[PEN-L:33037] Enron

["Ian Murray" <seamus2001@xxxxxxxxx>]

[New York Times]
December 12, 2002
Despite Denial, Enron Papers Show Big Profit on Price Bets
By DAVID BARBOZA


Even as Enron's top executives were insisting that the company did not
engage in speculative trading, Enron was reaping the bulk of its profits
during the California energy crisis by betting on the direction of gas
and electricity prices, according to company records and interviews with
former Enron traders and executives.

Enron made the hugely profitable bets - including one that resulted in a
$485 million gain on a single day in December 2000 - at a time when
federal and state investigators say the company was conspiring with
other energy trading companies to manipulate power and natural gas
prices in the West.

Indeed, Enron's standing as the nation's biggest energy trader may have
bolstered its ability to profit on bets on the direction of prices.
While it is unclear whether Enron could singlehandedly move markets with
its trades, several Enron trading officials said that to justify their
risk-taking, they told the company's executives and directors that, like
a casino, Enron had a "house advantage" in the energy markets.

A result of the speculation, the records show, was one of the most
stunning runs ever for a corporate trading operation - some $7 billion
in net trading profits for Enron during a power crisis that wreaked
havoc on consumers in 2000 and 2001 and forced rolling blackouts in some
parts of California. That tally included days with immense trading
losses, including a $550 million reversal just a week after the $485
million gain. Former Enron executives said the company hid its
speculative activities to shield it from criticism that it was profiting
from California's energy woes.

More than a year after Enron's collapse, the company's full role in the
energy crisis is only now coming to light. The disclosure of its
speculative trading practices, which are being reviewed by federal and
state investigators, comes as California officials await a decision by a
Federal Energy Regulatory Commission judge on the state's demand for
billions in refunds from power merchants. That ruling is expected soon.

At the time, Kenneth L. Lay, Enron's chairman and longtime chief
executive, and other Enron officials said that the company was simply a
middleman in the fast-growing market for buying and selling natural gas
and electricity. Most of the company's profits, they said, were made on
the markup taken as Enron's traders bought and then resold soaring
volumes of electricity and natural gas, as well as on selling to other
companies hedges against big moves in energy prices.

But in recent interviews, several former traders said that a huge share
of Enron's profit came from big bets on whether natural gas and power
prices would rise or fall.

"Yes, we were speculating," said John Arnold, who was Enron's most
successful trader last year, alone making a $750 million profit for the
company by trading natural gas in 2001. "There was a big move in 2001. I
identified it early and played it with lots of leverage."

In dozens of pages of profit-and- loss tables obtained by The New York
Times, Enron's records show a winning streak that several trading
experts called astounding.

For instance, at a time when Wall Street executives say a $100 million
daily trading profit was considered sizable for a major trading
operation, Enron recorded a $485 million profit on Dec. 4, 2000. For the
full month - a period when, California regulators, say the company was
trading with its own affiliates in an effort to raise energy prices -
the records show that Enron's net trading profit was $440 million.

Federal regulators have also accused Enron of trying to raise prices by
engaging in sham trades with an unnamed company on Jan. 31, 2001. On
that day, according to Enron's internal records, the company recorded a
$114 million trading profit.

Over the course of 2000 and 2001, the records show single-day trading
profit of $100 million or more on at least 17 days.

Wall Street analysts, who bullishly endorsed Enron's shares for much of
the period, said that they might have shown more restraint had they
known the extent of the company's speculative trading. Enron disclosed
some risk measures about its trading activities, and careful analysts
could have noted how those numbers rose in 2000 and 2001. But analysts
paid more heed to guidance from the company's executives.

"They specifically told us they were not speculating," said an analyst
at one of the nation's biggest brokerage houses, who insisted on
anonymity. "At the time, Enron was valued at close to 40 times earnings.
And Enron naysayers were saying, `How is this different from Goldman
Sachs, which on a good day is valued at 12 times earnings?' "

In a March 27, 2001, interview, Mr. Lay said: "We're basically making
markets, buying and selling, arranging supplies, deliveries. We do not,
in fact, speculate on where markets are headed." The company also
denied, in meetings with Wall Street analysts, that California accounted
for a large share of its profit in 2000, at the height of the state's
energy crisis.

But the trading records show that about $1.3 billion, or over half of
Enron's trading profit that year, was tied to soaring gas and power
prices on the West Coast.

"We had meetings every morning," one former trader said. "And there was
a lot of pressure to use more and more leverage and to put on bigger and
bigger trades."

A spokesman for Enron, which is struggling to emerge from Chapter 11
bankruptcy protection, said the company was cooperating with
investigators.

Mr. Lay's spokeswoman declined to comment. Jeffrey K. Skilling, who
built Enron's trading operation and served as the company's chief
executive for half of last year, was unavailable for comment.

Three weeks ago, a report issued by the Federal Energy Regulatory
Commission said that Enron conspired with Portland General Electric, an
Oregon utility it owns, to manipulate the price of power in the spring
of 2000. In October, Timothy N. Belden, a former Enron senior trader,
pleaded guilty in federal court to helping manipulate power prices in
the West during the California energy crisis. Mr. Belden is cooperating
with the government in continuing investigations.

According to the records, Enron's trading profit soared during the most
volatile trading periods in 2000 and 2001, when consumers and
politicians in the West started complaining about unusually high gas and
power prices.

In November and December 2000, for instance, Enron made nearly $1
billion in trading profit just in North America, according to a
presentation the company made to Moody's Investors Service, the credit
rating agency. Those results are evidence that the company was engaged
in speculative trading, financial experts said.

"Given their profit-and-loss swings, they were taking on huge
positions," said Robert Litzenberger, the former head of risk management
at Goldman Sachs. "You might have swings, but not like that in a hedged
market. That's quite extreme."

Occasionally, Enron got on the wrong side of the market, as it did in
mid-December 2000, when the trading operation lost nearly $1 billion
over three days.

The worst day was Dec. 12, when gas prices unexpectedly plummeted.
Enron's traders lost $550 million - a figure that sent shock waves
through the company. The loss equaled what Long Term Capital Management,
the hedge fund, lost on one of its worst trading days in 1998, when its
near-collapse shook global markets.

The $550 million reversal exceeded the company's risk control levels,
meaning that they had to be reported to the board. A week earlier, after
the traders recorded their $485 million gain, they had persuaded the
board to loosen Enron's risk limits. Trading executives argued that
Enron had superb risk management controls and that the traders could
reap even bigger profits in a volatile market, executives and trading
officials said.

During the last three months of 2000, according to internal company
records, Enron's so-called value-at-risk limits - what Enron was willing
to lose on a single day - were raised three times, from $80 million in
October to $140 million on Dec. 7.

J. C. Nickens, a lawyer for Richard B. Buy, who at the time was Enron's
chief risk officer, said that it was obvious that Enron was speculating.

"Of course they were speculating; they were traders," Mr. Nickens said
this week. "But they thought they were better traders and less risky.
They thought they had the system beat."

Another limit set by Enron's board - the "risk appetite," or the overall
amount of the company's capital that the company was willing to risk
losing in the course of a year - was set at $2 billion in early 2001,
records show.

"That figure is huge, shocking," said Mark Williams, a former energy
trading executive who now teaches at Boston University. "This gets back
to, was Enron really a hedge fund disguised as an energy company?"

Early in 2001, Herbert S. Winokur Jr., who was then the chairman of the
finance committee of Enron's board, began asking the company's risk
managers to re-evaluate the trading policies and tighten risk controls,
according to W. Neil Eggleston, a lawyer for Mr. Winokur.

After learning about the Dec. 12 loss, Moody's also grew concerned about
Enron's risk profile. Mr. Buy traveled to New York in late 2000 or early
2001 to soothe Moody's concerns, according to several former Enron
executives. Moody's said it decided not to take any action against the
company after Enron assured it that there were good controls in place
and that this was an opportunity to make even bigger profits.

In retrospect, officials at Moody's feel duped.

"We did express concern about the level of trading activity that they
showed us," said John Diaz, a managing director of Moody's energy group.
"But what we have come to believe is that the information Enron provided
to us was misleading, incomplete and designed to deceive. If we had
known that they were really speculating in a big way, that probably
would have led to a lower rating."

Instead, the trading profits during the California energy crisis only
heightened Enron's hunger for more, according to a former executive in
the company's risk-management unit.

"Enron's appetite for risk was huge," he said. "We could set some
limits, but we couldn't stop the train."