans as well.

To keep growing at a brisk pace in its final years, Enron needed billions in financing. Had the company raised the money by issuing more debt or taking out conventional loans, rating agencies might have become concerned and downgraded its credit, making it harder and more expensive for Enron to borrow in the future.

So instead, Enron engaged in sophisticated transactions with Citigroup and Credit Suisse First Boston. Enron entered into derivative contracts that mimicked loans but could be accounted for in less obvious ways. Some of the loans were arranged through a shell company, Mahonia, but the banks also made loans directly to Enron.

From late 1999 through early 2001, Citigroup lent Enron $2.4 billion in a series of transactions known as prepaid swaps, said people close to the deals. In a swap, two parties trade the future returns on specified investments over a set period of time.

Citigroup did not answer repeated questions about whether it had booked the transactions as loans.

Credit Suisse First Boston also lent Enron money using trades in derivatives. In 2000, the bank gave Enron $150 million to be repaid over two years. Enron's payments would vary with the price of oil.

Technically, the transaction was a swap. But because Credit Suisse First Boston paid Enron up front, the transaction took on the characteristics of a loan -- a reality noted by the bank. "It was like a floating-rate loan," said Pen Pendleton, a CSFB spokesman. "We booked the transaction as a loan."

Enron's balance sheet told a different story. The company posted the banks' loans as "assets from price risk management" and possibly, to a far lesser extent, as accounts receivable, said Charlie Leonard, a spokesman for Andersen. The repayments that Enron owed the banks were listed as "liabilities from price risk management" and possibly a small amount as accounts payable, Leonard said.

Close readers of Enron's financial statements would have seen lines identified as assets and liabilities from price risk management in the assets and liabilities sections. These lines grew far faster than the quantities of commodities traded by the company. From the fourth quarter of 1999 to the first quarter of 2001, price risk management grew to $22 billion from roughly $5 billion in assets and liabilities.

Enron provided little explanation even in the footnotes of regulatory filings.

"There are just so many things that go into assets and liabilities from price risk management that I don't think it's possible to narrow it down," said Jeff Dietert, an analyst at Simmons & Co., an investment bank based in Houston that specializes in the energy industry.