13. 1/20/2012
Hypotheses
• Cash flow statement holds irregularities.
• Income statement requires adjustment.
• Balance sheet not as strong as size indicates.
• Ratios after adjustment weaker than expected.
• Business traps and eats cash.
• Weak business model performance(?).
Identity of Sample Company: ENE
Should anyone show surprise?
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14. 1/20/2012
Off Balance Sheet Deception
White Wing shows up
on balance sheet as
minority interest.
Enron guaranteed
White Wing’s debt to
Citi.
Enron uses another SPE to hide more debt.
Enron guaranteed
Osprey’s debt.
Control by “3rd party”
allows Enron to take
White Wing off
balance sheet.
WW pays back $0.5
billion to CITI SUB.
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15. 1/20/2012
Debt trail leads back to ENRON.
Enron still owes $0.6B in debt (shielded by preferred stock).
Enron also owes $1.4B in Osprey bonds.
Debt guarantees include repayment triggers:
Investment rating triggers.
Stock price triggers.
NONE OF THIS SHOWS UP ON THE BALANCE SHEET.
IF THE STOCK PRICE CRATERS, THE ROOF CAVES IN: ALL DEBT
BECOMES DUE.
How to use SPE’s to Create Income and Cash Flow
• Enron finds itself short of earnings targets for the
quarter, or the year.
• Turns to SPE to bail itself out.
• Enron typically makes a repurchase agreement.
Solve 3 issues:
Solve 3 issues:
1. 1. Feed cash hungry
Feed cash hungry units.
2. Report cash flow.
3. Report income.
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