Financial Analysis: David Hatherly (Enron)

1. Four Feedback Failures of Accounting (Enron)
1. Failure to identify the performance of intangibles
2. Failure to link reward with risk
3. Failure to separate present performance and expected future performance (productive gains and speculative gains)
4. Failure to focus on the legacy value of promises
2. Rewards are "headlined" while risks are hidden in the footnotes
3. Enron's year 2000 annual report:
1. "We are participating in a New Economy, and the rules have changed dramatically. What you own is not as important as what you know. Hard wired businesses such as energy and communications, have turned into knowledge-based industries that place a premium on creativity. Enron has been and always will be the consummate innovator because of our extraordinary people..."
4. Enron's History:
1. Natural Gas producers/supplier, expands through acquisitions
2. Expands to other utilities as producer/supplier, became asset heavy
3. grew to an international scale utility producer/supplier, gained US political support
4. expanded into new markets into other utilities, obtained regulation easing
5. entered into long term contracts from supplier side, sold long term contracts to customers, creates a time mis-match, creates risk
6. Enron's Activities mirrored Banks: borrow short term but lend long-term (risky before even consideration of investment banking) 
7. Began an "online trading" scheme (only business to have value when they crashed)
8. Dispose of utility assets, began SPV (special purpose vehicle development)
9. Began a move into Broadband, in order to mirror their energy trading scheme
5. Energy/Communications
1. transportation and distribution
2. wholesale services
3. retail energy services
4. broadband services
6. Year 2000 Balance Sheet (millions, USD)
1. Fixed Assets and other investments: 22,496
2. Debt: (13,547) -> 8949
3. Intangibles: 3638
4. Cash: 1374
5. Other current assets: 16,989
6. Current liabilities: (16,232)
7. Working Capital: 2131
8. Deferred creditors (4336)
9. Price risk assets 1088 (3248) (net position on all of the futures and options entered into)
1. fair value stated (according to Enron)
10. Equity: 11,470 (book equity, not the market value of shares because market will )
7. Enron Income Statement
1. Natural Gas: 50,500
2. Electricity: 33,823
3. Metals: 9,234
4. Other: 7,232 100,189
5. Costs and expenses: 98,836
6. Operating Income: 1,953
7. Other Income and Deductions
1. gains on sale of assets: 146
2. interest (net), tax (1120)
8. Separating Productive and Speculative gain
1. traditional vs. casino banking! 
9. Enron's Profit making methods
1. selling options/futures (fees)
2. selling bundled long term contracts for NPV on a market
3. underlying asset value increase/decrease (depending on contract)
4. traditional energy rates (legal) 
10. Banking is a highly geared business
1. borrowings are greater than our equity (extremely risky)