Nov. 1: Enron says it has secured commitments for $1 billion in financing from units of J.P. Morgan
and Citigroup, as the company moves to strengthen its balance sheet and maintain its investment-
grade credit rating.

Write to John R. Emshwiller at jo

01300000000211


Nickoloff, Peter

ee

From: Carleton, Norman

Sent: Monday, December 03, 2001 12:31 PM

To: DeMarco, Edward; Bair, Sheila; Berardi, Steve; Bitsberger, Timothy, Cetina, Jill; Eichner,
Matthew; Gabilondo, Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail);
Nickoloff, Peter; Novey, Michael; Pietrangell, Fred; Roseboro, Brian; Schultheiss, Heidilynne;
Sharer, James; Whaley, Jean; Wiedman, Mark

Subject: WSJ: Enron Failure Likely to Burden Insurers And Further Increase Soaring Premiums

December 3, 2001

Enron Failure Likely to Burden Insurers
And Further Increase Soaring Premiums

By CHRISTOPHER OSTER
Staff Reporter of THE WALL STREET JOURNAL

Enron Corp.'s collapse is expected to cost insurance companies more than $3.5 billion and most
likely will further increase skyrocketing insurance rates.

About $2 billion of the losses is expected to be shouldered by property-casualty underwriters, who
are expected to pay $40 billion to $70 billion in claims from the Sept. 11 terrorist strikes. Those
claims already have touched off a run-up in premium rates. The losses would make next year's price
increases among the biggest in recent history for insurers, if not the biggest, said Alice Schroeder, a
property-casualty insurance analyst at Morgan Stanley. Such losses work to siphon off capital from
the insurance market, reducing price competition,

The damage to individual property-casualty insurers is “virtually impossible" to assess at this point,
but Ms. Schroeder said a "material impact" on the sector is likely. The losses are expected to result
from claims against directors-and-officers liability policies, surety bonds and financial-guarantee
coverage. Directors-and-officers liability policies protect a company from lawsuits stemming from the
actions of its executives and surety bonds are bonds that insure the completion of a transaction or a
project.

Life insurers, meanwhile, are expected to report that the values of their investment portfolios have
dropped by more than $1.5 billion, related to holdings of Enron debt, which has plunged in value in
recent weeks along with the company’s stock price. Investors’ confidence in the company has sunk
amid earnings restatements and revelations about related-party transactions.

Nontraditional financial-guarantee insurance and surety bonds could prove the source of some of the
biggest losses, analysts said. Enron obtained coverage for such purposes as enhancing the value of
Enron's guarantee of certain debt of Enron-related projects as well as the company's guarantees on
the execution of certain derivative contracts. Analysts said the payments on the policies would be
triggered immediately upon a default event -- for example, a missed payment or bankruptcy filing by
Enron. "We understand that some contracts may have already been triggered," Ms. Schroeder said.

156

01300000000275


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 29, 2001 11:30 AM
To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: Enron Replace CFO

October 25, 2001

Major Business News

Enron Replaces Fastow as Finance Chief;
Move Follows Concerns Over Partnerships

By REBECCA SMITH and JOHN R. EMSHWILLER
Staff Reporters of THE WALL STREET JOURNAL

Enron Corp. replaced its embattled chief financial officer, Andrew S. Fastow, capping a tumultuous
day in which the huge energy company saw its stock price again fall sharply and help pull down the
share prices of other major energy-trading companies.

Investors appeared worried that Enron's recent woes could have a destabilizing effect on the energy-
trading market. The Houston energy powerhouse, with annualized revenue topping $150 billion and
assets of more than $60 billion, handles transactions representing roughly one-quarter of the nation’s
traded-electricity and natural-gas volumes. In less than two years of operation, its EnronOnline
trading platform has become a central marketplace for the energy business and already has handled
more than $880 billion in transactions.

"Enron makes the market. Make no mistake about that," said Merrill Lynch analyst Donato Eassey.
"There's not a trader out there that doesn’t use EnronOnline." As such, Enron enters into thousands
of transactions every day in which the company's credit-worthiness is critical. Enron said its business
operations were functioning normally Wednesday. The company also has consistently said it is
financially strong and liquid.

Enron said its new chief financial officer is Jeffrey McMahon, the 40-year-old head of the company’s
industrial-markets division. His selection may be intended, in part, to raise the company's credibility.
People familiar with the matter say Mr. McMahon left his job as treasurer last year after voicing
concerns within the company about Mr. Fastow’s role in running two limited partnerships that were
involved in billions of dollars worth of transactions with Enron. Internal partnership documents
indicate Mr. Fastow and possibly a handful of associates made millions of dollars from the
partnerships. Mr, Fastow severed his ties with those partnerships in July in the face of increasing
conflict-of-interest concerns being expressed by Wall Street analysts and major Enron investors. On
Monday, Enron announced that the Securities and Exchange Commission was looking into the
Fastow-related transactions

01300000000177


A quick look at Enron's bonds shows the skepticism in the market, Enron's bonds are trading at about
25 cents on the dollar, which means bondholders are expecting to get only partial payment for their
investment, or are expecting that payment to be far off in the future.

To be sure, some investors who specialize in trading distressed stocks have been making profits on
Enron shares as the stock popped back up. Some of these investors may have shorted Enron's
stock are buying to close out their positions.

However, some of the activity may come from amateur investors, who think that there still could be
hope for a rebound.

"PG&E didn't go to zero,” said Andre Meade, an analyst at Commerzbank, referring to the stock of
PG&E Corp. (PCG). Burdened by debt from California's high-fiying power prices, PG&E's Pacific Gas
& Electric Co. unit filed for bankruptcy protection in April. "But there was a good chance its
shareholders would get paid. In my opinion, Enron's equity is likely to go to zero, and even
bondholders will not be paid.”

Enron shares recently traded at $1.15, up 28 cents, or 32.2%, on volume of 154.6 million compared
with average daily volume of 42.2 million.

-By Christina Cheddar, Dow Jones Newswires; 201-938-5166; christina.cheddar@dowjones.com

19

01300000000308


“It was not our intent to mislead," said Mr, Lay's chief of staff, Steve Kean, in mid-November.

On Oct. 17, the Journal revealed some of the partnerships’ inner workings, their dealings with Enron
and the fact that Mr. Fastow stood to make millions from his participation. Shortly afterward, Enron's
stock began tumbling.

That same day, word of the $1.2 billion reduction in shareholders’ equity started rippling through Wall
Street. On Oct. 18, the Journal reported for the first time that the equity reduction stemmed from
transactions related to the LJM partnerships.

During the earlier discussions with credit-rating agencies, Enron had attributed the equity reduction to
an “accounting error," says the person familiar with those discussions. However, in an Oct. 17
interview with the Journal, Enron Chief Accounting Officer Rick Causey didn't mention an accounting
error. He said that as part of its dealing with the partnerships, Enron had put up 62 million of its own
shares. In return, it gained a $1.2 billion note receivable from the partnerships, When the
arrangements were terminated, he explained, Enron simply canceled the note and retired the stock.
The retirement of so many shares accounted for a $1.2 billion reduction in shareholders’ equity.

A spokesman added that Enron didn't see this as a material transaction that needed to be publicly
disclosed. The spokesman Tuesday said that he had been told by company officials at the time that it
was "a balance-sheet issue” and didn't need to be included in the third-quarter eamings discussion.

However, in a Nov. 8 SEC filing, Enron declared that the equity reduction was largely due to an
accounting error -- one that required the company to restate prior-year financial reports.

The SEC within a few days started an informal inquiry. It soon grew into a formal investigation, which
meant the agency had power to subpoena witnesses and documents. At the same time, credit-rating
agencies were beginning to put Enron on review for possible downgrade.

That was worrisome. Keeping an investment-grade rating was vital for the health of the trading
operation, which produced more than 90% of Enron's third-quarter operating earnings. Moreover, a
fall to "junk" status would trigger accelerated repayment of billions of dollars of obligations.

Fastow Out

In an effort to stanch the bleeding and restore confidence, Mr. Lay and other top officials, including
Mr. Fastow, held a conference call on Oct. 23. Sparring with analysts and investors, the executives
seemed defensive and even hostile at times. Mr. Lay wouldn't let Mr. Fastow answer questions about
the partnerships, but expressed his "highest faith and confidence" in his chief financial officer.

The next day, the company announced Mr. Fastow was no longer Enron's CFO. Mr. Lay said the
about-face was necessary to “restore investor confidence.”

After the conference call, Enron top brass retreated from the public arena. Behind the scenes, Enron
was frantically looking for a rescue strategy, approaching both competitors such as Dynegy and
wealthy investors such as Warren Buffett for a cash infusion. So intense was the quest that one
Enron attorney, a member of the Weil, Gotshal & Manges law firm, flew from Dallas to Houston for a
planned two-hour meeting and didn't get back for two weeks.

Dynegy was intrigued by the notion of taking over a company that was five times its size and had
long overshadowed it. Dynegy President Steve Bergstrom, an Enron alumnus, had a scheduled

1”

01300000000303


yesterday,

Enron shares are selling for almost 32 percent less than the value of Dynegy's offer, showing investors have doubts the
deal will be completed. Dynegy shares fell $1.90 to $41.70 today,

“It's become more clear that the chances of this deal going through aren't 90 percent, but much closer to fitty-fifty,” said
Edward Paik, who helps manage the Liberty Utilities Fund, with 1.6 million Enron shares. ‘“There’s just so much
information that is unknowable” about Enron's financial position, he said.

Most of the $9.15 billion in debt is due before the end of the third quarter, when the Dynegy buyout is scheduled to close,
Enron said yesterday in a third-quarter filing with the SEC.

Asset Sales Planned

Last week, Enron Chief Operating Officer Greg Whalley said the company will sell assets of “non-core businesses" to
raise money, It has $8 billion invested in the businesses, including broadband telecommunications and the Dabhol power
plant in India, Enron expects to get “‘billions" from the sales, Whalley said, without being more specific.

Enron reported yesterday that its U.S. operations had $1.2 billion in cash left. It has added at least $5 billion since Sept. 30
from credit lines, loans and a $1.5 billion investment from ChevronTexaco, part owner of Dynegy.

Enron used $1 9 billion of the money it raised to retire commercial paper, which is short-term debt. It gave no details on
now it spent the remaining $3.1 billion.

Enron Chief Financial Officer Jeffrey McMahon said last week that the company also was looking to get another $500
million to $1 billion from private investors.

Asset sales valued at about $800 million are expected to close by the end of this year, according to the SEC filing. Enron
spokeswoman Karen Denne wouldn't comment on whether it could sell assets fast enough to keep current on its debts.

Dynegy will have to help Enron sell assets, said Mitchell Stapley, who manages $3.5 billion in fixed-income assets
including Enron bonds for Fifth Third Investment Advisors Inc.

Dynegy and ChevronTexaco Corp , which owns 26 percent of Dynegy, also will have to help Enron negotiate with its
lenders, said Kathleen Vuchetich, who helps manage the $1.4 billion Strong American Utilities Fund, which is 5 percent
Oynegy shares.

Debt Questioned

“| never dreamt (the $9.15 billion) would be that large, coming due all at once,” Vuchetich said. “It calls into question their
decision to schedule it that way in the first place.”

ChevronTexaco, the second-largest US. oil company, is providing $2.5 billion in cash as part of the Enron buyout. It
provided the first $1.5 billion a week ago.

‘Shares of ChevronTexaco, based in San Francisco, rose $3.62 to $88.53.

Enron yesterday reduced third-quarter results by 3 cents a share, bringing the period's loss to 87 cents, or $854 million, On
Nov. 8, Enron lowered earnings back to 1997 by $586 million to reflect losses by affiliated partnerships that were wrongly
kept off the books. That included a third-quarter reduction of $17 million.

A drop in Enron's senior unsecured debt rating to "BBB-" by Standard & Poor's on Nov, 12 may force Enron to pay offa
$690 mifion note by Nov. 27 if it doesn't find collateral to guarantee the debt taken on by an affilisted partnership that owns
Brazilian natural-gas assets, the filing said.

Without repayment or collateral, investors can begin to liquidate the partnership's assets, Enron said. The company said
it's working with lenders to come up with an acceptable agreement on the debt

Making good on debt owed by its Whitewing affiliated partnership may cut Enron's fourth-quarter earnings, Enron said
Enron is obligated to back Whitewing by issuing junior convertible preferred stock. Because Enron's stock has plunged, it
may have to write down its assets by $700 million, the filing said.

2

01300000000073


-- Gaspart (Brazil): Significant stake in the gas distribution companies of seven coastal states.

~ CEG and CEGRIO (Brazil): Equity interest in both gas distribution companies which were
previously government-owned.

~ Cuiaba (Brazil): A 480 megawatt (MW), combined-cycle natural gas power plant in Cuiaba.

— Bolivia-Brazil Pipeline: Partnership in the 3,000-km pipeline stretching from Santa Cruz de la
Sierra, Bolivia to Porto Alegre, Brazil.

-- Eletrobolt (Brazil): A 380 MW natura! gas power plant located near the city of Rio de Janeiro.

-- Transportadora de Gas del Sur (Argentina): An ownership interest in the 6,604-km pipeline
system, the largest pipeline system in South America.

-- Central Termica Modesto Maranzana (Argentina): A thermal power plant, located in the city of
Rio Cuarto, province of Cordoba.

Source; The company

182

0130000000027 1


Nickoloff, Peter

a,

From: Carleton, Norman
Sent: Friday, November 16,2001 9:13 AM
To: Roseboro, Brian; Bair, Sheila; Gross, Jared; Nickoloff, Peter; Schultheiss, Heidilynne;

Pietrangeli, Fred; Berardi, Steve; Bitsberger, Timothy, Novey, Michael; Eichner, Matthew,
Hammer, Viva

Subject: The Economist: Enron - See you in court

See you in court

Now 15th 2001 | NEW YORK
From The Economist print edition

The company’s trials have just begun

LAWYERS are swarming all over Enron's old financial statements and press releases in the hope of reaping
huge fees from securities litigation. More than 20 class-action lawsults have been filed in recent weeks,
and new ones are popping up every day. A formal process has been started to consolidate litigation in
Houston, where the troubled energy company is based, with all lawyers interested in the case required to
stake their claims by December 21st.

The broadest accusations will be of fraud and material misstatement, legal ways of saying that the
company’s financial statements were garbage. This week, Enron's founder and chairman, Kenneth Lay,
decided to forgo a severance package worth over $60m while admitting that the company’s problems “had
been exacerbated by the extensive use of debt capital, both on and off the balance sheet". America's
Financial Accounting Standards Board (FASB) Is looking again at off-balance-sheet financing, having
fretted about it on and off for a decade.

There will also be charges of insider trading, because even as Enron was issuing securities amid glowing
profits reports, top executives were dumping over $1 billion of Enron shares to “unsuspecting investors”, a
group that includes anybody who, however briefly, has held one of the company's 750m shares In the past
two years. “The number of class members will be huge,” says Maurice Pesso, a lawyer at a New York firm
that has filed a claim.

There are, however, limits to the company’s liability. It has already restated its results going back five
years, but federal law restricts litigation to the past three. Moreover, Enron will not take the rap alone. Its
auditor, Arthur Andersen (now plain Andersen), is also named as a defendant in at least one of the
complaints already filed, The litigation comes after a rough decade for Andersen. It has had to pay
hundreds of millions of dollars in settlements after sloppy audits on such companies as Waste
Management, Sunbeam and Discovery Zone.

Because Enron evolved from an energy company into a financial firm, it became much like an unregulated
bank. The lack of supervision meant that the role of the company’s auditor was crucial. Andersen was
certainly paid as if it was. In 2000, it collected $25m for auditing Enron's books and another $27m for
consulting services. Now how do you account for that?

11

01300000000220


One took the time to remove Dynegy’s stock symbol and stock price from the electronic tote board in
the Enron lobby. Left behind was Enron's stock price, by then measured in dimes, and the constantly
replaying message at the bottom of the board: "Enron ... endless possibilities."

Write to John R. Emshwiller at john. will WS. <mailto; ill j.com>? and
Rebecca Smith at . <mailto:rebecca.smith j.com>*

197

01300000000306


Nickoloff, Peter

From: Carleton, Norman
Sent: Wednesday, November 21, 2001 12:08 PM
To: Roseboro, Brian; Bair, Sheila; Gross, Jared; Bitsberger, Timothy, Nickoloff, Peter; Schultheiss,

Heidilynne; Whaley, Jean; Pietrangeli, Fred; Berardi, Steve; Novey, Michael; Hammer, Viva;
Eichner, Matthew; Lori Sanatamorena (E-mail); Cetina, Jill; Sherer, James
Subject: Dow Jones Newswires: Enron Din 20%; Goldman Doubts Ability To Recover Business

November 21, 2001

Enron Dn 20%; Goldman Doubts Ability To Recover Business

Dow Jones Newswires

By Michelle Rama
Of DOW JONES NEWSWIRES

NEW YORK -- Investors bailed out of Enron Corp. (ENE) as shares continued their dismal descent
Wednesday, falling more than 30% for a second day of declines after a company filing revealed even
more financial problems than previously disclosed.

Enron's 10-Q filing Monday with the Securities and Exchange Commission prompted at least one
analyst to downgrade the company’s shares.

Goldman analyst David Fleischer cut Enron's shares to market perform from its recommended for
purchase list, citing "concerns about ENE's ability to recover the significant business that has been
lost and new and major liquidity issues raised in Monday's 100 filing.”

“The cash infusion from Dynegy appears inadequate to restore the confidence of Enron customers
and we now question the accretion to Dynegy in a combination and valuation of energy convergence
shares during the current uncertain period,” Fleischer said in the note.

If the deal's potential earnings accretion to Dynegy is questioned, investors may doubt whether

Dynegy will buy Enron. Enron's ability to stay in business is questionable if Dynegy backs out of the
deal.

Enron officials weren't immediately available for comment.

Shares of Enron recently changed hands at $4.99, down 28.6%, or $2, on volume of 32.5 million.
Average daily volume is 19.7 million shares,

Dynegy shares recently traded at $39.16, down $2.54, or 6.1%, on volume of 5 million. Average daily
volume is 3.2 million shares.

13

01300000000231


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 29, 2001 11:21 AM
To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: Enron: Heard on the Street

October 26, 2001

Heard on the Street

Despite Losses, Complex Deals
Analysts Remain High on Enron

By SUSANNE CRAIG and JONATHAN WEIL
Staff Reporters of THE WALL STREET JOURNAL

Enron: Rarely have so many analysts liked a stock they concede they know so little about.

In recent years, Wall Street researchers have been overwhelmingly -- critics would say blindly --
enthusiastic about Enron, even as they acknowledge not always understanding the complex financial
transactions that accounted for its soaring profits, Now, Enron is reporting steep losses from some of
its most complicated transactions, which many on Wall Street still can’t figure out.

In a research note Wednesday, Goldman Sachs analyst David Fleischer conceded that scant
corporate disclosure at the Houston energy trader makes it difficult to value the company. The
company’s "lack of disclosure and transparency,” he says, is "a longstanding Enron hallmark.”

So is this a stock to avoid, in his view? Hardly. Goldman on Wednesday did bump Enron off its "U.S.
Select List," which consists of a few dozen top stock picks -- but Mr. Fleischer continued to keep the
stock on the firm's larger but prestigious “Recommended List" of 200 or so favored stocks, where it
has been since he joined Goldman in 1993.

“Just because | can't be specific in being able to create a simple model ... doesn't mean that you
write off that industry and say ‘I can't analyze it’ or ‘| can't figure it out,’ " says Mr. Fleischer, who owns
an undisclosed number of Enron shares. "If that were the case, there would be an awful lot of
industries we couldn't follow.”

Enron's shares have dropped about 50% since last week.

“Every sell-side analyst we spoke to early in 2001 admitted that this was a black box," says Jim
Chanos, principal of Kynikos Associates in New York, who has been selling Enron stock short --
trading it with an eye to profiting from its fall -- throughout this year, "It was really a trust-me story,
when all the evidence was mounting that there was reason to question that level of trust.”

24

01300000000167


Because unit Enron Metals & Commodity is located in New York, the parent company has the jurisdiction to
file for bankruptcy protection here, according to legal experts.

"I would give (the motions) a 30% to 40% chance of success - significant, but not a slam dunk,” said Nancy
Rapoport, dean of law at the University of Houston.

An alternative to moving the case to Texas would be for Judge Gonzalez to appoint an additional creditors
committee to represent the interest of employees, according to Rapoport.

The U.S. Trustee Office, a division of the Department of Justice, will hold a meeting Dec. 12 to form the
creditors committee - provided for under Chapter 11 law. The group will play a pivotal role in steering
creditors’ positions in court.

Bankruptcy experts said it's likely that one committee will be appointed at that time, and another group will be
named later - in order to ensure that the interests of all parties are accounted for in what is likely to be one of the
most complex bankruptcy cases ever.

Traditionally, only one official committee represents the interests of all creditors in bankruptcy proceedings.

-By Kathy Chu; Dow Jones Newswires; 201-938-5392
kathy. chu@dowjones.com

240

01300000000351


Nickoloff, Peter

LD

From: Carleton, Norman
Sent: Monday, December 03, 2001 3:09 PM
To: Bair, Shelia; Berardi, Steve; Bitsberger, Timothy, Cetina, Jil; Eichner, Matthew; Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey,
Michae!; Pietrangell, Fred; Roseboro, Brian; Schultheiss, Helditynne; Sharer, James; Whaley,
Jean; Wiedman, Mark

Subject: DJ: Enron Delivering Same Message To Customers As To Wall St

December 3, 2001

Enron Delivering Same Message To Customers As To Wall St

Dow Jones Newswires
NEW YORK -- Enron Corp.'s (ENE) message to its customers, partners and vendors is similar to its

message to Wall Street: We've filed for Chapter 11, we're working to recapitalize the company and,
in the meantime, we're doing what we can to minimize disruptions.

Enron has sent a version of that message to seven parties affected by its bankruptcy filing: trading
partners, transportation customers, Enron Energy Services customers, broadband customers,
international customers, vendors and the Houston community.

Each individual message can be found in the "news and press room" of Enron's Web site. Enron's
press room portion of its Web Site is at http://www.enron.com/corp/pressroom/

The most extensive letter was written to Enron's Energy Services customers. The message, written in
a Q&A format, attempts to answer general customers questions about their contracts, services and
operations.

For example, one question listed is “Since you filed Chapter 11, do | have the legal right to get out of
my contract?”

Enron's answer, "As long as we are providing contracted for services, we expect the contract to
remain in effect."

By George Stahl; Dow Jones Newswires; 201-938-5163.

161

01300000000280


« Enron has secured debtor-in-possession financing of $1.5 billion to fund operations while it is in
Chapter 11 proceedings.

« Enron is searching for a joint-venture partner to recapitalize the company’s wholesale energy-
trading business.

« Dynegy files suit against Enron, reasserting its claim over the Northern Natural Gas pipeline in
exchange for its $1.5 billion investment; the move comes after EnronOs $10 billion suit against
Dynegy filed Sunday for breaching its merger agreement.

« Enron lays off about 4,000 employees mostly among its 7,500 employees in its Houston head
office. The layoffs come in addition to 1,100 jobs in London cut Friday.

« Congress steps up up its probe of Enron, with House Commerce Committee staff set to meet this
week with the SEC and in Houston with Enron executives.

House members in Washington are also gearing up for an investigation. Ken Johnson, a spokesman
for the House Energy and Commerce Committee, said committee representatives will be briefed by
the general counsel and enforcement chief of the SEC Tuesday. Wednesday, top officials from
Arthur Andersen and the Financial Accounting Standards Board are meeting with committee staff in
separate venues and on Thursday, three committee investigators are headed to Houston to speak
with Enron executives. "The committee is moving aggressively to pinpoint what went wrong with
Enron to see what if anything Congress can do to make sure it doesn't happen again," Mr. Johnson
said.

For Enron, the key to survival may well be its ability to convince creditors not to rush the process,
One bankruptcy expert noted that creditors of Drexel Burnham Lambert Inc., a securities company
that sought bankruptcy protection a decade ago, agreed to a multiyear unwinding of assets, which
led to higher recovery to creditors than initially expected.

The debtor-in-possession financing will be doled out to Enron in three installments, beginning with a
$250 million piece this week, which was approved by the court Monday. That money, which will be
syndicated to other bank lenders, will be used in part to repay some of an existing $1 billion credit
line extended earlier by Citigroup and J.P. Morgan.

The new money will be secured by Enron assets, including proceeds from its sale of the Portland
General utility, and by other pipeline assets. A senior banker involved in the deal said despite
assumptions in the market that Enron has pledged all of its assets to raise money, the banks in this
latest round have had little problem finding available assets for further financing.

In the court hearing, Enron's lawyers said the company has $500 million in cash.

The bankruptcy filings of Enron and its affiliates reveal a dizzying array of creditors, ranging from
banks to telecommunications firms such as Level 3 Communications Inc. and 360networks Inc.
Enron's loans, in some cases, have been syndicated to as many as 100 lenders and investors.

As a result, the pain for banks is likely to be felt widely, but not necessarily deeply. The hit to the top
lenders with as much as $1 billion in exposure to Enron is likely to be a fraction of their loan
portfolios, which are measured in the hundreds of billions of dollars.

170

01300000000288


Nickoloff, Peter

From: Carleton, Norman
Sent: Thursday, December 06, 2001 4:51 PM
To: Sharer, James; Cetina, Jill; Bair, Sheila; Berardi, Steve; Bitsberger, Timothy, Eichner,

Matthew; Gabilondo, Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail);
Nickoloff, Peter, Novey, Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heditynne;
Whaley, Jean; Wiedman, Mark

Subject: Economist Magazine: Enron -- The amazing disintegrating firm

Enron

The amazing disintegrating firm
Ouch!

Enron share price. $

[WO0E Yuen our oven ¥00" POW WeOr OWY Pees FOV
WOLS2 99 56 9S 96 7 OF 9 TOPOL
Sosrce: Fhomaoe Financial Ditautrean

I prots or puttery? 2 |

Enron revenues, $bn

1% se Ld
Source: Reed Wasten

From The Economist print ©

The tragedy of one company's rise and fall

PRECISELY a year ago, Enron unveiled its master plan for domination of the universe. Not content with
changing from an obscure gas-pipeline concern into the world's biggest energy trader, Enron's bosses set
their sights higher. Jeffrey Skilling, then president, vowed to skyrocket past ExxonMobil to become the
world's leading energy firm-quite an ambition, given that Exxon had just posted a quarterly profit of over
$4 billion. But even that was not enough for Mr Skilling. He had a business insight so powerful that it

232

01300000000343


Nickoloff, Peter

From: Carleton, Norman
Sent: Thursday, December 06, 2001 4:23 PM
To: Baw, Shella; Berardi, Steve; Bitsberger, Timothy, Eichner, Matthew; Gabilondo, Jose; Gross,

Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael;
Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman, Mark
Subject: DJ: Judge Mulls Freezing Accts Of 29 Enron Officers, Directors

December 6, 2001

Judge Mulls Freezing Accts Of 29 Enron Officers, Directors

Dow Jones Newswires

HOUSTON -- A law firm representing Amalgamated Bank said a judge will consider freezing the
accounts of 29 officers and directors of Enron Corp. (ENE) accused of fraud at a hearing on Friday.

Amalgamated Bank filed a lawsuit Wednesday against Enron, alleging that through “false and
misleading” financial reports and statements, certain officials - including Enron Chief Executive
Kenneth Lay, former CEO Jeffrey Skilling, and former Chief Financial Officer Andrew Fastow -
pumped up Enron's stock price and took advantage of that to "dump" a total of 17.3 million shares for
more than $1.1 billion.

In a press release Thursday, Milberg Weiss Bershad Hynes & Lerach, the firm representing
Amalgamated, said the judge will hear the bank's request for unusual "expedited discovery” powers
to open up personal records of the 29 defendants and reveal the extent of additional liquidations and
limited partnerships not currently made public.

Amalgamated Bank submitted the ex parte application for a temporary restraining order and
injunction after filing the lawsuit.

Amalgamated, a union-owned bank whose Longview funds own Enron shares, charges it lost $10.3
million due to the decline of Enron stock and bonds.

An Enron spokesperson wasn't immediately available for comment.

23

01300000000332


Nickoloff, Peter

Deen eee en een ccc c nn

From: Carleton, Norman

Sent: Tuesday, November 20, 2001 5:06 PM

To: Roseboro, Brian; Bair, Sheila; Wiedman, Mark; Gross, Jared; Cetina, Jill; Sharer, James;
Nickolof, Peter; Schulthess, Heidilynne; Berardi, Steve; Pietrangeli, Fred; Whaley, Jean; Lori
Sanatamorena (E-mail); Novey, Michael, Hammer, Viva; Eichner, Matthew; Gabiondo, Jose

Subject: Dow Jones Newswires: Energy Cos Limit Business With Enron After 100 -Traders

November 20, 2001

Energy Cos Limit Business With Enron After 10Q -Traders

Dow Jones Newswires

By Mark Golden
Of DOW JONES NEWSWIRES

NEW YORK — Many energy trading companies were unwilling to sell power and natural gas for next
day delivery to Enron Corp. (ENE) Tuesday morning, a result of heightened credit concerns following
the release of Enron's quarterly financial report Monday, traders and other sources said.

For weeks, companies have limited both buying and selling with Enron for future deliveries, But for
the first time since Enron's troubles began a month ago, energy companies weren't selling to Enron
in the spot markets for fear that Enron might not be able to pay its bills as soon as next month.

“It's pretty well accepted in the industry that people are staying away for now,” said Charlie Sanchez,
energy market manager for Gelber & Associates in Houston.

Traders at all of the major companies contacted said they couldn't sell to Enron Tuesday morning.

Several spokespeople for energy companies confirmed the situation, but declined to say so on the
record.

"Nobody will take Enron,” one western electricity broker said. After struggling, however, that broker
eventually found a utility that was willing to sell to Enron Tuesday morning.

Calpine, a prominent independent power producer and trader, said it was willing to sell power to
Enron.

“We continue to sell power to Enron and are monitoring the situation closely," spokeswoman
Catherine Potter said.

The situation Tuesday morning was fluid. One utility that refused to sell to Enron in the moming was
willing to do so in the afternoon, a person at the company said. That company’s trading, however,
was still limited to the spot markets.

Credit concems about the once-dominant energy trading company were heightened with Enron's

filing of its third quarter annual report Monday evening with the U.S. Securities Exchange
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01300000000226


attributed to partnerships until recently run by CFO Andrew Fastow. Enron also discloses it shrank
shareholder equity by $1.2 billion, as a result of several transactions including ones undertaken with
Fastow’s investment vehicle.

Oct. 17: SEC sends letter to Enron saying it was beginning an “informal inquiry.”

Oct. 19: The Wall Street Journal! discloses that general partners of Fastow partnership realized more
than $7 million last year in management fees and about $4 million in capital increases on an
investment of nearly $3 million in the partnership, set up principally to do business with Enron,
according to internal partnership document. Enron's board meets to discuss SEC inquiry.

Oct. 22: Enron announces SEC will begin a probe of company’s "related party transactions,”
including those with Fastow partnerships. Enron says it will fully cooperate.

Write to Rebecca Smith at re
Emshwiller at john.emshwille

a

01300000000184


Nickoloff, Peter

From: Carleton, Norman
Sent: Friday, November 30, 2001 3:58 PM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Cetina, Jil; Eichner, Matthew; Gabliondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey,
Michael; Pietrangell, Fred; Roseboro, Brian; Schultheiss, Heiditynne; Sharer, James; Whaley,
Jean, Wiedman, Mark

Subject: DJ: Enron Stil Considering Options, Sources Say

November 30, 2001

Enron Still Considering Options, Sources Say

Dow Jones Newswires

By Christina Cheddar and Janet Whitman
Of DOW JONES NEWSWIRES

NEW YORK — Enron Corp. (ENE) is still considering all of its options, including the likelihood of filing
for bankruptcy protection under Chapter 11, people close to the matter said.

Such a decision, however, will not come until next week, these people said.

Some Enron employees are being told not to expect any action over the weekend, these people
said.

Although the people familiar with the situation insist an all-out liquidation - known as a Chapter 7 filing
- isn't in the cards, some industry observers continue to speculate that the beleaguered company
may be forced to go that route.

With its energy trading business crippled on Wednesday by the downgrade of its debt to junk status
and a buyout by Dynegy Inc. (DYN) nixed later that day, Enron's fortunes have been in a downward
spiral.

Enron's once high-flying stock has also nose-dived, swapping hands recently at 30 cents a share.
The stock had traded above $90 a share last year, and, all told, equity shareholders have lost over
$60 billion, Meanwhlie, Enron's outstanding bonds trade at prices of around 15 cents on the dollar.

The weakness in Enron's bonds - down from the upper 50-cent range before Wednesday's
developments - suggests bondholders don't expect much if any recovery on their investments.

There is little doubt that any proceedings will be complex and time-consuming, given the nearly $62
billion in assets on Enron's balance sheet (as of its last quarterly financial report). Also, the court
would have to wade through and untangle many items not listed on its balance sheet. Those
financing vehicles are what sparked the company's troubles last month.

Enron's liabilities are still a matter of debate. The company has an estimated $13 billion in debt on its
136

01300000000255


added.

According to the LJM2 offering document, the general partner, made up of Mr. Fastow and at least
one other Enron employee, received a management fee of as much as 2% annually of the total
amounts invested. Additionally, the general partner was eligible for profit participation that could
produce millions of dollars more if the partnership met its performance goals over its projected 10-

year life. In exchange, the general partner was obliged to invest at least 1% of the aggregate capital
commitments.

In an interview earlier this year, Mr. Lay said the LJM arrangement didn't produce any conflicts of
interest. Such related-party transactions, involving top managers or directors, aren't unusual, he said.
“Almost all big companies have related-party transactions.”

Typically, related-party transactions involve dealings with partly owned affiliates or a contract with a
firm tied to one of the company’s outside directors. It is rare for a top executive to be in a position
where he could have conflicting fiduciary responsibilities. The LJM2 offering document states that the
responsibilities of Mr, Fastow and other partnership officials to Enron could "from time to time conflict
with fiduciary responsibilities owed to the Partnership and its partners.”

Some institutions approached as potential LJM investors demurred partly because of such potential
conflicts.

Enron has publicly stated that the partnership deals were aimed to help it hedge against fluctuating
values for its growing portfolio of assets. In the past decade, Enron has seen its asset base rocket to
more than $100 billion. As a result of this rapid growth, Enron has at times been strapped for capital
and has sought ways to bring in outside investors to help bolster its balance sheet.

Charles LeMaistre, an outside Enron director and president emeritus of the M.D. Anderson Cancer
Center at the University of Texas, said he viewed the partnership arrangement partly as a way of
keeping Mr. Fastow at Enron, "We try to make sure that all executives at Enron are sufficiently well-
paid to meet what the market would offer,” he said.

Enron's interest in retaining Mr. Fastow may have been heightened by an exodus of top managers
who were cashing out large stock-option grants after the company’s success in 1999 and 2000. Mr.
Fastow’s yield from options for the 12 months through Aug. 31 was $4.6 million, according to
disclosure reports compiled by Thomson Financial. Mr. Lay netted about $70 million from exercising
options during this period, while Mr. Skilling, the former president, realized nearly $100 million.

Write to John Emshwiller at inn srietntortieal oat <mailt: john. emshwiller@wsj. com> and
Rebecca Smith at re z @ws

01300000000191


trading operation could be revitalized, but wouldn't name the parties to the talks.

-By Andrew Dowell, Dow Jones Newswires; 201-938-4430; andrew.dowe!ll@dowjones.com

01300000000318


disclosure and transparency and that Enron's board is comprised of a substantial majority of truly
independent directors who understand their accountability to shareholders," Peace wrote in the Oct.
30 letter.

Calpers’ board will discuss the letter in a closed-session meeting scheduled for Tuesday in
Pasadena, Calif., but isn't bound to act on it because Peace isn't a boardmember, Pacheco said.

Calpers is the nation’s largest public pension fund, with assets totaling approximately $151 billion.
-By Jason Leopold, Dow Jones Newswires; 323-658-3874;

01300000000216


receivables deals, the suit claims. The assets are not property of Enron because they were sold
before Enron's Dec. 2 bankruptcy filing. J.P. Morgan acted as an agent in two credit facilities whose
proceeds helped fund two accounts receivables transactions between Enron and Sequoia Financial
Assets, a special purpose, bankruptcy-related entity, the suit said, Sequoia allegedly bought the
receivables from Enron and reinvested the money collected on the bills in short-term paper issued by
Enron and its Enron North America unit.

Dynegy Files Motion to Dismiss Or Transfer Enron Case

Dynegy Inc. filed a motion on Monday asking the federal bankruptcy court in the Southern District of
New York to dismiss Enron's $10 billion breach-of-contract lawsuit against Dynegy, or, to transfer the
case to Houston, Dow Jones reported. Enron's claims against its former merger partner “in no way
relate to federal bankruptcy law or the administration of these chapter 11 cases,” according to the
filing.

Dynegy asked the New York bankruptcy court to abstain from hearing Enron's suit against Dynegy,
which allegedly involves state rather than federal breach-of-contract claims. Alternatively, the case
should take place in Texas - where Enron and most of its units are based - instead of New York,
where the “only link to the dispute is ... hung upon the gossamer thread of the location of (Enron's)
subsidiary Enron Metals and Commodity Inc."

01300000000357


The partnerships had been around for two years and appeared in Enron SEC filings during that time.
But the manner in which they were disclosed, with different pieces of information appearing in
different filings, made it difficult to learn such basics as which senior executive was running the
partnerships.

Worse, there was no way from the available information to understand just what the partnerships
were doing or what impact they had on Enron's finances. Some stock and credit analysts say they
had never heard about the LJMs until they read about them in the newspapers in recent weeks.

Mr. Fastow’s LJM dealings were, however, well-known within Enron and a magnet for criticism, Part
of LUM's activities involved buying Enron assets, and some officials balked at doing deals that could
enrich a senior executive at the company’s expense, say people familiar with the matter. At least two
senior officials complained internally about the potential conflicts of interest. The concems were
turned aside by top management, say the people familiar with the events.

The anger might have been greater had those who complained known the extent of Mr. Fastow's
financial gains from LJM. Internal partnership documents show that the CFO made millions of dollars
a year from LJM, far more than his corporate compensation.

One private document for LJM2’s successful effort to raise nearly $400 million boasted of “preferred
access” to Enron deals and said that Mr. Fastow's economic interests would be "aligned" with the
partners’. Late last year, Mr. Fastow and Enron were laying plans for a $1 billion LJM3 fund, though it
never came to fruition. Enron later estimated that Mr. Fastow made more than $30 million from the
LJM partnerships.

Mr. Fastow has declined repeated requests to be interviewed. His attorney points to Enron
statements saying that all of the company’s dealings with the partnerships were proper and
thoroughly vetted by the board and top management.

In September, Enron faced questions from The Wall Street Journal about the partnerships.
According to a person familiar with the matter, there were sharp internal disagreements over whether
to make top officials available for interviews. This person says that at one point, Mr. Fastow shouted
that he saw no “upside" to talking.

A Cryptic Reference

Then came Enron's Oct. 16 report of its third-quarter earnings. Although a $1 billion write-off for
telecommunications and other ventures produced a big net loss, the company trumpeted a 26%
increase in “recurring earnings” due to “very strong results" of its "core" businesses. The stock
posted a gain for the day.

The news release contained a cryptic reference to a charge relating to the "early termination ... of
certain structured finance arrangements with a previously disclosed entity." This seemed to be Enron
code for LJM. In response to questions, the company said the LJM-related charge was $35 million.

Mr. Lay himself tried to put the LJM matter to rest. "| don't think we need to say anything more about
that," he said in an interview at the time.

Later, however, an Enron SEC filing on Nov. 8 disclosed that the actual charge related to LJM
dealings was $462 million. The $35 million figure represented cash paid to LUM in the termination,
company officials now said, with the other hundreds of millions reflecting declines in the value of
Enron assets held by LUM-related entities.

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01300000000302


Nickoloff, Peter

Tel

From: Carleton, Norman

Sent: Monday, October 29, 2001 11:41 AM
To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: Enron -- $1.2 Billion Equtiy Reduction

October 18, 2001

Money & Investing

Enron Says Its Links to a Partnership
Led to $1.2 Billion Equity Reduction

By REBECCA SMITH and JOHN R. EMSHWILLER
Staff Reporters of THE WALL STREET JOURNAL

Enron Corp. shrank its shareholder equity by $1.2 billion as the company decided to repurchase 55
million of its shares that it had issued as part of a series of complex transactions with an investment
vehicle connected to its chief financial officer, Andrew S. Fastow.

Enron didn't disclose the big equity reduction in its earnings release issued on Tuesday, when the
Houston-based energy giant announced a $1.01 billion charge to third-quarter earnings that
produced a $618 million loss. But the company briefly mentioned it in a subsequent call with security
analysts and confirmed it in response to questions Wednesday. As a result of the reduction, Enron's
shareholder equity has dropped to $9.5 billion, the company said.

In an interview Tuesday, Enron Chairman Kenneth Lay said that about $35 million of the $1.01 billion
charge to earnings was related to transactions with LJM2 Co-Investment LP, a limited partnership
created and run by Mr. Fastow. In a conference call Wednesday with investors, Mr. Lay said that the
55 million shares had been repurchased by Enron, as the company "unwound" its participation in the
transactions. In the third quarter, the company's average number of shares outstanding was 913
million.

According to Rick Causey, Enron's chief accounting officer, these shares were contributed to a
“structured finance vehicle” set up about two years ago in which Enron and LJM2 were the only
investors. In exchange for the stock, the entity provided Enron with a note. The aim of the transaction
was to provide hedges against fluctuating values in some of Enron's broadband telecommunications
and other technology investments. Mr. Causey didn't elaborate on what form those hedges took.

Subsequently, both the value of Enron's stock and the value of the broadband investments hedged
by the entity dropped sharply. As a result, Enron decided essentially to dissolve the financing vehicle
and reacquire the shares. When Enron reacquired the shares, it also canceled the note it had

“

01300000000187


Nickoloff, Peter

From: Carleton, Norman

Sent: Wednesday, Novernber 14, 2001 10:34 AM

To: Roseboro, Brian; Bitsberger, Timothy; Cetina, Jil; Sharer, James, Schultheiss, Heidilynne;
Nickoloff, Peter; Gross, Jared

Subject: Dow Jones Newswires: Enron-Dynegy Deal Has Nov. 30 2002 Walkaway Date

November 14, 2001

Enron-Dynegy Deal Has Nov. 30 2002 Walkaway Date

WASHINGTON -- Dynegy Inc.'s (DYN) proposed $7.8 billion acquisition of Enron Corp. (ENE)
carries two breakup fees and must be completed by Nov. 30, 2002, unless extended, or either party
can walk away.

The proposed merger agreement can be terminated at any time by the mutual consent of both
parties, according to a filing Wednesday with the Securities and Exchange Commission.

If the deal is terminated because Enron's board withdraws its recommendation to shareholders or
opts for a superior proposal, Enron would have to pay $297.5 million to Dynegy and $52.5 million to
ChevronTexaco Corp. (CVX), as well as $10 million for expenses.

ChevronTexaco, which owns about 26% of Dynegy, has agreed to invest $2.5 billion into Dynegy in
conjunction with the acquisition of Enron, a Houston-based utilities and communications company.

Dynegy would have to pay a $350 million breakup fee, plus $10 million for expenses, if the deal is
terminated because of a change in the board's recommendation or a superior proposal.

Under the terms of the deal, announced Tuesday, Enron shareholders will receive 0.2685 a Dynegy
share for each Enron share.

-Robert L. Grant; Dow Jones Newswires; 202-393-7851 robert.grant@dowjones.com

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01300000000219


would transform Enron into the worid's leading company, period: the “disintegration” of the traditional
corporation,

Mr Skilling believed that deregulation and market forces would force traditional, asset-heavy companies to
break up into thousands of niche players, Rather than being vertically integrated, companies would be
“virtually integrated*-by enterprises such as Enron that would “wire those thousands of firms back
together cheaply and temporarily.”

As things have turned out, it is Enron that has disintegrated. The company filed for Chapter 11 bankruptcy
on December 2nd, The story behind the most spectacular corporate roller-coaster ride in memory is
impossible to tell in full detail yet, thanks to the secrecy and opacity for which Enron is notorious. The
principal actors involved are staying mum, though the dozens of lawsuits and official Investigations now
under way should eventually shine a flery spotlight on Enron's murky doings. Even so, a rough outline is
now clear.

Pride before the fall

What drove Enron into bankruptcy in what seems like just a matter of weeks? In fact, signs of trouble had
surfaced much earlier, Rebecca Mark, a rising star in the 1990s, launched Enron on ill-fated forays into
asset-heavy businesses overseas such as the Dabhol power project in India and Wessex Water in Britain.
During the first half of this year, Enron's shares fell to around half their peak of $90, after the firm was
burned in the fallout from California's botched power deregulation and from losses on its investments in
such exotica as bandwicth trading.

These events raised questions about Enron's direction under the brash Mr Skilling, who had become chief
executive in February. But he disliked criticism: when, during a conference call, one analyst dared to ask a
pointed question, Mr Skilling snapped that he was an “asshole”. Unable to take the heat, and perhaps
seeing an even worse financial crisis ahead, he unexpectedly resigned in August. That forced Kenneth Lay,
the chairman, to take back day-to-day control of the company he had founded a decade and a half ago.

Shareholders hoped that the return of Mr Lay, who promised more financial disclosure, would revive
Enron. But within weeks, it was mired in a financial scandal that rapidly ran out of control. By October, it
was on the brink of collapse, and had to accept a most unpalatable notion: a takeover by Dynegy, a
smaller energy-trading rival based down the road in Houston.

The biggest crack in the fagade came with the release of third-quarter results in mid-October that showed
8 $1 billion write-off on broadband, water and other bad investments. Worse, Mr Lay slipped in the news
that Enron had taken a $1.2 billion reduction in equity capital, stemming from a hedging deal with a
related private-equity fund. Almost nobody outside Enron was aware of the terms of the deal with this
“structured-finance vehicle", which turned out to be just one of many off-balance-sheet devices. Enron's
failure to offer details about the risks from these murky partnerships led many to fear the worst about its
finances.

Accounting for growth

The bad news kept coming. Enron's chief financial officer, Andrew Fastow, who had set up and profited
from some of these partnerships, was pushed aside. The company restated its accounts for the past five
years, and in the process wiped out nearly $600m of profits, about a fifth of the total, The news triggered
an investigation by the Securities and Exchange Commission. Yet the firm still refused to come clean. More
than any actual financial liability, that obfuscation proved the fast straw.

Once investors and counterparties started to doubt-even slightly-that Enron was profitable, its survival

became an immediate issue. Enron had been able to raise loans because its debt was rated as investment

grade; but the loans had clauses requiring Enron to make additional payments if it was downgraded. As

this prospect loomed nearer, the idea of this highly leveraged company having to raise fresh money scared
23

01300000000344


Nickoloff, Peter

Leen

From: Carleton, Norman

Sent: Friday, December 07, 2001 12:47 PM

To: Bair, Shella; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew, Gabilondo, Jose; Gross,
Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael:
Pietrangell, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman, Mark

Subject: DJ: Dynegy Files Motion To Transfer Enron Bankruptcy Case

December 7, 2001 _

Dynegy Files Motion To Transfer Enron Bankruptcy Case

By Kathy Chu
Of DOW JONES NEWSWIRES

NEW YORK -- Dynegy Inc. (DYN) filed a motion late Thursday to transfer former merger partner Enron
Corp.'s (ENE) bankruptcy case to Houston.

The case - the largest ever in corporate history - is currently presided over by Arthur J. Gonzales in the
Bankruptcy Court of the Southern District of New York.

With its court filing, Dynegy joins Enron's 401(k) plan holders and some of the energy-trading company’s
creditors in seeking a change of venue.

In its motion, Dynegy noted that hearing the case in the Bankruptcy Court of the Southern District of Texas
would make it more convenient for creditors, the debtors and witnesses to attend the hearings.

Also, Enron "will not suffer any economic harm or inconvenience if this case is transferred to the district in
which its headquarters and business operations are located," according to the filing. "In fact, just the opposite is
true. The costs to both creditors and the debtors in terms of both time and money will be astronomnical if these
cases remain in the Souther District of New York.”

The change-of-venuc motions are scheduled to be heard by federal Judge Gonzalez in a Jan. 7 hearing.
Enron couldn't immediately be reached for comment.

The parent company, Enron Corp., and almost all of its 19 units that have filed for Chapter 11 bankruptcy
protection are based in Houston. But Enron Metals & Commodity Corp. is headquartered in New York.

Enron currently employs about 3,500 workers in Houston - after laying off 4,000 there earlier this week - and
about 250 in New York.

The company’s problems began two months ago when it reduced its shareholder equity by $1.2 billion and
admitted that it had moved assets and debt off its balance sheet to limited partnerships controlled by Enron
executives, In November, the company restated more than four years' worth of financial results, cutting earnings
by a total of $586 million.

Dynegy agreed to buy the troubled company in a deal valued at more then $9 billion, but later backed out after
other financial problems were disclosed and credit-rating agencies cut Enron's notes to junk-bond status,

After filing for bankruptcy, Enron also filed a $10 billion lawsuit against Dynegy. Dynegy, in return, filed a
countersuit to stake its claim to a valuable Enron asset, the Northern Natural Gas pipeline.

The odds seem to be slightly against the transfer of Enron's bankruptcy case to Houston.
239

01300000000350


balance sheet, and a further $7 billion in financings off the balance sheet. However, there may be
other obligations lurking in connection with its investment partnerships.

Then, too, what kind of company Enron would be under a bankruptcy reorganization is also
uncertain.

Since the debt downgrade, Enron's trading business appears damaged beyond repair. Without a
viable credit rating, the company no longer has access to the reams of cash it needs to run that
business.

Underscoring Enron's woes, the company told some of its trading partners on Friday that it will
default on some of its deliveries of wholesale electricity under contract for Sunday and Monday,
people familiar with the situation said.

Some observers had expected Enron to file for bankruptcy protection as early as this week. But the
people close to the situation said the complex business structure is slowing the process, And where
the company would file is also a question: The Houston-based company could file where it's
headquartered, but it’s also incorporated in Oregon, and many companies look to the favorable
courts of Delaware whenever possible.

Enron hired restructuring and bankruptcy specialist Blackstone Group late last week to advise it on
corporate matters and to help restructure its debt.

The company also is being advised by law firm Weil Gotshal & Manges, a bankruptcy specialist.
-By Christina Cheddar, Dow Jones Newswires; 201-938-5166 christina. cheddar@dowjones.com

-By Janet Whitman, Dow Jones Newswires; 201-938-5248; janet.whitman@dowjones.com

Ww

01300000000256


bankruptcy court and possibly even the Federal Energy Regulatory Commission.

-By Carol &. Remond; Dow Jones Newswires; 201 938 2074;
carol. remondédowjones .com

22

01300000000321


Nickoloff, Peter

From: Carleton, Norman
Sent: Monday, December 03, 2001 2:46 PM
To: Salladin, Anne; Bair, Shella, Berardi, Steve; Bitsberger, Timothy; Cetina, Jill; Eichner,

Matthew; Gabilondo, Jase; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail);
Nickoloff, Peter; Novey, Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heiditynne;
Sharer, James; Whaley, Jean; Wiedman, Mark

Subject: DJ; Enron Hint On Other Affiliates Comes From Court Motion

December 3, 2001

Enron Hint On Other Affiliates Comes From Court Motion

NEW YORK -- Enron Corp. (ENE) suggested Monday that some of its affiliates beyond those who
have already filed for Chapter 11 bankruptcy protection may do so in the future.

In a motion filed with the New York federal bankruptcy court hearing Enron's Chapter 11 case, the
company said it "anticipate(s) that certain of (Enron's) non-debtor affiliates may also file voluntary
petitions under Chapter 11.”

An Enron spokesman couldn't immediately be reached for comment.

Enron and 13 related entities filed for Chapter 11 protection Sunday. Not all of Enron's businesses
filed, however, and the statement in Monday's motion raises the possibility that some of them might
file down the line.

The statement came in the context of a request by Enron for the court to extend the deadlines for
filing several documents it must file under bankruptcy law, including schedules of its assets and
liabilities and statements of its financial affairs. The company said that other affiliates might file for
Chapter 11, and that if they did, the extended deadlines should apply to those entities too.

The company didn't say which affiliates might file, or when, or how likely it was to happen.

-By Michael Rapoport, Dow Jones Newswires; 201-938-5976; michael.rapoport@dowjones.com

189

01300000000278


Nickoloff, Peter

From: Carleton, Norman

Sent: Thursday, November 01, 2001 2:01 PM

To: Roseboro, Brian; Gross, Jared; Bitsberger, Timothy; Schulthelss, Heidilynne; Nickoloff, Peter;
Cetina, Jil; Sharer, James

Subject; Economist Article on Enron: "Houston, we have a problem”

A financial black hole

Houston, we have a problem

Noy 1st 2001 | HOUSTON, LONDON AND NEW YORK
From The Econorwst print edition

AP
AP

The troubles of Enron, a Texan powerhouse in the energy markets, could result in a new
financial crisis

JUST last year, visitors to Enron's glittering headquarters in Houston were greeted by a giant banner that
proclaimed the firm, “The world's leading energy company”. That annoyed Enron's smaller energy-trading
rivals, many of which have offices only @ stone's throw away in Houston's Energy Alley, but not as much
as what came next-a new banner, declaring Enron “The world's leading company”. In recent weeks, as the
company has been engulfed by a financial crisis, that banner has quietly been removed.

The heady mix of audacity, ambition and arrogance revealed by the banners is as good a guide as any to
Enron's remarkable rise and fall. Forged in the 1980s by the merger of two troubled gas-pipeline firms,
Enron drove the development of the sophisticated spot-and-derivatives markets in energy that it has come
to dominate. Indeed, such Is the scale of its operations, and its dealings with many of the world's financial
institutions, that some observers see parallels with Long-Term Capital Management (LTCM), the hedge
fund that failed in 1998-and not just because seemingly brilliant financial alchemists have been humbled.
Were Enron to go bust-unlikely, but in the current nervous climate, not impossible-might a crisis ensue?

Troubles in California's politically crazed power market, an ill-advised foray into telecoms bandwidth
trading and concerns about management badly dented Enron's share price earlier this year, prompting the
departure of Jeffrey Skilling, the firm's newish chief executive, in August. Kenneth Lay, an avid free-
marketeer, friend of George Bush and visionary chairman of the firm, was obliged to resume hands-on
control.

This has not slowed Enron's decline. Day by day, it seems to be sinking deeper into a financial quagmire
that is largely of its own creation. Not least thanks to its lack of transparency, the firm's credibility with
the markets has eroded to the point that talk of a possible takeover or even bankruptcy is widespread.

Enron's reputation for financial wizardry has been turned from an asset to a liability since its third-quarter
results came out in mid-October, showing @ $1 billion write-off on water distribution, broadband trading
and other investments. Worse, disclosed only in passing by Mr Lay in a conference call with analysts, the
firm suffered @ $1.2 billion reduction in capital, stemming from a hedging deal with @ related private-
equity fund called LIM. The charge was due to Enron's forced sale of 55m of its own shares when the
partnership was unwound this summer. Almost nobody outside Enron had been aware of the terms of the
deal with LIM, a “structured finance vehicle”,

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01300000000197


indicating that those mostly unsecured creditors thought they would recoup only 20% to 25% of the money
loaned to Enron.

-By Carol S. Remond, 201-938-2074; Dow Jones Newswires; carol.remond@dowjones,com
(Phyllis Plitch contributed to this column.)

121

01300000000239


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 29, 2001 9:23 AM
To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: Enron sues Microsoft

October 26, 2001

Enron Sues Microsoft Over Failed Broadband Services Deal

By MICHAEL RIEKE

Of DOW JONES NEWSWIRES

HOUSTON -- In a July conference call with analysts when Jeff Skilling was still chief executive of
Enron Corp. (ENE), he threw out a ray of hope for his company’s foundering broadband business.

Enron Broadband Services had just signed a long-term deal to provide bandwidth for MSN, Microsoft
Corp.'s (MSFT) online Internet service, Skilling said. Enron would give more details on the deal later.

After three months without farther word on the deal, Enron has broken its silence by suing Microsoft.

In a suit filed Thursday in the district court of Harris County, Texas, Enron claimed Microsoft has
failed to live up to terms of the deal.

The agreement, signed June 25, called for Enron Broadband to develop and provide network
capacity and other services to support Microsoft's offering of high-speed Internet service, according
to the lawsuit.

Microsoft was required to develop an electronic ordering and billing system for use with all regional
Bell telephone companies during an initial phase of the deal, according to the lawsuit.

Microsoft has failed to provide that system and other items required in the deal, so Enron isn't
required to deliver operational broadband services for the deal, the lawsuit said.

Microsoft sent Enron a letter dated Oct. 23 saying that if Enron didn't provide an operational
broadband system by Oct. 25, Enron would have breached the contract, the lawsuit said. Microsoft
then would be entitled to recover damages.

The suit also said Microsoft failed to provide monthly subscriber growth forecast required by the deal.

In a third breach of the contract, the suit claimed, Microsoft made public announcements about the
subject of the agreement without getting Enron's prior approval.

An Enron official told Dow Jones Newswires that Microsoft had issued a press release Oct. 15 about
the service but that Enron wasn't mentioned in the release.

6

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Most of the $9.15 billion in debt is due before the end of the third quarter, when the Dynegy buyout is scheduled to close,
Enron said yesterday in a third-quarter filing with the SEC.

Asset Sales Planned

Last week, Enron Chief Operating Officer Greg Whalley said the company will sell assets of “non-core businesses* to
raise money. It has $8 billion invested in the businesses, including broadband telecommunications and the Dabhol power
plant in India, Enron expects to get '’billions” from the sales, Whalley said, without being more specific.

Enron reported yesterday that its U.S. operations had $1.2 billion in cash left. It has added at least $5 billion since Sept. 30
from credit lines, loans and @ $1.5 billion investment from ChevronTexaco, part owner of Dynegy.

Enron used $1.9 billion of the money it raised to retire commercial paper. which is short-term debt. It gave no details on
how it spent the remaining $3.1 billion

Enron Chief Financial Officer Jeffrey McMahon said last week that the company also was looking to get another $500
million to $1 billion from private investors.

Asset sales valued at about $800 million are expected to close by the end of this year, according to the SEC filing. Enron
spokeswoman Karen Denne woukin't comment on whether it could sell assets fast enough to keep current on its debts.

Dynegy will have to help Enron sell assets, said Mitchell Stapley, who manages $3.6 billion in fixed-income assets
including Enron bonds for Fifth Third Investment Advisors inc.

Dynegy and ChevronTexaco Corp., which owns 26 percent of Dynegy, also will have to help Enron negotiate with its
lenders, said Kathleen Vuchetich, who helps manage the $1.4 billion Strong American Utilities Fund, which is 5 percent
Dynegy shares.

Debt Questioned

“I never dreamt (the $9.15 billion) would be that large, coming due all at once,” Vuchetich said, “It calls into question their
decision to schedule it that way in the first place,"

ChevronTexaco, the second-largest U.S. oil company, is providing $2.5 billion in cash as part of the Enron buyout. It
provided the first $1.5 billion a week ago.

Shares of ChevronTexaco, based in San Francisco, rose $3.62 to $86.53.

Enron yesterday reduced third-quarter results by 3 cents a share, bringing the period's loss to 87 cents, or $664 million. On
Nov. 8, Enron lowered earnings back to 1997 by $586 million to refiect losses by affiliated partnerships that were wrongly
kept off the books. That included a third-quarter reduction of $17 million

A drop in Enron's senior unsecured debt rating to ““BBB-" by Standard & Poor's on Nov, 12 may force Enron to pay offa
$690 million note by Nov. 27 if it doesn't find collateral to quarantee the debt taken on by an affiliated partnership that owns.
Brazilian natural-gas assets, the filing said

Without repayment or collateral, investors can begin to liquidate the partnership's assets, Enron said. The company said
it's working with lenders to come up with an acceptable agreement on the debt

Making good on debt owed by its Whitewing affiliated partnership may cut Enron's fourth-quarter earnings, Enron said.
Enron is obligated to back Whitewing by issuing junior convertible preferred stock. Because Enron's stock has plunged, it
may have to write down its assets by $700 million, the filing said.

©2001 Bloomberg L.P. All nights reserved. Teems cf Sarvine <http /iwww.bloomberg.comios.himi>, Privacy Policy
shite thwew bioomberg comorivacy hime and Trademarks <nitp./wew. bloomberg. comiredemarks htm.

Trac ing: ecipient Deli ery cad
‘oveboro, Brian Delivered: 11/2081 4:41 PM ead: 11/2001 5:28 PM

2

01300000000090


social lunch with an old friend, Stan Horton, who runs Enron's pipeline business. Mr. Horton asked if
he could bring Enron Vice Chairman Mark Frevert and President Greg Whalley. In a private room at
Houston's Plaza Club, Mr. Whalley popped the question: Would Dynegy be interested in buying
Enron? “| was flabbergasted,” says Mr. Bergstrom. "We were like the little kid on the block to them.”
He remembers thinking, "They're in worse trouble than | thought.”

Mr. Bergstrom suggested having Mr. Lay call Dynegy Chairman and founder Chuck Watson, and
within hours the two talked. Then they met face to face and privately Oct, 27 at Mr. Lay’s home in
Houston's exclusive River Oaks neighborhood, hammering out major points of a deal.

Dynegy’s biggest shareholder, ChevronTexaco Corp., approved a $2.5 billion investment in Dynegy
that Dynegy would use to give Enron a cash infusion. The first $1,5 billion would come right away and
the rest at the closing. J.P. Morgan Chase & Co. and Citibank arranged a further $1 billion of credit,
so that on Nov. 9, the two sides were able to announce a $9 billion all-stock betrothal. Mr. Lay,
deflecting questions about Enron's woes, said the combination “is all about the future.”

But amid the optimistic talk, new bombshells were exploding at Enron. Its Nov. 8 SEC filing disclosed
for the first time company dealings with an entity called Chewco Investments LP. Just four days
before the filing, the company had refused requests by The Wall Street Journal to discuss the entity
or even acknowledge its existence.

As it turned out, Enron had plenty of reason to be sensitive about Chewco, named for the "Star
Wars" character Chewbacca. Chewco had been set up in late 1997 during a rocky period for Enron,
when the company was missing its quarterly earnings targets and losing a bit of its Wall Street
credibility. Prudential Securities analyst Carol Coale recalls a meeting with Mr. Skilling during this
period when, she says, he promised "some strong earnings growth” in the coming quarters.

Now it's known that between 1997 and the end of last year, Enron's dealings with Chewco and a

related partnership known as JEDI (for Joint Energy Development Investments) kept hundreds of
millions of dollars of debt off Enron's books. Moreover, business deals with the partnerships also
allowed Enron to book $390 million in net income, roughly 13% of reported profits for the period,

according to the Nov. 8 SEC filing.

Although Enron treated Chewco as an independent third party, there were lots of indications to the
contrary. Chewco was managed by Michael Kopper, an Enron officer who later helped Mr, Fastow
run the LJM partnerships. Early Chewco funding of $383 million came almost entirely via Enron
through loans it arranged or guaranteed.

In its Nov. 8 filing, Enron said that Chewco and JEDI should never have been treated as separate
parties, Retroactively folding them back into Enron was the principal cause of a restatement that
slashed Enron earnings for the prior four years by $586 million, or 20%. The company said its
financial statements for those years could no longer be relied upon.

These disclosures further rocked an already-shaken investment community. If Enron officials
knowingly created and controlled Chewco as a sham third party to boost profits, they could be in
violation of federal fraud statutes, says Jacob Frenkel, a former SEC attorney and federal prosecutor.
At the very least, says Ronald Barone, head of Standard & Poor's energy and utility group, Chewco
represented “financial engineering on the razor's edge.”

Mr. Kopper, who last summer left Enron to run the LJM operation, declines to be interviewed.

According to Enron, he bought out Mr. Fastow’s partnership interests. A recent visit to LJM's offices,
across the street from Enron's Houston headquarters, found no one willing to talk.

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01300000000304


has addressed this by restructuring the unit. The effort resulted in $180 million of the third-quarter
charge. The item included severance costs, a loss on the sale of inventory and an impairment charge
to reflect the reduced value of Enron's content services business.

However, since Enron has invested so much in the business, analysts believe it is possible further
impairment charges will needed if broadband doesn't begin to turn around.

Lay addressed these concerns during the company’s conference call,

"We tried to clean up anything we needed to clean up," he said.

The "cleanup" also included a $544 million charge related to Enron's investments.

According to Lay, half of the investment charge was related to Enron's investment in the New Power
Co., a provider of electricity and natural gas to the households and small businesses. New Power
shares have fallen to about $1.88 from its 52-week high of $20.88 last October.

The remainder of Enron's investment charge is tied to both investments in other broadband and
technology companies, including the now-bankrupt Northpoint Communications Communications
Group Inc. (NPNTQ), and the early termination of a structured finance arrangement.

The significant charge prompted credit rating agency Moody's Investors Service to review Enron for
a downgrade.

According to Lay, adjustments related to the third-quarter charge will increase Enron's debt-to-capital
tatio to 50%, but that level will be reduced to 40% by the end of 2002 by proceeds from pending
asset sales,

"I'm very comfortable with our liquidity position,” Lay said.

Even if Moody's downgrades Enron's debt, it is likely it will remain investment grade. However, the
move would increase the cost of capital for the company.

Looking ahead, Enron reaffirmed its prior earnings forecasts. The company expects to earn 45 cents
a share in the fourth quarter, $1.80 in 2001, and $2.15 for fiscal 2002. Analysts surveyed by
Thomson Financial/First Call expect the company to earn 47 cents a share in the fourth quarter,
$1.81 in 2001 and $2.14 in 2002.

-Christina Cheddar, Dow Jones Newswires; 201-938-5166; christina.cheddar@dowjones.com

b>}

01300000000194


[Go]See full coveragé of the rise’and fall of Enron

Mark-to-market accounting is required whenever companies have outstanding energy-related
contracts on their balance sheets, either as assets or liabilities, at the end of a quarter. For example,
these could be agreements to sell electricity or buy natural gas over time at certain prices. Under the
rules, companies estimate the fair values of the contracts. Quarterly changes in value -- representing
unrealized, noncash gains and losses -- then are run through the companies’ income statements.

One way to gauge the size of some companies’ past unrealized gains is to dig through their cash-flow
statements, which sometimes specify the noncash portion of trading gains. At Enron, unrealized
trading gains accounted for slightly more than half of the company’s $1.41 billion of originally reported
pretax profit in 2000 and about a third of its originally reported pretax profit of $1.13 billion in 1999.

At Dynegy, unrealized gains accounted for nearly half its $762 million in 2000 pretax profit and about
half its $227 million in 1999 pretax profit. Dynegy executives say there isn't anything wrong with the
quality of their company's earnings. And they point to financial reports for the first nine months of
2001 showing that none of the company's reported eamings for this year came from unrealized
gains.

Other energy traders whose earnings have been boosted in recent years by mark-to-market gains
include American Electric Power, Duke Energy, El Paso, Entergy, Mirant, Pinnacle West Capital and
Williams Cos.

How much discretion do energy traders have in valuing their contracts? The rule, pretty much, is that
there aren't many rules.

For instance, during a conference last week sponsored by the FASB and the American Accounting
Association, attendees were shown a hypothetical example under which the fair value of a power
contract could range from $40 million to $153 million, depending on which assumptions of future
trends were used.

And the mark-to-market rules that do exist for energy contracts were crafted in large part on
approaches that Enron and other traders lobbied for. "We developed those rules,” Enron's chief
accounting officer, Richard Causey, said in an August interview,

Over the past three years, members of the FASB's Emerging Issues Task Force have extensively
debated the subject of how to value energy-related contracts. What they have decided is that
companies should be left to their own discretion, though the task force recognizes that could create
problems. In a June 2000 report, for instance, the group noted that two companies in similar
circumstances might apply different methods to estimate the fair value of their energy contracts,
resulting in widely different valuations. “Those differences lead to the question of whether some of
the methods in practice yield estimated amounts that are not representative of fair value,” the report
said.

The task force's chairman, Tim Lucas, says it simply is too difficult to draft a one-size-fits-all solution:
“There's no one way to do it. There are various models, and we think it requires professional
judgment to assess.” Further, he says, requiring companies to disclose all the estimates underlying
their earnings would produce disclosures so voluminous that they would be of little value.

That is in line with the industry’s longtime position. In a June 2000 letter to Mr. Lucas, for instance,
Mr, Causey said "the valuation process should be determined by individual companies," and the task
force "should not address the valuation methodology for energy or energy-related contracts.”

206

01300000000315


Making good on debt owed by its Whitewing affiliated partnership may cut Enron's fourth-quarter earnings, Enron said.
Enron is obligated to back Whitewing by issuing junior convertible preferred stock. Because Enron's stock has plunged, it

may have to write down its assets by $700 million, the filing said.

©2001 Bloomberg L.P. Al rights reserved. Terms of Service <nttp:iwww Sloombers.comitos, him,
shrtgiilvem bioombern. comnnymey. him ard ’ s

107

01300000000225


Nickoloff, Peter

From: Carleton, Norman
Sent; Friday, November 23, 2001 12:13 PM
To: Nickoloff, Peter; Schultheiss, Heldilynne; Whaley, Jean
Subject: WSJ article on Enron accounting, Last two paragraphs mention Wendy Gramm
November 9, 2001
ard on the

Enron's Accounting Violated
Accepted Financial Practices

By JONATHAN WEIL
Staff Reporter of THE WALL STREET JOURNAL

What could Arthur Andersen have done to protect the investing public from Enron? Brushing up on a
basic accounting textbook might have helped, some critics say,

Confirming investors’ fears, the Houston energy trader Thursday filed a lengthy disclosure document
with the Securities and Exchange Commission declaring that Its financial statements going back to
1997 "should not be relied upon" and will have to be restated. Among other problems, Enron
acknowledged overstating its net income by a total of $586 million, or 20%, Enron's financial
statements long have been widely assailed as indecipherable. Now, it turns out, they were just plain
wrong.

But what is most striking about the latest disclosures is that they show Enron's misstatements weren't

limited merely to judgment calls and gray areas for the green-eyeshade crowd to debate. Portions of
Enron's accounting practices amounted to violations of elementary accounting principles, some
accounting specialists say.

Citing client-confidentiality rules, an Andersen spokesman, David Tabolt, declines to comment on his
firm's work for Enron, which on Friday agreed to be bought by crosstown rival Dynegy. He calls
Enron's disavowal of its previous financial statements an “unfortunate situation" and says Andersen
is cooperating with the SEC's Enron investigation and the special committee formed by Enron to
investigate the company's accounting and disclosure practices.

[GolDynéay’s Enron Deal Faces Uncertainties

Consider the primary reason for the $1.2 billion reduction in shareholder equity that Enron revealed in
mid-October, sparking much of the downdraft in the company’s shares. At the time, Enron said the
reduction came about because it had decided to unwind certain transactions with some limited
partnerships with which it had done business. On Thursday, however, Enron acknowledged that the

116

01300000000234


Carleton, Norman
a

From: Carleton, Norman

Sent: Tuesday, Novernber 20, 2001 4:43 PM

To: Wiedman, Mark; Nickoloff, Peter; Cetina, Jill; Sharer, James; Berardi, Steve; Pietrangeli, Fred;
Schultheiss, Heldilynne; Whaley, Jean

Subject: FW: Bloomberg: Enron Falls Amid Concern Debt Threatens Dynegy Bid (Update5}

-—-Origins! Message-—-

From: Carleton,

Sent: Tuesday, November 20, 2001 4:41 PM

To: Raseboro, Brian; Bair, Shella; Bitsberger, Timothy

Subject: Bloomberg: Enron Falls Amid Concern Debt Threatens Oynegy Bid (UpdateS)

11/20 16:08

Enron Falls Amid Concern Debt Threatens Dynegy Bid (Update5)
By Stacie Babula

Houston, Nov, 20 (Bloomberg) — Enron Corp. shares and bonds dropped after the energy trader disclosed it may have to
pay $9.15 billion in debt due by 2003, suggesting the company may run out of cash before its takeover by Dynegy Inc. can
be completed

Shares of Enron fell $2.05, or 23 percent, to $7.01. Earlier they touched $6.55, the lowest price in more than a decade
Enron's 6.4 percent notes due in July 2006 were bid as low as 69 cents on $1 of face value and offered at 73 cents, down
more than 13 percent in light trading, traders said.

Enron, whose dealings with affiliated partnerships led to earnings restatements, credit-rating cuts, a federal investigation
and a management shakeup, said in a regulatory filing that it has less than $2 billion in cash or credit lines. Dynegy plans
to complete its buyout by October, and Enron may have to ask lenders to restructure payment schedules to survive
“This filing shows that Enron is in a precarious financial situation,” said Commerzbank Securities analyst Andre Meade,
who (ates Epon nates “hold" and doesn't own them. “They have to stay afloat for the Dynegy deal to go through, and
that now looks difficult”

Enron and Dynegy wouldn't comment on the stock drop today. Standard & Poor's Investors Service said that Enron's credit
rating remained on negative watch, indicating it would not immediately downgrade the company’s debt

$690 Million Surprise

“Enron's near-term liquidity position is... expected to be sufficient to carry the company through the completion of its
proposed merger with Dynegy,” S&P said in a report.

Investors were concerned the debt, including 4 $690 million note that Enron disclosed it may have to pay off next week,
would lead to a cut in Enron's crecit rating, analysts said.

The filing was a “distraction” that will not threaten the merger, said Todd Shipman, a director at S&P who follows Enron.
“Our approach to this has been on the basis that the Dynegy deal is a good thing for credit quality," Shipman said

Moody's Investors Service, which didn’t issue a statement on Enron's debt today, kept the company’s credit rating at
investment grade on Nov. 9, the day Dynegy announced it would buy Enron in a deal now valued at $25 billion.

The ruling came after executives from Lehman Brothers Holding Inc., J.P. Morgan Chase & Co, and Citigroup Inc.'s
Salomon Smith Bamey lobbied the credit-rating company, people familiar with the situation said

Avoiding Junk
A junk rating would have led Dynegy to abandon the acquisition, Dynegy Chief Executive Officer Charles Watson said. It

would also have triggered debt repayment of at least $3.9 billion, Enron said in a Securities & Exchange Commission filing
1

01300000000072


Nickoloff, Peter

From: Carieton, Norman
Sent: Monday, December 03, 2001 12:02 PM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy, Cetina, Jill, Eichner, Matthew; Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Pater; Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian, Schulthess, Hetdilynne, Sharer, James; Whaley,
Jean; Wiedman, Mark

Subject: DJ: An Energy Giant Falls; Recap Of Dow Jones' Enron Coverage

December 3, 2001

An Energy Giant Falls: Recap Of Dow Jones’ Enron Coverage

Dow Jones Newswires

Enron Corp. (ENE) ended days of speculation and filed for Chapter 11 protection from creditors
Sunday, the biggest such filing in U.S. history. Simultaneously, the Houston-based energy firm sued
Dynegy Inc. (DYN) for "not less than $10 billion," accusing it of wrongfully terminating a merger deal
last week that the two firms had reached just two weeks earlier.

Dow Jones Newswires coverage of this fast-moving story can be found under the stock symbol ENE.

Dynegy CEO Says Enron Lawsuit Is "Without Merit”

Dynegy said Enron's lawsuit against it "has no merit whatsoever in law or in fact,” calling the suit “one
more example of Enron's failure to take responsibility for its demise.”

Private Illinois Firm Claims To Make Tender Offer For Enron

Standard Power & Light Inc., a privately held company that buys and develops power plants, plans
to hold a tender offer to acquire at least a majority stake in bankrupt Enron. Standard Power said it
expects the tender offering price to be less than $1 a share, depending on several issues, including
the final result of Enron's failed merger with Dynegy Inc.

NYSE Reviews Enron's Continued Listing Status, Cites
Bankruptcy Filing

The New York Stock Exchange is reviewing Enron's continued listing status. The Big Board plans to
continue trading Enron's stock, as the company still meets NYSE quantitative listing standards, but
the exchange isn't limited by those standards and can seek a stock delisting if it believes continued
listing is "not advisable."

Enron Corp.'s DIP Financing Expected Monday

Enron expects to receive debtor-in-possession financing as early as Monday, according to a person
familiar with the matter. Enron said it is in "active discussions and expects to complete these
discussions shortly.”

Enron Bankruptcy Wouldn't Push S&P To Cut Energy Co Ratings
14

01300000000260


Nickoloff, Peter

From: Carleton, Norman
Sent: Thursday, December 06, 2001 4:29 PM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew; Gabilondo, Jose; Gross,

Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael;
Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman, Mark
Subject: DJ: Vast Dealings With Enron Helped Diversify Risk, Some Say

December 6, 2001

Vast Dealings With Enron Helped Diversify Risk, Some Say

By JOE NIEDZIELSKI
Of DOW JONES NEWSWIRES

NEW YORK -- Enron Corp.'s (ENE) financial dealings rippled throughout global financial markets, but in
some ways, the spread of risk among hundreds of institutions has softened the blow from the biggest bankruptcy
in US, history.

Ata time when many companies are putting their house in order with regards to Enron - for example, by
disclosing bond holdings or closing out derivatives contracts - Standard & Poor's noted Thursday that credit
exposure to Enron isn't concentrated in any one institution, country, or even industry.

Total credit exposure to Enron likely exceeds the $33 billion on Enron Corp.'s balance sheet, but those
exposures come in many forms, not all of which are equally risky, S&P said. "The good news is that while some
of the exposures may be material, they do not appear, at least on the basis of initial reports, to be life threatening
to any institution," the rating agency said.

The tone of S&P's remarks Thursday echoes that of some reports this week from Wall Street fixed-income
firms. Merrill Lynch said almost every global financial entity has derivative contracts outstanding with Enron.
"This is actually a positive as risk to Enron is spread over a large number of counterparties," Merrill said.

But what's been difficult for agencies like S&P to get at, is the full picture of Enron's exposure throughout
financial markets, such as derivatives, Enron's liabilities to counterparties, or the amount it owed to third parties
under derivatives contracts, was around $18.7 billion as of Sept. 30, according to Swaps Monitor, the New York
firm that tracks over-the-counter derivatives.

A lot of Enron's derivatives counterparties who didn't want to keep the full share of their Enron exposure on
their trading books may have offloaded some of the risk in the credit derivatives market, or through surety bonds
issued by insurers. That in tum created more financial contracts or synthetic bonds that use credit derivatives
exposed to an Enron failure.

"We, by no means, have gathered the complete picture of who's holding the bag,” S&P's Tanya Azarchs told
Dow Jones Newswires.

Last week, S&P noted about a $3.3 billion notional, or face value, of Enron credit exposure in the synthetic
collateralized debt obligations, or CDOs, that it rates. In these deals, the credit risk of a portfolio of obligors is
transferred to a swap counterparty and to investors who buy notes ranging from high credit quality to slightly
speculative. Enron also was a swap counterparty on some $3 billion face value worth of deals rated by S&P.

And Enron was among the more actively-traded names in the single name credit default swap market,
insurance-like contracts between two counterparties that protect against defaults and other credit events like

227

01300000000336


Nickoloff, Peter

i

From: Carleton, Norman
Sent: Tuesday, December 04, 2001 10:01 AM
To: Bair, Sheila, Berardi, Steve; Bitsberger, Timothy, Cetina, Jill; Echner, Matthew; Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian; Schullheiss, Heiilynne; Sharer, James; Whaley,
Jean; Wiedman, Mark

Subject: DJ: House Staff To Meet With SEC Staff On Enron; Jan Hearing

December 4, 2001

House Staff To Meet With SEC Staff On Enron; Jan Hearing

Dow Jones Newswires

(This article was originally published Monday.)

WASHINGTON - U.S. House Energy and Commerce Committee staff have scheduled a series of
meetings this week - including one with Securities and Exchange Commission staff - in preparation
for a hearing sometime in January on the financial collapse of Enron Corp. (ENE).

"The committee will be moving very aggressively to try and pinpoint what went wrong and what, if
anything, Congress can do to prevent this type of thing from happening again," said Ken Johnson,
spokesman for Rep. Billy Tauzin, R-La., the committee's chairman.

Johnson disclosed the meeting schedule for the week: The committee staff will meet with key
Securities and Exchange Commission staff Tuesday. The agency is investigating the off-the-books
transactions that appeared to lead to Enron overestimating its earings and contributed to a collapse
in the company’s stock equity.

The committee staff will meet Wednesday with officials from Arthur Anderson, Enron's outside
auditor, and the Financial Accounting Standards Board. On Thursday, the committee staff will travel
to Houston to meet with top Enron executives.

The committee expects the hearing and any potential legislative action on the Enron debacle to
primarily address accounting and bookkeeping matters, assuming the investigation doesn't find other
issues were involved, Johnson said.

-By Bryan Lee, Dow Jones Newswires; 202-862-6647; Bryan.Lee@dowjones.com

165

01300000000283


Paul Haeberlen
Houston

The accounting profession and especially the "big 5", very much influence the accounting and
auditing standards. The fact that the profession has allowed the accounting and auditing standards
and their practical application to spin out of control, must be the fault of the profession. The
profession that it has allowed giant conflicts of interest to exist. Accountants should make sure they
are not only independent, but seen to be independent, and provide an independent view which can
be relied upon by third parties. If the auditing profession does not correct itself, then it must expect
that others will take the lead.

Angus McDowell
New York

01300000000313


Carleton, Norman

From: Carleton, Norman

Sent: Tuesday, November 20, 2001 4:41 PM

To: Roseboro, Brian; Bair, Sheila; Bitsberger, Timothy

Subject: Bloomberg: Enron Falls Amid Concern Debt Threatens Dynegy Bid (Update5)
19/20 16:05

Enron Falls Amid Concern Debt Threatens Dynegy Bid (Update5)
By Stacie Babula

Houston, Nov. 20 (Bloomberg) -- Enron Corp. shares and bonds dropped after the energy trader disclosed it may have to
pay $9.15 billion in Gebt due by 2003, suggesting the company may run out of cash before its takeover by Dynegy Inc. can
be completed.

Shares of Enron fell $2.05, or 23 percent, to $7.01. Earlier they touched $6.55, the lowest price in more than a decade.
Enron's 6.4 percent notes due in July 2006 were bid as low as 69 cents on $1 of face value and offered at 73 cents, down
more than 13 percent in light trading, traders said.

Enron, whose dealings with affiliated partnerships led to earnings restatements, credit-rating cuts, a federal investigation
and a management shakeup, said in a regulatory filing that it has less than $2 billion in cash or credit lines. Dynegy plans
to complete its buyout by October, and Enron may have to ask lenders to restructure payment schedules to survive.
"This filing shows that Enron is in a precarious financial situation,” said Commerzbank Securities analyst Andre Meade,

who rates Enron shares “hold” and doesn’t own them, “They have to stay afloat for the Dynegy deal to go through, and
that now looks difficult.”

Enron and Dynegy wouldn't comment on the stock drop today, Standard & Poor's Investors Service said that Enron's credit
rating remained on negative watch, indicating it would not immediately downgrade the company's debt.

$690 Million Surprise

“Enron's near-term liquidity position is. . . expected to be sufficient to carry the company through the completion of its
proposed merger with Dynegy,” S&P said in a report.

Investors were concerned the debt, including a $690 million note that Enron disclosed it may have to pay off next week,
would lead to a cut in Enron's credit rating, analysts said

The filing was a “distraction” that will not threaten the merger, said Todd Shipman, a director at S&P who follows Enron.
‘Our approach to this has been on the basis that the Dynegy deal is a good thing for credit quality,” Shipman said.

Moody's Investors Service, which didn't issue 2 statement on Enron's debt today, kept the company’s credit rating at
investment grade on Nov. 9, the day Dynegy announced it would buy Enron in a deal now valued at $25 billion,

The ruling came after executives from Lehman Brothers Holding Inc., J.P. Morgan Chase & Co. and Citigroup Inc.'s
Salomon Smith Barney lobbied the credit-rating company, people familiar with the situation said.

Avoiding Junk

A junk rating would have led Dynegy to abandon the acquisition, Dynegy Chief Executive Officer Charles Watson said. It
would also have triggered debt repayment of at least $3.9 billion, Enron said in a Securities & Exchange Commission filing
yesterday.

Enron shares are selling for almost 32 percent less than the value of Dynegy's offer, showing investors have doubts the
deal wil be completed. Dynegy shares fell $1.90 to $41.70 today.

“'It's become more clear that the chances of this deal going through aren't $0 percent, but much closer to fifty-fifty,” said
Edward Paik, who helps manage the Liberty Utilities Fund, with 1.6 million Enron shares. *’There’s just so much
information that is unknowable” about Enron's financial position, he said.

01300000000089


off even more customers.

The proposed merger with Dynegy should have restored confidence, and thus halted the unwinding of
Enron's trading book. In the event, Dynegy took a closer look inside Enron's black hole and decided not to
proceed-making the downgrading of Enron's debt and its bankruptcy inevitable. Chuck Watson, Dynegy’s
boss, argues that even another $1.5 billion would not have saved Enron, given the management's refusal
to be open about its financial position even with its rescuer, “It is incredible that they continued in this
manner...Enron never understood that business |s not just about numbers and the balance sheet: it's
about your brand, and the confidence you inspire.”

How did Enron manage to pull off its confidence trick?

This potted history may tell what happened, but it raises a question: how did Enron manage to pull off its
confidence trick? The key to understanding its collapse is contained in its annual report for 2000. The
company, the report says, “is laser-focused on earnings per share (EPS), and we expect to continue strong
earnings performance."EPS is a number that Is watched obsessively by investors and analysts, and so is
often crucial to share performance. It is also relatively easy to manipulate.

It now seems clear that growth in EPS became ever harder for Enron to deliver. So its laser focus switched
to looking for accounting fiddies that would make it look as if EPS was going up, and also hive debt off its
books. To that end, several off-balance-sheet entities were set up. These were not wholly independent of
Enron, but were judged sufficiently separate that their profit or loss did not have to be consolidated into
the company’s results. Assets, or portfolios of assets, were then “sold” to these entities.

For example, swaps were created on Enron's balance sheet that would compensate the buyer of assets in
the event of an unexpected loss. Sometimes the quality of the assets sold was doubtful (a block of
Internet shares, say); sometimes the third-party entity would pay using a loan from Enron, which then
booked the interest on the loan as income. For illiquid assets, Enron had considerable discretion in
deciding what constituted a fair price. According to Off Wall Street, a consultancy, around 28% of Enron's
EPS in 2000 came from gains on sales of securitised assets, mostly to third parties connected with Enron,

Andersen, Enron's auditors, may have allowed these transactions because they were considered too small
to be material, But a combination of bigger losses to hide and the success of the disguise meant that the
partnerships soon grew so big that it now seems surprising, to put it no stronger, that the auditors did not
revisit their accounting treatment and legality.

The thorniest question of all is why Enron ever had to resort to these financial shenanigans. Perhaps
evidence of simple, criminal activity will be found. Yet greed was surely not the only factor. Although
Enron's accounts remain a black box, there are growing suspicions that even its energy-trading business-
the jewel that Dynegy wanted so badly-may not have been as impressive as it seemed.

This is not to deny that Enron's traders were formidable. Harvey Padewer of Duke, an American utility that
was 2 big rival of Enron's, concedes that “Enron had the biggest and strongest energy-trading business in

North America.” The company accounted for 15-20% of gas and power trading in the region. John Martin,

an economist at Baylor University, reckons that the internal risk management of the trading business was

basically sound.

But did high volumes really add up to big profits? At first, yes. However, partly as a result of Enron's
success in expanding competitive markets, dozens of rivals flocked into trading. There proved to be few
barriers to entry in energy trading; and Enron's skilled employees were snapped up in droves by rivals.

One indication of Enron's growing difficulties was the declining returns on extra revenues. Revenues grew

by $10 billion from 1998 to 1999, and then jumped by another $60 billion to $100 billion in 2000. Profits
before tax, on the other hand, rose by $1 billion in 1998, and by rather under $500m in both 1999 and
2000. Enron's return on capital was only 6.6% in 2000, less than rivals such as Williams and Dynegy.

mA

01300000000345


The bankruptcy filing by Enron is unlikely to trigger downgrades of debt issued by U.S. oil and gas
explorers and producers rated by Standard & Poor's, said S&P analyst Bruce Schwartz.

Enron Likely Pullout Won't Hurt Japan Energy Deregulation

Japanese energy deregulation may be about to lose its single biggest advocate, as Enron decides
whether or not to fold its businesses there in the wake of its bankruptcy filing in New York Sunday.

Enron Collapse Could Weigh Heavy On Some Inaurere

The insurance industry didn't need Enron Corp.'s (ENE) problems, particularly when it comes to
reinsurance prices. Primary insurers could be on the hook for as much as $2 billion in claims. Some
insurers also will likely take a hit in their investment portfolios if Enron defaults on its bond payments.

The loss would be material but not devastating for the industry.

Enron Woes May Pressure Pricing For Broadband Services

Problems at Enron, which has a nationwide broadband fiber-optic network, could eventually translate
to greater downward pressure on pricing of broadband telecommunications services, according to

some experts.

Stories about companies with exposure to Enron:
Barclays Has $126M 'Trade Debt’ In Enron Piling - WSJ
Chase Manhattan Has $113M ‘Trade Debt' With Enron - WSJ
John Hancock Financial Confirms Enron Exposure At $320M
Royal & Sun Signals Tt Doesn't Have Large Enron Exposure
XTO Energy Sees Minimal Exposure To Enron
TXU Says Potential Exposure To Enron Lessa Than $20M
UriliCorp Says It has Limited Enron Exposure
Genesis Energy Says Potential Net Enron Exposure Is About
$21M
Covanta Energy Seea ‘No Exposure' To Enron
Constellation Energy: No Direct Credit Exposure to Enron
Southern Union Co Has No Material Fincl Deals With Enron
Spinnaker Exploration Announces Enron Exposure $2.2M
International Power's Enron Exposure Ie Les# Than GBP2
Min
U.K. Prudential Has Virtually No Exposure To Enron
Other stories related to Enron:
Pitch Lowers Enron Ratings To 'D’ >ENE
IntercontinentalExchange To Enter UK Gas, Power Markets
By Bnd of Dec.
Dutch Tennet Excludes Enron From Import Capacity Auctions
Amsterdam Power Exchange: Enron's Departure Not Affecting
Spot Power Trade
Enron's India Unit Reviewing Dispute With Sole Buyer
Enron Considering "All Possible Options" For Japanese Ops
Enron Australia Appoints Administrator, Seeks Buyer
Creditors Holding 20 Largest Unsecured Enron Corp. Claims
Largest Unsecured Enron Broadband Services Inc. Claims
Ten Largest Unsecured Enron Energy Services Inc. Claims
Largest Unsecured Enron Power Marketing Inc. Claims
Largest Unsecured Enron North America Corp. Claims

142

01300000000261


Nickoloff, Peter

De a cee ee

From; Carleton, Norman

Sent: Monday, October 29, 2001 11-35 AM
To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: SEC Seeks Information on Enron
October 23, 2001

Money & Investing

SEC Seeks Information on Enron Dealings
With Partnerships Recently Run by Fastow

By REBECCA SMITH and JOHN R. EMSHWILLER
Staff Reporters of THE WALL STREET JOURNAL

Enron Corp. said it has been contacted by the Securities and Exchange Commission seeking
information on the energy giant's controversial dealings with partnerships that were set up and run
until recently by its chief financial officer, Andrew S. Fastow.

Following Enron's announcement Monday moming of the SEC inquiry, the company’s stock took
another big slide, falling more than 20% in New York Stock Exchange trading. As of 4 p.m., Enron
shares were trading at $20.65, off $5.40, knocking about $4 billion off Enron's market capitalization.
Volume topped the Big Board's most-active list at about 36 million shares. A week ago, Enron stock
was trading at about $33 a share. Subsequently, the company announced a $1.01 billion third-
quarter write-off that produced a $618 million loss.

Analysts also voiced concerns Monday about possible other bad news lurking amid Enron's vast and
extremely complex operations. The company has dealings with a number of related entities. Under
certain circumstances, if Enron's credit rating and stock price fall far enough, the company would be
obligated to issue tens of millions of additional shares to these entities, diluting the holdings of
current shareholders.

[Go]Sée'a timeline of évents

Enron has previously acknowledged the provisions but said its business is strong and it feels
confident that there will be no defaults.

In a statement, Enron Chairman and Chief Executive Kenneth Lay said the company “will cooperate
fully" with the SEC inquiry and “look(s) forward to the opportunity to put any concern about these
transactions to rest." Enron has consistently said that it believes its dealings with the Fastow-related
partnerships were proper and properly disclosed. The company has said it put billions of dollars of

»

01300000000182


Those master agreements include certain events under which a counterparty can terminate a
transaction. Among those are failure to pay, failure to deliver and, of course, bankruptcy.

Whether counterparties will be able to claim exemption from the automatic stay that prevents anyone
from terminating contracts with a company that filed for bankruptcy will hinge on the type of deals
they're a party to and whether they meet certain statutory requirements. Although Enron and its
lawyers are likely to nitpick the unwinding of each and every contract involving the company, legal
experts noted that Enron's fondness for EE! agreements should help those entangled in power
purchase agreements to liquidate their positions since these contracts treat all participants as forward
contracts merchants. Such merchants are exempt from the stay stipulated by section 362A of the
bankruptcy code.

Key to how well or poorly counterparties will make out now that Enron's business has been all but
dried out, is how much if any collateral protects their transactions.

So far, it's unclear how much of Enron's derivative transactions were collateralized. But lawyers
familiar with the matter said it was likely that a large amount of those contracts were not
collateralized.

That's likely to be bad news for some counterparties. Because if they're owed money by Enron on
their netted derivative exposure, they'll have to join other unsecured creditors, likely receiving little of
their claims. The bonds and bank debt of Enron took a nose dive after Dynegy rescinded its merger
offer, with trading levels indicating that those mostly unsecured creditors thought they would recoup
only 20% to 25% of the money loaned to Enron.

-By Carol S. Remond, 201-938-2074; Dow Jones Newswires; carol.remond@dowjones.com

(Phyilis Plitch contributed to this column.)

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financial downfall.

Enron Seeks Supplier to Take Over California University System Powers Contract

Enron Corp is looking for another electricity supplier to complete its contract with California's
two public university systems, a spokeswoman for California State University said yesterday,
reported Dow Jones. Enron Energy Services Inc.'s current contract with California State and
the University of California Systems expires on March 31, 2004, said spokeswoman Clara
Potes-Fellow. The Enron subsidiary filed for chapter 11 bankruptcy protection Dec. 2.

Enron Contract Hearing Moved To Dec. 18

A bankruptcy court hearing regarding embattled Enron Corp.'s motion to negotiate, end or sell
certain contracts has been postponed to next Tuesday, Dec. 18, Dow Jones reported. The
meeting was originally scheduled for today. Earlier this week, Enron filed a motion with the
court asking to be allowed to terminate with other parties certain contracts with safe-harbor
provisions. The company doesn't want to ask for court approval every time it seeks to end an
agreement.

In its filing, Enron had asked for authority to end some of these safe-harbor contracts and
negotiate payments for each termination. Creditors, including Cinergy Corp.'s Cinergy

Services Inc. and Wiser Oil Co., have filed objections. The motions and objections will be
addressed at Tuesday's bankruptcy court hearing.

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one of Andersen's biggest clients. So far, Mr. Tabolt, the Andersen spokesman, says the SEC hasn't
told Andersen it is a subject of the Enron probe.

Enron's disavowal of its previous financial statements also is a major embarrassment for the directors
who sit on the Enron board's audit committee, which serves as the overseer of Enron's financial
reporting, intemal controls and compliance processes. Among the committee members is Wendy
Gramm, a former chairman of the Commodity Futures Trading Commission and the wife of U.S. Sen.
Phil Gramm (R., Texas). Ms. Gramm also was a member of the audit committee of IBP Inc., a
meatpacking company that earlier this year became engulfed in an accounting debacle that prompted
an SEC investigation and nearly derailed Tyson Foods’ since-completed plan to buy the company.

Enron last week said its audit committee had been responsible for conducting annual reviews of the
transactions between Enron and the partnerships run by former Chief Financial Officer Andrew S.
Fastow. The company said its special committee is investigating "whether those controls and
procedures were properly implemented.” Through an Enron spokeswoman, Ms. Gramm declined to
comment,

Write to Jonathan Weil at jona

01300000000236


In one sign of the ripple effects, the price investors pay to protect themselves from losses on Enron
debt was surging. The cost of a "default swap" -- in which an investor pays another investor to take a
chunk of debt at face value in the event of default -- rose to 10% of the size of the credit being
insured. That was up from 8% a day earlier, and more than holders of Lucent Technologies Inc. debt
had to pay at the height of that technology company’s troubles earlier during the year.

Even with its woes, Enron remains an investment-grade company. Most credit-rating agencies rate
Enron's senior unsecured debt at several notches above the noninvestment-grade level.

Yet Fitch said Thursday it put Enron's credit rating on watch for a possible downgrade, following a
similar move by Moodys Investors Service earlier during the week. (Standard & Poor's, a division of
McGraw Hill Cos., stopped short of putting the company on its Creditwatch list, opting instead to
revise its long-term ratings outlook to "negative," citing concems about the company’s financial
flexibility.)

Meanwhile, the weak bond prices are a sign that the markets are bracing for the worst. “These are
investment-grade bonds that are migrating toward distressed levels," said Glenn Reynolds, an
analyst at Credit Sights Inc., an independent fixed-income research firm in New York.

If Enron's credit ratings fall, it would have implications far beyond the company’s ability to raise
money. As an energy trader, a credit downgrade sends a signal to other participants in crucial
markets about its ability to make good on its commitments.

Enron makes markets in a variety of commodities. Thought it is best known for trading electricity and
natural gas, the company also is a huge force in the markets for other commodities such as lumber,
metals, bandwidth capacity and steel. As a market maker matching buyers and sellers, Enron
handles about a quarter of all the trading in the nation's energy and gas markets,

Enron's credit-worthiness is hugely important. The better its credit rating, the cheaper it can hedge, or
offset, its positions in all these commodities markets through derivatives and pass on savings to
customers. Without that credit rating, the cost of this high-margin, high-volume business starts to rise.
A derivative is an instrument whose value is linked to, or derived from, that of an underlying security
or asset, such as a stock, bond or commodity.

"Even if the company does retain its investment-grade rating, the perception that this might be at risk
will start to affect their core businesses,” said Mr. Reynolds at Credit Sights Inc. "Any prudent risk
[manager] at Enron's counterparties” -- any institution on the other end of a financial agreement with
Enron -- "is going to be examining their exposure to Enron, and looking for ways to minimize it or
Offset it," Mr. Reynolds said.

Write to Jathon Sapsford at jathon. ford @wsj.com < :jathon.sapsfordi j.com> and
Suzanne McGee at suzanne.mcgee@wsj.com <mailto:suzanne.mcgee@wsi,com>

01300000000164


Those factors led Mr. Chanos to begin shorting the stock in late November of last year, when it was
fluctuating between $65 and $80; he won't provide details. Overall, the level of short interest, or
short-selling positions not yet closed out, on Enron shares jumped 2.2 million shares to 7.9 million
shares for the month through mid December, from the same period in the previous month.

As other red flags surfaced, in February Mr. Chanos and other short sellers significantly ramped up
the bearish positions. Mr. Chanos first discussed his view of Enron with those outside the firm that
month in Miami, where he hosted his annual "Bears in Hibernation” conference, Attendees bring two
ideas to present, and one of his was Enron.

With Enron's stock trading at $72 at that time, or roughly 40 times 2001's per-share eamings
estimates, “the market is priced for perfection here," Mr. Chanos told the 25 or so attendees,
“whereas it looks like things may be anything but.”

Back in New York, Mr. Chanos arranged a second round of sessions with bullish analysts. “Here's
our thesis,” he told them. “What are we missing?”

Mr. Chanos came out of those meetings with a “heightened conviction that we were right.” For one
thing, he sensed frustration brewing about the level of trust required with Enron.

As the spring progressed, Mr. Chanos became increasingly confident, adding to his short position.
On a widely reported conference call in April, Jeffrey Skilling, then Enron's chief executive,
responded to another short seller's criticism that Enron hadn't provided a balance sheet by calling
him an “a--h---." For the first time, "| got a sense that the company was now getting tough questions
and was not happy about it,” Mr. Chanos says.

For their part, Wall Street analysts argue that they have limited time and resources for the in-depth
research that Mr. Chanos prefers. Many cover dozens of companies. Still, some say they have
learned lessons from Enron's fall from grace. Salomon Smith Bamey analyst Raymond Niles, for one,
says he will "pursue warning signs relentlessly and go by gut instinct" when he senses a looming
problem. Says Mr. Niles, who covers Enron: “| think shorts play a very valuable role in the market,
reminding us of what can go wrong.”

Write to Caseell Biyan-Low at gg $ ailto: = a @wsj.com> and
Suzanne McGee at suza a ailto:suzanne si

Oct. 16: Enron takes $1.01 billion charge related to write-downs of investments. Of this, $35 million
is attributed to partnerships until recently run by CFO Andrew Fastow. Enron also discloses it shrank
shareholder equity by $1.2 billion, as a result of several transactions including ones undertaken with
Fastow's investment vehicle.

Oct. 17: SEC sends letter to Enron saying it was beginning an “informal inquiry.”

Oct. 19: The Wall Street Journal discloses that general partners of Fastow partnership realized more
than $7 million last year in management fees and about $4 million in capital increases on an
investment of nearly $3 million in the partnership, set up principally to do business with Enron,
according to internal partnership document. Enron's board meets to discuss SEC inquiry.

Oct. 22: Enron announces SEC will begin a probe of company’s “related party transactions,"
including those with Fastow partnerships. Enron says it will fully cooperate.

9

01300000000206


companies.

He said a rethink was needed of accounting standards, saying that the rules have grown too
complex.

He added that the financial reporting model was broken.

"We can't long maintain trust in our capital markets with a financial reporting system that delivers
volumes of complex information about what happened in the past, but leaves some investors with
limited understanding of what's happening at the present and what is likely to occur in the future."

Mr Berardino also called for reform of the regulatory environment, saying standard-setting was too
slow, responsibility for administering discipline too diffuse and punishment not sufficiently certain.

The scrutiny of Enron's accounting is the latest setback for the big professional services firms as they
seek to reassure over perceived conflicts of interest.

Andersen, along with similar firms, says it has internal controls to prohibit such conflicts between
audit and consultancy.

216

01300000000325


B, PRAWL

A look at where Enron's major assets, operations and interests lie;

01300000000248


company heard that Enron had started buying something, he started buying. Or at least he didn't sell, which
would be like stepping in front of a moving train.

On those occasions when the market moved against Enron, the company allowed its senior traders to sit on
positions that were losing hundreds of millions of dollars in market value, so long as the senior trader could
justify his analysis. For example, when gas futures on the New York Mercantile Exchange unexpectedly started
to rise in October from about $2.25 per million British thermal units to $3.25, Enron stayed short, even as its
gas profit and loss statements deteriorated daily.

But Enron was right. Gas futures have since declined to their pre-October levels.
Unlimited Free Risk Capital

No other trading company would have allowed a trader to sit on even fraction of that position, a senior trader
with a merchant energy company said. And no deep-pocketed partner, if one were to infuse an Enron energy
trading venture with enough money to obtain an investment-grade credit rating, would allow Enron traders to
swing for the fences as in the old days.

Enron traders had unlimited risk capital for free. No bank partner is going to provide that kind of backing,
according to the senior trader (who also might not mind seeing Enron go away, duc to some long-term gas
supply contracted from the company at prices much higher than today’s market).

Besides, other energy companies have learned from Enron's collapse that it's too risky to do so much business
with one company.

"Even if it regained footing and credibility, the market will not allow another company to have 25% market
share like Enron once did," Fleishman said, "Market share would be a fraction of the past."

Couldn't Enron's talented traders still turn some decent profits and keep Enron's current good contracts running,
even if kept on a much shorter leash? After all, the company still has its trading book, talent, systems and
technology,

The answer: Not likely. Enron's excellent market analysis was in no small part due to the information it had
from its huge deal flow. Without that market information, Enron's ability to correctly call price directions would
deteriorate.

What's more, without the ability to bully the market, Enron's traders may not be that good. They have little
experience trading within value-at-risk limits standard at other companies, the senior trader said.

Enron may have trouble hanging on to its best traders anyway. Its senior traders have clauses in their contracts
that prevent them from jumping to the competition, but speculation is that Texas’ right-to-work laws could make
enforcement of those clauses difficult for a company in bankruptcy.

"Time is critical, as more talent will walk out the door and trading book will shrink,” Fleishman said. "I would
say something needs to be announced very soon and at full speed by year end.”

At the traders conference in Las Vegas, not even that glimmer of hope is evident, The most common sentiment
is "Enron's done."

-By Mark Golden, Dow Jones Newswires; 917-541-2468; mark.golden@dowjones.com
(Jason Leopold contributed to this article.)

01300000000339


Nickoloff, Peter

From: Carleton, Norman
Sent: ‘Wednesday, December 05, 2001 7:21 PM
To: Ceting, J@; Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew; Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman,
Mark

Subject: FT: 'Big Five’ back Andersen over Enron collapse

‘Big Five’ back Andersen over Enron collapse
By Adrian Michaels in New York and FT.com staff in London
Published: December 4 2001 20:35 | Last Updated: December 5 2001 20:28

Enron logo

The "Big Five" accountancy firms joined forces to suggest reforms to accounting standards in the
light of the collapse of Enron.

In a joint statement, the firms appeared to close ranks around Andersen, Enron's auditors, by arguing
“other market participants” had to “engage in self-scrutiny" over their role in the collapse of the
stricken energy trading company.

KPMG, Deloitte & Touche, PricewaterhouseCoopers and Emst & Young, together with Andersen,
said the firms were committed to learning lessons from the failure of Enron. The statement came
hours after Joe Berardino, Andersen's chief executive, had defended his firm's role as Enron's
auditor in the affair.

According to the joint statement issued late on Tuesday night: "When businesses fail and public
confidence wanes, all involved ... have a responsibility to actively seek to understand the core
problems and pursue meaningful solutions. We encourage other market participants to engage in
self-scrutiny and take significant steps.”

The statement added: “The process of accounting standard-setting is too cumbersome and slow in
today's economy. Working with others, we will find ways to streamline and modernise the system."

Andersen has faced questions over the competence and objectivity of its work for Enron, first for not
raising the alarm over the company’s finances, and then after it emerged that it had eamed $25m for
its audit last year and $27m for other services.

The firm is now being investigated by the Securities and Exchange Commission and faces lawsuits
and a probe by its rival Deloitte Touche Tohmatsu. It could be hit by fines and bans.

Mr Berardino wrote in Tuesday's Wall Street Journal that when a client failed, Andersen sought to
lear important lessons.

“We are co-operating fully with investigations into Enron. If we have made mistakes, we will
acknowledge them. If we need to make changes, we will.”

Mr Berardino's response, thought to be unprecedented in a case of this kind, quickly moves on to
discuss failings in the financial accounting system that are making it hard for investors to judge

215

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Commission.

Enron may have to pay $690 million on a note that became a demand obligation with the company's
most recent credit-rating downgrade, Enron said in Monday's filing. The company also warned that
its profits in the fourth quarter could be hurt by credit concerns, a decline in asset values and reduced
trading activity.

“The 100 in and by itself is a document that could raise concerns," Fitch analyst Ralph Pellecchia
said. "We have a lot of questions outstanding relative to disclosures that were new to us and their
strategies of how they are going to manage the situation.”

Companies are willing to buy from Enron in the spot gas and power markets, because taking delivery
on commodity and paying for it a month later poses no credit risk for the buyer

An Enron spokesman didn't respond to a request for comment.

Reliant Resources (RRI) and the Bonneville Power Administration, the federal government's western
power marketer, both said their organizations are continuing to "do business" with Enron, But when
asked specifically if they were selling spot power or gas to Enron, spokesmen for both declined to
comment.

"We're watching the situation very carefully,” said Reliant spokesman Richard Wheatley. "There is a
lot of speculation because of the filing yesterday.”

Energy companies began shying away from Enron over the past month, as concerns about its
finances precipitated a 75% drop in its stock price and left its bonds trading at levels typically
associated with junk-rated debt.

Traders and their companies have said consistently that until Enron's credit ratings improve, they will
continue to watch their exposure to Enron carefully, with trades limited to short-term deals.

Moody's Investors Service, Standard & Poor's and Fitch all rate Enron one notch above speculative
grade. Moody's has Enron's ratings on review for a downgrade, and S&P has Enron on negative
credit watch, Fitch calls Enron's credit rating “evolving.” Enron's ability to do business in the energy
markets depends on its maintaining investment-grade ratings.

The manager of one hedge fund that follows Enron closely said Tuesday that several trading
companies expressed strong concerns about Enron's financial viability. But the manager thought
those concerns weren't proportionate to Enron's position.

“They have nine days to work out the $690 million debt payment, and if they can't work it out, they
have the cash to make the payment,” the manager said.

Dynegy Inc, (DYN), which has agreed to buy Enron in a stock-swap currently worth about $10 billion,
injected $1.5 billion into Enron last week. Enron has also closed on $1 billion worth of revolving
credit lines with J.P. Morgan Chase & Co. (JPM) and Citigroup (C) in the past week, with $450 million
of that amount closed Monday.

Developments with Enron, however, have raised enough concerns that energy companies aren't
willing to extend themselves into positions that have even the appearance of vulnerability, Sanchez of
Gelber & Associates said.

109

01300000000227


received from the entity.

In addition, Enron was receiving increasing criticism from analysts and major shareholders
concerning the apparent conflict of interest involving the role of its chief financial officer in the
partnership, from which he stood to make millions of dollars. In July, Mr. Fastow formally severed his
connections to LUM. Mr, Fastow has declined to be interviewed.

Given all the complexities of the LJM-related financing vehicle and the questions it raised outside the
company, “the confusion factor wasn't worth the trouble of trying to continue this,” Mr. Causey said.

Enron downplayed the significance of the share-reduction exercise. Mark Palmer, an Enron
spokesman, described it "as just a balance-sheet issue" and therefore wasn't deemed “material” for
disclosure purposes,

Jeff Dietret, an analyst for Simmons & Co. in Houston, said that a large reduction of equity could be
“a flag for the rating agencies” because it could adversely affect a company’s debt-to-equity ratio.
Enron said Wednesday that as a result of the equity reduction, its debt-to-equity ratio rose to 50%
from 46% previously.

On Tuesday, after Enron reported its big quarterly loss, Moody's Investors Service Inc. put Enron's
long-term debt on review for a possible downgrade. Moody's said the move was related to "significant
write-downs and charges reflecting substantially reduced valuations” in several of Enron's
businesses. In recent years, Enron had moved aggressively into broadband telecommunications and
the water business, both of which failed to produce expected returns.

Enron, which as of June 30 had $33.6 billion in current liabilities and long-term debt, has lately been
attempting to shed assets to pay down debt.

Write to Rebecca Smith at rebecca.smil sj.com <mailto: smith j.com> and John R.
Emshwiller at john.emshwillet .com <. : iller@wsj.com>

45

01300000000188


Nickoloff, Peter

ee

From: Carleton, Norman
Sent: Thursday, December 06, 2001 4:26 PM
To: Bair, Shella; Berardi, Steve; Bitsberger, Timothy, Eichner, Matthew; Gabilondo, Jose; Gross,

Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael;
Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heiditynne, Whaley, Jean; Wiedman, Mark
Subject: DJ: US Power Markets Showing Few Scars From Enron's Fall

December 6, 2001

US Power Markets Showing Few Scars From Enron's Fall

By Jon KAMP and KRISTEN MCNAMARA
Of DOW JONES NEWSWIRES

NEW YORK -- U.S. electricity markets continued to hum along Thursday without Enron Corp.'s (ENE)
formerly dominant presence, and with few signs the energy giant's sudden departure is having any impact on
prices.

The unwinding of trading positions with Enron has caused some prices to fluctuate recently. But such trading
activity has waned, and fundamental factors like weather conditions and natural gas prices have regained their
place as key market drivers, traders said.

"| think everybody's done unwinding," said one power trader, who noted that Enron’s Web-based trading
platform wasn't showing any prices Thursday. "There's not a market open on EnronOnline."

Enron wouldn't comment on the status of its trading operations or EnronOnline Thursday.

Even in the Northeast U.S., one area where forward power prices were moved recently by Enron's troubles,
prices were once again moving on normal market conditions, traders said.

"Right now, everything's back to normal," a New York trader said, with "no influence at all” from Enron,

Prices for Northeast electricity scheduled for delivery months from now fell late last week, as traders sought to
resell power previously contracted with Enron into an already saturated market, Early this week, traders who
had purchased electricity from Enron and dissolved thosc contracts emerged as buyers, sending prices back up.
That trend seemed to end Thursday, as traders finished flattening positions with Enron.

Stronger natural gas futures prices bolstered so-called forward power prices in the Northeast Thursday. The
price of natural gas, fuel for a growing number of power plants, is often a major influence on forward electricity
markets,

The price for power scheduled for delivery in New York City during summer 2002 traded at $72 per megawatt-
hour Thursday, up $1 from the price seen for the same contract the previous day. Prices for winter power also
rose $1 in New England, pushed up by with natural gas, to trade at $38/MWh.

A similar increase in Midwest and Southeast forward power trading - linked by some traders to unwinding
Enron positions - also appears over with little impact seen on prices, traders said.

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01300000000335


Nickoloff, Peter

From: Carleton, Norman

Sent: Friday, November 02, 2001 2:50 PM

To: Schultheiss, Heidilynne; Nickoloff, Peter; Pietrangeli, Fred; Berardi, Steve; Ludwick, CM,
Cetina, Jill; Sharer, James; Whaley, Jean

Subject: Slate Article: “Enron's Transparent Problems”

moneybox

Enron's Transparent Problems

By Rob Walker

Updated Thursday, October 25, 2001, at 3:49 PM PT

On Wednesday, the CEO of Enron, Kenneth L. Lay, expressed the "highest faith and confidence" in
his chief financial officer. Yesterday, he announced that his CFO has been replaced.

Enron is having a transparency problem. | don't mean that it's easy to see what has gone so
drastically wrong in the firm’s numbers lately but rather the opposite. In fact, it's the maddening
opacity of certain aspects of Enron's financial dealings that has positively crushed its share price
recently. It's not that someone has found, or even claimed knowledge of, some smoking gun-it's that
no one even seems certain how to look for such a thing.

The trouble apparently began with a remark by Lay during the firm's most recent quarterly conference
call with analysts: Enron planned to repurchase 55 million shares issued as part of a transaction with
a “structured finance vehicle,” and as a result its shareholder equity would shrink by $1.2 billion. This
hadn't been mentioned in the company's actual earnings release, and people started asking
questions.

The investment “vehicle” was funded by Enron and a limited partnership created by Andrew Fastow-
the erstwhile CFO who is now technically on a “laave of absence.” This and transactions with similar
partnership vehicles were part of a hedging strategy to balance Enron's technology investments. The
strategy doesn’t seem to have worked out very well, but the Wail Street Joumal has reported that
Fastow seems to have done OK, getting millions in partnership management fees. This week an SEC
probe was announced.

Enron says it did nothing wrong and followed all the appropriate disclosure rules. That may well be
the case-and, ultimately, the problem. It turns out that analysts and others who follow Enron have
always found some elements of its financial structure to be rather bewildering, “hard to understand,”
even “impossible.” But its announced earnings-which leave out some balance-sheet items-looked
pretty good, and the stock was a superstar, jumping almost 200 percent over the two-year stretch
ending in the summer of 2000. Having peaked at about $90 back then, it's closer to $17 now. And
because those hedging arrangements are apparently tied to the health of Enron shares, it's now

getting to the point that the fallout may well affect the company’s debt rating and its actual bottom
line.

In any case, it seems that plenty of investors (large and small) were willing to overlook what they

didn't understand as long they liked what they did understand. This, | suspect, is not such an unusual

investor attitude. And Enron's case, all that confusing stuff didn’t really matter-right up until the

moment that it did. Now that it does, Enron is left with not only the task of explaining itself clearly, but

also of trying to convince shareholders to have more “faith and confidence” in the firm than the firm
73

01300000000200


Nickoloff, Peter

From: Carleton, Norman
Sent: Monday, December 03, 2001 12:16 PM
To: Salladin, Anne, Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Cetina, Jill; Eichner,

Matthew; Gabilondo, Jose; Gross, Jered; Hammer, Viva; Lori Sanatamorena (E-mail);
Nickoloff, Peter; Novey, Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heiditynne;
Sharer, James; Whaley, Jean; Wiedman, Mark

Subject: WSJ: Enron's Big Investments in Brazil Contributed to the Firm's Collapse

December 3, 2001

Enron's Big Investments in Brazil
Contributed to the Firm's Collapse

By MIRIAM JORDAN
Staff Reporter of THE WALL STREET JOURNAL

SAO PAULO, Brazil - Enron Corp. bullishly stormed into Brazil, only to have trouble beating a retreat
from Latin America's biggest energy market.

For example, in 1998, Enron offered $1.27 billion for a Sao Paulo state electricity distribution
company, nearly double the auction's minimum price. Two years later, the Houston company was
trying to sell the distributor, Elektro-Eletricidades e Servicos SA, and other projects in Brazil, where
Enron says it invested more than $3 billion.

Even before the company’s collapse in the U.S., Enron executives had admitted that its Brazilian
investments weren't working out as planned. "The prospect of selling Brazilian assets has been
something we have been looking at even before the current problems,” says company spokesman
Keith Miceli in Houston.

Enron's Brazil operations have suffered from a shift in the company's global strategy toward trading
rather than producing or distributing energy, local regulatory challenges, a sharp currency devaluation
and the country's energy shortage. "Brazil is obviously not the reason for Enron's downfall,” says a
former senior executive of Brazilian operations. "But it definitely contributed.” The executive said that
Enron is operating with a loss in Brazil. The company, which once had 300 corporate staffers in Sao
Paulo, now has only 100.

In 1993, Enron envisioned a single energy market spanning southern South America in which Enron
would be the dominant player. It moved aggressively into Brazil as of 1994, betting on its size, growth
prospects and new privatization drive. Brazil has installed power capacity of 75,000 megawatts, and
will require an additional 25,000 over the next five years. Its energy requirements are already four
times greater than those of neighbor Argentina and the same as Britain's. They will surpass
Germany's in five years.

The key to Enron's ambitions was a 1,870 mile, $2 billion pipeline to bring natural gas from Bolivia to
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01300000000269


independent committee to review the transactions.

Mr. Chanos, president of Kynikos, declines to discuss specifics of his gains from shorting Enron
stock (which entails selling borrowed shares and replacing them later with cheaper ones), other than
to say it has been a successful move. He continues to maintain a short position, declining as well to
comment on whether it has been or is now being scaled back. His short-only funds -- about half of
the total $1 billion under management -- boast returns of 24% so far this year, according to people
familiar with the returns. That is a big contrast to some of the tough years endured during the raging
bull market of the 1990's. For the past decade, the return is a negative 4.5%. (One of his bad calls:
America Online, whose stock price soared after he bet that it would fall.)

Of short sellers such as Mr. Chanos, an Enron spokeswoman says: “It was in their financial interest
to drive the stock price down, and they raised whatever doubts and whatever issues they could to
further their own financial gain.”

But Mr. Chanos says he was simply crunching whatever numbers he could find. “What struck us was,
despite their market-eadership position, just how poorly they were doing in terms of returns.” Mr.
Chanos calculated that the company’s retum on invested capital, including debt, was roughly 7% for
the year through Sept. 30, 2000, below his estimate of the company's cost of capital, between 9%
and 12%. He felt the return on capital should be three to five points above the cost of capital to justify
an investment. Enron has dismissed comparisons with a trading company in the past; it had no
immediate comment Friday.

Enron shares were trading at about six times the company's book value in late 2000. By comparison,
Wall Street brokerage firms typically trade at two or three times book value and hedge funds in effect
are priced at book value.

Among the pages of the 1999 report that Mr. Chanos marked with yellow Post-it notes and scribbled
comments was one detailing the related-party transactions. He underlined a sentence stating that
one of Enron's senior officers is the "managing member" of a private investment company with which
Enron had entered into a series of transactions. "We read the disclosure over and over and over
again, and we just didn't understand it -- and we read footnotes for a living.” he says. But at the time,
he concedes, “it was just an odd footnote to us.”

He started telephoning analysts at Wall Street firms to determine what aspects of the bulls' case he
was missing. What he heard excited him further. Part of the bullishness focused on Enron's strategy
of trading broadband-network capacity. Mr. Chanos, who already had placed bearish bets on some
telecommunications bandwidth providers, was convinced that the industry already suffered from
overcapacity and that the situation would only get worse. His conclusion: if Enron "couldn't see the
looming train wreck coming in telecom, what else were they missing? Maybe they weren't as infallible
in the energy area as people had thought.”

Another warning signal was insider stock sales through the second half of 2000, he says. That sat
awkwardly with the common refrain from Wall Street analysts that investors had to just trust
management given the difficulty of analyzing how earnings were derived, The company didn't
immediately comment on the sales on Friday.

“You look for patterns in my business," says Mr. Chanos. "The fact that this was a ‘trust me’ story,
while management was voting with its feet was another check. While we didn't have a smoking gun,
we certainly saw a reason to perhaps not trust management at its word that these earnings were
what they said they were."

01300000000205


Nickoloff, Peter

From: Carleton, Norman
Sent: Friday, December 14, 2001 10:15 AM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew; Gabiondo, Jose; Gross,

Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael;
Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman, Mark;
Bieger, Peter; DeMarco, Edward; Dorsey, Karen; Ellett, Martha; Ellis, Dina; Huffman, Lucy;
Hughes, Gerry, McGivern, Tom; McInerney, Roberta; Salladin, Anne; Smith, Amy; Sutton,

Gary; Tishuk, Brian
Subject: Enron -- Dec. 11 ABI Website
Enron Bankruptcy Update

Enron Japan, Affiliates Seek Bankruptcy Protection

Enron Japan Corp., a wholly-owned subsidiary of failed U.S. energy giant Enron Corp. announced
that it and its three Japanese affiliates filed for bankruptcy yesterday, Dow Jones reported. The
move follows Enron's Dec. 2 chapter 11 bankruptcy filing in New York. “Enron Japan Corp., Enron
Japan Marketing Corp., Enron Japan Funding Corp. and E Power Corp. filed for bankruptcy...in
accordance with the Japanese bankruptcy law,” Enron Japan said.

Enron Court Hearing Pushed Back to Dec. 20

An Enron Corp. hearing has been rescheduled for Dec. 20 from Dec. 14, Doe Jones reported. The
hearing, the second since the energy-trading company filed for chapter 11 bankruptcy protection on
Dec. 2, will pertain to Enron's request to continue paying utility companies for electric bills. Judge
Arthur Gonzalez, who is presiding over Enron’s case will also hear an interim request at this time to
retain Blackstone Group as financial adviser in Enron's restructuring.

600 Enron Employees Got Bonuses

Nearly 600 Enron Corp. employees deemed critical to running its prized energy trading business
received more than $100 million in bonuses last month as the company faced a merger and then
bankruptcy, according to the Associated Press. About half of those bonuses, given to 75 traders in
early November when Enron was planning to merge with smaller rival Dynegy Inc., may have to be
repaid because the merger collapsed, said Todd Zywicki, a law professor at George Mason
University.

Enron spokesman Mark Palmer said the $50 million given to traders before the merger crumbled
“was done in discussions with Dynegy to protect and preserve the value of the trading organization
through what we thought was going to be a fairly long merger process.” Dynegy spokeswoman
Debbie Fiorito said that Dynegy didn't approve or endorse those bonuses. Enron distributed an
additional $55 million to 500 employees two days before filing for bankruptcy as an incentive for them
to remain with the company while Enron works to emerge from chapter 11.

250

01300000000358


Nickoloff, Peter

From: Carleton, Norman
Sent: Tuesday, December 04, 2001 12:57 PM
To: Bair, Sheila; Berardi, Steve; Bilsberger, Timothy, Cetina, Jill, Eichner, Matthew, Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey,
Michael; Pletrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Sharer, James; Whaley,
Jean; Wiedman, Mark

Subject: NYT: Collapse of Enron May Reshape the Battlefield of Deregulation

December 4, 2001

BUSINESS

Collapse of Enron May Reshape the Battlefield of Deregulation

By JOSEPH KAHN and JEFF GERTH

WASHINGTON, Dec, 3 - The bankruptcy of Enron (news/quote) has Washington debating the way it
oversees the $200 billion power industry. But there is no consensus on erasing the legacy of
deregulation that the company’s political largess helped forge.

Congressional leaders and top regulators are moving forward on what had been Enron's No. 1
objective: a push to reduce local control of electricity transmission lines so that energy merchants like
the Enron Corporation can use them to transport and sell power.

But the politics of power are shifting, and some of Enron's longstanding opponents - chief among
them the Southern Company of Atlanta, which owns many local power monopolies - see a fresh
chance to slow deregulation, or even roll it back.

Among those who have called for inquiries into Enron's collapse are Representative Billy Tauzin, a
prominent Republican from Louisiana who is chairman of the House Energy and Commerce
Committee; the Senate majority leader, Tom Daschle, and Senator Jeff Bingaman, a Democrat of
New Mexico who is chairman of the Senate Energy and Natural Resources Committee.

All are vowing to get to the bottom of one of the most precipitous business reversals in history, And
some members of Congress say Enron's downfall, on the heels of California's energy meltdown early
this year, proves that Washington must demand more disclosure from energy traders, holding them
at least to the standards of Wall Street firms.

“Enron is the sequela to California, it's all part of the one-year story line,” said Representative Edward
J. Markey, Democrat of Massachusetts, who focuses on energy regulatory issues in the House. "We
can't leave energy products in the regulatory shadows. It hurts both investors and consumers."

Other influential officials are in no rush to turn back the clock on deregulation.

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01300000000292


itself has turned out to have in its CFO. Even the Goldman Sachs analyst who has been a great
enthusiast for the firm urged its management to overcome “the appearance that you are hiding
something.” That is, the company has to not only be open with investors, but also to seem open.
Doesn't that make it sound like Enron's future still depends as much on appearance as reality? Sure,
But that’s always true with stocks, Transparently so.

4

01300000000201


Enron shares were recently trading at $7.86, down $1.20, or 13.2%, while Dynegy shares changed
hands at $43.29, down 31 cents, or 0.8%.

A ChevronTexaco Corp. (CVX) official wasn't immediately available to comment on the matter.

ChevronTexaco, San Francisco, owns 26% of Dynegy and is providing $2.5 billion in cash to Dynegy
as part of the buyout. Last week, an inital payment of $1.5 billion was transferred to Dynegy and then
to Enron to help meet Enron's immediate cash needs.

Dynegy’s merger agreement with Enron contains several provisions beyond the standard “material
adverse change" provision that would allow the deal to be terminated. Still, some question whether
Dynegy was able to fully assess Enron's liabilities prior to striking the deal.

Investors have expressed frustration with Enron's lack of disclosure, and even marvelled at the fact

that the 10-Q included material that could have been mentioned in previous filings or company
conference calls.

-By Christina Cheddar, Dow Jones Newswires; 201-938-5166
christina. cheddaredowjones.com

(Corrected 1:50 PM)

Later, Dynegy spokeswoman Jennifer Rosser said Enron's filing Monday was an “important step" in
the due diligence process Dynegy was undergoing as part of its pending acquisition of Enron.

“This kind of filing is exactly what due diligence is about,” she said.

12

01300000000230


Nickoloff, Peter

ee

From: Carleton, Norman

Sent: Thursday, November 29, 2001 6:13 PM

To: Bair, Shella; Bieger, Peter, Bitsberger, Timothy, DeMarco, Edward; Dorsey, Karen; Eltett,
Martha; Ellis, Dina; Gabilondo, Jose; Gross, Jared; Huffman, Lucy; Hughes, Gerry; McGivern,
Tom; Mclnerney, Roberta; Nickoloff, Peter; Roseboro, Brian; Salladin, Anne; Schultheiss,
Heidilynne, Smith, Amy, Sutton, Gary, Tishuk, Brian; Berardi, Steve; Cetina, Jill; Eichner,
Matthew; Hammer, Viva; Lori Sanatamorena (E-mail); Novey, Michael; Pietrangeli, Fred;
Sharer, James; Whaley, Jean; Wiedman, Mark

Subject: DJ: IN THE MONEY-2:Collateral Key To Counterparties Recovery

November 29, 2001

IN THE MONEY-2:Collateral Key To Counterparties Recovery

Dow Jones Newswires

Thoughts of an Enron bankruptcy jogged memories of past filings, such as the case of Drysdale
Government Securities Inc., which involved public entities being left on the hook for millions of dollars
in uncollateralized government repurchase agreements.

But bankruptcy laws have evolved significantly since the 1982 collapse of Drysdale sent shockwaves
through the financial community and forced banks to pay out tens of millions of dollars to cover
Drysdale'’s obligations to other government securities firms,

More recently, Orange County's 1994 bankruptcy following its derivatives debacle and the bitter
dispute surrounding German's Metaligesellschaft Ag for breach of forward petroleum contracts
suggests that acrimonious and lengthy litigations might be in the offing. In the latter case, many
counterparties settled out of court and took "haircuts" after a judge ruled that independent petroleum
marketers who entered into long-term hedging contracts as protection against escalating fuel prices
could sue the metals and engineering conglomerate for breach of contract.

But the extent to which those cases provide any lessons for Enron and its derivative counterparties
remains to be seen, experts said, depending on what sticky and complex issues might arise in
potential court actions.

Meanwhile, although Enron has yet to file for bankruptcy, most of its derivative counterparties are
likely already scrambling to exit their trades.

That's because Dynegy Inc.'s (DYN) decision Wednesday to abandon its plan to rescue Enron all but
sealed the fate of the ailing Houston energy trader which has been hobbled by accounting
irregularities and unquantified off-balance-sheet liabilities. Enron shares plummeted from about $90
a share last summer to 36 cents Thursday.

Derivative contracts are built around master agreements developed by the International Swaps and
Derivatives Association. As far as its power purchase deals go, Enron is said to have favored master
agreements drafted by the Edison Electric Institute, which draws heavily on ISDA's blueprint.

12

01300000000240


Nickoloff, Peter

From: Carleton, Norman

Sent: Tuesday, October 30, 2001 12:02 PM
To: Schultheiss, Heidilynne; Nickotoff, Peter
Subject: ‘WSJ on Enron

October 30, 2001

Money & Investing

Moody's Downgrades Enron's Debt,
Maintains Review; Stock Drops 10%

By JOHN R. EMSHWILLER and MICHAEL SCHROEDER
Staff Reporters of THE WaLL STREET JOURNAL

In another potentially serious blow to Enron Corp.'s finances, Moody's Investors Service Inc. lowered

its ratings by one notch on the energy company's senior unsecured debt and kept the company under
review for a possible further downgrade.

It also was learned that the Securities and Exchange Commission has moved its inquiry into Enron's
finances to the agency's Washington headquarters from its regional office in Fort Worth, Texas. The
change is a sign that the probe is being treated as a high priority, according to a person with
knowledge of the inquiry. An SEC spokesman declined to comment.

Moody’s reduction on Enron's senior unsecured long-term debt to Baa2 from Baa leaves the
company’s credit rating two levels above noninvestment grade. If the energy-trading giant's ratings
were to fall to a noninvestment-grade level, there could be serious consequences for Enron. It could
throw the Houston company into default on obligations involving billions of dollars of borrowings and
force it under the terms of various financial agreements to issue millions of shares of stock to holders
of that debt, which would dilute the value of existing shares.

While Enron still has some room before hitting noninvestment-grade status, there have been
concems among analysts and investors that the company’s recent troubles could escalate. During
recent days Enron's bonds have traded at levels similar to securities that carry a noninvestment-
grade rating. Prices of the company’s bonds improved somewhat Monday, though its stock price
continued to fall sharply. In 4 p.m. New York Stock Exchange composite trading, Enron stock was at
$13.81, down $1.59 or 10%, and topped the most-active list with 36.4 million shares changing hands.
Enron's share price has fallen more than 50% during the past two weeks.

(Go]Eniron Is in Discussions With Banks for CreditLine of up to $2 Billion (Oct. 29)

63

01300000000195


Nickoloff, Peter

From: Carleton, Norman
Sent: Monday, December 03, 2001 6:44 PM
To: Bair, She®a; Berardi, Steve; Basberger, Timothy, Cetina, Jil, Eichner, Matthew, Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey,
Michaet; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne, Sharer, James; Whaley,
Jean; Wiedman, Mark

Subject: WSJ: Enron Secures $1.5 Billion in Financing

December 3, 2001

Major Business News

Enron Secures $1.5 Billion in Financing,
Plans to Cut About 4,000 Jobs in the U.S.

A WALL STREET JOURNAL ONLINE News Roundup

NEW YORK — Enron Corp. secured $1.5 billion in much needed “debtor in possession" financing
late Monday.

Separately, Enron will cut about 4,000 jobs in the U.S., or nearly 20% of its world-wide work force,
with the bulk of the staff cuts in Houston, a company spokeswoman said Monday.

The “debtor in possession" or DIP financing was seen as critical for Enron to continue operating and
especially crucial for the company to protect its trading operations.

The loan, provided by Enron's two lead banks, J.P. Morgan Chase & Co. and Citigroup Inc., is
collateralized by all of Enron's assets, including $1.8 billion in proceeds for the sale of Enron's
Portland General Electric to Northwest Natural Gas Co., and Enron's two pipelines, the Northern
Natural Gas pipeline and the Transwestern pipeline.

A person familiar with the matter said that as part of the financing package, Enron will receive $250
million immediately. Another $250 million will become available as soon as J.P. Morgan Chase and
Citigroup approve a business plan submitted by Enron. That's expected in the next couple of weeks.

The release of the remaining $1 billion is contingent upon syndication and final court approval, the
person familiar with matter said.

J.P. Morgan Chase and Citigroup, which had loaned $1 billion to Enron while the company struggled
to stabilized its spiraling finances, will get some of their investment back through the debtor-in-
possession financing.

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01300000000281


Sprecher said, “Our volumes are just soaring." Traffic on the ICE system has doubled in the past two
weeks, and, Mr. Sprecher added, "I'd attribute all that to Enron's problems."

ICE's financial-services partners include Goldman, Morgan Stanley, Deutsche Bank and Societe
Generale,

Although Morgan and Goldman have both fielded calls from parties that traded with Enron and want
to shift some of their activity to those firms, an executive of one of the firms said the possibility of a
bankruptcy-law filing had deterred dealers from taking over any of Enron's trading books or assets.
That is because any such transactions could be disrupted or canceled in the course of a bankruptcy
proceeding -- a step Enron took Sunday.

Enron's relations with Wall Street firms had shifted in recent years from that of a favored client to a
rivalry as well, as Enron's trading ambitions grew and it began treading more and more on Wall
Street's turf. Enron moved from trading securities closely related to its natural-gas business into oil
derivatives and then to instruments closer to Wall Street's core, such as credit derivatives and
packaging securities,

One securities firm that won't benefit as much as some might believe is the Salomon Smith Bamey
unit of Citigroup Inc, Although Salomon used to engage in more sizable energy-trading activity
through its Phibro commodities arm, the firm has wound down much of those activities, and doesn't
have anywhere near the market presence of Goldman or Morgan Stanley.

-- Stephen Parker contributed to this article,

Write to Randall Smith at j.com> and Henny
Sender at henny.sender@wsj, oS <mailto: on senders a

146

01300000000265


Energy Solutions, a unit of San Diego-based Sempra Energy. “But this isn't a simple business. It
involves credit risk for the customer. You don't switch a customer with a phone call," he said.

Write to Rhonda L. Rundle at rhonda.rundle@wsj.com <mailto:rhonda.rundle@wsj.com>
15s

01300000000274


Nickoloff, Peter

———

From: Carleton, Norman
Sent: Monday, December 03, 2001 2:49 PM
To: Bair, She&a; Berardi, Steve; Bitsberger, Timothy, Cetina, Jil, Eichner, Matthew, Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Senatamorena (E-mail); Nickoloff, Peter; Novey,
Michael; Pietrangell, Fred; Roseboro, Brian; Schultheiss, Heiditynne; Sharer, James; Whaley.
Jean, Wiedman, Mark

Subject: OJ: CMS Energy Refutes Enron Creditor Claim; Owes Enron Money (Confusion over who
owes)

December 3, 2001

CMS Energy Refutes Enron Creditor Claim; Owes Enron
Money

By CHRISTINA CHEDDAR

Of DOW JONES NEWSWIRES
NEW YORK -- In an illustration of just how complex Enron Corp.'s (ENE) bankruptcy case will be,
CMS Energy Corp. (CMS) said it shouldn't be listed among Enron North America Corp.'s largest
unsecured creditors.

According to CMS Energy spokesman Kelly Farr, CMS Energy, a Dearborn, Mich., operator of
electric and gas utilities, owes Enron money when ail of its forward trading positions are "netted out.”

Farr declined to say how much it owes Enron.

In the court filing for Enron's marketing and trading unit, Enron North America said it owes the
energy marketing unit of CMS Energy $13.6 million for trading debt.

An Enron spokesman wasn't immediately available to comment.

Enron filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code late Sunday
night in the U.S. Bankruptcy Court for the Southern District of New York. The initial hearing on the
case is scheduled for 4 p.m. EST Monday.

Enron North America, one of the 14 Enron units included in the filing, was said to have $13.74 billion
in assets, and $8.84 billion in debts, not including any off-balance sheet or contingent obligations.

-By Christina Cheddar, Dow Jones Newswires; 201-938-5166; christina.cheddar@dowjones.com

01300000000279


During the years in which Enron was Issuing earnings statements it now says were incorrect, Mr. Lay,
Mr. Skilling and other top executives of Enron sold hundreds of millions of dollars in Enron stock.
Partly as a result, they and others face a raft of shareholder suits. Some Enron traders complained
angrily at a company meeting last month about $62 million in severance the Dynegy deal would bring
Mr. Lay. After a day of giving out conflicting signals, Mr. Lay announced he wouldn't take the
severance.

Revelations about Chewco and LJM fueled concern about other surprises that might be hidden in
dozens of other partnerships with which Enron did business. One problem: Millions of shares of
Enron stock provided the underpinnings for at least some of those partnerships. As Enron's stock
price fell, the stability of those structures was threatened, says one Enron insider, who speculates
that Mr. Skilling's decision to resign might have been influenced by this development. "When he saw
the stock price falling, | think he knew a crisis was coming," this person says.

Mr. Skilling won't talk about Chewco or anything else having to do with Enron. Since leaving in
August he has remarried, grown a beard and hired a lawyer to help handle the mess. On a recent
morning, outside his newly built mansion in Houston's River Oaks neighborhood, Mr. Skilling
reiterated his desire to be left alone but didn't seem angry about being approached. "I understand it's
a big story,” he said in a soft voice.

On Nov, 19, Enron revealed more bad news. In another SEC filing, it said it could be forced to take a
further $700 million pretax hit to earnings because of a plunge in the value of assets at yet another
investment partnership. In addition, Enron said its declining credit rating had triggered $690 million in
accelerated payments to investors.

Trading partners began to back away. The stock plunged anew, falling to about $5 a share by
Thanksgiving.

One Last Effort

Dynegy executives say the Nov. 19 filing was pivotal in changing their thinking about the merger.
Enron appeared to be burning through cash at a frightening rate, says Mr. Bergstrom, Dynegy's
president, and it kept coming up with unpleasant surprises. "I think they knew more than they were
telling," he says. Enron spokesman Mark Palmer replies that "if they had done their due diligence,
they would have known about" Enron's condition.

The companies made one last stab at saving the deal over the Thanksgiving weekend, huddling at a
resort in Westchester County, N.Y.

They slashed the deal's price to $4.17 billion. But in an ominous sign for Enron, neither of Dynegy’s
top two executives attended. And the revised deal was never made final. Analysts estimated that at
least $4 billion more cash was needed to bolster trading partners’ confidence, and no one was willing
to put up that kind of money. A week ago, Enron's world caved in. Standard & Poor's, tired of waiting
for the negotiations to produce a new rescue of Enron, dropped its credit rating below investment
grade.

Other rating agencies followed. Later the same day, Dynegy formally called off the acquisition, and
Enron traders walked away from their screens. About 4,000 Enron employees already have been laid
off, with $4,500 in severance pay. Many face a further hit as retirement accounts, heavy with Enron
shares they weren't allowed to sell, are decimated. After the collapse of the merger, some of the
7,500 headquarters employees headed to Houston bars to blow off steam.

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Nickoloff, Peter

Cee ne ne eee eel

From: Carleton, Norman

Sent: Wednesday, December 05, 2001 2:49 PM

To: Gross, Jared; Roseboro, Brian; Wiedman, Mark; Bitsberger, Timothy; Nickoloff, Peter;
Schulthess, Heiditynne; Pietrangeli, Fred

Subject: WSJ op-ed piece by CEO of Enron

December 4, 2001

Commentary

Enron: A Wake-Up Call

By Joe Berardino, a managing partner and CEO of Andersen.

A year ago, Enron was one of the world's most admired companies, with a market capitalization of
$80 billion. Today, it's in bankruptcy.

Sophisticated institutions were the primary buyers of Enron stock. But the collapse of Enron is not
simply a financial story of interest to major institutions and the news media. Behind every mutual or
pension fund are retirees living on nest eggs, parents putting kids through college, and others
depending on our capital markets and the system of checks and balances that makes them work.

Our Responsibilities

My firm is Enron's auditor. We take seriously our responsibilities as participants in this capital-
markets system; in particular, our role as auditors of year-end financial statements presented by
management. We invest hundreds of millions of dollars each year to improve our audit capabilities,
train our people and enhance quality.

When a client fails, we study what happened, from top to bottom, to learn important lessons and do
better. We are doing that with Enron. We are cooperating fully with investigations into Enron. If we
have made mistakes, we will acknowledge them. If we need to make changes, we will. We are very
clear about our responsibilities. What we do is important. So Is getting it right.

Enron has admitted that it made some bad investments, was over-leveraged, and authorized
dealings that undermined the confidence of investors, credit-rating agencies, and trading counter-
parties, Enron's trading business and its revenue streams collapsed, leading to bankruptcy.

If lessons are to be learned from Enron, a range of broader issues need to be addressed. Among
them:

« Rethinking some of our accounting standards. Like the tax code, our accounting rules and
literature have grown in volume and complexity as we have attempted to turn an art into a

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22001 Bloomberg L.P. Al rights reserved Teems of Service <itp www bloomberg comitos.htm|>, Privacy Policy

shits bloombern com/prwacy Nim» sed

Trac ing:

ecipient

Wiedman, Mark
Nickolot, Peter
Cetina, Jill

Sharer, James
Berardi, Steve
Pietrargol, Fred
Schuthaiss. Heidityrne
Whaley, Jean

Doti ery

Deliveret: 11/2001 4:43 PRA
Delivered: 11/2001 4:43 Pl
Delivered: 11/2001 4.43 PM
Delivered: 11/2001 4:43 PM
Deliverc: 11/2001 4:43 PHA
Delivered: 11/2001 4:43 PM
Delivered: 11/2001 4:43 PMA
Delivered: 11/2001 4:43 PMA

ead

ead: 11/2001 4:88 PA
ead: 11/2001 4:43 PM
Deleted: 1/2002 10:55 AM
ead: 11/20/01 5:25 PM
ead: 11/21001 8:07 AM
ead: 11/21/01 5:11 AM
ead: 172/02 11:48 AM
ead 11/2001 5:54 AM

01300000000074


Nickoloff, Peter

eee ee eee en el

From: Carleton, Norman
Sent: Wednesday, December 05, 2001 11:21 AM
To: Bair, Shella; Berardi, Steve; Basberger, Timothy, Cetina, Jilt, Eichner, Matthew; Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatarnorena (E-mail); Nickoloff, Peter, Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian, Schultheiss, Heidilynne; Sharer, James; Whaley,
Jean; Wiedman, Mark

Subject: WSJ Front Page Story on Enron (For those who con't read the WSJ and are interested)

December 5, 2001

Page One Feature

Behind Enron's Fall, a Culture of Secrecy
Which Cost the Firm Its Investors’ Trust

By JOHN R. EMSHWILLER and REBECCA SMITH
Staff Reporters of THE Wau. STREET JOURNAL

HOUSTON -- Around the beginning of October, Enron Corp. executives visited credit-rating-agency
officials for talks about the company’s third-quarter results. Those results contained what turned out
to be a bombshell.

Enron mentioned in the talks that shareholders’ equity, the difference between the company’s assets
and its liabilities, would be reduced by $1.2 billion because of transactions with certain partnerships,
Says a person familiar with the matter. Some of the credit analysts, regarding this as so significant it
needed to be disclosed, privately urged Enron to report it to the Securities and Exchange
Commission, this person says.

But Enron didn't do so, nor did the company explain it in its nine-page earnings announcement in
mid-October. The only public inkling came during an earnings-report conference call, in a reference
by the company chairman so fleeting that some analysts say they missed it.

It was vintage Enron: minimal disclosure of financial information that, in retrospect, was central to
understanding the complex company. Only a few months ago, Enron was wowing Wall Street with its
growth and innovation, racking up large, steady earnings gains as it pioneered the global trading of
everything from power to weather contracts. But virtually unseen until the end was an Enron culture
that contained the seeds of its collapse, a culture of highly questionable financial engineering,
misstated earnings and persistent efforts to keep investors in the dark.

Senior Enron executives flouted elementary conflict-of-interest standards. The company hired legions
of lawyers and accountants to help it meet the letter of federal securities laws while trampling on the

intent of those laws. It became adept at giving technically correct answers rather than simply honest
ones.

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01300000000299


yesterday. Watson said he would rather get the pipeline than recoup the investment.

Northern Natural Gas, the biggest of Enron’s four gas pipelines, stretches from the Permian Basin in Texas to the Great
Lakes. Dynegy’s right to buy it “is not dependent on Enron's agreement to our right to terminate the merger," Dynegy
Chief Financial Officer Rob Doty said today in a statement.

Snares of Enron fell 9 cents to 27 cents In early afternoon trading. They had fallen 99 percent since mid-October. Dynegy
fell $2.34, or 7 percent, to $31.31. Enron's unsecured bonds were bid at 18 cents on the dollar this morning, down about 3
cents from yesterday, traders said.

Enron, which got its start as a natural-gas pipeline company, was transformed in the past decade into the biggest
competitor in the business of trading energy. As part of the company's strategy, it shifted its focus from developing assets

such as pipelines and power plants to developing markets for commodities, As a resull, Enron has few assets il can use
88 collateral for loans.

‘On the Brink,

Enron has been unable to raise enough cash to ensure it can pay debts and is having trouble financing daily operations.
Dynegy’s decision to back out of the acquisition left Enron on the brink of bankruptcy.

Northern Natural Gas can’t take any action, including filing for bankruptcy, without the consent of Dynegy as a preferred
stockholder, Dynegy said in the statement

“From what | understand, Dynegy hes as strong a legal claim to the pipeline as they can have," said Commerzbank
Securities analyst Andre Meade. “They structured the deal in a way, with bankruptcy as a likely scenario, to have good
legal standing.”

Meade rates Enron ‘’sell" and Dynegy “buy” and doesn’t own shares of elther company. He values Northern Natural at
$2.7 billion, more than the $2.47 billion that Dynegy is paying, including debt.

“Dynegy paid fair market value (for the pipeline), and they have the law and the facts on their side,” said John Olson,
research director for Sanders, Morris, Harris Group Inc., a Houston financial-services firm.

Watson said yesterday he hopes that Northern Natural employees won't quit after the takeover. Enron and Dynegy are
both based in Houston.

“Dynegy has contacted Enron to begin a transition of the pipeline’s management and expect Enron's full cooperation,”
Doty said today.

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01300000000258


Nickoloff, Peter

From: Carleton, Norman

Sent: Wednesday, Novernber 14, 2001 10:22 AM

To: Roseboro, Brian; Bitsberger, Timothy; Nickoloff, Peter; Schultheiss, Heidilynne; Gross, Jared;
Cetina, Ji, Sharer, James

Subject: Dow Jones Newswires: EnronOnline Competitor Reports Record Trading Volumes

November 13, 2001

EnronOnline Competitor Reports Record Trading Volumes

NEW YORK -- IntercontinentalExchange, an Intemet-based energy and metals trading operation,
saw record trading volumes last week, due in part to troubles at Enron Corp. (ENE), an ICE press
release sald Tuesday, without mentioning Enron by name.

Investors have been watching to see if Enron's trading partners in its core business - North American
gas and power marketing - significantly reduce activities with the financially troubled top energy
marketer. ICE is considered a primary alternative to Enron's Internet-based commodities market,
EnronOnline.

ICE's volume of North American bulk power trades last week totaled a record 54 million megawatt-
hours, a 34% increase over the October weekly average. North American natural gas volumes rose
13% from October to 950 billion cubic feet last week. Oil trading rose 45% to a record 55 million
barrels, and metals trading volumes was up 66%.

"We believe that this has resulted, in part, from the uncertainty that has been exhibited in several key
energy trading venues over the past several months,” said ICE chief executive, Jeffry Sprecher.

EnronOniine is different from ICE because EnronOnline is a mechanism for companies to buy from,
and sell to, Enron. ICE is a neutral multiparty exchange, allowing energy trading companies to trade
with all other members.

ICE's trading system, which has been installed in 7,000 desktops worldwide, covers 600 commodity
and derivative contract types. ICE also owns the International Petroleum Exchange of London,
Europe's largest energy futures exchange.

ICE is owned by companies including American Electric Power (AEP), Aquila Energy (ILA), BP
Amoco PLC (BP), Deutshe Bank AG (G.DBK), El Paso Corp. (EPG), Goldman Sachs Group (GS),
Morgan Stanley Dean Witter & Co. (MWD), Reliant Energy (RE!), Royal Dutch/Shell Group (RD),
Societe General SA (F.SGF), Mirant Corp. (MIR) and TotalFina Elf SA (TOT).

-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com

01300000000218


Nickoloff, Peter

TC roo

From: Carleton, Norman

‘Sent: Monday, November 05, 2001 12:19 PM

To: Schultheiss, Heiditynne; Nickoloff, Peter; Pietrangell, Fred; Berardi, Steve; Whaley, Jean
Subject; WSJ: Enron Short Setler Detected Red Flags in Regulatory Filings

November 5, 2001

Heard on the Street

Enron Short Seller Detected
Red Flags in Regulatory Filings

By CasseLt Bryan-Low and SUZANNE MCGEE
Staff Reporters of THE WALL STREET JOURNAL

In October 2000, short seller James Chanos labored through Enron Corp.'s annual report,
underlining complicated passages and scribbling exclamation points and question marks.

The exercise set in motion an ultimately lucrative investment for the 43-year-old money manager,
whose Kynikos Associates Ltd. long has been one of the largest and most visible of the firms that
make bets that a stock will fall. Enron's books may have been hard to figure out. But Mr, Chanos
spotted enough to bet that the then-highflying stock ultimately should tumble, because the company’s
success appeared to him less than met the eye.

Mr. Chanos, like any analyst either on the bull or bear side, isn't always right, of course. But he got
this one right -- Enron shares have plummeted 86% this year to $11.30 -- and the details of how he
did it are illuminating. Over time, he would build up an 18-inch stack of regulatory filings and other
material about Enron, While even he found the filings hard to understand, to him they raised multiple
red flags. As it turns out, Enron shares have been hammered by some of the very things that
alarmed Mr. Chanos as he sat in his 43rd-floor Manhattan office a year ago.

In Mr. Chanos's view, Enron had plenty of assets such as pipelines and utilities businesses, but it
appeared to him to be a “hedge fund in disguise." Specifically, much of Enron's growth came from
taking positions in the trading of energy contracts. To Mr. Chanos, that was similar to how a hedge
fund -- those largely unregulated investment pools for the wealthy — or a brokerage firm trades
securities. But with one important qualification: By Mr. Chanos' measure, it wasn't as profitable as the

average hedge fund. So why was it such a pricey stock? Mostly, Wall Street loved it because it
consistently met or beat eamings targets.

No longer, of course. Enron stunned investors on Oct. 16 when it announced a third-quarter loss,
and since then it has revealed a regulatory probe into its complex transactions with off-balance-sheet
partnerships, some involving the company’s own executives. Enron says its board has formed an

7

01300000000204


"The process of accounting standard-setting is too cumbersome and slow in today’s economy.
Working with others, we will find ways to streamline and modernize the system.

Enhancing Audit Effectiveness

“In light of the current challenging business environment, we are preparing an assessment of risk
factors that may be important for financial statement preparers, audit committees and auditors to
consider during the current reporting cycle.

“Last year, the independent Panel on Audit Effectiveness issued a comprehensive report on audit
process improvements. Many of the recommendations have been put into place and the others are
under active consideration. We are committed to timely implementation.

“As we learn more from the lessons of current events, we will work with others in the profession to
evaluate its self-regulatory mechanism. We recognize that the profession must maintain the
confidence of investors. Self-regulation is right for investors, the profession, and the financial
markets, and we know that changes are needed. We will work to make the right improvements in a
timely way.”

218

01300000000327


Nickoloff, Peter

From: Carleton, Norman
Sent: Friday, November 30, 2001 3:55 PM
To: Bair, Shela; Berardi, Steve; Basberger, Timothy, Cetina, Ja; Eichner, Matthew, Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorene (E-mail); Nickoloff, Peter; Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Sharer, James; Whaley,
Jean; Wiedman, Mark

Subject: DJ: Enron Collapse Could Weigh Heavy On Some Insurers

November 30, 2001

Enron Collapse Could Weigh Heavy On Some Insurers

By CHAD Bray

Of DOW JONES NEWSWIRES

NEW YORK -- The insurance industry didn't need Enron Corp.'s (ENE) problems, particularly when it
comes to reinsurance prices.

Primary insurers could be on the hook for as much as $2 billion in claims against directors and
officers policies, surety bonds and financial guarantees related to the Houston energy trading firm,
which, among its options, is considering seeking Chapter 11 bankruptcy protection. Some insurers
also will likely take a hit in their investment portfolios if Enron defaults on its bond payments.

The loss would be material, but not devastating for the industry. However, amid the backdrop of the
World Trade Center disaster, Enron's impact could pressure some firms going forward, particularly if
most of their Enron risk was ceded to reinsurers. "This event is likely to exacerbate the (reinsurance)
capacity shortfall in the market that already exists, making 2002 one of the more, if not the most,
powerful pricing years in recent history,” said Alice Schroeder, a Morgan Stanley insurance analyst.

Reinsurance prices were rising prior to the Sept. 11 terrorist attacks, Rates are expected to rise
dramatically in light of the events as reinsurers get a handle on how to insure this new risk in the U.S.

Aviation rates, for example, have already climbed 200% to 300% in some cases. Reinsurers also are
willing to take on less risk, forcing primary insurers to keep more of the coverage or write policies
Offering less coverage.

Chubb Corp. (CB), a Warren, N.J., insurer, said it was reviewing its surety bonds related to Enron
and could have a maximum net pretax exposure under outstanding surety bonds of about $220
million. The firm said its after-tax exposure is $143 million, or 82 cents a share.

A company takes out a surety bond in the event it can't fulfill a contractual obligation, Typically, surety
bonds would pay out any monetary guarantees if a company was unable do so. Surety bonds are
often used to improve a firm's credit rating.

The insurer was unable to estimate the actual amount, if any, that they may be required to pay or the
14

01300000000253


[GO]Enron' May Have to 188 Stock to’ COVErPossiblé Shortfalls in Investment Portfolio (Oct:24)
[GolEnton Sayslls Linksit6'@ Partnership Ledito $1.2 Billdh Equity Reductioni(Oct. 18)

While Enron as recently as Tuesday strongly defended Mr. Fastow, as well as the company's
dealings with the partnerships, controversy over those arrangements clearly played a role in the
executive's departure. "In my continued discussions with the financial community, it became clear to

me that restoring investor confidence would require us to replace Andy as CFO," said Chairman and
Chief Executive Kenneth Lay in a prepared statement.

Enron said Mr. Fastow “will be on a leave of absence from the company.” He couldn't be reached for
comment.

It remains to be seen how much Mr. Fastow's removal will assuage an increasingly restive
investment community. The action came after the 4 p.m. market close and followed a day in which
Enron's stock once again plunged. As of 4 p.m. Wednesday in New York Stock Exchange composite
trading, Enron shares were at $16.41, down $3.38, or 17%. It topped the Big Board's most active list
at nearly 76 million shares, more than twice the volume of the second-most-active stock, Several
trades Wednesday involved blocks of 800,000 shares or more, possibly indicating that some
institutional holders are souring on Enron stock.

Enron's shares are down about 50% from the beginning of last week. Earlier this year, the stock was
above $80 a share.

In an apparent ripple effect, the stocks of other energy-trading companies, which do business with
Enron, also fell sharply Wednesday. For instance, Dynegy Inc. shares on the Big Board were off
$5.45, or 13%, at $37.26. A number of the energy companies hit by the selloff have business
strategies much different than Enron's, which rely heavily on complex and highly structured
investment vehicles.

Prudential Securities analyst Carol Coale said Mr. Fastow's departure could be seen as evidence that
“management does care" about investor concems. However, she adds, the move also could be
viewed by some investors, coming as it did two days after the announcement of the SEC inquiry, as
“an admission of guilt." Ms. Coale Wednesday issued a sell recommendation on Enron largely
because of uncertainties about the company's extremely complex financial structure.

Enron has consistently denied any wrongdoing in its Fastow-related dealings.

Worries and rumors about Enron's financial strength could be found in the stock market Wednesday.
Goldman Sachs analyst David Fleischer said he heard people voice concerns about a possible
"death spiral" in which increasing credit concerns about Enron would decrease the number of people
willing to do business with the company, which would in turn weaken its finances and lead to further
business reductions. Mr. Fleischer, a longtime fan who still has a buy recommendation on the
company, said he hasn't yet seen any evidence of such a problem.

However, Mr. Fleischer said, Enron needs to disclose more information about its myriad of financial
transactions with related partnerships and other entities. Enron is facing a problem with "trust and
credibility. It's not easy to regain something as basic as trust." he said.

35

01300000000178


This statement is an apparent reference to SEC disclosure regulations regarding related-party
transactions. Under SEC rule S-K, a company has to report any transaction that exceeds $60,000
and involves "any director or executive officer." By contrast, Mr. Fastow, as CFO, would have fallen
into that category, but Mr. Kopper, as managing director of a business unit, presumably wouldn't
have.

However, reporting guidance issued by the Financial Accounting Standards Board seems to have a
broader definition, one that might include Mr. Kopper. According to FAS Statement 57, a related-
party transaction involves a "material" piece of business between the company and a member of
management, The statement defines management as directors, top officers, vice presidents in
charge of major business units and “other persons who perform similar policy-making functions.
Persons without formal titles may also be members of management."

Write to John R, Emshwiller at john, emshwiller@wsj.com <mailto:john.emshwiller@wsj.com>,
Rebecca Smith at rebecca.smith@wsj.com <mailto:rebecca.smith@wsj.com> and Jathon Sapsford
at jathon.sapsford@ws|,com <mailto:jathon.sapsford@wsj.com>

an

01300000000174


Nickoloff, Peter

From: Carleton, Norman
Sent: Friday, November 30, 2001 4:24 PM
To: Sailadin, Anne; Bair, Sheila, Berardi, Steve; Bitsberger, Timothy; Cetina, Jill; Eichner,

Matthew; Gablondo, Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail);
Nickoloff, Peter, Novey, Michael; Pietrangeli, Fred; Roseboro, Brian; Schulthelss, Heidilynne;
‘Sharer, James; Whaley, Jean; Wiedman, Mark

Subject: Bloomberg: Enron Fires U.K. Workers, Plans Bankruptcy Soon (Update)

Enron Fires U.K. Workers, Plans Bankruptcy Soon (Update1)
By Mark Lake

New York, Nov. 30 (Bloomberg) — Enron Corp. fired 1,100 employees in the U.K. as the energy trader sought to line up
financing for the largest U.S. bankruptcy reorganization.

Enron's bankers, led by J.P. Morgan Chase & Co, and Salomon Smith Barney Inc., sought to arrange more than $1 billion
of loans to help Enron trade while in bankruptcy, said people familiar with the situation, The dedtor-in-possession financing
may be secured in part by $1.8 billion in proceeds Enron expects to receive by selling its Portland General Electric Co,
unit.

Enron is also considering using its Northern Natural Gas Co. pipeline, which analysts estimate is worth $2.7 billion, as
Collateral for new loans, Dynegy Inc. said it would seek to block such a move by exercising an option to purchase the
pipetines,

“This whole thing is going to be in the courts,” said Kathleen Vuchetich, who helps manage $1.4 billion in assets. The firm
‘owns Dynegy shares in the Strong American Utilities fund that Vuchetich helps run.

Enron will have 250 U.K. workers after the dismissals, according to a statement by PricewaternouseCoopers, which is
oversesing the company’s British operations. Enron has 6,800 workers in Europe and 21,000 total.

More firings are likely in the U.S, after its $23 billion acquisition by Dynegy collapsed earlier this week. That failure, and @
credit-rating downgrade to junk, left the company short of cash needed to pay its $15 billion of debt.

Enron, with less than $2 billion in cash as of last week, needs to pey $690 million to lenders by mid-December and is
responsible for another $3.9 billion in debt owed by affiliated partnerships.

Pipeline Debate

Dynegy said it plans to take over Enron's Northern Natural Gas pipeline on Dec, 12, even if Enron files for bankruptcy.
Dynegy invested $1.5 billion in Enron as part of the merger plan, giving it preferred stock in Northern Natural Gas. Dynegy
backed out of the takeover Wednesday.

Enron likely will go to court to argue that Dynegy didn't have the right to end the merger, so it shouldn't get the pipeline,
New York bankruptcy lawyer Robert Christmas said. Enron needs collateral for loans to stay in business.

Enron pledged assets of Northern Natural Gas and Transwestern Pipeline as collateral for $1 billion in loans from J.P.
Morgan and Salomon this month. The banks may not back Enron's claim, as they are more likely to be repaid by Dynegy,
said Fahnestock & Co. analyst Fadel Gheit.

“| expect to see Enron, J.P. Morgan, Citibank and Dynegy all in court fighting over who owns the pipeline.” said Jon Kyle
Cartwright, a fixed-income senior analyst at Raymond James & Associates, “Al this point we put our chips on Dynegy. We
suspect they had the time and expertise to perfect their purchase.”

Biggest Pipeline

Dynegy will assume $950 million of Northern Natural debt with the purchase. Enron can buy the pipeline back if it pays
Oynegy $1.5 billion, plus interest, within 180 days of the merger’s collapse, Dynegy Chairman Chuck Watson said
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01300000000257


In its financial filings, Dynegy explains that when market-price quotes aren't available for certain long-
term contracts, "the lack of long-term pricing liquidity requires the use of mathematical models to
value these commitments.” As a result, actual cash retums may “vary, either positively or negatively,
from the results estimated."

Quoted market prices offering independent guidance on many short-term energy contracts have
become more readily available in recent years. Even then, there aren't rules specifying which market
quotes companies must use. For instance, should companies mark their contracts based on the
"bid" price, which is the price a market maker would offer to pay for a given contract? Or should they
use the "ask" price, which is the price at which a trader is willing to sell? Or somewhere in between?
Currently, individual companies decide for themselves.

On most contracts for short-term deliveries of natural gas, bid-ask spreads are fairly small, about 1%
or so. But even for some short-term electricity contract prices quoted on Enron's now-shuttered
online trading portal, spreads of 20% were common. On contracts for short-term delivery of
telecommunications bandwidth, Enron often posted "ask" prices that were as much as eight times
the posted "bid" prices.

For other long-term derivatives, such as electricity contracts stretching 20 years or longer, market
quotes don't exist. In such cases, companies are allowed to base contract valuations on their own
undisclosed estimates, covering everything from future commodity prices to credit risks and discount
rates.

"It would seem wise for energy companies in this highly skeptical environment to provide the
disclosures necessary for financial statement readers to understand the quality of their eamings, and
provide the disclosures voluntarily,” says Tom Linsmeier, an accounting professor at Michigan State
University.

For now, however, energy traders aren't stepping up their disclosures. Dynegy's senior vice president
and controller, Michael Mott, for instance, says his company "is committed to full disclosure and to
eliminate any cloudiness around these disclosures.” But he says Dynegy won't disclose any
information about the market assumptions or methodologies underlying the unrealized gains it has
recorded over the years. He says that would place Dynegy “at a competitive disadvantage in the
marketplace.”

-- John R, Emshwiller contributed to this article.
Write to Jonathan Weil at j

207

01300000000316


Nickoloff, Peter

From: Carleton, Norman
Sent: Wednesday, December 05, 2001 $:33 PM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew, Gabilondo, Jose; Gross,

Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael;
Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman, Mark
Subject: DJ: IN THE MONEY: Enron Needs JV Now To Up Recovery Value

December 5, 2001

IN THE MONEY: Enron Needs JV Now To Up Recovery Value

By Carol S. REMOND

A Dow Jones Newswires Column
NEW YORK -- The race is on to save Enron Corp.'s (ENE) energy-trading business.

Enron and its creditors have to move quickly to try to preserve as much of the business as possible
now that the Houston company has filed for bankruptcy and customers have begun migrating in
droves to other trading partners and dealing platforms.

First, Enron's lead banks, J.P. Morgan Chase & Co. (JPM) and Citigroup Inc. (C), arranged for $1.5
billion in interim financing to help Enron get going again. Now, they and others appear to be hustling
to shore up one of Enron's most significant assets, its EnronOnline trading system.

So far, details are scant. But people familiar with the matter said that J.P. Morgan Chase & Co.,
Citigroup Inc. and Swiss banking giant UBS AG (UBS) are considering some form of a joint venture
under which UBS' subsidiary UBS Warburg alone would take over Enron's trading operations. The
joint-venture partners would share any revenues.

UBS has well-established businesses in trading and risk management, but the bank has virtually no
presence in the energy trading market.

People familiar with the matter said that UBS is doing due diligence on Enron's trading operations,
attempting to figure out what value, if any, could be restored to the once mighty trader.

J.P. Morgan declined to comment on the matter. A spokesman for Citigroup's Salomon Smith
Bamey’s unit wasn't immediately available for comment.

But a person familiar with the matter said that under one option under review, UBS would take over
Enron's trading business. That person said that the plan was likely to have been discussed during a
UBS board meeting that took place in Zurich earlier Wednesday.

Banks Look To Get Something Back
J.P. Morgan, Citigroup, and other financial institutions have a lot riding on Enron, having loaned

billions of dollars to a company that not so long ago dominated by far the U.S. energy trading
20

01300000000319


that two of its subcommittees would "move past the headlines and get the facts on Enron” in their
joint hearings planned for next Wednesday.

Meanwhile, Enron continues to hive off non-core operations. PwC, which is acting as the
administrator for Enron Europe, said it intended to sell the group's European metals, commodity
trading and credit derivatives business, having agreed the sale of Enron Direct, the UK-based gas
and power supplier, on Tuesday.

At the same time, the parent company is trying to salvage its stricken core north American trading
business. UBS, the Swiss banking group and JP Morgan Chase have both registered an interest in
forming a joint venture.

The latest of at least two dozen lawsuits was filed on Wednesday against Enron executives and
board members, together with a request for an order to freeze their assets.

Bill Lerach, lead attorney for the new suit said: “Our investigation is revealing to us the fraud thus far
disclosed was the tip of the iceberg.”

Additional reporting by Elizabeth Wine and Sheila McNulty

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This year, though, it has been hit by a string of troubles, from soured business initiatives to executive
departures. On Tuesday, Enron announced a $618 million third-quarter loss, because of a $1.01
billion write-off on investments in broadband telecommunications, retail energy services and Azurix
Corp., a water company. A small chunk of that write-off, about $35 million, was attributed to ending
certain LJM2-related transactions, That termination also produced a $1.2 billion reduction in Enron

shareholder equity as the company decided to repurchase 55 million shares that had been part of
LJM2 deals.

At 4 p.m. Thursday in New York Stock Exchange composite trading, Enron was down 9.9%, or
$3.20, to $29 a share. Within the past year, the stock had topped $80 a share.

Enron officials didn't have any comment about the LJM2 partnership document. Enron has
consistently said its dealings with LIM2 have been proper. They said the LJM2 deals, like ones done
with other parties, were aimed at helping hedge against fluctuating market values of its assets and
adding sources of capital.

Mr. Fastow has declined several requests for an interview about LJM2. In late July, he formally
severed his ties with LJM2, as a result of what Enron officials said was growing unease by Wall
Street analysts and major shareholders. Mr. Fastow has been finance chief of Enron since 1997 and
has been with the firm 11 years, which included extensive work setting up and managing company
investments.

Michael Kopper, a former Enron executive who an Enron spokesman said is now helping to operate
LJM2, declined to comment. He also wouldn't describe his relation to LJM2.

In his April 30 report, Mr. Fastow said the partnership, which raised $394 million, had invested in
several Enron-related deals involving power plants and other assets as well as company stock. The
document said LJM2 sought a 29% internal rate of return. That was down from a 48% targeted rate
of retum at the end of 2000, which the document said was due in part to a decline in the value of
LJM2's investment in New Power Co., an Enron-related energy retailer. In some transactions, LIM2
did much better than the 29% target, though this sometimes involved renegotiating individual deals.

In September 2000, the partnership invested $30 million in “Raptor I!!," which involved writing put
options committing LJM2 to buy Enron stock at a set price for six months. Four months into this deal,
LJM2 approached Enron to settle the investment early, "causing LJM2 to receive its $30 million
capital invested plus $10.5 million in profit," the report said, The renegotiation was before a decline in
Enron's stock price, which could have forced LJM2 to buy Enron shares at a loss of as much as $8
each, the document indicated.

Write to Rebecca Smith at rebecca.smith@wsj.com <mailto:rebecca.smith@ws|.com> and John R.
Emshwiller at john.emshwiller@wsj.com <mailto:john.emshwiller@wsj.com>

4a

01300000000186


provide an explanation to investors, years after some of these entities were formed. How did the Securities and
Exchange Commission fail to require adequate disclosures over those years?"

His second question (there are 15 in all) referenced FASB statement No. 57, "Related Party Disclosures," and
wondered in part: "How did Enron avoid making these disclosures and how did Arthur Andersen fail to require
adequate disclosures?"

And so on. Dingell’s last question was: "Who profited from Enron's complex business structure? Where did all
the money go?"

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power-trading industry, a mix of U.S, and European companies are poised to scoop up Enron's
business.

Who gets what slice will depend on each company’s heft, its trading sophistication and the strength
of each business's assets in different regions, say analysts and company executives.

“Because of this meltdown, you will see companies move in that have assets in the area" to expand
their trading activities, says Steve Malcolm, president and chief operating officer at Williams. While
companies are prohibited from sharing information between their marketing and interstate-pipeline
affiliates, “clearly you are looking to gain and extract intelligence from the marketplace to allow you to
take more well-thought-out positions,” he said.

El Paso will likely expand its natural-gas trading on the West Coast, where it owns significant pipeline
assets, and in the Northeast. Duke and Reliant, already big traders on the West Coast, could grab
even bigger chunks there, where they own generating capacity. Dynegy would likely be able to pump
up in the Midwest, where it already is a strong power marketer and generator. In the Mid-Atlantic,
American Electric's power-generation facilities would give it an edge.

American Electric, which has muscled up into the second-biggest trader of power and natural gas
behind Enron, is viewed as a major beneficiary of Enron's decline. The company is the nation's top
generator, with slightly less than 40,000 megawatts of capacity. Enron was trading about twice as
much combined gas and power as AEP. “We are going to be one of the firms that picks up the
slack," says Eric van der Walde, AEP’s executive vice president of trading and marketing.

Asset-rich companies with plenty of cash to take on big trading positions include El Paso, which has
the largest interstate pipeline in the country. El Paso also is one of the top five producers of natural
gas in the U.S. and has contracted a huge amount of pipeline storage capacity on other people's
lines, particularly in the West. Dynegy, which had most closely mirrored Enron's asset-light approach,
has been adding generating assets and has a sizable pipeline capacity. El Paso and Williams have
the biggest contract positions in natural-gas storage.

Williams is more focused on long-term risk-management contracts with producers and end-users
seeking to hedge their exposure to volatile commodity prices. The company, which already has the
second-largest pipeline system in the U.S., will spend about $5 billion on pipeline projects through
2004.

While company executives say confidently that any gains in market share will easily counteract any
losses resulting from uncollected money owed by Enron, some analysts say the Enron debacle may
continue to depress the stocks of companies with big trading businesses.

Across the Atlantic, U.S. firms such as AEP and Duke, which have small operations in Europe, are
likely to face stiff competition from Europeans such as RWE Trading GmbH, a unit of German power
giant RWE, Belgium's Electrabe! and Innogy PLC, the second-largest generator of electricity in
England and Wales.

Most of Innogy's trading is in the United Kingdom, but the demise of Enron might spur it to expand its
operations more quickly in Europe, said Brian Senior, Innogy’s director of trading and asset
management.

RWE Trading, barely one year old, is considered the most-aggressive European player, with trading
activities in London and Essen, Germany; it plans to open an operation in Houston early next year.

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financial products, including credit derivatives. Enron, in effect, abandoned its roots as an energy provider
in favour of becoming a Wall Street trader that just happened to be based in Houston, Texas-in effect, a
hedge fund with a gas pipeline on the side.

Grinning and bearing it

While Enron has struggled to survive this week, its bankruptcy has created ripples in financial markets
around the world. Its troubles have weighed on both equity and credit markets In the weeks since its
problems first emerged In October. However, some of the problems hidden by Enron’s opaque accounting
are only now emerging. In Japan, there has been a near panic after it was revealed that four asset-
management companies were big holders of a ¥105 billion ($848m) bond issued by Enron. Money-market
funds, of the sort where the bonds were held, are marketed as "safe" assets, and so news of Enron’s
imminent demise triggered massive redemptions. In the way of these things, the redemptions have run at
‘well over the level of the holdings of the bond-they have been around ¥1,000 billion, or almost ten times
the value of the bond-and the scale of redemptions forced the bonds below their face value. In addition,
many Japanese banks have lent to Enron. Three admitted that their combined exposure exceeded ¥60
billion ($485m). The Bank of Japan was forced to step in and has injected more than $200 billion into its
banking system to offset the liquidity problems arising from Enron’s collapse. This is its largest ever
injection of funds into the system.

The FTSE 100 index of leading stocks in London was dragged down in trading on December 3rd as it
emerged that Barclays, one of Britain’s biggest banks, was among those exposed to Enron, to the tune of
$126m in an unsecured loan. CSFB in London, an investment bank, has a $70m unsecured loan, and UBS,
@ Swiss bank, in New York, one of $74m. Fortis, a Belgian-Dutch financial group, said this week that it has
@ $68m exposure, ABN Amro of the Netherlands and Britain’s Abbey National have already admitted to
chunky exposures, Investors were also worried about other banks that may not yet have disclosed their
exposure to Enron, and this dragged down the whole sector.

But what has been bad news for investors and lenders has been good news for Enron’s rivals, who see the
giant's travails as an opportunity to pick up assets on the cheap. Centrica, a British gas utility, has bought
Enron Direct, which sells gas and electricity to 160,000 small and medium-sized customers in Britain, for
$137m. PricewaterhouseCoopers, which are the administrators of Enron's European assets, are now trying
to sell the company's metals, commodity trading and credit derivatives business. Dynegy will not rule out
a bid for Enron's share of Europe's biggest gas-fired power station at Teeside In the north-east of England.
Shell’s Indian business is looking to buy Enron’s liquefied natural-gas terminal there. Two other
companies, Britain’s BG Group and the Gas Authority of India are rumoured to be interested in the plant
too, though Enron is seeking to sell the terminal along with a power plant. Enron‘s Australian
administrators have received 18 expressions of interest in the company's electricity derivatives book.

Others see a chance to pick up business now that customers are nervous of trading with Enron, Duke
Energy, an American utility and energy trader, is looking at picking up Enron's role as a market-maker in
power. InterContinentalExchange, @ young, electronic over-the-counter commodities market, is picking up
business from EnronOnline, an electronic trading platform.

AP

a7

01300000000348


Nickoloff, Peter

From: Carleton, Norman
Sent: Tuesday, December 04, 2001 11:20 AM
To: Bair, Shella; Berardi, Steve; Bitsberger, Timothy; Cetina, Jill, Eichner, Matthew, Gabllondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter, Novey,
Michael, Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Sharer, James; Whaley,
Jean; Wiedman, Mark

Subject: Bloomberg: Enron Takes tst Steps in Bid to Negotiate Bankruptcy (Update)

12004 09:52

Enron Takes 1st Steps in Bid to Negotiate Bankruptcy (Update5)
By Jeff St.Onge

New York, Dac. 4 (Bloomberg) — Enron Corp. is working to survive history's biggest Chapter 11 reorganization, lining up a
$1.5 biltion bankruptcy credit line, getting permission to spend money to keep operating and firing 4,000 workers.

An Enron attorney told U.S, Bankruptcy Judge Arthur Gonzalez the company is talking with backers to revive its energy-
trading business under new ownership. The operation, Enron's most profitable, unraveled after the Houston-based
company in October posted a third-quarter loss of $1.01 billion.

While the line of credit eliminated one immediate threat, trading partners are hard to find, rival Dynegy Inc. is seeking to
take over an Enron pipeline and federal authorities are investigating whet sent the biggest energy trader into bankruptcy.
Competitors such as Suez SA, the second-biggest water company, are looking at buying company assets as Enron raises
money.

“The key issue now for Enron's creditors is whether the company can salvage material value from its trading operations
before their critical mass of personnel, expertise and reputation dissolves,” said Jeff Werbalowsky, senior managing
director at Houlihan Lokey Howard & Zukin,

In an indication that unsecured creditors don't expect to be repaid in full, Enron's 6 3/8 percent bonds due in 2003 traded
around 24 cents on the dollar, according to Bloomberg data.

Shares of Enron rose 39 cents to 79 cents. Shareholders are tast in line to be paid in Chapter 11 cases and typically get
nothing if other creditors aren't fully reimbursed.

Business Challenges

Enron is courting investors to revive its crippled trading business, even as it loses customers who fear the company will be
unable to make good on its obligations. The company is in talks with financial institutions to fund the wholesale trading
business “under new ownership,” Chief Operating Officer Greg Whalley said in a statement.

Enron is negotiating with J.P. Morgan Chase & Co., Citigroup Inc.'s Salomon Smith Barney and UBS AG about a possible
joint venture to run the energy-trading operations, the Wall Street Journal said, citing unidentified sources.

‘The trading business is the most valuable part of Enron, analysts say. “‘if they don't resurrect it, they have an extreme
problem," said Jon Kyte Cartwright, an analyst with Raymond James & Associates. “Cash alone won't save the operation,
they need someone to run it" because of Enron’s low credit ratings and deteriorated credibility, he said,

At EnronOnline, the Web site that once handled $2.8 billion in commodity transactions a day, trading has plunged, raising
doubts that Enron will be able to rescue the business. Enron customers such as Mirant Corp. and Aquila Inc. have taken
business elsewhere.

“Until we've seen the fallout from this bankruptcy, | don't think you're going to find a lot of entities that are
trade with" Enron, said Daniel Gordon, head of commodities trading al Hagerstown, Marytand-based Allegheny Energy
Inc., which owns utilities in five states.

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Dingell suggested Pitt was seeking to “repudiate” the legacy of the SEC under former chairman
Arthur Levitt, when the commission's record in fighting financial fraud represented a "high mark” that
Pitt's tenure will be measured against.

“| trust that this is not what you meant to convey and that you will correct any misunderstanding at the
earliest possible time,” Dingell wrote.

“| expect you and your agency to conduct a vigorous and fair investigation of the Enron matter and of
any and all other matters involving your former clients,” Dingell said, noting that Pitt, as an attorney in
private practice, represented the AICPA and the Big Five accounting firms.

Dingell noted that Enron failed to disclose and describe the nature of Its relationship with the private
investment partnerships, apparently in violation of FASB's standard No, 57 addressing “related-party
disclosures."

“How did Enron avoid making these disclosures and how did Arthur Andersen fail to require
adequate disclosures?" Dingell demanded of the SEC.

"It does not appear to be that Andersen was misled by management fraud, as the disclosures in prior
filings should have alerted Andersen to the existence of these transactions. This appears to be
similar to Andersen's behavior in Waste Management Inc. (WMI), where Andersen identified issues
during the audit, but then failed to require the company to correct them," the letter said.

Noting that Andersen received $52 million in fees from Enron last year for auditing and consulting
services, Dingell asked: "Could that million dollars a week have played a role in their clouded
judgment here?"

The letter went on to ask the SEC for details regarding what third parties the partnerships did
business with, how Enron's board and internal oversight committees approved of the transactions,
why past auditing adjustments weren't recorded, how the capitalization structure of the partnerships
evolved, and why Andersen allowed "improper accounting” practices to help Enron misstate its
equity by $1 billion.

Citing Enron's SEC filings, the partnerships were established to enrich company management, hide
debt from investors, and create "fictitious profits,” Dingell suggested.

"Did Andersen help Enron ‘financially engineer’ these types of transactions to get around the
accounting rules?" Dingell asked the SEC. "What law firms or firms were involved in structuring or
engineering, and providing legal opinions, with respect to these entities, transactions and
disclosures?"

Dingell asked the SEC to explain any patterns of insider stock selling in late 2000 and early 2001 that
may have been related to management's knowledge of Enron's true financial condition.

The letter also sought the SEC's suggestions for what reforms of accounting rules may be needed.

-By Bryan Lee, Dow Jones Newswires; 202-862-6647;
Bryan. Lee@dowjones.com

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01300000000331


In a March 2000 SEC filing, Enron makes a brief reference to its new JEDI partner, which Enron
doesn't identify but presumably is Chewco. The filing said "an officer of Enron has invested in the
limited partner of JEDI and from time to time acts as agent on behalf of the limited partner's
management." While the officer isn't named, the description is similar to that given for Mr. Kopper in
relation to Chewco in the LJM2 offering memorandum.

In March of this year, Enron moved to purchase the balance of JEDI that it didn't already own. In an
SEC filing earlier this year, Enron said it acquired for $35 million “the limited partner's interests" in
JEDI. Again, the partner wasn't named, but presumably was Chewco.

Enron consolidated JED!'s assets and liabilities into the company. The SEC filing said JEDI's
holdings included 12 million shares of Enron stock. Enron said it also paid off about $620 million of
JEDI “third-party debt.” The third party or parties weren't named.

Oct. 16: Enron takes $1.01 billion charge related to write-downs of investments. Of this, $35 million
is attributed to partnerships until recently run by CFO Andrew Fastow. Enron also discloses it shrank

shareholder equity by $1.2 billion, as a result of several transactions including ones undertaken with
Fastow’s investment vehicle.

Oct. 17: SEC sends letter to Enron saying it was beginning an “informal inquiry.”

Oct. 19: The Wall Street Journal discloses that general partners of Fastow partnership realized more
than $7 million last year in management fees and about $4 million in capital increases on an
investment of nearly $3 million in the partnership, set up principally to do business with Enron,
according to internal partnership document. Enron's board meets to discuss SEC inquiry.

Oct. 22: Enron announces SEC will begin a probe of company’s "related party transactions,”
including those with Fastow partnerships. Enron says It will fully cooperate.

Oct. 23: Enron's treasurer acknowledges the company may have to issue additional shares to cover
potential shortfalls in investment vehicles it created, although he says the company believes it can
repay about $3.3 billion in notes that were sold by those investment vehicles without having to resort
to issuing more stock.

Oct. 24: Enron replaces Fastow as CFO with Jeffrey McMahon, the 40-year-old head of the
company’s industrial-markets division. Enron shares fall 17% on heavy volume ahead of the
announcement.

Oct. 25: The company draws down about $3 billion, the bulk of its available bank credit lines, in a bid
to restore confidence in its financial strength and liquidity. The Fitch rating agency puts Enron on
review for a possible downgrade, while another, Standard & Poor's, changes Enron's credit outlook to
negative from stable. A noninvestment-grade rating would throw the company into default on
obligations involving billions of dollars of borrowings.

Oct. 29: Moody's lowers its ratings by one notch on the Enron's senior unsecured debt and kept the
company under review for a possible further downgrade. Shares fall below $14 on the NYSE.

Oct. 31: The SEC elevates to a formal investigation its inquiry into Enron's financial dealings with

partnerships headed by Andrew Fastow. Enron shares rise $2.74 to $13.90, after plunging for 10
straight days.

83

01300000000210


Nickoloff, Peter

From: Carleton, Norman
Sent: Monday, December 03, 2001 12:09 PM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Cetina, Jill; Eichner, Matthew; Gabllando,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey,
Michzel, Pietrangell, Fred; Roseboro, Brian, Schultheiss, Heidilynne; Sharer, James; Whaley,
Jean, Wiedman, Mark

Subject: WSJ: Finance Firms Stand to Gain Share Of Markets Enron Once Dominated

December 3, 2001

Finance Firms Stand to Gain Share
Of Markets Enron Once Dominated

By RANDALL SMITH and HENNY SENDER
Staff Reporters of THE WALL STREET JOURNAL

Although financial-services firms are on the hook for billions owed to them by Enron Corp., there also
are some winners among Wall Street firms that stand to pick up market share in the energy trading
markets that Enron dominated.

Both Goldman Sachs Group Inc. and Morgan Stanley & Co., for example, hold leading positions in

numerous energy markets, and both Wall Street experts and some executives at the firms said they
should stand to benefit in increased trading volume.

Van Hesser, a credit analyst at Credit Suisse First Boston, noted in a report Friday that both
Goldman and Morgan Stanley “have meaningful energy-trading operations." He cautioned that those
firms might incur "some additional risk [from] their exposure to smaller, less-sophisticated trading
firms that may be stressed by their own exposures to Enron.” But, Mr. Hesser added, “they are
experienced hands and know how to hedge and how to structure collateralized trading agreements."

John Shapiro, head of global energy trading at Morgan Stanley, agreed that his firm would likely be
one of the financial-services firms whose trading activity could benefit from the reduction in Enron's
market activity. Other participants that could also benefit include the trading units of J.P. Morgan
Chase & Co., Bank of America Corp., Societe Generale SA and Deutsche Bank AG.

Although Goldman doesn't break out its commodity-trading revenue, Morgan Stanley does. For the
fiscal year that ended in November 2000, Morgan Stanley's principal transaction commodity trading
revenue rose 34% to $579 million, helped by higher revenue for energy-related products including
electricity, natural gas and crude oil.

One barometer of the impact of Enron's reduced market presence has already been seen at
Intercontinental Exchange, an online energy marketplace that has trailed a competing platform,
EnronOnline, In an interview Thursday with Dow Jones Newswires, |CE Chief Executive Jeffrey

Ms

01300000000264


"The industry has been shell-shocked by their recent announcements, and they're not ready to go
back to trading with them," said Sanchez of Gelber & Associates.

Some traders wondered why Dynegy hasn't stepped in to buy energy from sellers and then sell that
product to Enron. Such a move, known as “sleaving” in energy markets, serves as an ad hoc form of
credit guarantee one transaction at a time.

Dynegy didn't return phone calls on the matter.

-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com

(John Edmiston in Houston, Kristen McNamara in New York and Jon Kamp in Chicago contributed to
this article.)

Reached later, Dynegy made clear it wouldn't take any extraordinary measures to support Enron in
the market.

"We will operate as two separate companies until the merger is completed," Dynegy spokesman
John Sousa said. "We have to act independently.”

Mirant Corp. (MIR), a major trader of North American power and gas, has trimmed its business with
Enron.

"We're trading on a very limited basis,” said spokesman Chuck Griffin, who wouldn't be more specific,

Cinergy Corp. (CIN), a mid-sized energy trading company, said it is buying and selling gas and power
with Enron.

-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com

(John Edmiston in Houston, Kristen McNamara in New York and Jon Kamp in Chicago contributed to
this article.)

110

01300000000228


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 29, 2001 11:32 AM
To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: Enron May Have to Issue Stock
October 24, 2001

Major Business News

Enron May Have to Issue Stock to Cover
Possible Shortfalls in Investment Portfolio

By REBECCA SMITH and JOHN R, EMSHWILLER
Staff Reporters of THE WALL STREET JOURNAL

Enron Corp. might have to come up with several hundred million dollars or more during the next 20
months to cover potential shortfalls in investment vehicles it created. Covering such shortfalls could
involve issuing additional Enron shares, diluting the position of current shareholders.

However, Enron Treasurer Ben Glisan said in an interview Tuesday that the company believes it can
repay about $3.3 billion in notes that were sold by those investment vehicles without having to resort
to issuing more stock. The notes were sold to investors during recent years by several entities —
known as the Marlin Water Trust II, the Marlin Water Capital Corp. II, the Osprey Trust and Osprey I,
Inc. The notes are coming due during the next 20 months.

Mr. Glisan said assets from the entities could be sold to pay off some of the notes. Also, Enron is
selling other assets. Proceeds from those transactions also could go toward repaying the notes,
which ultimately are guaranteed by Enron.

He said it appears that asset sales will raise at least $2.2 billion by the end of next year. This amount

includes cash proceeds of $1.55 billion from the previously announced sale of Enron's Portland
General Electric utility unit. Enron hopes to complete that sale by the end of 2002.

[GO]SEC Seeks Information on Enron Dealings With Partnerships Récently Run by Fastow/(Oct.23)
[Go]Enron CFO's Tito a Pafffiétship Resulted iff Big Profits for the’Firm (Oct. 19)

[Go]Enron Says Its Links to a Partnership Led to $2'Billion Equity’Réduction (Oct!"18)

[Go]Enron Posts Surprise 3rd-QuartenLoss After Investment, Assét WritéDowns (Oct:17)

"There are a number of other assets we believe will raise sufficient proceeds" to repay the notes, Mr.

nv

01300000000180


128

01300000000246


A Microsoft news release dated Oct. 15 announced what the company calls MSN 7, a new version of
the MSN network which includes high-speed, or broadband, access to the Web. The service was to
be available on Oct. 25.

The Microsoft release said MSN 7 would deliver "state-of-the-art" video and audio through
"dramatically improved" broadband technology. The new service would extend MSN broadband
service "to more than 29 million households in 45 markets."

By the end of the first quarter of 2002, the Microsoft release said, the MSN broadband service would
be available to more than 90% of U.S. households capable of using high-speed digital subscriber line
access.

The Enron lawsuit asked that Microsoft be declared in breach of contract. It also asked that Enron
be allowed to recover unspecified damages as well as costs stemming from the lawsuit.

Neither Enron nor Microsoft have responded to requests for comment on the lawsuit.

The Microsoft deal is the second failed broadband agreement. In July 2000, Enron and Blockbuster
Video, a unit of Viacom Inc. (VIA), announced a deal to deliver movies over the Internet.

That deal fell apart in March of this year when Blockbuster said Enron's fiber-optic network couldn't
deliver the service on a dependable basis. Enron countered that Blockbuster couldn't deliver the
quality and quantity of movies needed for a successful video-on-demand service.

-By Michael Rieke, Dow Jones Newswires; 713-547-9207; michael.rieke@dowjones.com

Because of the failure of the Enron Broadband Services-Microsoft deal, MSN will have to temporarily
limit delivery of its new high-speed Internet services to the 14 states covered by Qwest
Communications International Inc. (Q), said Bob Visse, director of MSN marketing.

Those 14 states are Arizona, New Mexico, Colorado, Wyoming, Idaho, lowa, Minnesota, South
Dakota, North Dakota, Montana, Nebraska, Oregon, Utah and Washington.

The Enron deal was to provide backbone services outside of the Qwest area, Visse said. Backbones
provide longhaul services that connect smaller areas of networks.

An analyst, who didn't want to be identified, expressed shock when told that the disagreement would
limit the new MSN broadband services to the 14-state Qwest region. That calls into question the
performance of the entire Enron broadband network, he said,

Many different companies can provide the necessary backbone services and MSN will find one,
MSN's Visse said.

The new service was just launched Thursday so there weren't existing customers in the areas outside
the Qwest region, he said.

Visse wouldn't comment on the lawsuit filed by Enron because Microsoft hasn't reviewed it in detail.
Commenting would violate the nondisclosure agreement Microsoft has with Enron, he added,

"We do believe we have fully upheld the terms of the agreement,” he said.

Microsoft hasn't filed a lawsuit against Enron relating to the deal, he added. He wouldn't comment on
7

01300000000161


Nickoloff, Peter

From: Carleton, Norman

Sent: Tuesday, November 20, 2001 5:11 PM

To: Roseboro, Brian; Bair, Sheila, Wiedman, Mark, Bitsberger, Timothy, Gross, Jared;
Schultheiss, Heidilynne; Nickoloff, Peter; Berardi, Steve; Pietrangeli, Fred; Whaley, Jean;
Novey, Michael; Eichner, Matthew, Hammer, Viva, Gabilondo, Jose; Lori Sanatamorena (E-
mail)

Subject: DOW JONES NEWSWIRES: Dynegy Won't Comment On Merger Partner Enron's 10-Q

November 20, 2001

Dynegy Won't Comment On Merger Partner Enron's 10-Q

By CHRISTINA CHEDDAR

Of DOW JONES NEWSWIRES

NEW YORK -- Dynegy Inc. (DYN) declined Tuesday to comment on whether its merger with Enron
Corp. (ENE) would be affected by the contents of Enron's quarterly filing with the Securities and
Exchange Commission late Monday.

In the 10-Q, which was filed five days past the SEC deadline, Enron revised its third-quarter earnings
downward by 3 cents a share, and disclosed it may have to pay off a $690 million note owed to an
affiliated partnership because a clause in a financial agreement was triggered by the reduction in
Enron's senior unsecured debt rating to triple-B-minus by Standard & Poor's a week ago.

The amount will have to be paid by Nov. 27 if Enron doesn't find collateral to guarantee the debt, the

company said in the filing. Enron is working to come up with an acceptable agreement on the debt,
but didn't disclose who holds the note.

» Enron used partnerships in order to hedge its investment risk, and in some cases to keep the debt
off its balance sheet. The practice is being investigated by the SEC and by an internal committee
Enron has named.

In the filing, Enron also said it may have to take a $700 million pretax charge to earnings for the
declining value of assets held by another partnership, Whitewing LLP.

When asked if Dynegy had known about the collateral call on the debt or about the deciine in
Whitewing's value, a Dynegy spokeswoman declined to comment.

“We are referring all questions about the Enron 10-Q to Enron," said the spokeswoman.
Representatives of Enron weren't immediately available for comment.

Dynegy agreed to buy Enron earlier this month. Earlier Tuesday, the deal was worth about $11.97
billion in stock, but Enron shares were trading at a 32.5% discount to the offer price earlier Tuesday
morning, which is a sign of the uncertainty surrounding the transaction.

i

01300000000229


original accounting for the transactions violated generally accepted accounting principles.

Starting in early 2000, the company said last week, Enron issued shares of its own common stock to
four “special-purpose entities,” in exchange for which it received a note receivable. Enron said it had
increased both its note-receivable assets and shareholder equity, a move the company called "an
accounting error" that it is correcting. Under GAAP, the payment a company receives when issuing
stock only counts as equity if it is cash. As a result, Enron's 2000 audited financial statements
overstated the company’s notes-receivable assets and shareholder equity by $172 million. And
Enron's 2001 unaudited statements overstated them by $828 million. The $1 billion overstatement
represents 8.5% of Enron's previously reported shareholder equity as of June 30.

“It is basic accounting that you don't record equity until you get cash, and a note doesn't count as
cash," says Lynn Tumer, a former chief accountant for the SEC. "The question that raises is: How did
both partners and the manager on this audit miss this simple Accounting 101 rule?" Adds Douglas
Carmichael, an accounting professor at Baruch College in New York: “Anyone that's an accountant
looking at the entry should have known" it violated GAAP.

An Enron spokesman, Vance Meyer, says, "The accounting error was just that — an error," explaining
that, "We believed it was not material. However, it was, of course, corrected ... And we did make the
correction with Andersen's concurrence." He says Andersen “performed limited quarterly reviews” of
the company's unaudited financial statements and reviewed the entries that resulted in the
shareholder-equity overstatements "to the extent they deemed necessary.”

To some who follow the accounting world closely, this has a familiar ring to it. During the past few
years, every Big Five auditor has been hit by multiple accounting debacles at high-profile clients. For
Andersen, Enron joins a list including Waste Management Inc. and Sunbeam Corp. While the names
of the clients may change, the issues remain largely the same,

For instance, Enron had reported net income of $105 million for 1997, a figure that Enron last week
said will be reduced to $9 million in its upcoming restatement for that year. Enron said the reduction
is mostly because of $51 million in various unexplained "audit adjustments and reclassifications” that
its auditors had proposed in 1997 but at the time had determined to be "immaterial." Cumnulatively,
those immaterial adjustments added up to nearly half of Enron's net income for 1997 and now will be
included in the company's restatements.

That looks a lot like what happened at Sunbeam. According to the SEC's May settlement order with
Sunbeam, Andersen auditors had routinely dismissed so many violations of GAAP as immaterial that
they eventually piled up to produce significant distortions in Sunbeam’s financial statements, making
the barely solvent consumer-products maker look handsomely profitable. Sunbeam filed for Chapter
11 bankruptcy-court protection this past February. In May, the SEC filed a civil lawsuit against five
former Sunbeam executives and the Andersen partner in charge of the company’s audit, accusing
them of engaging in a massive financial fraud; all six defendants have denied the SEC's allegations.
Andersen itself wasn't named as a defendant and has said it believes the lawsuit against its partner
was an unjustified action over questions of professional judgment.

Under GAAP, misstatements aren't immaterial simply because they fall beneath a numerical
threshold, according to an SEC accounting bulletin, Under certain circumstances -- and it remains to
be seen if they apply in the Enron case -- the SEC says intentional immaterial misstatements are
unlawful. One reason is that when immaterial misstatements are combined with other misstatements,
they can “render the financial statements taken as a whole to be materially misleading.”

Enron, which paid Andersen $25 million last year in audit fees and $27 million for other services, is

7

01300000000235


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 29, 2001 9:20 AM
To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: WSJ:Enron

October 29, 2001

Manager's Journal

How Enron Ran Out of Gas

By Paul Kedrosky. Mr, Kedrosky is a professor of business at the University of British Colombia.

I; troubled Enron Corp. the Long Term Capital Management of the energy markets, or merely yet
another mismanaged company whose executives read too many of their own press releases? Or is
poor Enron just misunderstood? Those are the questions after another week of Chinese water
torture financial releases from the beleaguered Houston-based energy concem.

A year ago Enron was the hottest of the hot. While tech stocks were tanking, Enron's shares gained
89% during 2000. Even die-hard Enron skeptics -- of which there are many — had to concede that
last year was a barnbumer for the company. Earnings were up 25%, and revenues more than
doubled.

Not bad, considering where the company came from. A decade ago 80% of Enron's revenues came
from the staid (and regulated) gas-pipeline business. No longer. Enron has been selling those assets
steadily, partly fueling revenues, but also expanding into new areas. By 2000, around 95% of its
revenues and more than 80% of its profits came from trading energy, and buying and selling stakes
in energy producers.

The stock market applauded the move: At its peak, Enron was trading at around 55 times earnings.
That's more like Cisco's once tropospheric valuation than the meager 2.5 times earnings the market
affords Enron competitor Duke Energy.

But Enron management wanted more. It was, after all, a "new economy” Web-based energy trader
where aggressive performers were lucratively rewarded. According to Enron Chairman and CEO Ken
Lay, the company deserved to be valued accordingly. At a conference early this year he told
investors the company's stock should be trading much higher -- say $126, more than double its price
then.

Then the new economy motor stalled. The company's president left under strange circumstances.

And rumors swirled about Enron's machinations in California's energy markets. Investors pored over

Enron's weakening financial statements. But Enron analysts must have the energy and persistence
3

01300000000157


high credit rating. At the same time, it was tempting for many parties to offer that insurance. The
business seemed an easy way to earn fees; only if Enron defaulted would the seller have to make
any payments. And, given Enron's longstanding investment-grade status and $62 billion in assets,
default seemed a remote possibility.

There are other ways in which Enron cast a huge shadow in this market. For example, Enron's own
debt was a big piece of the many packages of securities others assembled and sold to investors.
Now, the credit of the whole package becomes weaker. Moreover, Enron packaged securities itself,
through special-purpose vehicles on which it provided guarantees, as part of its ambitions to be a
financial powerhouse.

To be sure, the market has already had some experience with defaults. Three years ago, there was
the Russian debt crisis; this year the market has already absorbed such shocks as the Chapter 11
filings of Pacific Gas & Electric Co. and financial-services company Conseco Inc. and the collapse of
Swissair Group. But the three combined don't begin to approach the magnitude of an Enron.

Part of the problem is the uncertainty; nobody yet knows the full scale of Enron's involvement in the
market or how much insurance was written against a default by Enron. Because credit derivatives
aren't exchange-traded, and the deals are off-balance-sheet, the market is relatively opaque.
Standard & Poor's put out an analysis Friday suggesting various Enron exposures in the credit-
derivatives market could amount to more than $6 billion. But that number just reflects the securities
that happen to have been rated; Nik Khakee, who heads S&P's structured Finance Derivatives group,
concedes that those securities are a small part of the total. "If the recovery value is zero, there will be
huge losses for investors,” Mr. Khakee says.

Write to Henny Sender at

144

01300000000263


Nickoloff, Peter

From: Carleton, Norman

Sent: Wednesday, November 21, 2001 1:22 PM

To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Cetina, Jill; Eichner, Matthew; Gabllondo,
Jose; Gross, Jared; Hammer, Viva; Nickoloff, Peter, Novey, Michael; Pietrangeli, Fred;
Roseboro, Brian; Schultheiss, Heidilynne; Sharer, James; Whaley, Jean; Wiedman, Mark

Subject: Dow Jones Newswires: Enron Closes On $450M Secured Credit Line

November 21, 2001

Enron Closes On $450M Secured Credit Line

HOUSTON -- Enron Co, (ENE) closed on the remaining $450 million of a previously announced $1
billion in secured credit lines and said it is in active discussions to restructure its debt to improve
liquidity.

In a press release Wednesday, Enron said the $450 million credit facility is secured by the assets of
Enron's Northern Natural Gas Co.

A $550 million credit facility, secured by the assets of Enron's Transwestern Pipeline Co., closed
Nov. 16. The proceeds are being used to supplement short-term liquidity and to refinance maturing
obligations.

The company said the maturity on its $690 million note payable obligation will be extended to mid-
December.

Dow Jones Corporate Filings Alert reported Monday that Enron is currently preparing a restructuring
plan aimed at taking aggressive steps to rationalize the company’s existing cost structure,
accelerating the process of divesting noncore businesses and assets and restructuring scheduled
maturities of debt and other obligations.

Enron's credit lines are from J.P, Morgan, the investment-banking arm of J.P. Morgan Chase & Co.
(JPM), and Salomon Smith Barney, the investment-banking arm of Citigroup Inc. (C).

Enron also reaffirmed its commitment to the merger with Dynegy Inc. (DYN). On Nov. 9, Enron and
Dynegy signed a definitive merger agreement that would give Enron shareholders 0.2685 share of a
Dynegy share. The merger is expected to close by the end of the third quarter of 2002.

On Monday, Enron filed its Form 10-Q for the third quarter, which reflected a wider loss by 3 cents a
share. The energy company previously reported a loss of $618 million, or 84 cents a share, on
revenue of $47.6 billion for the third quarter ended Sept. 30.

~Stephen Lee; Dow Jones Newswires; 201-938-5400

ns

01300000000233


Nickoloff, Peter

From: Carleton, Norman

Sent: Thursday, December 06, 2001 4:39 PM

To: Bitsberger, Timothy; Gross, Jared; Wiedman, Mark; Nickoloff, Peter; Schultheiss, Heidilynne
December 6, 2001

TradeSpark Adds Energy Products After Enron's Collapse

NEW YORK -- TradeSpark LP, an electronic marketplace for energy, has added hourly power and balance-of-
the-day instruments to its product suite, spokeswoman Deanna Cox said Thursday.

The Internet-based trading platform is initially offering on-peak and off-peak physical hourly power instruments
for all 24-hour periods at major interconnects within the West Coast, Mid-Continent and South regions. It's also
offering on-peak and off-peak financial hourly power, including balance-of-the-day strips, for all 24-hour
periods at major East Coast interconnects, Cox said.

"The market is becoming increasingly interested in and dependent on electronic multilateral platforms like
TradeSpark, and we believe that the addition of these products will be one more reason customers will come to
us to execute their trades," TradeSpark Managing Director Mike Williams said in a release.

TradeSpark and other online competitors of Enron Corp.'s (ENE) EnronOnline platform have expanded product
offerings as Enron's troubles deepen. Questions arose in October about Enron's creditworthiness, leading to the
collapse of its share price last week. Enron filed for bankruptcy protection Sunday. It suspended trade on
EnronOnline this week.

TradeSpark competitors IntercontinentalExchange and the New York Mercantile Exchange have seen their
energy volumes grow as traders move business over from EnronOnlinc.

TradeSpark is a partnership formed by eSpeed Inc. (ESPD), Cantor Fitzgerald LP, Coral Energy, Dominion
Resources Inc, (D), Koch Energy Trading Inc., TXU Corp. subsidiary (TXU) TXU Energy Trading, and
Williams Cos.' (WMB) Williams Energy Marketing and Trading Co. unit.

Active TradeSpark marketplace participants include Dynegy Inc. (DYN) and Entergy Corp. (ETR).

-By Stephen Parker, Dow Jones Newswires; 201-938-4426; stephen.parker@dowjones.com

pai

01300000000342


Nickoloff, Peter

Deen ene ne

From: Carleton, Norman
Sent: Friday, November 30, 2001 7:19 PM
To: Salladin, Anne; Bair, Sheila, Berardi, Steve, Bitsberger, Timothy; Cetina, Jill; Eicher,

Matthew; Gadilondo, Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorene (E-mail);
Nickoloff, Peter; Novey, Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne;
Sharer, James; Whaley, Jean, Wiedman, Mark

Subject: Dow Jones Newswires: Enron To File For Bankruptcy Mon. Or Tues -Report

November 30, 2001 [WSJ.com]

Enron To File For Bankruptcy Mon. Or Tues -Report

Dow Jones Newswires

NEW YORK -- Enron Corp. (ENE) will file for bankruptcy protection on Monday or Tuesday,
according to a report on CNBC that cited an Enron employee as its source.

According to CNBC, the employee was told the news by his unit vice president.

The Enron employee also said the Houston energy trading company would lay off 95% of the
company's staff at that time, and provide employees two weeks severance for each year of service,
according to the television network.

Enron wasn't immediately available for comment.

-By Christina Cheddar, Dow Jones Newswires, 201-938-5166; christina.cheddar@dowjones.com

140

01300000000259


Nickoloff, Peter —_

From: Carleton, Norman

Sent: Thursday, November 29, 2001 6:19 PM

To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Cetina, Jill; Eichner, Matthew; Gabilondo,
Jose; Gross, Jared; Hammer, Viva; Lori Sanatamnorena (E-mail); Nickoloff, Peter, Novey,
Michael; Pietrangell, Fred; Roseboro, Brian, Schultheiss, Heidilynne; Sharer, James; Whaley,
Jean; Wiedman, Mark; Bieger, Peter, DeMarco, Edward; Dorsey, Karen, Ellett, Martha: Ellis,
Dina; Huffman, Lucy; Hughes, Gerry; McGivern, Tom; Mcinerney, Roberta; Salladin, Anne;
Smith, Amy; Sutton, Gary, Tishuk, Brian

Subject: Enron's Financial Woes Ripple Out Across Asia

November 30, 2001

Enron's Financial Woes
Ripple Out Across Asia

By JASON Booth, HENNY SENDER and RICHARD B. SCHMITT
Staff Reporters of THE WALL STREET JOURNAL

The sudden deep financial troubles of U.S. energy giant Enron Corp. sent ripples of concer across
Asia, damaging investments in Japan and potentially undermining businesses in South Korea and
Australia.

The uncertainty for Asia is likely just beginning. If Enron files for protection under Chapter 11 of the
federal Bankruptcy Code in the U.S., as many investors and financial experts now expect, it is likely
to be one of the messiest, most complex bankruptcy cases ever, lawyers say. That is because of the
multifaceted nature of Enron's once highflying operations, which combined a global energy business
with a massive financial-trading operation involving tens of billions of dollars in complex contracts. A
filing by Enron, with about $13 billion in debt, would rank among the largest bankruptcy filings ever.
Enron has about 800 trading partners or creditors.

The scale of the Enron collapse is huge, experts say. "There is nothing to compare it to,” said
Edward Tillinghast, a bankruptcy specialist with Coudert Brothers in New York. "The business was so
large. There were so many different kinds of operating entities under the Enron umbrella.”

On Wednesday, as the last-ditch merger with Dynegy Inc. unraveled, the company’s credit was
downgraded to "junk" status by rating agency Standard & Poor's Corp. The stock market, signaling
that a bankruptcy filing is expected, hammered Enron stock, which was halted for a time on
Wednesday, and knocked lower some of its financial backers’ shares. Enron shares closed at 4 p.m.
in New York Stock Exchange composite trading at 61 cents, down $3.50, or 85%. Thursday morning
in New York, Enron was trading down 33%, or 20 cents, to 41 cents. On Wednesday, Enron bonds
also fell sharply, dropping to 50 cents on the dollar from around 55 cents, reflecting concems over

126

01300000000244


Such a venture would help shore up EnronOnline which was once one of Enron's most valuable asset,

Spokesmen for J.P. Morgan Chase, Citigroup and UBS declined to comment officially, A spokesman for Enron
wasn't immediately available.

Enron filed for bankruptcy protection on Dec. 2 after its debt was downgraded to junk status and investors and
clients lost confidence in the company over accounting irregularities and off-balance-sheet liabilities. The
Chapter 11 filing is the largest in U.S. history, with more than $31 billion in reported debt and billions more in
as-yet unreported off-balance-sheet liabilities.

-By Carol S. Remond; Dow Jones Newswires; 201 938 2074;
carol.remond@dowjones.com

2s

01300000000334


restructuring. Estimates from CreditSights in New York put the counterparty exposure to Enron in the default
swap market in the range of $8 billion to $10 billion.

But Enron's credit exposure isn't concentrated among financial institutions like it may have been at one time,
S&P said Thursday.

The bonds are held mostly by insurance companies, pension and mutual funds, and CDO structures, which, in
tum, may be held by insurance and banking organizations, S&P said.

Among banks, the highest exposures in dollar terms are to be found at Enron's lead banks, J.P. Morgan Chase &
Co. (JPM) and Citigroup Inc. (C), S&P said. But much of that exposure is secured.

As of Thursday, the estimated direct exposure of U.S. insurers’ asset portfolios to securities issued by Enron
and its affiliates is more than $3,5 billion, which is not likely in itself to “negatively affect" the ratings of those
insurers, S&P added.

The derivatives exposures present the more "complicated and incomplete" picture. But Enron, prior to its
demise, was a triple-B-rated counterparty, meaning that institutions on the other side required higher levels of
collateral.

And S&P added that those with Enron exposure often sought to protect themselves by obtaining credit
protection on the Enron name in the form of credit default swaps, letters of credit, or bank guarantees. This
transferred the risk beyond the natural counterparties on derivative transactions, which are otherwise a relatively
small group of companies.

"The mechanism of diversifying risk, by laying it off in a varicty of markets, worked,” Azarchs said.
-By Joe Niedzielski, Dow Jones Newswires, 201-938-2039; joe.niedzielski@dowjones.com

01300000000337


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, November 05, 2001 12:27 PM

To: Schulthetss, Heiditynne; Nickoloff, Peter; Whaley, Jean; Pietrangeli, Fred; Berardi, Steve
Subject: WSJ: Arthur Andersen Could Face Scrutiny On Clarity of Enron Financial Reports

November 5, 2001

Money & Investing

ey

eare1 104200122390
tet

Arthur Andersen Could Face Scrutiny
On Clarity of Enron Financial Reports

By JONATHAN WEIL
Staff Reporter of THE WALL STREET JOURNAL

As Enron Corp.'s independent auditor, Arthur Andersen LLP has the job of making sure the Houston
energy trader's financial statements not only are accurate and complete in all material respects, but
also are understandable.

Now for the really tricky part: Understandable to whom?

For Andersen, this isn't just an academic question. Once again, the accounting practices of one of
the Big Five firm's most prized clients have come under intense scrutiny from regulators and
shareholders. Questions could well turn to whether Andersen fulfilled its obligation to protect
investors’ interests. And an important focus is likely to be whether Andersen should have required
Enron to better explain its dealings with partnerships run by former Chief Financial Officer Andrew S.
Fastow before agreeing to bless the company's financial statements.

Enron revealed last month, in a conference call, that its shareholder equity had fallen by $1.2 billion
during the third quarter as a result of transactions in which a partnership controlled by Mr. Fastow
was at least at times involved, fueling a steep dive in the stock price amid growing concerns about
the company's financial health. Many Wall Street analysts, including die-hard Enron bulls, long have
grumbled that parts of Enron's financial statements are indecipherable.

“The heart of disclosure is intelligibility,” says Alan Bromberg, a professor of securities law at
Southem Methodist University in Dallas. “If the people to whom it's addressed can't understand it, it
hasn't been adequately disclosed. There's clearly a qualitative, as well as a factual, component to
disclosure.”

Under generally accepted accounting principles, the rules for disclosing related-party transactions

as

01300000000212


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, November 05, 2001 12:23 PM

To: Schultheiss, Heidilynne; Nickoloff, Peter; Pietrangeli, Fred; Berardi, Steve; Whaley, Jean
Subject: WSJ: Enron Transaction With Entity Run by Executive Raises Questions

November 5, 2001

Money & Investing

Enron Transaction With Entity
Run by Executive Raises Questions

By JOHN R. EMSHWILLER
Staff Reporter of THe Wait STREET JOURNAL

In a transaction that raises new questions about Enron Corp.'s financial dealings with its
management, the company in March made a $35 million purchase from an entity run by a company
Officer.

That payment appears to have been the last step in a complex series of transactions that allowed
Enron to keep hundreds of millions of dollars of debt off its balance sheet for the past three years,
during which the Houston-based energy-trading giant has grown rapidly. In recent weeks, Enron's
labyrinth of financial transactions, particularly with members of company management, has come
under intense scrutiny from investors and regulators, who are seeking information about the impact
of the transactions on the company and whether Enron adequately disclosed the deals to the public.
Enron last week disclosed that the Securities and Exchange Commission had begun a formal
investigation.

Enron officials have said repeatedly that all their actions were legal and properly disclosed, They
have promised to cooperate with the SEC probe,

Enron officials wouldn't discuss the $35 million transaction. What has been learned about it was
gleaned from interviews with others familiar with the matter, snippets from Enron SEC filings and
private partnership documents. Based on these sources, the Enron officer involved in the transaction
was Michael Kopper, a former managing director of the company’s Enron North America unit. The
entity receiving the $35 million was Chewco Investments LP. It wasn't clear from the available
information what form the payment took or what, if any, gain Chewco or Mr. Kopper realized.

Mr. Kopper, who a company spokesman says left Enron in July, didn't return phone calls seeking
comment. In the past, he has declined to be interviewed.

At Enron, Mr. Kopper was an associate of Andrew Fastow, the company’s chief financial officer until
81

01300000000208


Nickoloff, Peter

—

From: Carleton, Norman

Sent: Monday, October 29, 2001 11:22 AM
To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: Enron Official Sell Snares

October 26, 2001

Money & Investing

Enron Officials Sell Shares
Amid Stock-Price Slump

By THEO FRANCIS and CASSELL BRYAN-LOW
Staff Reporters of THE WALL STREET JOURNAL

Officials at Enron Corp., whose unusual transactions with its chief financial officer are under
regulatory scrutiny, have steadily sold sizable amounts of their holdings of company stock as the
share price has fallen this year.

Corporate officials had sold 1.8 million shares valued at about $106 million through July, as the stock
fell to less than $45 a share from $83 at the start of the year. Since July, the stock has plummeted an
additional 63% to $16.35, including a 50% plunge since the beginning of last week.

Kenneth Lay, chief executive of the Houston energy-trading company, cashed in shares for $25.7
million so far this year, usually in transactions paired with options exercises. He sold 429,614 shares,
leaving him with some 2.8 million shares as of July, the latest data available on his sales, according
to Thomson Financial/Lancer Analytics.

The dollar amount for his 2001 sales is approaching the total for all Mr. Lay's sales of Enron shares
for 2000, which reached $30.7 million. In 1999, he sold shares for a total of $26 million.

In Houston, an Enron spokeswoman declined to comment on the figures, saying the company
doesn't keep a running tally of stockholdings by corporate officials. Enron also wouldn't comment on
the number of options held by company insiders and called the sales "a personal decision." Many
sales by Enron insiders were concurrent with options exercises or sales followed soon after option
exercises,

Strong selling by company officers and directors amid share-price declines should raise red flags for
investors, says Jonathan Moreland, research director of Insiderinsights.com, who uses insider-
trading data to zero in on investment ideas.

7

01300000000170


Is Enron too big and too important to be allowed to fall? Philip Verleger, an energy economist, thinks that
Enron is so central to energy markets that it could not easily be replaced. Enron's rivals mostly disagree,
unsurprisingly.

But even Enron's worst enemies do not (yet) expect the firm to die from its current crisis. Most traders
seem keen that it should live. "Nobody likes to see a wholesale trader disappear,” says one. They admire
Enron's armies of traders and their ability to do deals. EnronOnline is one of the Internet's few success
stories, assuming its huge trading volumes do indeed generate big profits, as the firm claims.

Enron's, and the financial system's, problems could worsen if doubts grow about its ability to meet its
obligations. On the surface it is rich in assets, if not cash. But its lack of transparency leaves
uncomfortable room for doubt. In June 2000, The Economist challenged Mr Lay to reply to accusations of
arrogance, high-handedness and a propensity to push the limits of the law. His response was revealing. To
show that such charges were baseless, he pointed to another firm unfairly maligned by critics: Drexel
Burnham Lambert, an investment bank that rose from obscurity to market prominence in the junk-bond
boom of the 1980s. Drexel was accused of arrogance, he groused, but it was only being "very innovative
and very aggressive". Drexel was not bailed out: Michael Milken, its star, ended up in jail, and Drexel
collapsed in a heap of bad debts and ignominy.

nR

01300000000199


However, the targeted transactions have varying degrees of execution risk, particularly the divestiture
of assets in emerging market countries, the rating agency said.

An additional uncertainty is the Securities and Exchange Commission's investigation of certain
Enron-sponsored partnerships. The outcome and potential impact of the SEC activity is difficult to
predict, Fitch said.

-By Joe Niedzielski, Dow Jones Newswires, 201-938-2039;

joe .niedzielskiédowjones.com

01300000000203


Nickoloff, Peter

From: Carleton, Norman
Sent: Wednesday, November 21, 2001 1:14 PM
To: Roseboro, Brian; Bair, Sheila; Gross, Jared, Wiedman, Mark; Cetina, Jill; Sharer, James;

Pietrangeli, Fred; Berardi, Steve; Whaley, Jean; Nickoloff, Peter; Schultheiss, Heidilynne;
Novey, Michael; Hammer, Viva; Eichner, Matthew, Bitsberger, Timothy
Subject: Bloomberg: Enron Gets Extension on $690 Min Note Due Next Week (Updatet)

1021 12:38

Enron Gets Extension on $690 Min Note Due Next Week (Update1)
By Mark Johnson

Houston, Nov, 21 (Bloomberg) - Enron Corp., whose shares had dropped 92 percent this year amid a financial crisis, said
lenders extended to mid-December the payment date on a $690 million note due next week,

Enron, which agreed to be bought out by rival energy trader Dynegy Inc. in a transaction now valued at more than $23
billion, said earlier this week a drop in its credit rating may force it to repay the $690 million note. The repayment would
strain cash reserves Enron needs to back its trading operations, investors and analysts said.

The Houston-based company didn’t say in its release who holds the note, which is owed by an affiliated partnership that
owns Brazilian natural-gas assets and was backed by Enron.

The note is held by a group of banks led by the Citibank unit of Citigroup Inc., Standard & Poor's said in a press release
yesterday

Enron also is in discussions with other lenders on @ restructuring of its debt, the company said in a statement distributed by
PR Newswire.

~We believe the interests of Chase and Enron's other primary lenders are aligned in this restructuring effort,” James Lee,
vice president of JP Morgan Chase & Co., said in the Enron statement. ““We will work with Enron and its other primary
lenders to develop a plan to strengthen Enron's financial position up to and through its merger with Dynegy.” Morgan has
been advising Enron on its merger with Dynegy.

Enron said yesterday it may have to pay $9.15 billion in debt due by 2003, suggesting the company may run out of cash
before the merger closes. Dynegy has said the merger should close before the end of the third quarter of 2002

Enron said in 2 regulatory filing that it has less than $2 bition in cash or credit lines.

‘Shares of Enron, the most active stock in U.S. trading, fell $1.79, or 23 percent, to $5.20 in midday trading. Before the
announcement that it had renegotiated the $690 million note, its shares had fallen as much as 42.78 percent, the lowest
level in more than a decade,

Oynegy fell $2.50, or 6 percent, to $39.20. Shares of ChevronTexaco Corp., which owns 26 percent of Dynegy, rose 49
cents to $87.02

4

01300000000232


Nickoloff, Peter

From: Carleton, Norman
Sent: Tuesday, December 04, 2001 1:01 PM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Cetina, Jill, Eichner, Matthew; Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter, Novey,
Michael, Pielrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Sharer, James; Whaley,
Jean, Wiedman, Mark

Subject: Reuters: House Energy Panel Sets Enron Meetings This Week

December 3, 2001

House Energy Panel Sets Enron Meetings This Week

By REUTERS

Filed at 4:43 p.m. ET

WASHINGTON (Reuters) - A congressional panel looking into the disintegration of energy giant
Enron Corp. said on Monday it would meet this week with executives from the company and
representatives of the Securities Exchange Commission and auditing firm Arthur Andersen.

The meetings scheduled by the House Energy and Commerce Committee indicate the panel is
moving quickly to investigate the collapse of Enron, a company which until a few weeks ago
dominated U.S. natural gas and electricity markets.

The committee's chairman, Louisiana Republican Rep. Billy Tauzin, directed his staff to meet with the
SEC, Enron financial auditor Arthur Andersen and top Enron executives, a panel spokesman told
Reuters.

“The committee will be moving aggressively to pin down what went wrong and what, if anything,
Congress can do to prevent this type of thing from happening again," said a spokesman for Tauzin.

On Tuesday, committee staff will meet with the SEC's head of enforcement and general counsel, the
spokesman said.

The following day, the House panel's investigators will interview representatives of Arthur Andersen
and the Financial Accounting Standards Board.

On Thursday, three committee staffers will travel to Houston to meet with top Enron officials “to
begin laying the groundwork for a hearing," the staffer said. Enron Chairman Kenneth Lay was not
asked by the panel to participate in the meeting, he added.

Enron filed the biggest U.S. Chapter 11 bankruptcy case in history on Sunday. The company listed
assets of $49.8 billion and debts of $31.2 billion. Tauzin launched the House panel's investigation
last Thursday.

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Yet while wide distribution helps limit the damage to each lender, it can make the bankruptcy process
even more complicated, “When you have a syndication that large, you often have large
constituencies forming sometimes with cross purposes," said Walter Einhorn, president of Sunrock
Capital Corp., an asset-based lender with experience in workouts, "You never know who's going to
upset the apple cart."

Another potential stumbling block to Enron's restructuring effort is the myriad off-balance-sheet
partnerships that were key to many of Enron's transactions. Creditors have yet to receive a clear
picture of these liabilities, which bankers involved in the process have put at around $27 billion.

-- Michael Schroeder and John Emshwiller contributed to this article.

Write to Mitchell Pacelle at mitchell.pace! lotiwel com <maltio, mitchell.pacelle@wsj.com>, Jathon
a . @ws! rd@wsj.com> and Ann Davis at

71

01300000000289


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 28, 2001 11:19 AM
To: ‘Schulthelss, Heiditynne; Nickoloff, Peter
Subject: More Enron

October 26, 2001

Tech Center

Enron Sues Microsoft in Spat
Over Deal to Support MSN

A WALL STREET JOURNAL ONUNE News Roundup

HOUSTON -- Enron Corp. sued Microsoft Corp., accusing the software giant of failing to live up to
the terms of a deal in which Enron agreed to provide bandwidth for the MSN online service.

The suit was filed Thursday in the district court of Harris County, Texas.

According to the lawsuit, the deal called for Enron's broadband unit to develop and provide network
capacity and other services to support Microsoft's offering of high-speed Internet service.

Microsoft, in return, was required to develop an electronic ordering and billing system for use with all
regional Bell telephone companies during an initial phase of the deal. Enron charges that since
Microsoft has failed to provide that system and other items required in the deal, Enron isn't required
to deliver the broadband services required of it.

The suit also said Microsoft failed to provide monthly subscriber growth forecast required by the deal,
and that Microsoft made public announcements about the subject of the agreement without getting
Enron's prior approval.

An Enron official said Microsoft had issued a press release Oct. 15 about the service, but that Enron
wasn't mentioned in the release. A Microsoft news release dated Oct. 15 announced what the
company calls MSN 7, a new version of the MSN network which includes high-speed access to the
Web. The service was to be available on Oct. 25. The release said MSN 7 would deliver "state-of-
the-art" video and audio through "dramatically improved" broadband technology. The new service
would extend MSN broadband service “to more than 29 million households in 45 markets.”

By the end of the first quarter of 2002, the Microsoft release said, the MSN broadband service would

be available to more than 90% of U.S. households capable of using high-speed digital subscriber line
access,

01300000000165


Meanwhile, European companies began scrutinizing Enron's assets. Suez is interested in some of Enron's holdings, said
Jacques Van Hee, a spokesman for its energy unit. Glencore international AG yesterday said it was considering Enron's
motals- trading business,

Legal Threats

Enron's woes come at a time when the U.S. economy is in its first recession in about a decade and the European and
Japanese economies are also shrinking. As of lest month, a record 224 publicly traded companies had filed for bankruptcy
in the U.S. this year, 27 percent more than last year’s record 176, according to BankruptcyData.com, a Boston-based Web
site, Fillers range from Bethlehem Stee! Corp. to Polaroid Corp.

Lawsuits and federal investigations are adding to Enron's difficulties. The U.S. Department of Justice has sterted a criminal
probe of Enron's dealings, the Wall Street Journal reported Monday, citing unidentified sources.

Dynegy is suing in a Texas court to gain control of Enron's Northern Natural Gas Co. pipeline. Enron went to court first,
seeking $10 billion over its rival's abandonment of a $23 billion merger.

Enron's nosedive - its shares have lost 99 percent of the value -- has also placed a spotlight on Arthur Andersen LLP,
the company’s auditor. Enron said last month it overstated its 1998 income by $113 million. The Securities and Exchange
Commission Is investigating.

Enron workers are suing over losses to their retirement accounts.
$1.5 Billion Loan

‘With just $500 million left to fund operations, Enron yesterday won Gonzalez’s permission to draw $250 million of the $1.5
bition in Chapter 11 financing from @ bank group led by J.P. Morgan Chase and Citigroup Inc.'s Citibank. A hearing to
approve use of the full arnount was set for Jan. 7.

The company will use more than a third of the $1.5 billion credil line to repay an earlier $550 million unsecured loan from
J.P. Morgan Chase and Citibank to Enron's Transwestern Pipeline unit.

The new loan would be paid out ahead of all previous debts. The unit will likely file for bankruptcy once its debts have been
repaid, $id Donald S, Bernstein, an attorney for J.P. Morgan Chase.

Enron also got Gonzalez's permission to spend as much as $40 million to complete construction of its office tower in
Houston and as much as $8 million for Internet access and other expenses critical to trading energy.

Firing Workers

Seeking to cut costs, Enron eliminated 4,000 jobs at its Houston headquarters, more than half its staff (here, The company
had about 21,000 employees at the end of September, two-thirds in the U.S., about a fifth in the U.K. and the rest in other
parts of the world. It fred 1,100 workers in the U.K, last week.

Judge Gonzalez approved Enron's request to pay fired employees from $4,500 to $15,000 in severance.

Enron Chairman anc Chief Executive Officer Kenneth Lay said he will try to keep workers who are running trading
operations, which used to provide 97 percent of Enron’s revenue.

Enron and at least 13 units dectared bankruptcy Sunday, listing total assets of $49.8 billion and debts of $31.2 billion, The
company's Enron Gas Liquids Inc. unit on Monday filed for bankruptcy, adding more assets to the case.

More Enron units will file for bankruptcy "in the days ahead,” the company’s attorney Martin Bienenstock told Gonzalez in
court yesterday.

"We do not today have every ‘i’ dotted and every ‘t' crossed," in preparing the Chapter 11 reorganization, he said.

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Oct. 23: Enron's treasurer acknowledges the company may have to issue additional shares to cover
potential shortfalls in investment vehicles it created, although he says the company believes it can
repay about $3.3 billion in notes that were sold by those investment vehicles without having to resort
to issuing more stock,

Oct. 24: Enron replaces Fastow as CFO with Jeffrey McMahon, the 40-year-old head of the
company's industrial-markets division. Enron shares fall 17% on heavy volume ahead of the
announcement.

Oct. 25: The company draws down about $3 billion, the bulk of its available bank credit lines, in a bid
to restore confidence in its financial strength and liquidity. The Fitch rating agency puts Enron on
review for a possible downgrade, while another, Standard & Poor's, changes Enron's credit outlook to
negative from stable. A noninvestment-grade rating would throw the company into default on
obligations involving billions of dollars of borrowings.

Oct. 29: Moody's lowers its ratings by one notch on the Enron's senior unsecured debt and kept the
company under review for a possible further downgrade. Shares fall below $14 on the NYSE.

Oct. 31: The SEC elevates to a formal investigation its inquiry into Enron's financial dealings with
partnerships headed by Andrew Fastow. Enron shares rise $2.74 to $13.90, after plunging for 10
straight days.

Nov. 1: Enron says it has secured commitments for $1 billion in financing from units of J.P, Morgan

and Citigroup, as the company moves to strengthen its balance sheet and maintain its investment-
grade credit rating

01300000000207


eciplent Dell ory oad

Bat, Sheltie Delivered: 11/20/01 4:41 PM ead 11/2001 4:51 PM
Bitsberger, Timothy Delivered: 11/201 4.41 PM ead 11/2001 4.53 PM
3

01300000000091


Nickoloff, Peter

From: Carleton, Norman

Sent: Thursday, December 06, 2001 4:15 PM

To: Roseboro, Brian; Bitsberger, Timothy, Wiedman, Mark; Gross, Jared; Gabilondo, Jose;
Sutton, Gary; Nickoloff, Peter; Schulthelss, Heidilynne; Novey, Michael; Hammer, Viva;
Eichner, Matthew

Subject: CAPITAL VIEWS: New SEC Chairman Gets A "Dingell-Gram’ (Enron mentioned at end)

December 6, 2001

CAPITAL VIEWS: New SEC Chairman Gets A ‘Dingell-Gram*

By JOHN CONNOR
A Dow Jones Newswires Column

WASHINGTON -- Perhaps inevitably, Harvey Pitt, the new chairman of the Securities and Exchange
Commission, has Rep, John Dingell, D-Mich., on his case.

Dingell, the ranking minority member and former chairman of the House Energy and Commerce Committee,
has been spreading apprehension if not outright terror through the nooks and crannies of the federal bureaucracy
for decades with what have come to be known as Dingell-grams. Now he has fired one off to Chairman Pitt.

“On October 22, 2001, in your first speech as chairman of the Securities and Exchange Commission, you
observed to an audience of accountants that the SEC ‘has not, of late, always been a kinder and gentler place for
accountants," Dingell wrote in a Dec. 5 letter to Pitt,

The missive (maybe missile is a better word) was released by the Congressman Thursday.

“After noting your representation of the AICPA (American Institute of Certified Public Accountants) and cach
of the Big Five Accounting firms for the past two decades, you lamented that ‘somewhere along the way,
accountants became afraid to talk to the SEC, and the SEC appeared to be unwilling to listen to the profession,’
and you vowed that ‘those days are ended. Dingell recounted, laying the groundwork for what came next.

“Iam deeply troubled by the tone and tenor of your remarks," the Congressman said. "Your choice of words
sends the wrong message to auditors, to the SEC staff, and to the investing public. Your message appears to be
that the rules will not be implemented as vigorously as they should be. I trust this is not what you meant to
convey and that you will correct any misunderstanding at the carlicst possible time. This is critical, given the
plummeting confidence of investors in the integrity of financial reporting at this time.

“You may choose to repudiate the legacy of your predecessor, Arthur Levitt,” Dingell continued. "But make no
mistake about it: his tenure, and that of his team on these issues - former Chief Accountant Lynn Tumer and
former Director of Enforcement Richard Walker - represent a high mark at the SEC in fighting financial fraud,
and the standard against which you will be measured.”

We'll await Pitt's full response, which no doubt will come in due course.

Having dispensed with the pleasantries or lack thereof, the Congressman served up a number of questions that
he asked Pitt to consider in the course of the SEC's investigation into the Enron matter.

Dingell's first question reads as follows: "Enron Corp, set up a complex web of off-balance sheet special
purpose entities. What was the underlying business purpose and substance of each of these entities and of
Enron's transactions with them? Enron's current report on Form 8-K dated November 8, 2001, still does not

219

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Nickoloff, Peter

_

From: Carleton, Norman
Sent: Friday, December 14, 2001 10:02 AM
To: Bair, Sheila; Bieger, Peter; Bitsberger, Timothy, DeMarco, Eaward; Dorsey, Karen, Ellett,

Martha; Ellis, Dina; Gabilondo, Jose; Gross, Jared; Huffman, Lucy; Hughes, Gerry, McGivern,
Tom; Mcinemey, Roberta; Nickoloff, Peter; Rosebdoro, Brian; Salladin, Anne; Schultheiss,
Heidilynne; Smith, Amy; Sutton, Gary; Tishuk, Brian; Berardi, Steve; Eichner, Matthew;
Hammer, Viva; Lori Sanatamorena (E-mail); Novey, Michael; Pletrangeli, Fred; Whaley, Jean;
Wiedman, Mark

Subject: Enron and Bankruptcy Bill -- ABI Website

ENRON UPDATE

Greenspan, Oxley Meet; Netting Bill Gains Support Following Enron Debacle

Federal Reserve Chairman Alan Greenspan met yesterday with key House lawmakers to
discuss this year’s prospects for passing legislation that clarifies corporate bankruptcy laws
by allowing companies to quickly settle outstanding derivatives contracts in the event of an
insolvency, Dow Jones reported. The once-obscure financial issue has gained new
prominence and urgency on Capitol Hill as federal investigators sift through the mess left
behind by Enron’s chapter 11 bankruptcy filing. The measure allows institutions to quickly
close outstanding derivatives contracts with bankrupt trading partners by netting all the
losses and gains of individual contracts into one deal.

House Financial Services Chairman Michael Oxley (R-Ohio) invited Greenspan to meet with
House Judiciary Chairman James Sensenbrenner (R-Wis.) after Oxley held a bruising hearing
on Wednesday on financial improprieties leading to Enron's demise. Complicated, off-balance
sheet transactions were the company’s undoing. Its stock collapsed after a Nov. 8
announcement that the firm had overstated its net income over four years by $569 million.
Creditors are now lining up to collect on about $40 billion in debt owed by Enron.

“Congress should not fail to enact netting legislation this year,” Greenspan and Treasury
Secretary Paul O'Neill wrote House lawmakers a few weeks after the attacks. “Further delays
would unnecessarily place the financial system at greater risk.” Lawmakers are now
questioning whether the legislation, which is also attached to a broader bankruptcy bill in
both chambers, could be applied to Enron's bankruptcy case if the bill passes this year.
Federal securities officials said it was unclear whether they could apply new contract netting
laws retroactively. Oxley hopes to get the bill passed by next week, before Congress finishes
its work for 2001.

House Probe Seeks Andersen's Records On Enron Audits

The House Energy and Commerce Committee yesterday asked Arthur Andersen to provide
records relating to its audits of Enron Corp., Dow Jones reported. At the same time, the
committee sent a letter to former Enron Chief Executive Jeffrey Skilling, requesting an
interview with committee investigators within the next two weeks. The committee also
formally sought interviews with David Duncan, Andersen's partner in charge of the company's
Enron account, and Andersen employees involved in the company’s audits. The requests
came after Joseph Berardino, Andersen’s chief executive, told the House Financial Services
Committee on Wednesday that the auditing and consulting firm didn't receive critical
information from its client concerning the special-purpose entities that brought about Enron's

24

01300000000352


Nickoloff, Poter

From: Carleton, Norman
Sent: Wednesday, December 05, 2001 5:30 PM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy, Eichner, Matthew; Gabiondo, Jose; Gross,

Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael;
Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman, Mark
Subject: DJ: Enron Maintains Suspension Of Trading On Ontine Platform

December 5, 2001

Enron Maintains Suspension Of Trading On Online Platform

Dow Jones Newswires

NEW YORK -- Enron Corp. (ENE) on Wednesday maintained its suspension of business on its
Internet platform EnronOnline, directing counterparties to call its trading desk if they wanted to do
deals, the company said.

Enron, which continues to post prices on the system, also cut the number of products for which it put
up bids and offers to 100 from 127 Tuesday and 1,700-2,000 before the company began its spiral
into bankruptcy court, spokesman Eric Thode said,

The suspension and the number of products for which EnronOnline is posting prices could change
daily, Thode said.

The point-and-click system, which once handled as much as a quarter of the volume in North
American natural gas and power markets, is now all but ignored as the energy markets have moved
on to other counterparties and other platforms, What trade is being done with Enron is attributed to
continued efforts to flatten positions or is chalked up to companies that, on balance, owe Enron
money.

"Certainly, on a day-to-day basis, it's evident it's significantly down," Thode said of Enron's trading
activity. He wouldn't reveal precise volumes.

In the past, Enron pushed its traders to present aggressive bid-offer spreads for a full range of
products on EnronOnline in a successful effort to win market share.

Closing down trade on the system, on which Enron is the counterparty to every deal, really just
removes one means of doing business with the Houston-based company. The switch to telephones,
however, would give Enron traders a choice whether to complete deals.

J.P. Morgan Chase & Co. (JPM), Citigroup Inc. (C) and Swiss banking giant UBS AG (UBS) are
considering some form of a joint venture under which UBS' subsidiary UBS Warburg alone would
take over Enron's trading operations, Dow Jones Newswires reported, citing people familiar with the
matter.

Thode confirmed Enron was in talks with potential partners for a joint venture under which Enron's

208

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Ajunk rating would have led Dynegy to abandon the acquisition, Dynegy Chief Executive Officer Charles Watson said. It
would also have triggered debt repayment of at least $3.9 billion, Enron said in a Securities & Exchange Commission filing
yesterday.

Enron shares are selling for almost 32 percent less than the value of Dynegy’s offer, showing investors have doubts the
deal will be completed, Dynegy shares fell $1.90 to $41.70 today.

“It's become more clear that the chances of this deal going through aren't 90 percent, but much closer to fifty-fifty,” said
Edward Paik, who helps manage the Liberty Utilities Fund, with 1.6 milion Enron shares. ‘There's just so much
information that is unknowable” about Enron's financial position, he said.

Most of the $9.15 billion in debt is due before the end of the third quarter, when the Dynegy buyout is scheduled to close,
Enron said yesterday in a third-quarter filing with the SEC.

Asset Sales Planned

Last week, Enron Chief Operating Officer Greg Whalley said the company will self assets of “non-core businesses” to
raise money. It has $8 billion invested in the businesses, including broadband telecommunications and the Dabhol power
plant in India. Enron expects to get “billions” from the sales, Whalley said, without being more specific.

Enron reported yesterday that ts U.S. operations had $1.2 billion in cash left. It has added at least $5 billion since Sept. 30
from credit lines, loans and a $1.5 billion investment from ChevronTexaco, part owner of Dynegy.

Enron used $1.9 billion of the money it raised to retire commercial paper, which is short-term debt. It gave no details on
how it spent the remaining $3.1 bition.

Enron Chief Financial Officer Jeffrey McMahon said last week that the company also was looking to get another $500
million to $1 billion from private investors.

Asset sales valued at about $800 million are expected to close by the end of this year, according to the SEC filing, Enron
spokeswoman Karen Denne wouldn't comment on whether it could sell assets fast enough to keep current on its debts.

Dynegy will have to help Enron sell assets, said Mitchell Stapley, who manages $3.5 billion in fixed-income assets
including Enron bonds for Fifth Third Investment Advisors Inc.

Dynegy and ChevronTexaco Corp., which owns 26 percent of Dynegy, also will have to help Enron negotiate with its
lenders, said Kathleen Vuchetich, who helps manage the $1.4 billion Strong American Utilities Fund, which is 5 percent
Dynegy shares.

Debt Questioned

“never dreamt (the $9.15 billion) would be that large, coming due all at ence," Vuchetich said, ‘It calls into question their
decision to schedule it that way in the first place.”

ChevronTexaco, the second-largest U.S. oil company, is providing $2.5 billion in cash as part of the Enron buyout, It
provided the first $1.5 billion a week ago,

Shares of ChevronTexaco, based in San Francisco, rose $3.62 to $86.53.

Enron yesterday reduced third-quarter resulls by 3 cents a share, bringing the period's loss to 87 cents, or $664 million. On
Nov. 8, Enron lowered earnings back to 1997 by $586 million to reflect losses by affiliated partnerships that were wrongly
kept off the books. That included a third-quarter reduction of $17 milion.

A drop in Enron's senior unsecured debt rating to “BBB-" by Standard & Poor's on Nov. 12 may force Enron to pay off a
$690 million note by Nov. 27 if it doesn't find collateral to guarantee the debt taken on by an affiliated partnership that owns
Brazilian natural-gas assets, the filing said.

Without repayment or collateral, investors can begin to liquidate the partnership's assets, Enron said. The company said
it's working with lenders to come up with an acceptable agreement on the debt.
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Write to Rebecca Smith at rebecca.smi j.com <mailto:re ith j.com> and John R.
Emshwiller at john.emshwil wsj.com <mailto:john.emshwiller

01300000000179


The big question now may be whether Mr. Watson will retain his enthusiasm after his people study
Enron's trading positions. Enron has always said it hedged its big derivative positions - positions that
can contain huge leverage that does not show up on the balance sheet - but some of that hedging
was with affiliated companies. If big surprises are found, Dynegy could back out of the deal.

There is plenty of blame to go around here, and suits have been filed against Enron, its current and
former officials, and its auditor, Arthur Andersen. But investors also bear responsibility. Enron's
financial statements were, as Mr. Lay conceded this week, “opaque and difficult to understand."
Investors and analysts knew they did not know what was going on. They bought anyway.

Enron was viewed as a company that always made its numbers. An old-line gas pipeline company
had been transformed into a brilliant trader that could apply its magic around the world. Investors did
not care how Enron made the numbers. Now, when it is too late, they do.

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One senior Wall Street official recalls recently asking Enron officials whether the company had
retained bankruptcy counsel. He was told no. He later found out that while Enron hadn't formally
retained such representation, it had met with bankruptcy lawyers. "If you don't ask the absolute right
question, you don't get the right answer," he says. "Enron does that a lot."

Yet public trust, above all, was what Enron had to have, in order to conduct its business as a trader
and party to thousands of contracts. Once doubts began to seep into the public realm, thanks partly
to that mysterious hit to equity and Enron's waffling about what it meant, other suspicious Enron
moves began to emerge.

The company had transactions with certain partnerships that were run by its own officers -- but
treated by Enron as separate. It offered only murky and fragmented information about these
partnerships. One partnership, whose existence Enron didn't reveal for four years, was part of an
arrangement that inflated earnings by several hundred million dollars during that period.

And the company’s debt level was much higher than it revealed, thanks to the partnerships, which
allowed Enron to keep some debt off its books. Meanwhile, executives made repeated public
assurances that Enron's finances and business operations were healthy, only to have those
statements refuted by subsequent revelations. Ultimately, these disclosures created a crisis at Enron,
sending its stock plunging and its partners and clients fleeing.

While Enron has acknowledged that a loss of investors’ confidence was at the root of its woes,
company officials have consistently defended their actions as legal and proper. An Enron spokesman
reiterated Tuesday that the company made every effort to put out accurate information. When
something was found to be inaccurate, Enron took prompt steps to correct it, the spokesman said.

On Sunday, Enron filed for bankruptcy-law protection in New York federal court -- the biggest such
filing ever. It simultaneously filed a multibillion-dollar suit against a company that last week backed
out of a rescue pact, rival Dynegy Inc. Enron's stock, which touched $90 a share last year, closed
Tuesday on the New York Stock Exchange at 87 cents.

Top officials now are the targets of some two dozen shareholder suits. They face a formal SEC
investigation, a Justice Department criminal probe and congressional inquiries. The company, now
struggling to avoid liquidation, has tapped existing credit facilities and lined up fresh capital exceeding
$7 billion in recent weeks, and is looking for more.

Not every detail of this tangled tale has yet been fully unraveled. It's still not clear whether
concealment and financial engineering were a central strategy at Enron for years, or just a last
desperate resort when earings were falling short. Questions also still surround the sudden
midsummer resignation of Chief Executive Jeffrey Skilling, whose role in Enron's collapse remains
uncertain.

What is clear, though, is that rarely in the annals of American business has an enterprise so mighty
and so highly regarded fallen so far so fast.

Led by its chairman, Kenneth Lay, Enron during the 1990s morphed from a nondescript gas-pipeline
company into the nation's biggest energy trader, matching utilities, power suppliers and other
investors in a vast unregulated marketplace. It gradually turned into a trading juggernaut that
increasingly disdained long-term ownership of hard assets.

Moving far beyond energy, Enron pioneered hundreds of different types of trading contracts, ranging
from commodities such as water to exotic new financial instruments. The company assembled an

191

01300000000300


Nickoloff, Peter

From: Carleton, Norman

Sent: Wednesday, November 07, 2001 3:05 PM

To: Nickoloff, Peter; Schultheiss, Heidilynne

Subject: DJ: Calpers Board To Meet On Enron investments Next Week

November 7, 2001

Calpers Board To Meet On Enron Investments Next Week

By JASON LEOPOLD

Of DOW JONES NEWSWIRES

LOS ANGELES — The board of California's Public Employees’ Retirement System plans to meet next
week to discuss how best to protect its investments in Enron Corp, (ENE), a Calpers spokesman
said Wednesday.

Calpers, which holds 3 million shares in the Houston energy company and a $500 million stake in an
Enron partnership called Joint Energy Development Investments II, has a history of shareholder
activism, but it's too early to speculate on what steps the board may take, spokesman Brad Pacheco
said.

Theoretically, the board could decide to take a more activist approach, because the energy
company’s stock is "underperforming," Pacheco said.

“If a company is underperforming, we focus on the board structure and sit down with the directors of
the company and say these are the issues," Pacheco said. "If the company does not cooperate, we
increase our shareholder propriety and we could move forward with several actions, including
litigation, to say the board has breached its fiduciary responsibility.”

Enron's shares fell to a low of $7 Wednesday before rebounding on a Wall Street Journal report the
company was in talks with Dynegy Inc. (DYN) for a cash infusion and potentially a full merger.

Concerns about the company’s dealings with off-balance sheet partnerships like JEDI II have driven
the decline, which has erased three-quarters of the company's share price since mid-October.
Enron's credit ratings have also been downgraded.

Calpers hasn't yet approached Enron executives to discuss the plunge in the company’s stock and
the quality of its investment, Pacheco said,

Last week, California state Sen. Steve Peace, D-El Cajon, wrote Calpers Chief Executive James
Burton urging the pension fund to take steps to defend its investment in Enron.

"Calpers may play a significantly larger and more active role in the governance of Enron to ensure
that Enron directors do not have conflicting interests, that Enron adheres to a policy of full financial

01300000000215


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 29, 2001 11:24 AM
To: Schultheiss, Heidilynne; Nickotoff, Peter
Subject: Enron Taps

October 26, 2001

Money & Investing

Enron Taps $3 Billion From Bank Lines
In Pre-Emptive Move to Ensure Liquidity

By JOHN R. EMSHWILLER, REBECCA SMITH and JATHON SAPSFORD
Staff Reporters of THE WALL STREET JOURNAL

Enron Corp. drew down about $3 billion, the bulk of its available bank credit lines, in a bid to restore
confidence in its financial strength and liquidity.

Enron will use part of the money to offer to redeem about $1.85 billion of outstanding commercial
Paper -- short-term corporate |OUs -- according to a person familiar with the matter, with the
remainder providing the energy concer with a cash cushion. Some observers believe the move is a
pre-emptive step by Enron to ensure that it had adequate liquidity should its access to bank lines be
interrupted. The person also said Enron was talking to its banks about a new, multibillion-dollar credit
line.

Enron insists its business operation and financial condition remain strong. But, “when the market is
reacting as irrationally as it has been the last few days, we thought that cash was better than a
commitment from a bank," said an Enron spokesman. In a statement, the company's new chief
financial officer, Jeff McMahon, said that by drawing down the bank lines, “we are making it clear that
Enron has the support of its banks and more than adequate liquidity to assure our customers that we
can fulfill our commitments.”

The move underscored the tumultuous conditions that have been sweeping over the Houston
energy-trading concern in the past 10 days. Enron is the nation's largest energy trader and is a

principal in nearly one-quarter of all electricity and natural-gas trades. Thursday, for example, Enron
was involved in about $4 billion of deals through its EnronOnline unit.

2

01300000000172


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 29, 2001 11:44 AM
To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: Enron Posts Surprise

October 17, 2001

M &! .,

Enron Posts Surprise 3rd-Quarter Loss
After Investment, Asset Write-Downs

By JOHN EMSHWILLER and REBECCA SMITH
Staff Reporters of THE WALL STREET JOURNAL

Enron Corp. Tuesday took a $1,01 billion charge mostly connected with write-downs of soured
investments, producing a $618 million third-quarter loss. The loss highlights the risks the onetime
highflier has taken in transforming itself from a pipeline company into a behemoth that trades
everything from electricity to weather futures.

In addition to the size of the charge, a particular slice raises anew vexing conflict-of-interest
questions. The slice is connected with a pair of limited partnerships that until recently were run by
Enron's chief financial officer. The company said the charge connected with the partnerships is $35
million and involves the “early termination ... of certain structured finance arrangements,”

Two years ago, the chief financial officer, Andrew S. Fastow, entered into the unusual arrangement
with his employer. With the approval of the board of Enron, Mr, Fastow set up and ran the
partnerships that stood to make him millions or more, according to partnership documents. While the
company says that this arrangement was proper, some corporate-governance watchdogs have
questioned whether a chief financial officer, who is responsible for overseeing the financial interests
of the company, should have been involved in such a partnership that was, among other things,
looking to purchase assets from Enron.

The two partnerships, LJM Cayman LP and the much larger LJIM2 Co-Investment LP, have engaged
in billions of dollars of complex hedging transactions with Enron involving company assets and
millions of shares of Enron stock. It isn't clear from Enron filings with the Securities and Exchange
Commission what Enron received in return for providing these assets and shares. In a number of
transactions, notes receivable were provided by partnership-related entities.

Mr. Fastow’s role as chief financial officer made him privy to internal asset analyses at Enron. An

offering memorandum for the LJM2 partnership said that this dual role "should result in a steady flow

of opportunities ... to make investments at attractive prices." Mr. Fastow would find his interests

“aligned” with investors because the “economics of the partnership would have significant impact on
a7

01300000000189


punishment is not sufficiently certain to promote confidence in the profession.

All of us must focus on ways to improve the system, Agencies need more resources and experts.
Processes need to be redesigned. The accounting profession needs to acknowledge concems about
our system of discipline and peer review, and address them. Some criticisms are off the mark, but
some are well deserved, For our part, we intend to work constructively with the SEC, Congress, the
accounting profession and others to make the changes needed to put these concerns to rest.

« Improving accountability across our capital system. Unfortunately, we have witnessed much of
this before. Two years ago, scores of New Economy companies soared to irrational values then
collapsed in dust as investors came to question their business models and prospects. The dot-
com bubble cost investors trillions. It's time to get serious about the lessons it taught us.

Market Integrity

In particular, we need to consider the responsibilities and accountability of all players in the system
as we review what happened at Enron and the broader issues it raises. Millions of individuals now
depend in large measure on the integrity and stability of our capital markets for personal wealth and
security.

Of course, investors look to management, directors and accountants. But they also count on
investment bankers to structure financial deals in the best interest of the company and its
shareholders. They trust analysts who recommend stocks and fund managers who buy on their
behalf to do their homework -- and walk away from companies they don't understand. They count on
bankers and credit agencies to dig deep. For our system to work in today’s complex economy, these
checks and balances must function properly.

Enron reminds us that the system can and must be improved. We are prepared to do our part.

01300000000311


last month, In 1999, they set up and subsequently ran a private partnership known as LJM2 Co-
Investment LP, which was involved in billions of dollars of transactions with Enron, according to
private-partnership documents and company SEC filings. Those partnership documents indicate Mr.
Fastow and possibly a handful of Enron associates, including Mr. Kopper, made millions of dollars in
fees and investment gains from LJM2.

Last month, in response to mounting controversy over the partnership dealings, Enron replaced Mr.
Fastow as chief financial officer. Mr. Fastow hasn't responded to numerous interview requests.

Chewco is mentioned in a brief biography of Mr. Kopper that is part of a 1999 offering memorandum
for the LJM2 partnership. The document said Mr. Kopper, besides being a “principal” of LJIM2,
“manages the general partner of Chewco, an investment fund with approximately $400 million in
capital commitments that was established in 1997 to purchase from Enron an interest in a defined
pool of Enron assets.” The document doesn't specify what assets were purchased.

Chewco's name also appears as the debtor in a 1997 filing with the office of the Texas secretary of
state. The secured party, and presumably the lender, on that debt was a limited partnership called
Joint Energy Development Investments LP.

Known as JEDI, this limited partnership was created in 1993 by Enron and the huge California Public
Employees’ Retirement System to make energy-related investments. According to Enron SEC filings,
the company and Calpers each put in $250 million and an Enron affiliate served as JEDI general
partner and operator.

Besides bringing in outside equity, entities such as JEDI allowed Enron to borrow large sums for
asset purchases without that debt showing up on Enron's balance sheet. In recent years, top Enron
Officials have said publicly that keeping down debt load was vital to protecting the company’s credit
rating and sustaining its tremendous growth. At the end of 1995, Enron had $13.2 billion in assets;
as of June 30, it had $63.4 billion.

Messrs. Kopper and Fastow had “extensive involvement in the organization, investment activity and
operations” of JEDI, according to the 1999 LJM2 private-offering memorandum. JEDI invested $2.1
billion in 63 separate transactions, the document said. After accounting for JEDI's $500 million in
equity, this indicates the partnership borrowed as much as $1.6 billion.

In 1997, Calpers sold its interest in JEDI back to Enron for about $375 million. At about the same
time, Calpers put $500 million into a new Enron partnership, known as JED! Il.

At this point, Enron could have held on to all of JEDI, but that probably would have entailed
consolidating the partnership and its debts into the company’s financial statements.

That, apparently, is where Chewco came in. (Chewco got its name, says one person familiar with the
matter, from the character Chewbacca in the "Star Wars” movies, where Jedi warriors also roamed.)
Cheweco bought from Enron the JED! interest formerly held by Calpers, according to documents and
interviews. It couldn't be determined what the terms of that transaction were. However, the fact that
Chewco shows up as a debtor to JED! in the Texas state filing suggests that money for the purchase
was borrowed from JED! itself.

The available information on the chain of transactions raises questions about how separate JED! and

Chewco really were from Enron and whether JEDI's assets and liabilities should have been folded
into the company’s financial statements.

01300000000209


Nickoloff, Peter

—— — nn.  «nX nn nn ae

From: Carleton, Norman

Sent: Monday, October 29, 2001 11-26 AM
To: Schultheiss, Heldilynne; Nickoloff, Peter
Subject: Enron and Calpine

October 26, 2001

Calpine:No Exposure To Enron; No Calif Pwr Contract Talks

(This article was originally published Thursday)

NEW YORK -- Calpine Corp. (CPN) has no credit exposure to trading partner Enron Corp. (ENE),
Calpine said Thursday in an earnings conference call. And the company hasn't been contacted by
the state of California about renegotiating the billions of dollars in long-term supply contracts the
company signed with the state earlier this year.

Calpine's diluted net earnings for the third quarter were 88 cents a share compared with 48 cents for
the same quarter last year. Setting Calpine’s consistent earnings growth aside, Wall Street analysts
in Thursday's conference call focused their questions on trouble spots in the energy industry, like
Enron, California, and whether the U.S. will have a surplus of electric power stations in a few years.

Moody's has put Enron's credit on watch for possible downgrade, and some of the company’s debt is
trading like junk bonds in the secondary market this week. Trading partners like Calpine have been
asked about their exposure to Enron.

"We continue to assess the situation, but right now don't have any net exposure to Enron,” said
Calpine's vice president of corporate risk management, Paul Pasoli. “We continue to trade with them.
We will adjust our credit threshold based on how their bonds are trading and their credit rating.”

When asked if there would be any exposure to Enron if trading were to be halted immediately, Pasoli
said that, in fact, Calpine would owe Enron a little money.

In another energy industry area of concern, Calpine was asked about the state of Califomia's stated
desire to renegotiate tens of billions of dollars of long-term power contracts. Calpine is by far the
biggest supplier under those contracts, which on a mark-to-market basis are worth far less now than
when California bought this past winter and spring.

"Nobody has come to us directly or indirectly with regard to the Calif contracts. In general, we respect
our contracts and expect our counterparties to do so as well,” said Calpine cheif executive, Peter
Cartwright. "If there are any contract renegotiations that can result in a win-win, we would be happy to
look at that, if California asks. We've done that many times.”

As for future power prices, Calpine said that it's going
forward with ita program to build a portfolio of 70,000
megawatts of generation, which igs about three times its
current capacity and would be about 7% of all U.S. capacity.
The critical determinant of profitability in power

2

01300000000175


Nickoloff, Peter

From: Carleton, Norman

Sent: Wednesday, December 05, 2001 10:33 AM

To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy, Cetina, Jill, Eichner, Matthew, Gabiondo,
Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter, Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian; Schulthelss, Heidilynne; Sharer, James; Whaley,
Jean, Wiedman, Mark

Subject: DJ: Enron Hearing Set For Dec. 12 Before Two House Panels

December 5, 2001

Enron Hearing Set For Dec. 12 Before Two House Panels

WASHINGTON -- Two subcommittees of the House Financial Services Committee have scheduled a
joint hearing next Wednesday on the collapse of Enron (ENE) and the impact on investors and
financial markets.

Witnesses invited to testify at the Dec. 12 hearing include Securities and Exchange Commission
Chairman Harvey Pitt, Enron CEO Ken Lay, and Arthur Andersen CEO Joe Berardino.

Issues to be examined at the Enron hearing by the Subcommittee on Capital Markets, Insurance and
Government-Sponsored Enterprises and the Subcommittee on Oversight were identified by the
panels as including "the impact on commodity markets, the reasons behind Enron's overstated
earings, mishandling of the employee 401(k) plan, potential securities fraud, and accounting
irregularities.”

Rep. Richard Baker, R-La., chairman of the Capital Markets panel, said, “It looks to me like a whole
bunch of innocent people got crushed here. Obviously we've got a lot of questions. We need to find
out whether the retirement savings of Enron workers and the mutual funds of a lot of other people
were victims of fraud or from violations of any existing securities laws, Do we need better disclosures
and accounting standards to give investors the real picture?

“What I'd also like to know, to begin with, is how this happened, could it have been avoided, where
were the warnings from the experts, and how do we avoid a similar collapse in the future?” added
Baker.

-By John Connor, Dow Jones Newswires; 202-862-9273; John.Connor@dowjones.com

01300000000298


Nickoloff, Peter

————— —— — —

From: Carleton, Norman

Sent: Thursday, November 29, 2001 6:16 PM

To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy, Cetina, Jill, Eichner, Matthew; Gabiondo,
Jose; Gross, Jared; Hammer, Viva; Lori Sanatarmorena (E-mail); Nickoloff, Peter, Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Sharer, James; Whaley,
Jean, Wiedman, Mark

Subject: DOW JONES NEWSWIRES: Bank Regulators See No Systemic Risk From Enron Collapse

November 29, 2001

Bank Regulators See No Systemic Risk From Enron Collapse

By REBECCA CHRISTIE

Of DOW JONES NEWSWIRES

WASHINGTON -- U.S. bank regulators say the financial collapse of energy giant Enron should have
littie lasting impact on the banking industry.

None of the four major bank regulators expressed concern Thursday that Enron's meltdown would
snowball into systemic problems.

"It's something we are looking at. We have not identified anything that would concern us a great
deal,” said Mark Schmidt, assistant director of supervision for the Federal Deposit insurance
Corporation, of possible ripple effects from Enron's difficulties. "Obviously the Enron situation is
something we and other regulators are following closely.”

Bank regulators generally don't comment on specific banks. Schmidt said the banks the FDIC has
been contacted haven't expressed undue concer about Enron's crisis. Schmidt said regulations and
internal guidelines generally limit bank exposure to any one company and even any one industry.

"We are not aware of any individual bank that house outsized direct exposure to Enron,” Schmidt
said. "Obviously, there will be some losses suffered."

Citigroup was one of the banks with the closest ties to Enron's failed deal with Dynegy Inc., which
scotched its buyout bid Wednesday as financial ratings agencies lowered Enron to junk status.
Citigroup is regulated by the Office of the Comptroller of the Currency, which had no specific
comment on that bank but expressed confidence in the banking industry's ability to weather the
storm.

"The OCC continually monitors market conditions and banks are always in the process of taking
profits and losses," said a spokesman for the Office of the Comptroller of the Currency. "The OCC is
confident that any losses due to market conditions can be accommodated with minimum impact."

Another major would-be dealmaker, JP Morgan Chase, is regulated by the Federal Reserve. The Fed

had no specific comment on banks’ exposure to Enron, but a spokesman for the Federal Reserve
14

01300000000242


Nickoloff, Peter

From: Carleton, Norman
Sent: Wednesday, December 05, 2001 7:24 PM
To: Cetina, Jill; Bair, Shella; Berardi, Steve; Bitsberger, Timothy, Eichner, Matthew, Gabiondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatarorena (E-mail); Nickoloff, Peter; Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian; Sctultheiss, Heidilynne; Whaley, Jean; Wiedman,
Mark

Subject: FT: Statement by the heads of the ‘Big Five’ accountancy firms on the collapse of Enron

Statement by the heads of the ‘Big Five’ accountancy firms on the collapse of Enron
Published: December 5 2001 13:02 | Last Updated: December 5 2001 13:21

Issued on behalf of the following:

Joseph F. Berardino, Andersen

Stephen G. Butler, KPMG

James E, Copeland, Jr., Deloitte & Touche
Samuel A. DiPiazza, PricewaterhouseCoopers
James S. Turley, Emst & Young

“As with other business failures, the collapse of Enron has drawn attention to the accounting
profession, our role in America's financial markets and our public responsibilities. We recognize that
a strong, diligent, and effective profession is a critically important component of the financial reporting
system and fundamental to maintaining investor confidence in our capital markets. We take our
responsibility seriously.

“The issues are broad and complex. When businesses fail and public confidence wanes, all involved
in the capital markets have a responsibility to actively seek to understand the core problems and
pursue meaningful solutions. We encourage other market participants to engage in self-scrutiny and
take significant steps.

“Working together, our five firms are committing our attention and resources to evaluate and chart a
course to address issues important to investors. We are also committed to future action based on
insights gained from current events.

Enhancing Financial Reporting

"We are developing specific recommendations to the SEC for improved disclosure guidance on
related party transactions, special purpose entities (SPEs), and issues related to market risks,
including those relating to energy contracts. We will work with the profession to submit these
recommendations by the end of the year, and urge that this additional information be available to
investors in 2001 annual reports,

"On a broader scale, we will work with the SEC as it begins the process of modemizing our financial
reporting system, which is long overdue. Too often, financial statement disclosures are plentiful but
may lack meaning. Many different streams of information - not just earnings - are needed for
informed decision-making, and backward-looking financial statements delivered on a periodic basis
no longer are sufficient to communicate real value and risk.

a7

01300000000326


An Enron spokeswoman said the company is “working diligently” to keep an investment-grade credit
rating. Among other things, the nation's biggest energy-trading firm is in negotiations with its banks
on a new $1 billion to $2 billion credit line to bolster its liquidity. Enron repeatedly has said its
business operations remain strong.

Monday's ratings downgrade is the latest piece of bad news for a company that has been engulfed in
turmoil during the past two weeks. Confidence in its financial situation was shaken after Enron earlier
this month announced a $618 million third-quarter loss and disclosed a $1.2 billion erosion of
shareholder equity related to transactions it had carried out with entities connected to its then-chief
financial officer, Andrew Fastow. Last week, Enron named a successor to Mr. Fastow and said the
SEC was looking into the deals.

The SEC is looking into whether Enron violated federal-securities laws regarding its handling and
disclosure of the transactions connected to Mr. Fastow, the person familiar with the probe said.
Generally, the SEC's headquarters office has more resources to apply to complex, high-profile cases
than regional offices do. Moving the Enron inquiry to headquarters indicates that the SEC is looking
to make a decision relatively quickly about whether or not to allege securitiesaw violations by the
company, this person said.

Enron repeatedly has said the transactions were proper and legal. Monday, the Enron
spokeswoman said the company is continuing to cooperate with the SEC probe and is gathering and
sending the agency information that it requested.

Moody's said the downgrade was “prompted by the deterioration in Enron's financial flexibility,” which
has contributed to "a substantial loss in investor confidence.” Going forward, Moody's said it will
focus on Enron management's "success in lining up further liquidity support and on their ability to
retain credit availability" from major trading partners. Enron is a principal in nearly one-quarter of all
electricity and natural-gas trades in the nation.

Write to John R. Emshwiller at john.emshwill . <mailto:john.emshwille: j.com> and
Michael Schroeder at |.schroeder@wsj.com <mailto:micha if j.com>

01300000000196


Nickoloff, Peter

From: Carleton, Norman
Sent: Thursday, November 29, 2001 6:09 PM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Cetina, Jill; Eichner, Matthew; Gabiondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter, Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Sharer, James; Whaley,
Jean; Wiedman, Mark; Bieger, Peter; DeMarco, Edward; Dorsey, Karen; Eliett, Martha; Ellis,
Dina; Huffman, Lucy; Hughes, Gerry; McGivern, Tom; Mcinemey, Roberta; Salladin, Anne;
Smith, Amy; Sutton, Gary; Tishuk, Brian

Subject: A Dow Jones Newswires Column: Enron's Derivatives Could Test Courts (discusses
bankruptcy netting issues)

November 29, 2001

IN THE MONEY: Enron's Derivatives Could Test Courts

By CAROL S. REMOND and PHYLLIS PLITCH
A Dow Jones Newswires Column

NEW YORK -- Prepare for the largest test in bankruptcy history of safe harbors designed to protect the liquidity
of the nations’ financial system.

Enron Corp.'s (ENE) much-anticipated bankruptcy filing, if it indeed comes, is certain to be precedent setting.
First, in terms of sheer magnitude, we're talking about $62 billion in assets, But also because it's likely to
involve hundreds, if not thousands, of counterparties intertwined with Enron in various financial and energy
derivative transactions.

Unlike other creditors whose claims will be stayed under U.S. bankruptcy laws, those counterparties will vie to
unwind their trades, may they be "power forwards" or credit derivative contracts, in order to find more worthy

hedging partners.

Built in the bankruptcy code are exemptions for securities or commodities contracts. These safe harbors were

developed over the years as a sort of security blanket for the vital hedging functions that these transactions
provide.

"These special rules are designed to avoid a domino effect,” said a bankruptcy lawyer, who like many contacted
for this column, declined to be identified given the likelihood that he'll end up representing one or many parties
involved in Enron's expected Chapter 11 filing.

Counterparties claiming redress through these exemptions should be able to net out their various derivative
contracts with Enron, attempting to use whatever collateral was pledged under those transactions to quantify
how much money they owe to or are owed by Enron. All of that is normally done on the side, without prior
bankruptcy court approval.

The problem is that Enron will likely question attempts to unwind those trades and take issue with the manner
in which its counterparties netted their exposure to the company, observers say.

Given the large number of parties involved and the magnitude of Enron's recent losses, the treatment of
derivative contracts could be further complicated by the market's lack of understanding of just how much value
is left in Enron's assets. That's an issue that will permeate the proceedings with all of Enron's stunned creditors.
On top of its derivative exposure, Enron is on the hook for roughly $13 billion in debt,

As part of its energy trading operations, Enron was a party to billions of dollars of derivative contracts designed
19

01300000000237


Nickoloff, Peter

From: Carleton, Norman
Sent: Thursday, December 06, 2001 4:19 PM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy, Eichner, Matthew; Gabilondo, Jose; Gross,

Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael;
Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman, Mark
Subject: DJ: Rep. Dingell Asks SEC For Details On Enron Partnerships

December 6, 2001

Rep. Dingell Asks SEC For Details On Enron Partnerships

Dow Jones Newswires

WASHINGTON - U.S. Rep. John Dingell, D-Mich., is asking the Securities and Exchange
Commission for detailed explanations of complex derivative transactions that led to the financial
collapse of Enron Corp. (ENE).

"Where did all the money go?" Dingell asked in a Dec. 5 letter to SEC Chairman Harvey Pitt, echoing
a question on the minds of thousands of Enron investors who've seen billions of dollars in equity
vanish virtually overnight.

“Who profited from Enron's complex business structure?” Dingell demanded.

The House Energy and Commerce Committee, where Dingell in the ranking minority member, has
launched an investigation into the accounting practices of Enron.

Enron entered into complex derivative hedging arrangements with two private investment limited
partnerships established by Enron executives. The transactions helped Enron keep its debt off its
books and overstate its earnings.

“L intend to fully cooperate with and participate in (the committee's) probe, which is being conducted
on a bipartisan basis," Dingell told Pitt.

Committee staff investigators traveled to Houston Thursday to meet with top Enron executives.
Earlier in the week, the committee met with key SEC staff involved in that agency's investigation of
Enron's business practices, and officials from Arthur Andersen, Enron's outside auditing firm, and the
Financial Accounting Standards Board, known as FASB.

The committee plans to hold a hearing early next year delving into Enron's accounting practices,
which could set the stage for a legislative response affecting corporate auditors.

In his letter, Dingell voiced concem with comments Pitt made before the American Institute of
Certified Public Accountants shortly after he became SEC chairman, which the Michigan Democrat
said suggested "the rules will not be implemented as vigorously as they should be."

nu

01300000000330


Nickoloff, Peter

From: Carleton, Norman
Sent: Friday, December 14, 2001 10:13 AM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew, Gabilondo, Jose; Gross,

Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael;
Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman, Mark;
Bieger, Peter, DeMarco, Edward; Dorsey, Karen; Ellett, Martha; Ellis, Dina; Huffman, Lucy;
Hughes, Gerry; McGivern, Tom; McInerney, Roberta; Salladin, Anne; Smith, Amy; Sutton,
Gary; Tishuk, Brian

Subject: Enron -- ABI Website Dec. 12

Enron Update

U.S. Congress to Hold First Hearing on Enron Bankruptcy Today

The first congressional hearing into the collapse of Enron Corp, gets underway today with testimony
from auditors of the former energy trading giant but not the top executive of the embattled Houston-
based company, Reuters reportad. Enron chief executive Kenneth Lay declined an invitation to
testify before the House Financial Services Committee. “We're disappointed,” panel chairman and
Rep. Michael Oxley (R-Ohio) said. “But this is [just] the first in a series of hearings and investigations
that the committee will be conducting.”

Arthur Andersen CEO Joseph Berardino will face questions about when Enron's auditors first realized
there were problems with Enron's accounts. SEC Chairman Harvey Pitt, who has promised a
thorough but quick probe of Enron, also declined an invitation to appear at today’s hearing. Instead,
SEC Chief Accountant Robert Herdman will testify. Also set to testify at the hearing is Richard
Trumka, secretary-treasurer of the AFL-CIO. Oxley has said any further Financial Services committee
hearings on Enron after Wednesday will not occur until 2002.

Congress Demands Records, Briefing From Enron

A congressional committee yesterday demanded that Enron Corp. hand over financial records and
meet with committee staff within 10 days, according to Reuters. The House Energy and Commerce
Committee called on Enron to turn over documents relevant to the committee's investigation into the
company’s collapse, said committee Chairman Rep. Billy Tauzin (R-La,) and Rep. James Greenwood
(R-Pa). In letters sent this week to Enron Chairman Kenneth Lay, and Andrew Fastow, the
company's former chief financial officer, Tauzin and Greenwood also requested staff interviews with
both current and former senior Enron employees as well as members of Enron's audit and
compliance committee by Dec. 27.

In their letters, Tauzin and Greenwood requested that a mountain of documents be turned over to the
committee by Dec. 17. The request listed 43 separate aspects of the Enron case in which the
committee has interest, including: earnings restatement decisions, financial ties among Enron officers
and outside partnerships they were involved with, minutes from board and audit committee meetings
from 1997 to present and correspondence between Enron auditor Arthur Andersen and the company.

J.P. Morgan Sues Enron for $2.1 Billion

J.P. Morgan Chase & Co., one of Enron Corp.'s biggest creditors, yesterday sued the troubled
energy trader for more than $2.1 billion, Reuters reported, The New York-based bank claimed in a
suit filed in the U.S. Bankruptcy Court in New York on behalf of itself and related parties that it has
rights to Enron assets such as accounts receivable, commercial paper, cash, and other property,
which allegedly are not protected in Enron's bankruptcy proceedings.

Enron holds the assets in dispute only as a servicer for the alleged owners, under two accounts
248

01300000000356


accounting professor at Baruch College in New York. "The quality of the disclosure is low, which
creates uncertainty about the quality of their accounting.”

Further, he says, Enron's explanation of why it entered the transactions "seems to defy imagination."
In the year-end financial statement, Enron said the purpose was "to hedge certain merchant
investments and other assets," a category that includes energy assets whose values are prone to
wide price fluctuations. Yet the disclosure shows that Enron chose to use shares and options of its
own stock as its chief hedging instrument, even though their price movements wouldn't appear to be
directly related to the value of the investments Enron was trying to hedge.

"| don't see how that possibly hedges any of Enron's risks or assets," Mr. Carmichael says. Indeed,
the disclosures have given rise to widespread speculation that Enron's actual purpose was to use its
off-balance-sheet transactions to shift losses off its books to avoid running them through its income
statement. Asked whether that was Enron's purpose, Ms. Denne declines to comment. She says
Enron stands by its earlier statement that Enron was trying to hedge certain investments.

To date, Andersen hasn't been named as a defendant in any of the numerous shareholder lawsuits
filed against Enron, which paid Andersen $52 million last year, including $25 million in audit fees.
Enron's woes come during a year already filled with embarrassments for Andersen. In June, the SEC
fined Andersen and three partners $7 million over their audits of Waste Management Inc.'s financial
statements, the largest SEC fine ever against an accounting firm. Andersen, which neither admitted
nor denied the SEC's fraud allegations, paid $75 million in 1998 to settle its portion of a shareholder
lawsuit over the Houston-based garbage hauler. Also this year, without admitting wrongdoing,
Andersen agreed to pay $110 million to settle a shareholder lawsuit over audits it conducted for
Sunbeam Corp.

Write to Jonathan Weil at jonathan. weil@wsi.com <mailto:jonathan.weil@ws|.com>

01300000000214


to enable the company and its trading partners to hedge, among other things, against rapidly fluctuating energy
prices and foreign exchange volatility - stabilizing otherwise uncertain markets. By its own account,as of
December 2000, Enron was involved in roughly $20 billion of derivative contracts on which it owed its
counterparties. More recent numbers aren't available.

Thoughts of an Enron bankruptcy jogged memories of past filings, such as the case of Drysdale Government
Securities Inc., which involved public entities being left on the hook for millions of dollars in uncollateralized
government repurchase agreements.

But bankruptcy laws have evolved significantly since the 1982 collapse of Drysdale sent shockwaves through
the financial community and forced banks to pay out tens of millions of dollars to cover Drysdale's obligations
to other government securities firms.

More recently, Orange County's 1994 bankruptcy following its derivatives debacle and the bitter dispute
surrounding German's Metallgesellschaft Ag for breach of forward petroleum contracts suggests that
acrimonious and lengthy litigations might be in the offing. In the latter case, many counterparties settled out of
court and took “haircuts” after a judge ruled that independent petroleum marketers who entered into long-term
hedging contracts as protection against escalating fuel prices could suc the metals and engineering conglomerate
for breach of contract.

But the extent to which those cases provide any lessons for Enron and its derivative counterparties remains to
be seen, experts said, depending on what sticky and complex issues might arise in potential court actions.

Meanwhile, although Enron has yet to file for bankruptcy, most of its derivative counterparties are likely
already scrambling to exit their trades,

That's because Dynegy Inc.'s (DYN) decision Wednesday to abandon its plan to rescuc Enron all but scaled the
fate of the ailing Houston energy trader which has been hobbled by accounting irregularities and unquantified
off-balance-sheet liabilities. Enron shares plummeted from about $90 a share last summer to 36 cents Thursday.

Derivative contracts are built around master agreements developed by the International Swaps and Derivatives
Association. As far as its power purchase deals go, Enron is said to have favored master agreements drafted by
the Edison Electric Institute, which draws heavily on ISDA's blueprint.

Those master agreements include certain events under which a counterparty can terminate a transaction. Among
those are failure to pay, failure to deliver and, of course, bankruptcy.

Whether counterparties will be able to claim exemption ftom the automatic stay that prevents anyone from
terminating contracts with a company that filed for bankruptcy will hinge on the type of deals they're a party to
and whether they meet certain statutory requirements. Although Enron and its lawyers are likely to nitpick the
unwinding of each and every contract involving the company, legal experts noted that Enron's fondness for EE1
agreements should help those entangled in power purchase agreements to liquidate their positions since these
contracts treat all participants as forward contracts merchants, Such merchants are exempt from the stay
stipulated by section 362A of the bankruptcy code.

Key to how well or poorly counterparties will make out now that Enron's business has been all but dried out, is
how much if any collateral protects their transactions.

So far, it's unclear how much of Enron's derivative transactions were collateralized. But lawyers familiar with
the matter said it was likely that a large amount of those contracts were not collateralized.

That's likely to be bad news for some counterparties. Because if they're owed moncy by Enron on their netted
derivative exposure, they'll have to join other unsecured creditors, likely receiving little of their claims. The
bonds and bank debt of Enron took a nose dive afier Dynegy rescinded its merger offer, with trading levels

120

01300000000238


and she said there haven't been any service interruptions. "The customers are calling, and we're
Calling them. We're doing everything possible to assure that they receive power and gas, and it's a
very difficult situation,” she said.

Enron Energy Services offers a broad spectrum of energy-management services, and can take over
nearly all aspects of a customer's energy-related activities. This “outsourcing” role includes
monitoring power meters, paying energy bills, installing efficient air-conditioning, heating and lighting
systems and even designing and constructing energy infrastructure projects.

Enron Energy Services is known as an innovator that has grown rapidly since it began operations in
1997. The Enron unit was "an icebreaker into the executive suite of corporate America to show how
they could unlock the value of energy expenditures,” said Craig Sieben, chief executive of Sieben
Energy Associates, a management consulting firm in Chicago. Enron doesn't disclose how many
customers it has, but says the total value of its long-term contracts has mushroomed to about $50
billion.

Nobody knows what is going to happen to all those contracts in the wake of the bankruptcy filing.
“What the clients are hearing from everybody, including us, is that if you have any other options, look
at them,” Mr. Sieben said.

"We're monitoring the situation very closely. We do have contingency plans in place if we need to
use them,” said a spokesman for PepsiCo Inc.'s Quaker Oats Co, unit, which recently entered into a
10-year energy management agreement with Enron, A spokeswoman for another major customer,
Stanwood Hotels & Resorts Worldwide Inc., said the hotelier is watching the situation, but doesn't
expect to be affected.

[Table]

California's universities and state colleges, which signed a high-profile agreement with Enron in 1998,
are in negotiations to extend that contract beyond its expiration in March, But as Enron's financial
picture has worsened, the talks have lagged, said Pat Drohan, an assistant vice chancellor at the
state college system. "We are looking at alternatives to try and counteract any unfortunate collapse
at Enron," he said. In addition to providing electricity, Enron is the prime contractor on construction of
a new heating system at a facility in Stockton, Calif., he said.

One complication for Enron's California customers is that the state passed a law this summer that
prohibits new "direct access” contracts between power companies and commercial users. And in the
time since Enron signed many of its contracts in the state, power prices have risen by 40% to 80%,
raising the prospect that if Enron customers are forced to rely anew on the state's utilities, they
suddenly will be paying much higher prices. In other states, the situation is almost the opposite:
Customers abandoned by Enron might now find they can buy power more cheaply given the drop in
the price of natural gas, which fuels many U.S. power plants.

Arthur Gelber & Associates has been contacted by at least eight of Enron's customers, but "we
haven't assumed any contracts,” said Mr. Gelber, owner of the Houston-based advisory and
consulting firm, which is a smaller Enron competitor. Each contract is unique and different, but "some
I've reviewed have an ‘adverse material change’ clause and may be terminated," he said. He
declined to identify any of the customers or contracts.

Other rivals in the management business are getting calls from Enron's customers. "Have our phones
been ringing more recently? Yes, of course they have,” said Bob Dickerman, president of Sempra

is

01300000000273


DYNECY

Friends no more

But as Enron tries to hold on to the trading business, and sell other assets, it will be dealing with
regulatory investigations, fighting off a raft of lawsuits, and pursuing one of its own. It is suing Dynegy for
$10 billion for backing out of the merger. It is also trying to stop Dynegy from exercising an option to take
possession of the Northern Natural Gas pipeline, its most valuable asset, Stung by this move, on
December 3rd, Dynegy countersued for the pipeline, and dismissed Enron's suit as “frivolous and
disingenuous”.

Enron's employees are suing the trustees of their pension plan, which invested in Enron shares, for
mishandling their investments. The American labour department has also opened an investigation into the
retirement plan. Congress has signalled that its planned investigation into Enron will be “very aggressive”.
More than 15 law firms are seeking class-action status from American courts for shareholder actions
against Enron, They are also pursuing Andersen, Enron's auditors, for allegedly mis-stating Enron's
finances.

The Securities and Exchange Commission (SEC), America’s top securities watchdog, is investigating all of
Enron's accounting, including Andersen's role. This Is in addition to a separate investigation of Enron's off-
balance-sheet dealings. Andersen's chief executive, Joe Berardino, tried to deflect attention from Andersen
by arguing in a newspaper article that both the financial reporting model and regulation were to blame.
The profession has swung behind Andersen in an attempt to shift attention from one of their own. The "Big
Five” top accounting firms said that they were committed to “chart[ing] a course to address issues
important to investors.” The whole profession has come under scrutiny in recent years. Last year the SEC
attempted to prevent auditors from offering non-audit services, but dropped the proposal after sustained
lobbying by the industry,

The accountants are not the only ones who missed the signs at Enron, Ron Barone, an analyst at UBS
Warburg, a bank which had extensive dealings with Enron, downgraded Enron's stock from 4 “strong buy”
to a “hold” only when Dynegy withdrew its merger offer last week. And a fund manager at Alliance Capital
Management, once Enron's biggest shareholder, admitted that it had bought shares all the way down from
$80: the stock trades well under $1 now, “All the way down the stock looked cheap,” Alfred Harrison said.
He admitted that the departure of former chief executive Jeff Skilling in August after just six months for a
change In lifestyle, ought to have raised a red flag. “Anytime you get something like that, you have to
wonder if there was something more afoot,” he observed ruefully.

236

01300000000349


On Friday, Chubb Corp., Warren, N.J., said it was reviewing its surety bonds related to Enron and
estimated its maximum exposure at $143 million. The property-casualty underwriter said it is unable
to estimate the actual amount, if any, that it may be required to pay and that thus far it hadn't
received any claims under the surety bonds.

Ms. Schroeder estimated that a maximum of $300 million in directors-and-officers liability coverage
likely is involved, divided among several insurance companies. Already, Enron faces multiple
shareholder-driven lawsuits because of the steep drop in the company's stock price.

Jason Zucker, a life-insurance analyst at Banc of America Securities, said the Enron exposures
would “pressure bond portfolios in this recessionary environment.”

Among those with big holdings is John Hancock Financial Services Inc., according to insurance
analyst Colin Devine of Salomon Smith Barney, who expects the company to incur a loss of $120
million this quarter on the bonds. A John Hancock spokeswoman declined to comment on the
estimate.

Mr. Devine said Principal Financial Group Inc. and Lincoln National Corp. also have substantial
Enron bond holdings. In a news release, Principal said the company is reviewing its approximately
$171 million "exposure to Enron" and expects to take a write-down this quarter of a size not yet
estimated. Principal said it also is reviewing an additional exposure of $50 million from investments in
Enron-related entities. A spokeswoman for Lincoln National said the company had $25 million of
Enron Corp. debt and $70 million from its subsidiaries. "We may take a charge of some of the
exposure related to the parent, but we won't know until we get closer to the end of the quarter.”

Write to Christopher Oster at chris oster@wsj.com <mailto:chris. oster@wsj.com>

157

01300000000276


assets and stock into partnership-related transactions as a way to hedge against fluctuating market
conditions.

The SEC inquiry came from the agency's Fort Worth, Texas, regional office. According to a person
familiar with the matter, this would indicate that the inquiry comes from the SEC's enforcement arm,
as opposed to its corporate-finance section. The participation of the enforcement branch would
indicate that the agency is looking into whether there were possible violations of securities law.
However, enforcement-branch inquiries often don't produce any allegations of wrongdoing. It also
appears that the SEC hasn't yet taken the step of launching a formal investigation, which would be a
sign that the agency believes securities laws might have been violated. The SEC declined to
comment.

[Enron]

Certainly, there have been questions and concerns about those partnership transactions, which
contributed to a $1.2 billion reduction in shareholder equity last week as part of Enron's efforts to
unwind the deals. Mr. Fastow, who has declined repeated interview requests, resigned from the
partnerships, known as LIM Cayman LP and LJM2 Co-Investment LP, in late July in the face of
rising conflict-of-interest concerns by Wall Street analysts and major company investors.

Since then, internal partnership documents have shown that Mr. Fastow and perhaps a handful of
Enron associates made millions of dollars last year in fees and capital increases as general partner
of the LJM2, the larger of the two partnerships.

Mr. Fastow’'s partnership arrangement caused some unhappiness inside Enron, according to people
familiar with the matter. For instance, these people say, sometime after the creation of the
partnerships in 1999, Enron Treasurer Jeffrey McMahon went to company president Jeffrey Skilling
and complained about potential conflicts of interest posed by Mr. Fastow’s activities. Mr. Skilling
didn't share Mr. McMahon's concem, these people say, and Mr. McMahon requested and received
reassignment to another post.

Mr. Skilling resigned as Enron president and chief executive in mid-August, citing personal reasons
and the fall in Enron's stock price, which peaked at about $90 a share last year. Mr. McMahon and
Mr. Skilling haven't responded to repeated interview requests.

Investors are also concerned about potential problems arising in Enron's dealings with other related
entities. In some cases, Enron could be required to issue large amounts of stock to noteholders in
some of the entities if certain so-called double trigger provisions occur.

For example, last July Enron helped create the Marlin Water Trust Il, which sold $915 million in notes
that are due July 15, 2003. However, Enron can be considered in default, in advance of that date, if
its stock price falls below $34.13 for three trading days and its senior debt is downgraded to below
investment grade by either Moody's Investors Service or Standard & Poor's.

Currently, Enron debt is still investment-grade at both ratings agencies and would have to be lowered
by several notches to fall into a noninvestment grade category. Last week, Moody's put Enron on

review for a possible downgrade. However, observers believe that even if Moody's lowers Enron's
rating, the company will still be investment-grade.

Oct. 16: Enron takes $1.01 billion charge related to write-downs of investments. Of this, $35 million is

0

01300000000183


science. In the process, we have fostered a technical, legalistic mindset that is sometimes more
concerned with the form rather than the substance of what is reported,

{Illustration}

Enron provides a good example of how such orthodoxy can make it harder for investors to
appreciate what's going on in a business. Like many companies today, Enron used sophisticated
financing vehicles known as Special Purpose Entities (SPEs) and other off-balance-sheet structures.
Such vehicles permit companies, like Enron, to increase leverage without having to report debt on
their balance sheet. Wall Street has helped companies raise billions with these structured financings,
which are well known to analysts and investors.

As the rules stand today, sponsoring companies can keep the assets and liabilities of SPEs off their
consolidated financial statements, even though they retain a majority of the related risks and
rewards. Basing the accounting rules on a risk/reward concept would give investors more information
about the consolidated entity's financial position by having more of the assets and liabilities that are
at risk on the balance sheet; certainly more information than disclosure alone could ever provide. The
profession has been debating how to account for SPEs for many years. It's time to rethink the rules.

* Modemizing our broken financial-reporting model. Enron's collapse, like the dot-com meltdown, is
a reminder that our financial-reporting model -- with its emphasis on historical information and a
single earnings-per-share number -- is out of date and unresponsive to today’s new business
models, complex financial structures, and associated business risks.

Enron disclosed reams of information, including an eight-page Management's Discussion & Analysis
and 16 pages of footnotes in its 2000 annual report. Some analysts studied these, sold short and
made profits. But other sophisticated analysts and fund managers have said that, although they were
confused, they bought and lost money.

We need to fix this problem. We can't long maintain trust in our capital markets with a financial-
reporting system that delivers volumes of complex information about what happened in the past, but
leaves some investors with limited understanding of what's happening at the present and what is
likely to occur in the future.

The current financial-reporting system was created in the 1930s for the industrial age. That was a
time when assets were tangible and investors were sophisticated and few. There were no derivatives.
No structured off-balance-sheet financings. No instant stock quotes or mutual funds. No First Call
estimates. And no Lou Dobbs or CNBC.

We need to move quickly but carefully to a more dynamic and richer reporting mode!. Disclosure
needs to be continuous, not periodic, to reflect today's 24/7 capital markets. We need to provide
several streams of relevant information. We need to expand the number of key performance
indicators, beyond earnings per share, to present the information investors really need to understand
a company's business model and its business risks, financial structure and operating performance.

* Reforming our patchwork regulatory environment. An alphabet soup of institutions -- from the
AICPA (American Institute of Certified Public Accountants) to the SEC and the ASB (Auditing
Standards Board), EITF (Emerging Issues Task Force) and FASB (Financial Accounting
Standards Board) to the POB (Public Oversight Board) - all have important roles in our
profession's regulatory framework. They are all made up of smart, diligent, well-intentioned
people. But the system is not keeping up with the issues raised by today's complex financial
issues. Standard-setting is too slow. Responsibility for administering discipline is too diffuse and

201

01300000000310


Nickoloff, Peter

From: Carleton, Norman
Sent; Thursday, December 06, 2001 4:25 PM
To; Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew; Gabilondo, Jose; Gross,

Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael;
Pietrangell, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman, Mark
Subject: DJ: Enron's $1.5B DIP Loan Syndication To Start Next Week

December 6, 2001

Enron's $1.5B DIP Loan Syndication To Start Next Week
By CAROL 8. REMOND

Of Dow Jones Newswires

NEW YORK -- Enron Corp.'s (ENE) $1.5 billion interim financing package will be marketed for syndication
beginning next week.

A final term sheet for the deal, which was preliminarily approved by the bankruptcy judge who oversees Enron's
reorganization on Dec. 3, is now in the process of being finalized, people familiar with the matter said Thursday.

J.P. Morgan Chase & Co. (JPM) and Citigroup INC. (C), Enron's two lead banks, have been organizing the
rescue loan, known as debtor-in-possession, or DIP, financing.

That money is needed for the company to continue to operate and to protect any value left - value that could be
crucial for creditors to recoup any of their losses.

Under the terms of the deal, Enron has already received $250 million from J.P. Morgan Chase and Citigroup.
Another $250 million is expected to become available in the next couple of weeks, after Enron's lenders approve
the company new business plan,

The final $1 billion in funding is contingent on final approval of the court and successful syndication of the
loan. Some of that last installment will be used to repay a $550 million loan extended by Citigroup and J.P.
Morgan Chase to Enron last month,

Although Enron's rapid fall has left a number of financial institutions exposed to the company’s fiscal and
accounting woes, the people familiar with the matter said they expected most syndicate players to be interested
in taking on some of the DIP financing. In a loan syndication, lead lenders offload a large part of the loan onto
other banks, thereby sharing the risk with the so-called syndicate group.

Most banks are willing to take on DIP lending because such exposure is senior to all other claims in bankruptcy
court. DIP loans are also attractive because they carry higher interest rates.

In the case of Enron, DIP financing comes at a cost of 350 basis points (3.5 percentage points) over the London
Interbank Offered Rate, or LIBOR. That's 100 basis points wider than the rate under which Citigroup and J.P.
Morgan Chase recently loaned $1 billion to Enron, which consisted of a $550 million loan secured by Enron's
Transwestern pipeline and a $450 million loan secured by the company’s Northern Natural Gas pipeline.

The final DIP package is scheduled to be approved by the bankruptcy judge on Jan. 7.

Meanwhile, J.P. Morgan Chase and Citigroup are said to continue working with UBS AG (UBS) on a plan to
form a joint venture under which UBS' subsidiary UBS Warburg would take over Enron's trading operations.

24

01300000000333


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 29, 2001 9:21 AM
To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: DJ: Enron

October 28, 2001

Enron Asks Banks For Additional Credit -FT

NEW YORK — Enron Corp. (ENE) is attempting to persuade banks to provide additional credit, The
Financial Times reported on its Web site Sunday.

The company was also due to hold a special board meeting Sunday to consider confidence-building
measures after surprise financial disclosures damaged its reputation among U.S. investors, The
Financial Times reported.

The Financial Times quoted Enron spokesman Mark Palmer as saying he hoped the company could
have something to announce in coming days as a result of its latest effort to “establish additional
lines of liquidity.”

"Once we are able to the liquidity position shored up, that will put a lot of fears of the unknown to
rest,” The Financial Times quoted Palmer as saying.

01300000000159


"We have had a number of false starts, and it would be crazy not to take a look at the lessons we can
lear," said Nora Brownell, one of President Bush's appointees this year to the Federal Energy
Regulatory Commission. "But we should not leap to the conclusion that competitive markets do not
work.”

The Bush administration, along with some Democrats - including Mr. Bingaman and William Massey,
a Democrat on the energy commission - continue to favor plans advanced by Enron that would pry
open regional electricity markets.

“We have to look carefully at the causes of consequences of Enron's collapse,” Mr. Bingaman said.
“But | don't see anything in this that would keep us from moving ahead with open transmission
access and these types of things.”

The durability of such views is a sign of how effective Enron was during the last decade in keeping
Washington at bay as the company pushed to restructure the electricity industry and limit government
oversight of new energy markets,

Enron and its employees were the largest contributors to President Bush's campaigns over the years,
and Enron gave more money to politicians in the last election cycle than did any other energy
company. Since 1993, its employees and its chairman, Kenneth L. Lay, have donated nearly $2
million to Mr. Bush. In the 2000 election cycle, more than $1 million was donated to federal political
campaigns, most of it to Republicans.

Mr. Lay also had powerful friends. He recruited Wendy L. Gramm, the top commodities regulator in
the administration of President Bush's father and the wife of Senator Phil Gramm, Republican of
Texas, to serve on Enron's board in 1993. The appointment came just five weeks after Ms. Gramm
helped push through a ruling at the Commodity Futures Trading Commission that exempted many
energy contracts from regulation.

Last year, as Congress and the Clinton administration debated whether to exercise more oversight of
the financial instruments used by Enron and other companies to trade energy contracts, Mr. Lay
courted Linda Robertson, a senior Treasury official who was the department's liaison with Congress.

Ms. Robertson twice accepted paid trips to talk with company executives while she was still employed
at the Treasury, her financial disclosure shows. The measure that became law, the Commodity
Futures Modernization Act of 2000, specifically exempted energy trading from the regulatory scrutiny
applied to brokers of money, securities and commodities.

Ms, Robertson, who became the head of Enron's Washington office, did not return a phone call
seeking comment.

Last spring, when the Bush administration drafted a new national energy policy, Mr. Lay had a 30-
minute meeting with Vice President Dick Cheney to discuss the report. The policy blueprint endorsed
breaking up monopoly control of electricity transmission networks, an Enron goal that was spelled out
in a memorandum Mr, Lay discussed during his meeting with Mr. Cheney.

Enron also had an unusual opportunity to influence Mr. Bush's choices for the Federal Energy
Regulatory Commission, which oversees the markets in which Enron operates. Mr. Lay met Mr.
Bush's personnel adviser, Clay Johnson, to discuss nominees, When Mr. Bush picked people to fill
two vacant Republican slots on the five-member commission, both had the backing of Enron as well
as other companies.

14

01300000000293


immense pool of financial and trading talent among its 21,000 employees.

As Enron concentrated on trading of complex instruments, it came to resemble a vast financial-
services empire, handling billions of dollars of other people's money. But to analysts and investors
seeking to understand it, Enron wasn't very informative. Officials could be dismissive of inquiries,

even rude. Closely questioned during a conference call last spring, Mr. Skilling called one company
critic an “ah.”

Many Wall Street analysts admitted to not fully understanding chunks of Enron, a company that had
3,500 subsidiaries and affiliates spread across the globe. During the booming 1990s, as Enron
delivered plump earnings and stock gains, this didn't matter. Investors “were scared not to be in it,”
says Paul Patterson, an analyst at ABN Amro.

A Sudden Departure

The confluence of events that changed perceptions began in August with the sudden resignation of
Mr. Skilling.

The former McKinsey & Co. consultant, who is 48, had become president in 1997. Last February he
became CEO as well. Remaining chairman was his mentor, Mr. Lay, a friend and financial backer of
President Bush and Vice President Cheney. In the early days of the Bush administration, Mr. Lay,
who is 59, had been widely expected to take a cabinet post.

Messrs. Lay and Skilling made a formidable team. The courtly and amiable Mr. Lay had wide-ranging
experience in government, academia and business, and his opinion was frequently sought in the
energy world. Mr, Skilling, a Harvard M.B.A., was a brash, fiery figure who spoke rapidly and
peppered his conversations with financial jargon.

Without warning, Mr. Skilling resigned on Aug. 14. He initially cited "personal reasons,” But in an
interview the next day he said his own frustration over Enron's weakening share price -- then about
$43 -- played a major role in his decision. "I don't think | would have felt the pressure to leave if the
stock price had stayed up," he said.

The abrupt departure forced Mr. Lay to retake the reins. He was reassuring to the public. "| can
honestly say the company is in the strongest shape it's ever been in,” Mr. Lay said at the time. He
also promised that in the future, Enron would be more open and accessible to investors. Mr. Lay
acknowledged that the company had “lost some credibility” with investors.

Dealings With Partnerships

The day of the announcement, Enron filed its report with the SEC for the three months ended June
30. Tucked in the 36-page document were several paragraphs describing deals involving hundreds of
millions of dollars between Enron and unnamed partnerships headed by and partly owned by an
unnamed “senior officer” of the company. The filing added that the officer had sold his partnership
interests in July and "no longer has any management responsibilities for these entities.”

But it wasn't Mr. Skilling who ran the two partnerships, known as LJM Cayman LP and LJM2 Co-
Investment LP. t was Chief Financial Officer Andrew S. Fastow, a Skilling protégé who was still very
much with the company. The "LUM" came from the first initials of Mr. Fastow’s wife and two sons. A
company spokesman said the dealings between Enron and Mr. Fastow’s partnerships were perfectly
proper and had been done to help Enron protect its assets against fluctuating market prices.

192

01300000000301


Nickoloff, Peter

Cee ae cc ee

From: Carleton, Norman

Sent: Wednesday, December 05, 2001 2:42 PM

To: Bitsberger, Timothy; Gross, Jared; Pietrangeli, Fred, Berardi, Steve; Nickoloff, Peter;
Schuillheiss, Heid@ynne

Subject: DJ: Another Enron ‘Rally’ As Shorts Close Out Positions

December 5, 2001

Another Enron ‘Rally’ As Shorts Close Out Positions

By CHRISTINA CHEDDAR

Of DOW JONES NEWSWIRES

NEW YORK - Even as more Enron Corp. (ENE) units succumb to bankruptcy, the Houston energy
trader's stock has bounced up over 30% Wednesday in heavy volume.

Buyers of the stock Wednesday included professional investors and traders closing out short
positions as well as some retail investors.

The movement comes even though Enron shares will likely be worthless by the time its bankruptcy
court case is through. This is because there is a strict hierarchy that is followed in a bankruptcy
proceeding, and the last in line to get paid are the common shareholders of Enron's stock,

Standing at the front of the line are the lenders who provided the company with debtor-in-possession
financing. In Enron's case, this is the $1.5 billion it received from Citigroup Inc. (C) and J.P. Morgan
Chase & Co. (JPM).

Next in line are secured lenders and bondholders whose claims are backed by the company's assets,
Behind them are unsecured creditors such as Enron's trading counterparties and vendors seeking to
paid,

Anything left over after all of that goes to the company’s stockholders.

The original 14 Enron units that filed for bankruptcy on Sunday had more than $18 billion in
combined liabilities, without accounting for any of its off-balance-sheet obligations, which is what got
Enron into trouble in the first place.

The Wall Street Journal, citing information provided by bankers involved in the process, said the off-
balance-sheet liabilities could add another $27 billion in debt.

Tuesday's bankruptcy filing by another three units of the company - Enron Net Works LLC, Enron
Globa! Markets LC and Enron Industrial Markets LLC - added $439 million in debt.

And there is no assurance, Enron won't make additional bankruptcy filings.

198

01300000000307


Enron's failure to offer details about the risks from other related partnerships have fed many to fear the
worst about its huge balance sheet. Its shares plunged by 19% on October 30th alone (see chart), before
recovering a bit the next day.

Andrew Fastow, who was replaced as chief financial officer on October 24th, was a general partner in LIM.
Jeffrey McMahon, his successor, has much to do to restore confidence. Questions abound. Were the trusts
run at arm's length? What did Mr Fastow earn from the partnership? Ominously, the Securities and
Exchange Commission (SEC) has now launched a formal inquiry.

Moody's, @ rating agency, last week cut its rating on the company's debt to barely above “junk” level,
Further downgrades might unleash claims from other off-balance-sheet partnerships. Those known about,
such as Atlantic Water and Marlin Water, do not seem big enough to bankrupt Enron, but speculation Is
rife about what other obligations might lurk secretly in other structured vehicles.

A lower credit rating could destroy Enron's core franchise as the leading energy middleman, by scaring
away customers and freezing the wholesale energy markets. That might have nasty consequences in other
markets. Enron acknowledges that it is a large participant in the derivatives market, holding a portfolio
with a notional value of $21 billion. Rightly or wrongly, many traders believe that figure vastly understates
Enron's presence. If the firms on the other side of Enron's trades start to fear that payment is not coming,
they might curb their other trading, producing a knock-on effect. Where this could end up Is a subject of
much conjecture.

Utilities that trade energy could be hit. So could the commodity and derivative operations of large
commercial and investment banks. The ties are notably tight between Enron and J.P. Morgan Chase,
according to Ventana Capital, a research firm. Not only does J.P. Morgan provide innumerable separate
credit arrangements for Enron; It also has the largest derivative operation of any bank, as well as a large
business trading commodities. There is "no doubt” that Enron is on the other side of many J.P. Morgan
trades, says Ventana.

Were Enron to fail, Ventana thinks "it has the potential to cause a major financial crisis”, worse, in some
ways, than what occurred after LTCM. That merely froze the debt markets temporarily, whereas Enron
deals in the bullding-blocks of the American economy. Imagine gridlock in the markets for gas, timber,
coal, metals, fertiliser, bandwidth or indeed any of the products Enron deals in.

As yet, this all seems unlikely. Many big traders were happy to deal with Enron this week, although at
shorter maturities and with less complex : structures then in the past. Trading on

h r html> was reportedly strong. Jim Donnell
of Duke Energy, a big energy trader, described 2 huge dichotomy” between the collapse in confidence in
Enron in the equity and credit markets and the “business as usual” attitude taken by big commodity
trading firms when considering Enron as a counterparty.

Yet as questions about Enron's credit-standing spread this week, it began to have difficulty making
markets in some instruments. Few firms would accept Enron's name as guarantor of a credit derivative. In
its core energy markets some big trading counterparties refused the Enron name. On the InterContinental
Exchange (ICE), two houses reportedly specified that they would not take Enron's credit.

The biggest credit exposure appeared to be with banks, whose $3 billion of back-up lines to Enron were
drawn down last week, J.P. Morgan arranged an additional $1 billion emergency credit-line this week, This
back-up, it is widely assumed, is needed mainly to meet margin calls triggered by the ratings downgrade,

Too big to fail?

71

01300000000198


of Talmudic scholars to penetrate the company’s cryptic financials. In effect, Enron's troubles were
hiding in plain sight.

It should have been a waming. Because of the poor financial disclosure there was no way to assess
the damage the economy was doing to the company, or how it was trying to make its numbers. Most
analysts blithely concede that they really didn’t know how Enron made money — in good markets or

bad.

Not that Enron didn't make money, it did -- albeit with a worrisomely low return on equity given the
capital required -- but sometimes revenues came from asset sales and complex off-balance sheet
transactions, sometimes from energy-trading revenues. And it was very difficult to understand why or
how -- or how likely it was Enron could do it again next quarter.

Enron's financial inscrutability hid stranger stuff. Deep inside the company filings was mention of LIM
Cayman, L.P., a private investment partnership, According to Enron's March 2000 10-K, a “senior
officer of Enron is the managing member" of LUM. Well, that was a puzzler. LJM was helping Enron
"manage price and value risk with regard to certain merchant and similar assets by entering into
derivatives, including swaps, puts, and collars.” It was, in a phrase, Enron's house hedge fund.

There is nothing wrong with hedging positions in the volatile energy market -- it is crucial for a market-
maker. But having an Enron executive managing and benefiting from the hedging is something else
altogether, especially when the Enron executive was the company’s CFO, Andrew Fastow. While he
severed his connection with LJM (and related partnerships) in July of this year -- and left Enron in a
whirl of confusion last week -- the damage had been done.

As stories in this paper have since made clear, Mr. Fastow's LJM partnership allegedly made millions
from the conflict-ridden, board-approved LJM-Enron relationship. And recently Enron ended the
merry affair, taking a billion-dollar writedown against equity two weeks ago over some of LJM's
wrong-footed hedging. Analysts, investors, and the Securities & Exchange Commission were left with
many questions, and very few answers.

To be fair, | suppose, Enron did disclose the LJM arrangement more than a year ago, saying it had
erected a Chinese wall between Fastow/LJM and the company. And in a bull market, no one paid
much attention to what a bad idea that horribly conflicted relationship was -- or questioned the
strength of the wall. Now it matters, as do other Enron-hedged financings, a number of which look to
have insufficient assets to cover debt repayments due in 2003.

We didn't do anything wrong is Mr. Lay's refrain in the company's current round of entertainingly
antagonistic conference calls. That remains to be seen, but at the very least the company has shown
terrible judgment, and heroic arrogance in its dismissal of shareholders interests and financial
transparency,

Where has Enron's board of directors been through all of this? What kind of oversight has this motley
collection of academics, government sorts, and retired executives exercised for Enron shareholders?
Very little, it seems. It is time Enron's board did a proper investigation, and then cleaned house --
perhaps neatly finishing with themselves.

01300000000158


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 29, 2001 11:46 AM

To: Schultheiss, Heidilynne; Nickoloff, Peter

Subject: Enron Meets #Q Estimates Excluding Hefty Charge
October 16, 2001

Dow Jones Newswires

Enron Meets 3Q Estimates Excluding Hefty Charge

By CHRISTINA CHEDDAR

Of DOW JONES NEWSWIRES

NEW YORK -- Enron Corp. (ENE) posted a third-quarter loss after accounting for a $1.01 billion
charge to write off impaired assets at its Azurix Corp. water services unit and a number of other
investment losses.

The Houston energy trader reported a loss of $618 million, or 84 cents a share, compared with
earnings of $292 million, or 34 cents a share, a year ago.

Revenue, meanwhile, jumped 59% to $47.61 billion from $30.01 billion.
Enron's charges, which totaled $1.11 a share, consist of $287 million related to asset impairments
recorded by Azurix, $180 million associated with the restructuring of broadband services and $544

million related to losses associated with certain investments, including those at New Power Holdings
Inc.'s (NPW) The New Power Co. unit.

Excluding the charge, Enron was able to meet Wall Street's expectations as reported by Thomson
Financial/First Call, with recurring earnings of $393 million, or 43 cents a share.

“After a thorough review of our businesses, we have decided to take these charges to clear away
issues that have clouded the performance and earings potential of our core energy businesses,"
Enron Chairman and Chief Executive Kenneth Lay said in a press release.

There are two ways to view the charge, according to Commerzbank analyst Andre Meade.

With a “positive spin," one could view the charge as a clearing of the books, he said. However,

Meade said he also feels the charge could be seen as the "other shoe" investors were waiting to drop
after ex-Chief Executive Jeffrey Skilling's abrupt resignation this summer.

"Skilling hinted pretty well that there wasn't going to be a charge," Meade said.

01300000000192


Nickoloff, Peter

ao

From: Carleton, Norman
Sent: Monday, December 03, 2001 12:20 PM
To: Bair, Shella; Berardi, Steve; Bitsberger, Timothy, Cetina, Jil, Eichner, Matthew, Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Senatamorena (E-mail); Nickoloff, Peter; Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heiditynne; Sharer, James; Whaley,
Jean, Wiedman, Mark

Subject: WSJ: Enron Customers Seek Backup, Check Contracts for Out Clauses

December 3, 2001

Enron Customers Seek Backup,
Check Contracts for Out Clauses

By RHONDA L. RUNDLE
Staff Reporter of THE WaLL STREET JOURNAL

THE DEAL MAKE

Enron Corp.'s commercial and industrial customers, including some big manufacturers, technology
firms and hotel chains, are scrambling to line up alternative suppliers in case the collapsed energy
company isn't able to supply power or meet other obligations under its long-term contracts.

A sense of urgency spread last week among corporate customers of Enron, which filed Sunday for
Chapter 11 bankruptcy-court protection. Some customers of Enron, Houston, are scouring their
contracts for language they are hoping may allow them to legally break those pacts, energy
consultants said. Customers who signed long-term accords at prices above current market also have
an economic incentive to drop them, the advisers added.

A spokeswoman for the Enron subsidiary that serves commercial and industrial companies, Enron
Energy Services, which was one of the Enron units that also filed Chapter 11, declined to discuss its
customers’ intentions. She said she wasn't aware of one that has recently switched to a rival supplier,

153

01300000000272


[Go}Despite Losses!'Complex Deals’Analysts Remain High ‘on Enron
Among other insiders selling during the year, Kenneth Rice, former chairman and CEO of Enron's
broadband unit, sold shares for $23.7 million. Mr. Rice has sold 456,966 shares of the 1.5 million
shares he was listed as owning in Enron's March proxy filing. Former Enron Chief Executive Jeffrey

Skilling -- who resigned in August -- sold 160,000 shares for $9.8 million during the year. In March,
Mr. Skilling owned 1.9 million shares.

Messrs. Rice and Skilling couldn't be reached to comment.

Overall, Enron’s insiders were busier selling shares last year, when they sold 5.8 million shares for
about $449 million. During 1999, insiders sold 3.4 million shares for $123.1 million.

Since December 1999, only one Enron executive has reported buying company shares. The buyer
was Andrew Fastow, who was ousted during the week as Enron's chief financial officer after the
company disclosed it was under a Securities and Exchange Commission investigation into financial
ties between the company and Mr. Fastow.

Mr. Fastow reported purchasing 10,000 Enron shares in August at $36.98 each, or a total of
$369,800. Today, those shares are valued at $163,500, based on Enron's stock price of $16.35 in 4
p.m. New York Stock Exchange composite trading. After the purchase, Mr. Fastow owned 110,586
shares, Thomson Financial/Lancer Analytics says.

Enron said Mr. Fastow wasn't available to comment.

On Monday, a New York law firm filed suit in U.S. District Court in Houston, alleging that Enron
misrepresented its performance by failing to disclose problems with its broadband division and failing
to properly write down the value of investments in limited partnerships managed by Mr. Fastow. The
suit, which seeks class-action status, also says Enron insiders sold $73 million of their own Enron
holdings during parts of 2000 and 2001.

Write to Theo Francis at theo.francis at wsj.com <mailto:theo.francis at wsj.com> and Cassell Bryan-
Low at

01300000000171


According to the lawsuit, Microsoft sent Enron a letter dated Oct, 23 saying that if Enron didn't
provide an operational broadband system by Oct. 25, Enron would have breached the contract and
Microsoft would be entitled to recover damages.

The Enron lawsuit asked that Microsoft be declared in breach of contract and that Enron be allowed
to recover unspecified damages as well as costs stemming from the lawsuit.

Neither Enron nor Microsoft responded to requests for comment on the suit.

The deal was signed June 25 and announced by Enron's then-chief executive Jeffrey K. Skilling in a
July conference call with analysts, It came as a ray of hope for his company’s foundering broadband
business.

Mr. Skilling promised more details would be in the offing, but none came. Mr. Skilling stepped down
as CEO in August, citing personal reasons, but analysts suggested a sharp decline in the Houston
firm's stock might have spurred his departure. Enron's stock price was hurt as the federal government
tried to curb high power prices that had helped Enron achieve record earnings. Meanwhile, investors
had also cooled on Enron's aggressive push beyond its gas-pipeline business into broadband
telecommunications markets, a strategy identified with Mr. Skilling.

Since then, the news has only gotten worse for Enron: Its stock has been hammered amid heavy
losses and news that the Securities and Exchange Commission is conducting an inquiry into billions
of dollars of transactions it did with entities connected to its former chief financial officer. On
Thursday, the company drew down about $3 billion -- the bulk of its available bank credit lines -- in a
bid to restore confidence in its financial strength and liquidity (see article).

Mr, Skilling had taken over from the CEO spot from Kenneth Lay in late 2000 after a long stint as
president and chief operating officer. Before that, he advised Mr. Lay as a McKinsey & Co.
consultant. The two men were largely credited with building Enron into a formidable commodities
market player over the past decade, trading everything from electricity to weather derivatives. In
doing so, Enron shed many of its power-production assets, a tactic advocated by Mr. Skilling.

Enron and several other big energy companies have spent billions of dollars building fiber-optic
networks, which they can string along their utility rights of way. But Enron's ambitions were always
even larger -- in July 2000, for example, the company signed a 20-year exclusive agreement with
Blockbuster Inc. to deliver movies on demand to U.S. and European homes via high-speed phone
lines. That deal fell apart in March: Blockbuster said Enron's fiber-optic network couldn't deliver the
service on a dependable basis, and Enron countered that Blockbuster couldn't deliver the quality and
quantity of movies needed for a successful video-on-demand service.

—Michael Rieke of Dow Jones Newswires contributed to this article.

01300000000166


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 29, 2001 9:18 AM

To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: Enron

October 29, 2001

Money & Investing

Enron Is in Discussions With Banks
For Credit Line of up to $2 Billion

By JATHON SAPSFORD and JOHN EMSHWILLER
Staff Reporters of THE WALL STREET JOURNAL

Enron Corp., scrambling to restore confidence in its finances, is negotiating with banks for a new
credit line of between $1 billion and $2 billion, and is likely to close a deal within days, according to
Officials familiar with the matter.

The new credit line is intended to bolster Enron's financial condition and head off a potentially
devastating loss of investor and business confidence. The new credit would supplement existing

lines, which are largely tapped out after Enron last week drew down about $3 billion to increase cash
reserves and calm fears in the stock, bond and energy markets.

An Enron spokesman confirmed that the company is negotiating a new credit line, but said he
couldn't supply any further details. Houston-based Enron is the nation's biggest energy trader and a
principal in nearly one-quarter of all electricity and natural-gas trades. Once a favorite of Wall Street,
the company now is in the unfamiliar position of convincing a deeply concerned investment
community that, despite difficulties, its finances remain sound.

Confidence in Enron's situation was shaken after Enron earlier this month announced a $618 million
third-quarter loss and disclosed a $1.2 billion erosion of shareholder equity related to controversial
transactions it had done with entities connected to its then-chief financial officer, Andrew Fastow.
[Enron]

Last week, Enron replaced Mr. Fastow and said that the Securities and Exchange Commission was
looking into the transactions. The company has consistently said that the transactions were proper
and legal.

Enron's stock price fell again Friday. As of 4 p.m., in composite trading on the New York Stock
1

01300000000155


Nickoloff, Peter

a

From: Carleton, Norman
Sent: Tuesday, December 04, 2001 11:10 AM
To: Bair, Sheila; Berardi, Steve; Bilsberger, Timothy, Cetina, Jill, Eichner, Matthew, Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey,
Michael; Pietrangeli, Fred, Roseboro, Brian, Schultheiss, Heidllynne; Sharer, James; Whaley,
Jean; Wiedman, Mark

Subject: ‘WSJ: Enron Secures $1.5 Billion in Financing, Lays Off About 4,000 Workers in the U.S.

December 4, 2001

Major Business News

Enron Secures $1.5 Billion in Financing,
Lays Off About 4,000 Workers in the U.S.

By MITCHELL PACELLE, JATHON SAPSFORD and ANN Davis
Staff Reporters of THE Watt STREET JOURNAL

Turning to some of its largest creditors as potential saviors, Enron Corp. secured as much as $1.5
billion in new financing from J.P. Morgan Chase & Co. and Citigroup Inc., and was deep in
negotiations for an additional lifeline to salvage its flagship energy-trading operations.

The new agreement for debtor-in-possession financing, which will rank senior to most of Enron's
existing debt obligations, represented a critical first step to keeping the company alive as it
reorganizes under bankruptcy-court protection. The Houston-based energy firm is laboring to devise
a plan to navigate the Chapter 11 process without being forced into a hurried liquidation. The
developments came as the Justice Department, following a recent similar move by the Securities and
Exchange Commission, began a criminal probe into Enron's dealings, a person familiar with the
matter said.

Enron has been negotiating with three money-center banks -- J.P. Morgan, Citigroup's Salomon
Smith Barney unit, and UBS AG - for a separate deal to pump capital into its trading operations
through a joint venture that would likely result in one of the banks controlling a new trading company,
according to people involved in the matter. A spokesman for Citigroup said, "We are not at this time
interested in the trading business.” The other banks declined to comment.

Enron's advisers consider it vital to keep alive these wholesale energy-trading operations -- once
considered the crown jewel of Enron — if the company is to have any hope of continuing to operate.
In recent days, trading has ground almost to a halt, with the exception of trades with counterparties
who want to unwind positions, Enron Monday laid off 4,000 people in Houston -- roughly 20% of its
world-wide work force of 21,000 people.

Late Monday afternoon, in the company’s first hearing in the U.S. Bankruptcy Court, Southem District
166

01300000000286


Nickoloff, Peter

—

From: Carleton, Norman

Sent: Monday, December 03, 2001 12:07 PM

To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Cetina, Jill, Eichner, Matthew; Gablondo,
Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey,
Michael; Pietrangeli, Fred; Roseboro, Brian, Schultheiss, Heidilynne; Sharer, James; Whaley,
Jean; Wiedman, Mark

Subject: WS: Credit-Derivatives Market Faces Stiff Test After Collapse of Enron

December 3, 2001

Credit-Derivatives Market Faces
Stiff Test After Collapse of Enron

By HENNY SENDER
Staff Reporter of THE WALL STREET JOURNAL

The collapse of Enron Corp. casts a spotlight on a little-known but highly complex market in credit
derivatives, a market that has swelled from almost nothing five years ago to a face value of more
than $1 trillion today, according to estimates from Goldman, Sachs & Co.

Now, as Enron files for protection under Chapter 11 of the Bankruptcy Code, the credit-derivatives
market faces the biggest test of its young life. The way the market functions over the next few weeks
will have significant consequences in determining who will bear the potentially massive losses, how
widely those losses will be distributed and whether any one institution took overly risky bets by having
significant concentrations of unhedged exposure to Enron. Whether Enron's collapse takes any other
institutions down with it will probably be decided in this marketplace.

Enron was a big presence in this market. For one thing, since Enron had a voracious appetite for
capital and raised so much debt -- $13 billion in bonds and loans on the parent's balance sheet
alone, and much more off -- numerous financial institutions needed to hedge their Enron bonds and
loans. And then, because Enron was such a huge dealer itself, especially in longer-dated, thinly
traded securities where few others made markets as boldly, it became Wall Street's counterparty on
everything from oil to weather to credit derivatives.

"Enron showed up everywhere," says the head of the credit-derivatives desk at one major bank in
New York. "Everyone had exposure to it."

[Go]See full coverage of the rise and falllof Enron

In recent weeks, before its debt crumbled to a small fraction of its face value on news of the
company’s loss of its investment-grade status, hundreds of Enron's lenders, bondholders and
counterparties sought to buy protection against possible default by Enron through one significant
segment of the credit-derivatives market, called credit-default swaps (a complicated name for what
was essentially insurance in case Enron defaulted). Indeed, the demand for protection against a
default by Enron was so great that the price was far higher than it should have been, given its then-

43

01300000000262


Nickoloff, Peter

From: Carleton, Norman
Sent: Friday, November 16, 2001 9:37 AM
To: Roseboro, Brian; Bitsberger, Timothy; Gross, Jared; Nickoloff, Peter; Schultheiss, Heidilynne;

Pietrangell, Fred; Berardi, Steve; Cetina, Jill; Sharer, James; Novey, Michael; Eicher,
Matthew, Hammer, Viva
Subject: NYT: Did Ken Lay Understand What Was Happening at Enron?

November 16, 2001

FLOYD NORRIS

Did Ken Lay Understand What Was Happening at Enron?
What a tangled web was weaved by Enron. Both investors and managers seem to have been misled.

“Enron became overleveraged,” Kenneth L. Lay, Enron's chairman and chief executive, said this
week, adding that things went wrong in ways that “| could not have ever contemplated.” He pointed to
investments that "performed far worse than we ever could have imagined."

That was the first time that Enron had admitted it had a leverage problem, and it came only after the
brutal reality had become apparent to many others. Mr. Lay says he understood what was going on,
but | suspect he had left crucial details to others who have since departed and did not fully grasp the
reality that was obscured by Enron's soothing financial statements.

When Enron was riding high, it could easily have sold stock to raise capital that it now desperately
wants. Mr. Lay and other executives sold stock, but the company did not. Just a month ago, Mr. Lay
spoke enthusiastically of how great the company's continuing earnings were.

The leverage was not easy to find. A lot of it was carried off Enron's balance sheet. Partnerships and
special- purpose entities that Enron set up borrowed money and funneled the cash to Enron. Enron
guaranteed the debt but did not have to show it on its own balance sheet because it could meet its
obligations by issuing stock. As undisclosed losses built up in those entities, it became more likely
they could not pay their bills, leaving Enron to do so.

It is also clear that the bond rating agencies did not understand Enron's plight until the last couple of
weeks. When they figured it out, it took a $1.5 billion equity infusion that is part of the Dynegy
(news/quote) takeover to keep Enron's rating above junk level.

Now Enron has a board committee investigating various transactions, and promises to release details
as they are uncovered. Officials speak as if they are learning what happened for the first time, and
perhaps they are, Jeffrey Skilling, Mr. Lay's protégé, was Enron's chief financial engineer until he quit
this summer. And Enron's chief financial officer and treasurer were ousted as Enron unraveled.

Some investors would say none of that matters now, that the only important fact is that Dynegy is
buying Enron anyway. Chuck Watson, Dynegy’s chief executive, is convinced that Enron's energy

trading business is a gem that more than justifies the price Dynegy is paying. He figures the losses
from the bad investments can be contained.

102

01300000000221


generation is the difference between natural gas prices and
power prices, and Calpine said that difference, or "spark
spread," hag grown the past few months, Furthermore, the
company executives said they are holding to a requirement
that all projects generate an

after-tax return of 18% on the investment.

As a result, the company expects earnings to grow at least 40% annually

through 2005. Calpine will fund near-term cash needs in
the debt markets and won't issue new stock until its stock
price rises substantially.

-By Mark Golden, Dow Jones Newswires; 201-938-4604; mark.golden@dowjones.com

01300000000176


Enron's rapid tumble began several weeks ago when news surfaced of off-balance-sheet
transactions that led to a $1.2 billion write-down in shareholder equity and contributed to a $1 billion
charge. The company’s plunging share price led to a series of credit downgrades, and a failed
attempt by Dynegy Inc. to rescue the company,

The Democratic-led Senate Energy Committee also plans to investigate the impact of Enron's
financial troubles on the overall U.S, energy market,

01300000000297


the possibility of such a suit.

In recent trading, shares of Enron were down 66 cents, or 4.04%, to $15.69. Shares of Microsoft
were off 15 cents, or 0.25%, at $62.63.

-By Michael Rieke, Dow Jones Newswires; 713-547-9207,

01300000000162


regulators do for companies in their domain.

“We'll do it now," he said, “or we'll do it when we get the next shock."

186

01300000000295


Nickoloff, Peter

From: Carleton, Norman
Sent: Thursday, December 06, 2001 4:34 PM
To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew; Gabilondo, Jose; Gross,

Jared; Hammer, Vive; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael;
Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman, Mark
Subject: BJ; POWER POINTS Special: Reconstituted Enron A Pipe Dream

Pesember. 6, 2001 a - —
POWER POINTS Special: Reconstituted Enron A Pipe Dream

By MARK GOLDEN and JASON LEOPOLD
A Dow Jones Newswires Column

LAS VEGAS -- The idea that Enron Corp. (ENE) can find the financial backing to fence off its profitable North
American gas and power trading operation in a joint venture with other partners is near fantasy, energy traders
and Wall Street analysts said.

The fantasy of salvation is understandable. If Enron's energy trading operation shuts down, the most valuable
piece of Enron will be lost.

How valuable? Enough that some counterparties wouldn't mind seeing Enron default. One Northwest
municipal utility, for example, is buying power long-term from Enron at prices much higher than today’s
market. But the utility can't walk away from Enron and into the cheaper market, because Enron continues to
deliver.

"Somchow, every day, they've scraped together the power and delivered so far,” a buyer for that utility said
while attending an energy trader conference this week in Las Vegas. "I wish they would default someday, so we
could get out of the contract."

That situation can be multiplied perhaps thousands of times. If Enron's trading operation deteriorates, the
company’s creditors could eventually recover even less of what they're owed.

But deteriorate it will, observers said, even if Enron finds backers for a new venture.

"Most counterparties seem very hesitant about doing business with Enron again,” said Steve Fleishman, energy
industry analyst for Merrill Lynch. "Financial backing would help, but lack of clarity on Securities Exchange
Commission review and litigation lingers as an uncertainty.”

Brute Force

Much of the strength of Enron's traders came from the brute force that big-swinging Enron exccutives
encouraged in order to meet earnings growth targets. The company for a couple of years overcame huge losses
in disastrous investments overseas and in telecom with ever larger bets on just three markets: North American
gas, Easter U.S. power and Western U.S. power.

Only a few senior Enron traders really had the power to make market calls. Those traders had excellent
fundamental analysis, and they were usually right in their bets on the direction of prices. Enron went long
Western power and gas last year as prices in those markets skyrocketed. It shorted those markets this year as
demand was killed by mild weather, a recession and delayed approval of higher utility rates.

Enron's market power was so great that its positions were somewhat self-fulfilling. If a trader for another

229

01300000000338


Glisan said. "But if we are wrong, we will issue equity." Mr. Glisan said a worst-case scenario would
involve issuing as much as $1 billion in stock. Enron said it has about 850 million shares outstanding.

Making up any shortfall with equity has become more expensive because of the drop in Enron's
share price. In 4 p.m. New York Stock Exchange composite trading, Enron shares were down 86
cents to $19.79. The stock was once again one of the most actively traded with about 27 million
shares changing hands. Early this year, Enron stock was more than $80 a share,

During the past week, shares of the energy-trading giant have dropped more than 40%. Early last
week, Enron reported a $618 million third-quarter loss, resulting from $1.01 billion in write-offs. The
company also disclosed a $1.2 billion reduction in shareholder equity for the quarter as a result of
terminating certain transactions related to a partnership that for a time was headed by Enron Chief
Financial Officer Andrew S. Fastow. In July, Mr. Fastow ended his connection to the partnership in
the face of growing concerns by analysts and major investors. On Monday, Enron disclosed that the
Securities and Exchange Commission was looking into the transactions related to Mr. Fastow. Enron
has said its dealings with the partnership were proper.

The turmoil of the past several days prompted Enron to schedule a conference call Tuesday morning
with Wall Street analysts and others in an effort to reassure investors. Enron Chairman and Chief
Executive Kenneth Lay said while "we are extremely disappointed with our stock price .., our
businesses are performing very well." Mr. Lay and other executives said Enron has adequate
liquidity to meet its needs.

Mr. Fastow, the chief financial officer, took part in the conference call. But neither he nor Mr. Lay
would answer any questions concerning the Fastow-related partnership, which was known as LJM2
Co-Investment LP, Mr. Lay said the SEC was in the midst of an inquiry concerning that partnership
arrangement, which has raised conflict-of-interest questions among analysts and others. Mr. Lay
cited shareholder suits filed recently as another reason not to discuss the partnership questions. Mr.
Lay said he was "very concerned about the way Andy's character has been loosely tossed about.” He
added “we continue to have the highest faith and confidence in Andy.”

Internal LJM2 documents indicate that Mr. Fastow and perhaps a handful of fellow Enron officials
made millions of dollars in management fees and capital increases from running the partnership.
Billions of dollars of Enron assets and stock were involved in LJM2-related transactions, according to
Enron SEC filings.

During the conference call, analysts -- even some who have been longtime Enron fans — challenged
executives about the Fastow partnership arrangement and the company’s often opaque financial
reports. "There's the appearance you are hiding something,” said Goldman Sachs analyst David
Fleischer, "You need to do everything in your power to demonstrate to investors that your dealings
are above board.”

Mr. Lay responded, "We're trying to be as transparent as we can."

Write to Rebecca Smith at rebecca

S j.com> and John R.
Emshwiller at john.emshwille! j.com <mailto:jo!

01300000000181


landscape.

Enron's bankruptcy filing is the largest in U.S. history, with more than $31 billion in reported debt and
perhaps billions more in as-yet unreported off-balance-sheet liabilities. Citing a person involved in the
reorganization, The Wall Street Journal reported that Enron's top 10 bank lenders account for
between $7.5 billion and $8.5 billion in on- and off-balance-sheet debt.

Creditors’ desire to maximize recovery value and UBS's longing to take a foothold in the energy
trading business could be what's behind the idea of a joint venture to revive the now moribund
EnronOnline. (UBS has a relatively small $74.3 million exposure to Enron, which the banking giant
says is fully hedged.)

Until recently, EnronOnline accounted for 25% of all wholesale energy trading in the U.S.,
representing about 60% of Enron's trading volume. But as Enron's financial troubles mounted,
ultimately leading to a Chapter 11 filing in New York Sunday, this crown jewel has rapidly been
deteriorating.

And with trades almost at a standstill, customers have been moving to competing trading platforms
like Dynegy Inc.'s DynegyDirect, TradeSpark or the Intercontinental Exchange, known as ICE. ICE
said Tuesday that trading volume more than doubled in the two last weeks of November.

What's certain is that if Enron's major creditors and UBS want to resuscitate EnronOnline, they have
to move quickly.

"The customer list is very ephemeral,” said Art Gelber of Gelber & Associates, energy advisers and
consultants in Houston, "Whomever gets enough liquidity will get it and become the chosen
platform.”

Gelber and others said that UBS, or any other interested parties, have the benefit of the upcoming
holidays, a time when trading slows. But they say that if no new ownership is in place by the middle
of January, any value to EnronOnline operations will have likely vanished forever.

Just how much of Enron's prior market share UBS would be able to reclaim is unclear. But even a
portion would give the bank a sizable entry into the energy market.

It's also unciear whether UBS' interest in EnronOnline would extend to physical contracts that were
also offered by the trading platform in addition to financial contracts. If so, UBS would have to quickly
develop a presence in the pipeline and power-grid market in the U.S. and likely Europe. (Indeed, a
big question for any Wall Street firm or bank considering an investment in energy trading is whether
to simply be a broker or actually take and make physical delivery of power and other commodities.)

Energy adviser Gelber said given the relative openness of the energy industry in the U.S., it would be
pretty easy for UBS to get in the physical delivery business if it chose to.

Introduced in 1999, EnronOnline is a trading platform that provided customers with price discovery
and point- and-click transaction ability. The platform offers trading in natural gas, power, oil, other
refined products, coal, chemicals and metals, among others. Unlike rival platforms like ICE, which
merely match customers, Enron was a party to every transactions taking place on EnronOnline.
Therein is another question: would an Enron joint-venture partner also want to take on courterparty
risk?

Whatever firm, if any, steps in, the resulting joint venture would have to be approved by the

al

01300000000320


Nickoloff, Peter

From: Carleton, Norman

Sent: Thursday, December 06, 2001 4:37 PM

To: Nickoloff, Peter; Schultheiss, Heidilynne; Bitsberger, Timothy; Gross, Jared; Wiedmen, Mark;
Cetina, Jill; Novey, Michael; Eichner, Matthew; Hammer, Viva

Subject: OJ: Europe's 1st Exchange-Traded Weather Futures Launch Mon

December 6, 2001 |

Europe's Ist Exchange-Traded Weather Futures Launch Mon

By MARK LONG
Of DOW JONES NEWSWIRES

LONDON -- The first exchange-traded weather futures in Europe start trading Monday, adding to the host of
products that are springing up around deregulating energy and agricultural markets in the region.

The London International Financial Futures and Options Exchange, or Liffe, said Thursday that it acknowledged
activity will be modest on the first day, but it remains confident that cnergy and insurance companies will boost
liquidity and encourage interest from other sectors down the line,

Liffe said last month that it was to launch the first exchange-based weather futures market on Dec. 10 in order to
provide a means for the many industries affected by weather to manage risk.

The U.K. Meteorological Office suggested last month that U.K. firms could save more than GPB7.6 billion a
year if they were able to fully mitigate the effects of weather on their business, according to Liffe's Thursday
briefing for reporters.

The initial listing of six Liffe weather futures contracts will be settled against the monthly and winter season
indexes which Liffe introduced earlier this year.

The Liffe monthly weather indices are based on the mean of the daily average temperature for every calendar
day of the month for each of three locations: London Heathrow, Paris Orly and Berlin Tempelhof. The index is
expressed from a basis of 100 to ensure positive figures.

For the monthly weather futures contracts, twelve delivery months will be available at any one time and the first
delivery months available to trade will be January to December 2002, inclusive.

For winter season contracts, two delivery months will be available starting with winter 2002, stretching from
November-March.

‘The Liffe weather futures contracts are valued at GPB3,000, or EUR3,000, per one degree change. The tick size
is 0.01, or one hundredth of a degree Celsius, giving each tick a value of GPB30 or EUR30.

So, a U.K. company could buy 50 lots of the January contract at 105 to hedge against warmer weather. If the
January temperature is two degrees warmer than average - making the index 107 - the company would make
GPB300,000. (50 lots times 200 index points times GPB30.) This could help offset, for example, a lower price
received for the electricity it wanted to sell in the same timeframe.

The contracts will be cleared through the London Clearing House, "which gives a great deal of comfort to those
market participants,” said lan Dudden, director of non-financial products for Liffe.

Exchanges all over the energy and commodities sectors have been quick to point out the higher credit quality
1

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Get started with audio/video

However, he declined to be more specific about what information the SEC sought. He also declined
to say when the subpoenas were issued or whether SEC officials had begun conducting interviews of
Andersen personnel,

An SEC spokesman declined to comment.

Andersen likely will face questions on a host of fronts. Among them are whether Andersen should
have required Enron to better explain its dealings with several partnerships operated by former Enron
officers before agreeing to bless the company's financial statements. Securities-law specialists said
Andersen likely will face questions about why it agreed to sign off on Enron's decision not to
consolidate several off-balance-sheet financial vehicles whose debts ultimately were Enron's
responsibility.

The firm likely will also face questions about whether it was unduly influenced by the unusually large
fees Enron paid Andersen over the years. In 2000, Enron paid Andersen $52 million, including $27
million for consulting services, making Enron Andersen's second-largest U.S. client.

Further, some of Enron's accounting violations appear to have amounted to basic violations of
generally accepted accounting principles. Enron, for example, earlier this month acknowledged
improperly boosting its shareholder equity by $1.2 billion by swapping shares of its own stock for a
note receivable from a limited partnership tied to one of its former officers. Additionally, Enron
boosted its earnings over the years by declining to make certain audit adjustments that Andersen had
proposed, But at the time, Andersen determined those adjustments to be "immaterial." In 1997, for
instance, those adjustments added up to nearly half of Enron's net income. And other questions
about Andersen's level of responsibility could well arise as investigators dig deeper into the case.

Alan Bromberg, a securitiestaw professor at Southern Methodist University in Dallas, said Andersen
could face stiffer-than-usual sanctions from the SEC, depending on what investigators find, because
of the firm's recent brushes with the SEC over audit failures at Sunbeam Corp. and Waste
Management Inc. Among the possible sanctions the SEC may consider, he said, are prohibitions
against Andersen taking on new audit clients for a period of time and prohibitions on certain firm
partners from practicing accountancy before the SEC.

Mr. Tabolt said Andersen will cooperate with all government investigations, but declined to comment
on them in detail.

Andersen's role in the Enron probe also could present sticky issues for SEC Chairman Harvey Pitt,
whose former law-firm clients include Andersen and the other Big Five accounting firms. In a June
letter to the SEC's ethics officer, Mr. Pitt said he wouldn't take part in decisions by the commission
related to his former law-firm clients for a year.

An SEC spokesman declined to comment Thursday when asked if Mr. Pitt will recuse himself from
the Enron probe.

In an interview earlier this month, the SEC's general counsel, David Becker, said commission
Officials are "not going to comment on a commissioner's choice in any particular case." But he added:
"| do think the public is safe in assuming that the chairman, like all the other commissioners, is quite
aware of his ethical obligations and will behave consistently with them."

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Enron did not always get its way in Washington. It failed to win regulatory exemptions for some
futures products it wanted to trade, for example. And with Enron now discredited, its longtime
nemeses like the Southern Company hope to turn the regulatory agenda in a direction that favors
their interests.

The Southern Company has long been Enron's main challenger for influence in Washington. The
company has nurtured a loose coalition of Southeast lawmakers - the Senate minority leader, Trent
Lott of Mississippi, most prominent among them - in support of its view that the states should retain
leeway in deciding the pace and scope of energy deregulation.

So far this year, its political action committees have outspent all other energy companies, including
Enron and big oil companies like Exxon Mobil (news/quote), in supporting members of Congress,
according to the U.S. Public Interest Research Group. Southern strongly opposes efforts to diminish
the power of local regulators to supervise electricity pricing, production and transmission.

“We have long felt that Enron's vision of open markets does not work with electricity," said Dwight
Evans, executive vice president of the Southern Company. "! think our credibility has been enhanced
by recent events.”

Mr. Evans said that the Federal Energy Regulatory Commission under Mr. Bush had tried to "design
systems that meet what Enron needs." Congress should slow the commission, Mr. Evans argued, or
risk a fresh bout of instability and volatile prices.

Some states have halted the introduction of open markets for electricity. Nevada, Oklahoma and New
Mexico are among those that have put off deregulation, while California and a few other states that
once promoted unfettered competition are debating ways to reimpose regulatory control,

Enron's assiduous efforts to keep its energy trading free of government interference could be another
casualty of its collapse.

As the value of energy contracts soared into the hundreds of billions of dollars - at one point up to
half all electricity and natural gas transactions passed through Enron's trading operation, by some
estimates - Enron scrambled to hold off Congress and regulators.

But some regulatory experts now say that Enron's collapse is reminiscent of the failure of Long-Term
Capital Management. Long-Term Capital was the hedge fund based in Greenwich, Conn., that
operated without direct federal oversight and, by some accounts, threatened world markets when its
elaborate portfolio of derivatives crumbled in late 1998.

With its exemption from scrutiny in hand, Enron revealed relatively little about its trading portfolio,
leaving analysts guessing how it had made its profits. Enron's secrecy was one factor that caused
investor confidence to plummet in recent weeks, after the company revealed some unorthodox
financial arrangements that benefited top executives.

“Enron was getting very heavily into derivatives, and along with Wall Street banks, they went to bat to
keep us away," said Michael Greenberger, who was director of trading and markets at the
Commodities Futures Trading Commission until September 1999. "This should be as scary for
regulators and Congress as Long- Term Capital was.”

Representative Markey agreed that Congress should demand more oversight of energy trading. He
said regulators should begin requiring transparency from companies like Enron, while examining the
adequacy of their capital and the stability of their trading portfolio, much as banking and securities

01300000000294


Bank of New York noted Wednesday that “the markets are functioning normally.”

The Office of Thrift Supervision, whose members generally lend to homebuyers and smaller
businesses, also was not expecting a major ripple effect.

“It looks like the Enron deal would have no broad-range effect on the thrift industry,” said Office of
Thrift Supervision spokesman Sam Eskanazi, who noted that thrifts tend to lend to smaller
businesses. Still, he said OTS was “monitoring the situation carefully."

-By Rebecca Christie; Dow Jones Newswires; 202 862 9249; rebecca.christie@dowjones.com

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Nickoloff, Peter

ee

From: Carleton, Norman
Sent: Thursday, December 06, 2001 5:48 PM
To: Sharer, James; Cetina, Ja; Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Eichner,

Matthew; Gabilondo, Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail);
Nickoloff, Peter; Novey, Michael; Pietrangeli, Fred; Roseboro, Brian; Schultheiss, Heidilynne;
Whaley, Jean; Wiedman, Mark

Subject: Economist: The ripples spread

The ripples spread

Dec 6th 2001
From The Economist Global Agenda

The collapse of Enron, the world’s biggest corporate bankruptcy, has created ripples through
financial markets around the world. The Bank of Japan has had to step in to avert a crisis there.
But rival oil companies see it as an opportunity to acquire assets on the cheap

AP

Lay is down

AS DOWNFALLS go, it has been spectacular. In February, Enron was worth $60 billion. Its founder,
Kenneth Lay, was a close friend of George Bush and his family. Now the energy trading giant has filed for
the world’s biggest-ever corporate bankruptcy and is fighting a host of lawsuits. But it may be too soon to
bury Enron, known as the most innovative and aggressive of energy traders. On December 3rd, a day after
it filed for bankruptcy following the withdrawal of a merger offer by Dynegy, @ smaller rival, it had lined up
$1.5 billion in additional funding. If secured-and its key bankers, J.P. Morgan Chase and Citigroup, need to
persuade other banks to join the syndicate-it could mean that the energy-trading firm survives in America.
Whether the Enron name survives is another matter. Meanwhile, rivals are circling to pick up the pieces of
its other businesses elsewhere In the worid.

The new $1.5 billion loan will, unsurprisingly, be secured against the company’s assets. It already has a
long list of unsecured creditors seeking repayment. Following approval by the New York bankruptcy court
overseeing Enron, the company has received $250m immediately. It will get another $250m when It
completes a business plan, with the rest dependent on the syndication of the loan to other banks. Whether
any banks will be keen to take on new Enron debt while so many of their number are nursing write-offs, is
another matter. Enron hopes that the cash injection will enable it to keep its core wholesale energy-
trading business afloat while it secures other partners, J.P. Morgan Chase and UBS Warburg, both
investment banks, have said that they are in talks with Enron, Citigroup has also not ruled out @ trading
alliance. It is vital that a deal is done soon if the trading operation is to survive. Enron's lawyers revealed
that the trading operation's net equity has almost halved from $12 billion to around $6 billion since the
crisis began in mid-October, That was when Enron failed to explain a $1.2 billion write-down in its third-
quarter earnings.

Enron was the dominant trader in the markets for energy that had been spawned by electricity
deregulation in America. It bought and sold contracts on gas and electricity, among other things, and
made markets in financial derivatives related to the energy markets. Increasingly, though, it traded purely

736

01300000000347


Nickoloff, Peter

ES

From: Carleton, Norman

Sent: Monday, October 29, 2001 9:24 AM
To: ‘Schultheiss, Heidilynne; Nickoloff, Peter
Subject: WSJ 10/26 Enron

October 26, 2001

Money & Investing

Enron's Financial Troubles
Reverberate to Its Bonds

By JATHON SAPSFORD and SUZANNE MCGEE
Staff Reporters of THE WALL STREET JOURNAL

NEW YORK -- Enron Corp.'s bonds have held up better than its battered stock amid escalating
financial woes at the energy-trading powerhouse.

Not for long, some bond traders say.

In trading Thursday, the Houston energy-trading company's five-year bond, a $250 million issue due
in July 2006 carrying a coupon of 6.4%, was quoted at 82 cents on the dollar, down from a bid of 88
late Wednesday, and representing a 16% drop during the past two weeks.

Still, that is far less than the 50% decline in Enron's stack price since the Oct. 16 disclosure of a
$1.01 billion charge linked to soured investments, resulting in a $618 million third-quarter loss. But
the fall in the bond's price translates to a yield of 7.7 percentage points above bellwether U.S.
government bonds, which is a widening from about three percentage points two weeks ago. Although
Enron still is an investment-grade credit, that kind of "spread" is more characteristic of a junk bond
with a credit rating of single B or lower.

At the same time, it is becoming nettlesome to trade big blocks of Enron bonds, Thursday's 82 bid,
for instance, was for a block of less than $2 million in bonds, a small percentage of a typical trade.
This poor liquidity underscores the uncertainties affecting not only Enron but the market as a whole.

Driving the bond-price drop are fears among investors that credit-rating concems will lower ratings on
Enron debt after it conceded earlier during the week a number of troubles, including losses in the
wake of questionable investments, a Securities and Exchange Commission investigation, and the
sudden resignation of its chief financial officer.

“Even at these levels, there's very little buying interest,” said Harold Rivkin, a principal at distressed-
debt trader H. Rivkin & Co. in Princeton, N.J.

01300000000163


Nickoloff, Peter

From: Carleton, Norman

Sent: Friday, November 30, 2001 3:49 PM

To: Nickoloff, Peter, Schultheiss, Heidilynne; Eichner, Matthew
Subject: Article on Enron and Arthur Andersen

November 30, 2001

SEC Starts Probe of Enron Audits
Conducted by Arthur Andersen

By JONATHAN WEIL
Staff Reporter of THE WALL STREET JOURNAL

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The Securities and Exchange Commission's investigation of energy trader Enron Corp. has now
expanded to include the actions of the company’s auditor, Arthur Andersen LLP.

The SEC has subpoenaed records from Arthur Andersen as part of the agency's formal investigation
into Enron's accounting and financial-disclosure practices.

That Andersen's actions would become a focus of the SEC’s investigation isn't surprising, accounting
and securities-law specialists said. This month, Enron disavowed its financial statements going back
to 1997, and Enron's market value has plunged more than $75 billion since it peaked last year.
However, until Thursday, Andersen's public position was that the SEC hadn't told the firm itis a
subject of its investigation into Enron.

Given the subpoenas, the delivery of which Andersen spokesman David Tabolt confirmed in an
interview Thursday, the Big Five accounting firm now has concluded that the “work of our
engagement team is a subject of the SEC investigation,” Mr. Tabolt said. The subpoenas cover a
litany of documents, mainly working papers generated by the Andersen team of auditors assigned to
Enron, he said.

CNBC Dow Jones Business Video
Media <http://www.cnbedowjones.com/msnbc/November_01/112901/asx/112S9watr.asx>
Lost Credibility:
Dynegy CEO Chuck Watson says Dynegy was given Enron's third-quarter financial report only three hours before it was
flied, and was surprised by Enron's disclosures
Leam About CNBC/Dow Jones Business Video <http://www.cnbcdowjones.comiwsjie/>

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they offer relative to over-the-counter participants like Enron Corp. (ENE), which spectacularly collapsed last
week leaving many of its counterparties badly exposed.

While cnergy and insurance companies are expected to dominate early weather trading activity, the retail, travel
and tourism, agricultural and Icisure sectors are expected to follow suit.

In addition, products more tailored to specific market sectors, based on the Liffe trading system, may be
designed by others in the future, Dudden said.

There is no intention to have larger participants acting as market makers in weather futures initially, Dudden
said, adding the exchange will be constantly evaluating the response to the trading system and adjusting
methods accordingly.

Also, Liffe will seck to add additional weather trading markets in the U.S. and Asia, These markets would likely
have summer season contracts in addition to winter season contracts.

"This is really about building the market,” Dudden said. "As we do that it'll become more and more apparent
where we need to channel our energies. This is not the sort of market where you can dip onc toe in and then
jump right out again.”

-Mark Long; Dew Jones Newswires; +44 ((0)20 7842 9356, mark.long@dowjones.com

01300000000341


timing of those payments because of contingencies, including the actions of others, possible judicial
rulings or the amounts that Chubb may recover under surety bond documents. No claims have yet
been filed under the surety bonds.

Jay Cohen, a Merrill Lynch analyst, said Chubb’s surety bond obligations in regards to Enron
generally guaranteed the delivery of natural gas to energy producers, such as utilities. Each bond
could have different defined events that would trigger a claim, such as a bankruptcy, Cohen said.

"The Enron loss will likely be a very sizable one in the surety line, a line that was not particularly
effected by the Trade Center attack,” Cohen said. "The loss will likely exceed $1 billion and we note
that the industry wrote surety premiums totaling $3.5 billion in 2000. We would expect this loss to
have an effect on insurers’ risk appetite pertaining to surety obligations.”

Cohen said Chubb likely has reinsurance for its losses and that its gross exposure is “above the $220
million maximum net exposure.”

Ron Frank, a Salomon Smith Barney analyst, said, while the Enron situation is clearly "unusual," the
loss should be viewed relative to Chubb's overall financial condition, which is quite solid. He said
Chubb's historical profitability in surety is “very good even including Enron.”

Frank noted the Chubb announcement didn't address any other exposure to Enron, such as
directors and officers liability. "Management did comment to us that if they saw another exposure
material to earnings per share, it would have been released," Frank said. "We infer from this that
reinsurance and reserves will meaningfully mitigate such exposures.”

Large surety writers include St. Paul Cos. (SPC), American International Group (AIG), CNA Financial
(CNA), Act Ltd. (ACE), Safeco Corp. (SAFC) and the Travelers unit of Citigroup Inc. (C). However,
not all large writers of surety obligations necessarily have an exposure to Enron.

At the same time, a major Enron loss could inhibit some traditional property-casualty insurers from
writing financial guarantee-related risk in the future, said Schroeder, the Morgan Stanley analyst.

Schroeder noted that could be a positive for traditional financial guarantors in terms of less
competition, but could also be a concern,

For example, Ambac Financial Group Inc. (ABK) and MBIA Inc. (MBI), both traditional financial
guarantors, have been able to "wrap" lower levels of risk on certain collateralized debt obligation
deals with traditional P&C insurers, while taking the higher, or less risk prone, layers for themselves.
Being conservative in nature, they might not be willing to take on the more risky layers in the future.

By Chad Bray, Dow Jones Newswires, 201-938-5293
chad. bray@dowjones.com

135

01300000000254


Enron Seeks $6 Billion From Asset Sales

Bankrupt Enron Corp. yesterday announced that it may sell its key energy trading unit and plans to raise up to $6
billion by selling other assets, Reuters reported. Chief Financial Officer Jeff McMahon said that Enron plans to
sell Its troubled Azurix Corp. water unit, businesses in emerging markets and wind energy assets. It plans to
retain its exploration and production unit, wholesale and retail services and regulated businesses. McMahon
said Enron has about $13 billion in unsecured bank debt and an additional $2 billion in secured bank debt. Enron
plans to raise between $4 billion to $6 billion with the noncore asset sale.

Dynegy Suit to Gain Enron Pipeline Moved to Federal Court

Dynegy Inc.'s lawsuit to secure ownership of an Enron Corp. pipeline company has been transferred to the
Federal District Court in Houston, Dow Jones reported. The state District Court of Harris County, Texas, where
Dynegy originally filed the suit, transferred the case on Tuesday. Enron asked that the suit be moved to federal
court to determine whether it should be heard by the federal bankruptcy court in New York, as Enron's lawyers
have argued, or in state court, as Dynegy prefers. Dynegy plans to seek to move the case back to state court.

Dynegy filed suit against two Enron subsidiaries on Dec. 3 in the state court seeking control of the
Enron Northern Natural Gas Co. Dynegy based its claim to Northern Natural on an option it secured
from Enron in exchange for a $1.5 billion cash infusion. The option allowed Dynegy to acquire
complete contro! of Northern Natural in the event Dynegy’s offer to acquire Enron fell through.
Dynegy terminated its acquisition offer last month and told Enron it was exercising its option to buy
Northern Natural. Enron is contesting Dynegy's claim and has sued its one-time suitor for $10 billion
for wrongfully terminating its acquisition offer.

Enron Objection Deadline Extended to Dec. 18

Enron announced that it has moved the date of its next bankruptcy hearing, originally
scheduled for tomorrow, to Dec. 20. Enron representatives weren't immediately available to
provide the reason for the rescheduling. Enron said the hearing is designed to give adequate
assurance to utility companies providing services to Enron and its debtor subsidiaries. In
connection with the rescheduled hearing, Enron has extended the objection deadline to Dec.
18.

rls

01300000000355


More pointedly, notes Cary Wasden of Reed Wasden, an investment firm that has long been sceptical of
Enron, the firm's trading margins collapsed, from 5.3% in early 1998 to less than 1.7% In the third
quarter of this year. He notes that "margins have fallen in spite of the company’s practice of selling fixed
assets (ie, generation plants) and booking the gains as operating revenues.”

Whether Enron pumped up its trading revenues Is a crucial question. As chart 2 shows, the spectacular
growth of the past year or so was due almost entirely to Mr Skilling's embrace of the “disintegrated”,
asset-light trading model. Dean Girdis of the Petroleum Finance Company, 2 consultancy, points to other
possible wheezes. He reckons Enron may have used limited partnerships and other financial vehicles to
inflate profits. Another technique he points to is the lumping of assets such as pipelines into its trading
business. In fact, profits from hard assets may have masked the shrinking margins of Mr Skilling's virtual
trading business and encouraged him to bet the company on his radical, risky view that Enron could create
markets in just about anything.

With margins shrinking, Mr Skilling tried to stretch the brand Into new areas. Enron grew to have contracts
with some 8,000 counterparties, in hundreds of business lines ranging from credit insurance to metals
trading, In practice, this meant taking ever bigger bets, such as trading telecoms bandwidth,

As these bets started to go horribly wrong all at once, Enron may have felt compelled to pump up its
revenues and profits using ever more Ingenious tactics. Dynegy's Mr Watson puts it this way: “Enron tried
to be a worldwide commodities broker and market maker to the world, open 24 hours a day, with just a
BBB rating, unlike banks, which have a much stronger balance sheet-and the market fell for it.”

The limits to markets

In one sense, the saga Is far from over. In bankruptcy, Enron can borrow from banks, which know that
fresh loans will be senior to old ones. The plan now seems to be to sell what assets it can (the ownership
of its main gas pipeline is disputed by Dynegy), so as to keep alive the core trading business and the

Internet operation, EnronOnline <http://www.enrononline.com>, perhaps with a view to selling them to a
bank.

Yet it looks unlikely that Enron can stay alive, even in truncated form. A buyer of its trading and online
operations would surely ditch such a besmirched brand. In any case, the company may be crippled by
lawsuits that are likely to drag on for years. A better strategy for a would-be buyer might simply be to hire
away Enron's best staff and start a new business.

That points to the most ironic twist of all in this morality tale. Mr Lay had always described himself as
“passionate about markets”, That fervent belief in the invisible hand led him to spot one of the most
powerful trends of the past decade: the deregulation of commodity markets. He would often forge ahead
fearlessly into newly deregulating markets, bully recalcitrant regulators into speeding reforms and develop
clever financial vehicles that pressed to the very edge of the law, In the end, though, Enron appears to
have overstepped the mark. The resultant backlash comes as a bitter reminder that the market forces that
Mr Lay once worshipped can prove a double-edged sword.

01300000000346


Brazil's industrial heartland. Rebecca Mark, then president of Enron's international unit, crisscrossed
South America trying to gain approvals for the pipeline and for a string of new power projects that it
would feed. Enron bought stakes in power plants, natural gas distributors and in 1998, Elektro.

Enron's problems were, from the start, almost as big as its ambitions. A $550 million project in the
central Brazilian state of Mato Grosso to build three power plants fed by Bolivian gas overran its
budget by $200 million and its construction deadline by two years. The 400-mile pipeline needed for
the project was held up when Brazilian environmental officials forced a 62 mile diversion so as not to
disturb a rare species of bat, What's more, only one of the three power plants is operating and until
September had to run on more expensive diesel fuel until the natural gas pipeline was finished.

Brazil's volatile economy also hurt Enron, as well as other foreign energy investors. Elektro
distributes electricity to about 40% of Sao Paulo, Brazil's largest and wealthiest state. But the
devaluation of the Brazilian currency in 1999 has been a blow to Elektro. The government controls
electricity rates and has resisted companies’ pleas to pass on dollar-based costs, including corporate
debt, to consumers. Electricity rates in Brazil are half as much as those in neighboring Argentina, for
example, industry officials say. Making matters worse, Brazil imposed energy rationing in June,
reducing Elektro's revenue by 30%, said an energy specialist who advised Enron in Brazil.

The Brazil-to-Bolivia pipeline, in which Enron has a minority stake alongside state companies, hasn't
turned out to be much of a salvation for energy starved Brazil either. Few of the power plants that it
was to feed have been built due to investor concerns about the regulatory environment. As a result,
demand for gas from the pipeline is less than expected.

Even the more opportunistic moves by Enron haven't worked out. Earlier this year, the company built,
in just six months, a $300 million natural gas power plant outside Rio de Janiero to capitalize on the
country’s acute energy shortages. But the local spot market for energy remains plagued by
operational and financial-settlement problems. So far, Enron hasn't received a cent for the energy it
has sold from the plant. What was supposed to be a "cash cow” has turned out to be "a disaster,”
says an Enron executive.

Enron has found a buyer, so far, only for its 25% and 34% stakes, respectively, in Companhia
Estadual de Gas and Companhia Estadual de Gas-Rio de Janeiro, two gas-distribution companies
serving the city and state of Rio. Enron and Brazilian state oil company Petroleo Brasileiro SA signed
a deal on April 30. Closure is imminent, Enron says.

“They have been shopping around for a while and not found the prices they wanted,” says UBS
Warburg energy analyst Ronald J, Barone of Enron's Brazilian assets. "The fact that the situation is
dire now means ... they will get low-ball bids because people know they are desperate.”

Write to Miriam Jordan at

Southern Exposure

Enron's Latin American assets and interests include:
~ Elektro (Brazil): Power distribution company in Sao Paulo.

1s1

01300000000270


Nickoloff, Peter

From: Carleton, Norman

Sent: Tuesday, November 13, 2001 12:51 PM

To: Nickoloff, Peter; Schultheiss, Heidilynne; Cetina, Jill; Sharer, James; Adams, Fred;
Pietrangeli, Fred; Berardi, Steve; Anderson, Helen; Ludwick, CM; Whaley, Jean

Subject: Nice work if you can get it

Enron CEO May Get at Least $60.6 Million After Buyout (Update2)
By Margot Habiby

Houston, Nov. 13 (Bloomberg) -- Enron Corp. Chairman end Chief Executive Officer Kenneth Lay may get $60.6 million or
more in severance if he leaves after Enron's sale to Dynegy is completed, according to a regulatory filing.

Lay is entitled to receive a lump sum payment equal to $20,2 million, multiplied by the number of full calendar years
remaining on his contract, if he terminates his employment under certain circumstances, such as the acquisition by
Dynegy, Enron said in a filing with the U.S. Securities and Exchange Commission.

Dynegy says its buyout of Enron, the biggest energy trader, is expected to close in 2002's third quarter. Lay's contract
expires at the and of 2005. His contract provides that he also receive an amount to cover tax penalties if the payment he
gets is considered an “excess parachute payment,” the SEC filing said,

Enron agreed on Friday to be acquired by rival Dynegy for at least $23 billion in stock and assumed debt, ending a
financial crisis that threatened to bankrupt Enron and disrupt U.S. power and natural-gas markets. Lay has said he won't
be an active manager in the new company, which wil be led by Dynegy Chairman and CEO Chuck Watson

Lay's contract was extended by two years, to the end of 2005, when he resumed the CEO's job following the departure of
Jeffrey Skilling in August. If Enron's buyout by Dynegy were to close this year, or if there were another form of "change of
control” at Enron, Lay may receive $80,8 million, the Enron filing indicates.

Pay Package

Enron more than tripled Lay's pay package last year to $18.3 million following the company's best share-price performance
in 20 years, according to a proxy filed in March with the SEC, Enron shares have plunged 90 percent this year. Lay made
$5.97 million in 1999, according to Enron's proxy statement fled with the SEC.

Lay also received options to buy 782,830 shares over seven years, most at $47.31 each, the March filing said, Those
options are now worthless because Enron's stock price is below the price at which they could be exercised. Lay had gains
of $123.4 million from the exercise of options in 2000.

Enron's has been battling a cash crunch and a loss of investor confidence this year because of questions about
partnerships it started and put under the control of its senior executives.

After the Enron acquisition, top managers at Dynegy will include Dynegy’s Steve Bergstrom as president and chief
operating officer, Dynegy’s Robert Doty as chief financial officer and Enron's Greg Whalley as executive vice president,
Whalley is Enron's president and chief operating officer

Shares of Enron rose 21 cents to $9.45 in midday trading, Dynegy rose 91 cents to $45.22. Bath companias are based in
Houston.

01300000000217


Nickoloff, Peter

From: Carleton, Norman
Sent; Tuesday, November 20, 2001 4:43 PM
To: Wiedman, Mark, Nickoloff, Peter; Cetina, Jill, Sharer, James; Berardi, Steve; Pietrangeli, Fred;
Schultheiss, Heidilynne; Whaley, Jean
Subject: FW: Bloomberg: Enron Falls Amid Concern Debt Threatens Dynegy Bid (Update5)
somOriginal Message--—-
From: (Carleton, Norman
Sent: ‘Tuesday, November 20, 2001 4:41 PM
Roseboro, Brian; Bair, Sheila; Bitsberger, Timothy
Subject: Bloomberg: Enron Falls nid Concern Det Threatens Oyrey Bid (Upcetes)
11/20 16:08

Enron Falls Amid Concern Debt Threatens Dynegy Bid (Update5)

By Stacie Babula

Houston, Nov. 20 (Bloomberg) -- Enron Corp. shares and bonds dropped after the energy trader disclosed it may have to
pay $9.15 billion in debt due by 2003, suggesting the company may run out of cash before its takeover by Dynegy Inc. can
be completed.

Shares of Enron fell $2.05, or 23 percent, to $7.01. Earlier they touched $6.55, the lowest price in more than a decade.
Enron's 6.4 percent notes due in July 2006 were bid as low as 69 cents on $1 of face value and offered at 73 cents, down
more than 13 percent in light trading, traders said.

Enron, whose dealings with affiliated partnerships led to earnings restatements, crecit-rating cuts, a federal investigation
and a management shakeup, said in a regulatory filing that it has less then $2 billion in cash or credit lines. Dynegy plans
to complete its buyout by October, and Enron may have to ask lenders to restructure payment schedules to survive.

This filing shows that Enron is in a precarious financial situation," said Commerzbank Securities analyst Andre Meade,
who rates Enron shares ‘“hoid" and doesn't own them. ‘They have to stay afloat for the Dynegy deal to go through, and
that now looks difficult.”

Enron and Dynegy wouldn't comment on the stock drop today. Standard & Poor's Investors Service said that Enron's credit
rating remained on negative watch, indicating it would not immediately downgrade the company's debt.

$690 Milion Surprise

“Enron's near-term liquidity position is... expected to be sufficient to carry the company through the completion of its
proposed merger with Dynegy,” S&P said in a report.

Investors were concemed the debt, including a $690 million note that Enron disclosed it may have to pay off next week,
would lead to a cut in Enron's credit rating, analysts said.

The filing was a “distraction” that will not threaten the merger, said Todd Shipman, 2 director at S&P who follows Enron.
"Our approach to this has been on the basis that the Dynegy deal is a good thing for credit quality," Shipman said.

Moody's Investors Service, which didn't issue a statement on Enron's debt today, kept the company’s credit rating at
investment grade on Nov. 9, the day Dynegy announced it would buy Enron in a dee! now valued at $25 billion.

The ruling came after executives from Lehman Brothers Holding Inc., J.P. Morgan Chase & Co, and Citigroup Inc.'s
Salomon Smith Barney lobbied the credit-rating company, people familiar with the situation said,

Avoiding Junk
105

01300000000223


Nickoloff, Peter

From: Carleton, Norman

Sent: Friday, December 14, 2001 10:10 AM

To: Bair, Sheila; Berardi, Steve; Bitsberger, Timothy, Eichner, Matthew, Gabilondo, Jose; Gross,
Jared; Hammer, Viva; Lori Sanatamorena (E-mail); Nickoloff, Peter; Novey, Michael;
Pietrangell, Fred; Roseboro, Brian; Schultheiss, Heidilynne; Whaley, Jean; Wiedman, Mark;
Bieger, Peter; DeMarco, Edward; Dorsey, Karen, Ellett, Martha; Ellis, Dina; Huffman, Lucy,
Hughes, Gerry; McGivern, Tom; Mcinemey, Roberta; Salladin, Anne; Smith, Amy; Sutton,
Gary, Tishuk, Brian

Subject: DEC 13 ABI Website -- More on Enron and Bankruptcy

Enron Update

House Panel Vows Comprehensive Enron Investigation

House Financial Services Committee members yesterday plunged into what they pledged would be a
comprehensive investigation into the collapse of Enron Corp., a task made more difficult by Enron
Corp. CEO Kenneth Lay's failure to appear before the panel as a witness, CongressDaily reported.
Lay sent the committee a letter on Tuesday, explaining that he would be unable to attend the hearing
because he was scheduled to participate in bankruptcy proceedings. Financial Services Capital
Markets Subcommittee Chairman Richard Baker (R-La.) said the committee would continue its
investigation In “late January, possibly early February.” And, he added, “Our task is to establish the
facts, change the rules where needed and assist the SEC in pursuit of those who have violated the
law."

Several lawmakers on both sides of the aisle also used Enron's demise as an opportunity to renew
their calls for the passage of a financial “netting” bill, provisions of which are included in the
bankruptcy reform bill. Financial Services Committee Chairman Michael Oxley (R-Ohio) and ranking
member John LaFalce (D-N.Y.) agreed that Enron's collapse underscores the urgent need for
passage of provisions designed to strengthen and update current statutory protections for netting
financial market contracts if a party defaults. Netting refers to the practice where the amounts due
between financial institutions in the event of a default are quickly calculated as one net amount,
helping reduce risk. The netting language is one of the few consensus items included in
comprehensive bankruptcy reform legislation that “is destined to go down to defeat,” LaFalce
asserted. “[Netting] is not a new issue,” he fumed, “We need to extract [those] provisions and simply
pass them independently.”

Auditor Hints of ‘Illegal Acts’ at Enron

Enron Corp.’s outside auditor said yesterday “illegal acts” may have been committed at the energy-
trading company before it sought bankruptcy protection last week, The Washington Post reported.
The chief executive of Arthur Andersen, the accounting firm that approved years of financial
statements that overstated Enron's profits and understated its debts, also said Andersen made “an
error in judgment” that accounted for $103 million in overstated profits.

While Joseph F. Berardino testified yesterday on Capito! Hill, giving Andersen's first substantive
explanation of why it certified Enron's reports, top Enron officers detailed a reorganization strategy for
creditors at a meeting in New York. And former Enron chief financial officer Andrew Fastow, after
failing to honor a Securities and Exchange Commission subpoena, surfaced at a news conference to
dispel speculation that he had fled the country. In addition to Congress and the SEC, the Justice and
Labor departments are investigating Enron's collapse. More congressional hearings are expected

next month. To read the entire story, point your browser to <http://www.washingtonpost.com/wp-
dyn/articles/A34904-2001 _html>.

26

01300000000354


True, no stock picker is immune from bad calls. And Wall Street analysts long have been criticized
for their overwhelmingly bullish bias, particularly on stocks in hot sectors with lots of investment-
banking deals to be had.

But Enron stands apart, precisely because so many of the analysts still recommending the stock
have acknowledged that the company’s disclosure practices are lacking. Which raises the question:
How can an analyst recommend that others purchase a stock when key information about the
company's operations is so often either unavailable or indecipherable?

Concerns about the way that Enron runs its business aren't new. Many of the issues now plaguing
Enron's stock were first raised more than a year ago by bearish hedge-fund managers and
independent accounting experts. Yet time and again, Wall Street analysts dismissed as unimportant
many of the lingering questions about the company’s various partnership transactions.

Besides those partnerships, Enron also has been dogged by concerns about the secretive valuation
techniques it uses to record its assets and earnings.

Through it all, most analysts have stuck by this onetime stock-market darling, publicly dismissing
questions about the firm's accounting practices and level of disclosure. As of Thursday, of the 17
analysts who following the stock, 10 had a "strong buy” or equivalent rating on the stock, according to
Thomson Financial/First Call. Five others rated the stock a "buy," though not strongly.

Only Prudential Securities, which downgraded the stock this week, has a “sell” rating on Enron.
The bullish treatment is the latest and one of the most high-profile examples of Wall Street taking a

glass half-full stance, despite what in retrospect seems to be ample warning that a less-enthusiastic
approach was warranted.

Over the past year in the wake of the Nasdaq Composite Index’s general collapse, analysts have
been widely assailed for a lack of independence - particularly those who, like Goldman's Mr.
Fleischer, own shares in the companies they cover, Regulators have raised concerns that analysts
have compromised themselves to help their firms land lucrative investment-banking fees and other
revenue.

Enron has spread the wealth across many Wall Street firms. For instance, for one $865 million equity
offering in 1999 led by Credit Suisse First Boston, Enron retained seven co-managers, including
Donaldson Lufkin & Jenrette, Lehman Brothers and Merrill Lynch.

“Enron is a big company, and | don't think you're going to find a firm that hasn't been involved," says
Credit Suisse First Boston analyst Curt Launer, who still rates the stock a “strong buy” with a $40
price target. "They pay a lot of investment-banking fees to Wall Street.”

He adds, "We do our analysis every day based on the information we have. Are we here strictly to
defend companies? That's ludicrous. We're here to provide information to investors. ... Yes, | have

the wrong recommendation on the stock. | don't think my analysis has been as wrong as the stock
has performed."

2s

01300000000168


Nickoloff, Peter

From: Carleton, Norman

Sent: Wednesday, December 05, 2001 2:54 PM

To: Roseboro, Brian; Bitsberger, Timothy; Gross, Jared; Wiedman, Mark; Nickoloff, Peter;
Schultheiss, Heidilynne; Pletrangeli, Fred

Subject: WSJ Aricle on Enron and Mark to Market Accounting

December 4, 2001

Heard o1 Street

‘Mark to Market’ Accounting
Is Under Increased Scrutiny

By JONATHAN WeiL
Staff Reporter of THE WALL STREET JOURNAL

With their industry's pioneer in bankruptcy court, the legions of energy companies that followed
Enron's lead into the go-go world of commodity trading are finding their own profits and accounting
practices under scrutiny as well.

What ultimately triggered the collapse of investor confidence in Enron were its indecipherable
disclosures for related-party transactions, compounded by its admitted financial misstatements and
massive off-balance-sheet liabilities. But many critics say disclosure issues of a different sort dog the
financial statements of most companies that trade electricity, natural gas and the like -- with the
approval of the nation's accounting-rule makers.

At issue is a technique called "mark to market" accounting, under which the Financial Accounting
Standards Board has given energy traders wide discretion to include as current earnings those profits
they expect to realize in future penods from energy-related contracts and other derivative
instruments.

For many energy-trading companies, significant chunks of earnings in recent years have come from
recording unrealized, noncash gains through such accounting entries. Often, these profits depend on
assumptions and estimates about future market factors, details of which the companies don't provide.
And because of the minimal disclosure standards, it is difficult for investors to assess whose
assumptions might be too aggressive, or what market changes might invalidate the assumptions --
and force earnings revisions.

"Whenever there's a considerable amount of discretion that companies have in reporting their
earnings, one gets concerned that some companies may overstate those earnings in certain

situations where they feel pressure to make earnings goals,” says ABN Amro analyst Paul Patterson,
who follows energy-trading firms.

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01300000000314


Separately, U.S. Rep. Billy Tauzin (R-La.), chairman of the House Commerce Committee, Thursday
asked his committee staff members to begin investigating Enron's collapse. Mr. Tauzin, whose
committee has oversight over accounting standards and practices, said he expects to hold hearings
on the matter in the near future, focusing in large measure on Enron's financial misstatements. Mr,
Tabolt said Andersen will cooperate with the committee's investigation.

ime

ma ia

Congressional scrutiny won't be limited to Andersen and Enron either. In a statement Thursday, the
House Commerce Committee's leading Democrat, John Dingell of Michigan, said his focus will also
tum to, among other groups, the Financial Accounting Standards Board, adding that “our accounting
and auditing system and its oversight are seriously broken and need immediate reform.”

Critics of Enron have long complained that Enron was able to aggressively boost its earnings through
loopholes in the board's current standards. For instance, the board has been working on a project for
more than a decade to tighten the rules governing when companies must consolidate certain off-
balance sheet "special purpose entities" like the kinds utilized by Enron that kept billions of dollars of
debt off its balance sheet. And the board says it still isn't close to finishing the project.

Also, over the past two years, as Enron emerged as a highflying symbol of the New Economy, many
investors didn't realize that much of its reported profits were noncash unrealized gains. Those gains
depended on a multitude of undisclosed assumptions about future market factors that were subject to
later revision, such as changes in electricity and natural-gas prices.

At the heart of those gains is an accounting technique that allows energy traders to include as current
earnings those profits they expect to realize from energy-related contracts and other derivative
instruments in future periods, sometimes stretching over more than 20 years, even in situations
where markets aren't well established and quoted prices aren't readily available. To date, the
accounting-standards board has given energy traders almost boundless latitude to value their energy
contracts as they see fit.

Analysts and investors already have begun calling for greater disclosure by other energy traders of
the assumptions underlying their noncash gains. In a research note Thursday, for instance, Goldman

Sachs analyst David Fleischer said, “Investors are likely to be asking much more difficult questions
and to be dissatisfied with less than full answers and anything but radically enhanced disclosures.”

At the accounting-standards board, research director Tim Lucas declined to comment on Enron

132

01300000000251


Since early last week, Enron's share price has plummeted 50%. Last week, it reported a $618 million
third-quarter loss and a reduction in shareholder equity of $1.2 billion. It also disclosed that the
Securities and Exchange Commission is conducting an inquiry into billions of dollars of transactions it
did with entities connected to its former chief financial officer, Andrew S. Fastow, who was replaced
Wednesday,

The draw-down of the credit facilities came as one rating agency, Fitch, put Enron on review for a
possible downgrade, while another, Standard & Poor's, changed Enron's credit outlook to negative
from stable. Moody's Investors Service already has said it is looking at a possible downgrade of
Enron. In order to fall below investment grade, Enron's credit rating would have to fall several
notches.

if that were to happen, however, a host of bad consequences could follow. Together with the sharp
decline in its stock price, a noninvestment-grade rating would throw the company into default on
obligations involving billions of dollars of borrowings. In that event, Enron could be forced to issue
millions of shares of stock to holders of that debt, diluting the value of existing shares. At 4 p.m.
Thursday in New York Stock Exchange composite trading, Enron was down six cents at $16.35.

Liquidity is a key issue for Enron, which handles energy-trading volumes more than triple its next-
biggest competitor, American Electric Power Co. Enron's EnronOnline Internet-based trading
platform has transacted more than $884 billion of trades since it was created in November 1999.

The company’s wildly successful wholesale unit has been dragged down by underperforming assets
elsewhere in the company, chiefly the approximately $6.5 billion of intemational assets such as its
Dabhol power project in India. Raising cash and retiring debt largely is a timing issue. The cash
needs of its trading operation are immediate; it takes time to sell assets, particularly in today's slower
economy.

The company also is suffering from a string of disclosure controversies that have damaged its
credibility, particularly in connection with its dealings with Mr. Fastow, the former chief financial
officer. Internal documents related to one of the Fastow partnerships disclose that Enron also did as
much as hundreds of millions of dollars of business with an entity connected to another company
official, who has since left Enron. While Enron disclosed its Fastow-related transactions in SEC
filings, a computerized search of the SEC's database of public filings produced no reference to this
other employee-related entity known as Chewco.

Chewco was established in 1997 “with approximately $400 million in capital commitments" to buy an
interest in Enron assets, according to one of the partnerships documents. The document didn't
further specify what assets were purchased, and It didn't disclose the financial impact of the
transactions for either Chewco or Enron. Chewco was being run by Michael Kopper, a managing
director in Enron's Global Equity Markets Group, according to the document.

Enron, which has maintained that its complex financial transactions with employee-related entities
were legal and properly disclosed, didn't have any comment regarding Its dealings with Chewco.

Mr. Kopper, who Enron says left the company this year to focus on helping to run the Fastow-related
partnerships, didn't return phone calls. A person at his office in Houston Thursday said Mr. Kopper
was traveling. In response to questions about Chewco, an Enron spokesman would say only that
“Michael Kopper was never an executive officer of Enron.” Mr. Fastow repeatedly has declined
interview requests. He severed his relationships with the partnerships in July.

%»

01300000000173


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, Novernber 05, 2001 12:15 PM

To: Rosebdoro, Brian; Bitsberger, Timothy, Schultheiss, Heiditynne; Nickoloff, Peter; Gross, Jared;
Sharer, James; Cetina, Jill

Subject: OJ: Enron Sr. Unsecured Debt Cut To Triple-8-Minus By Fitch

November 5, 2001

Enron Sr. Unsecured Debt Cut To Triple-B-Minus By Fitch

NEW YORK -- Fitch downgraded Enron Corp.'s (ENE) senior unsecured debt ratings Monday to
triple-B-minus from triple-B-plus, putting the Houston energy and trading giant's credit rating just one
notch above noninvestment-grade or junk status.

In its action, the rating agency was more aggressive than Moody's Investors Service and Standard &
Poor's, both of which lowered Enron's long-term corporate credit ratings one notch last week to Baa2
and triple-B, respectively.

Fitch said its rating action Monday reflects the difficulties Enron faces in managing its liquidity
position in the face of an erosion in investor confidence. This follows the recognition of a substantial
diminution in value of its global merchant investments, which were partly financed with an aggressive
use of off-balance sheet vehicles, the rating agency said.

Enron, though, should be able to manage through this challenging environment, ultimately
recognizing the values of the company's core businesses, Fitch said.

In other rating actions, Fitch lowered Enron's subordinated debt to double-B from triple-B, while
Enron’s preferred stock was lowered to single-B-plus from triple-B-minus. Fitch cut Enron's
commercial paper to F3 from F2.

Fitch also took action on the senior unsecured debt ratings of Enron's pipeline subsidiaries. The
tatings of those units, Northern Natural Gas Co. and Transwestern Pipeline Co., were lowered to
triple-B-minus from single-A-minus. The assets of Northern Natural and Transwestern were pledged
last week to help Enron secure a new $1 billion secured bank facility.

The rating agency said all of the ratings remain on "Rating Watch Negative” status.

Fitch said it would consider further downgrades if Enron was unable to make progress in reducing
debt, if its wholesale marketing and trading business were to show signs of material deterioration, or
if expenses and charges related to the disposition of non-core businesses and investments exceed
present estimations.

A management priority is debt reduction and the exiting of problem businesses. Clearly, these

actions, if completed as envisioned will reduce risk and improve the company's credit profile, Fitch
said.

01300000000202


Nickoloff, Peter

LS

From: Carleton, Norman
Sent: Friday, November 30, 2001 3:44 PM
To: Salladin, Anne; Bair, Shela; Berardi, Steve; Bitsberger, Timothy; Cetina, Jill, Eichner,

Matthew; Gabilondo, Jose; Gross, Jared; Hammer, Viva; Lori Sanatamorena (E-mail);
Nickoloff, Peter; Novey, Michael; Pietrangeti, Fred; Roseboro, Brian; Schultheiss, Heiitynne;
Sharer, James; Whaley, Jean; Wiedman, Mark

Subject: DJ: Enron's Global Reach

Click on icon to see map.

Enron's Global Reach

Es

anne 1 1220012212
Tht

North America

Purchases, markets and delivers natural gas, electricity and other commodities, and runs a broad
range of price, risk management and financing services,

Latin America

Has interests in natural gas, crude oil and products pipelines and a transmission system for the
distribution of electricity.

Europe

Delivers physical commodities, price risk management and financing services; operates several
power plants.

Asia/Pacific

Owns interests in electricity-generating plants and distribution of natural gas liquids; conducts
commodity risk management and finance services.

129

01300000000247


Nickoloff, Peter

From: Carleton, Norman

Sent: Monday, October 29, 2001 11:39 AM
To: Schultheiss, Heidilynne; Nickoloff, Peter
Subject: Enron's CFO's Tie

October 19, 2001

Money & Investing

Enron CFO's Tie to a Partnership
Resulted in Big Profits for the Firm

By REBECCA SMITH and JOHN R. EMSHWILLER
Staff Reporters of THE WALL STREET JOURNAL

A limited partnership organized by Enron Corp.'s chief financial officer, Andrew S. Fastow, realized

millions of dollars in profits in transactions it did with Enron, according to an internal partnership
document.

The partnership, in some instances, benefited from renegotiating the terms of existing deals with the
Houston energy company in ways that improved the partnership's financial positions or reduced its
risk of losses.

Mr. Fastow, and possibly a handful of partnership associates, realized more than $7 million last year
in management fees and about $4 million in capital increases on an investment of nearly $3 million in
the partnership, which was set up in December 1999 principally to do business with Enron.

[enron]

The profits from the deals were disclosed in a financial report to investors in the partnership, LIM2
Co-Investment LP, that was signed by Mr. Fastow as the general partner and dated April 30. In one
case, the report indicates the partnership was able to improve profits by terminating a transaction
early.

The LJM2 arrangement has become controversial for Enron, as shareholders and analysts have
taised questions about whether it posed a conflict by putting the company’s chief financial officer,
who has a fiduciary duty to Enron shareholders, in a position of reaping financial rewards for
representing LJM2 investors in business deals with Enron. |nvestors in LJM2 include Wachovia
Corp., General Electric Co,"s General Electric Capital Corp. and Credit Suisse Group's Credit Suisse
First Boston.

Attention has focused on Mr. Fastow’s partnership activities at a tumultuous time for Enron, which
over the past decade grew enormously by becoming the nation’s biggest energy-trading company.
42

01300000000185


Nickoloff, Peter

From: Carleton, Norman
Sent: ‘Wednesday, December 05, 2001 7:18 PM
To: Cetina, Jit; Bair, Sheila; Berardi, Steve; Bitsberger, Timothy; Eichner, Matthew, Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Senatamorena (E-mail); Nickoloff, Peter; Novey,
Micheel; Pietrangeli, Fred; Roseboro, Brian, Schuttheiss, Heidilynne; Whaley, Jean; Wiedman,
Mark

Subject: FT: Enron probe will examine industry-wide impact

Enron probe will examine industry-wide impact
By Gwen Robinson in Washington and Andrew Hill in New York
Published: December 5 2001 19:22 | Last Updated: December 6 2001 00:03

US lawmakers signalled on Wednesday that investigations into the Enron case would go beyond the
collapse of the energy trader and dig deep into the implications for companies, markets and the
accountancy profession.

Investigators from the House of Representatives energy and commerce committee - one of the most
powerful congressional panels - will meet Enron officials on Thursday in Texas as part of their probe
into the company, which filed for bankruptcy protection on Sunday.

Billy Tauzin, the Louisiana Republican who chairs the committee, said his investigators “intend to be
very aggressive" and would begin hearings next month.

"This is just the beginning,” said an official involved with the hearings. “These issues go way beyond
Enron to securities law and financial markets regulation - and the role of auditors.”

"Too many people were hurt by this," Mr Tauzin said, adding that he wanted to know how Enron

manipulated accounting procedures and would examine the impact of the company’s failure on
energy markets.

Although Mr Tauzin said he could not say right away whether Congress needed to take action, an
official involved with the probe predicted that “at the very least” it would lead to tighter regulation of
accountants and ensure more transparency in commodities trading.

The "Big Five" accountancy firms including Andersen, Enron's auditor, issued a joint statement on
Wednesday that responded to growing criticism over the the quality and objectivity of Andersen's
audits and promised to react to the implications of the Enron collapse.

The energy committee, which conducted a comprehensive investigation into last year's controversy
over defective Firestone tyres on Ford Explorer vehicles, is promising an equally thorough inquiry into
Enron.

The committee's investigators met on Wednesday with the Financial Accounting Standards Board
and senior executives of Andersen. Wednesday's talks with Enron in Texas will centre on the
company's accounting procedures and its relationship with Andersen. The committee this week
asked Enron and the SEC to hand over documents on the company's accounts and the SEC's

investigation.
Michael Oxley, the Republican chairman of the House financial services committee, said on Tuesday
213

01300000000322


of New York, Judge Arthur J. Gonzalez, who will handle the case, approved a series of routine
requests by Enron lawyers to make $48 million of payments on everything from rent at its skyscraper
in Houston to severance for employees who will be laid off,

Enron's plan for bankruptcy seems to be shaping up as a multifront effort. The company first hopes
to calm the markets with its new debtor-in-possession financing, then revive its crippled trading arm
by putting it under the control of a new, credible partner. Chapter 11 bankruptcy protection
temporarily shelters a company from creditors to provide time for the company to reorganize.

Once some assets are sold to generate cash, the plan is to reorganize -- or "skinny down," one
adviser said — into a new, smaller Enron around several core assets, such as its pipeline business.
Enron has agreed to sell its Portland General utility,

The company will have to clear a number of major hurdles. For starters, it will have to convince
creditors they stand to recover more by keeping the company operating, at least for a while, than by
liquidating the company in a fire sale.

According to one bankruptcy lawyer who has been contacted by several creditors, it isn't yet
obvious to creditors “that recoveries will be higher by keeping the company going.”

The list of creditors in the case, the largest bankruptcy filing ever with more than $31 billion in
reported debt and billions more in as-yet unreported off-balance-sheet liabilities, runs to more than
50 pages, and the most powerful of the bunch are expected to maneuver aggressively for control of
the official creditors’ committee. All told, Enron's top 10 bank lenders account for between $7.5 billion
and $8.5 billion of on- and off-balance-sheet debt, one person involved in the workout said.

Among those with the most exposure are J.P. Morgan, Citigroup, Deutsche Bank AG, Credit Suisse
Group's Credit Suisse First Boston, Royal Bank of Scotland Group PLC and Bank of America Corp.,
according to a senior banker involved in the workout, Some of these banks have exposure of as
much as $1 billion, the banker said, in a variety of loans or other forms of credit, including both
secured and unsecured. J.P. Morgan has confirmed its exposure within that range. The other banks
declined to comment, citing client privilege.

“There will be jockeying between and among the bank creditors, the bondholders, and the trade
creditors,” predicted one lawyer who has been contacted by several clients involved in the process.
The creditors who control the committee, which is expected to take as long as several weeks to be
formed, will be able to steer the creditors’ positions in court.

As all of this is going on, the Justice Department has decided to open a criminal investigation into the
company, a person close to the matter said, leading to competition among federal attorneys’ offices
that want to take the lead. Offices in New York, San Francisco, Los Angeles and Houston have all
expressed interest. The probe comes in addition to an SEC investigation into Enron and Arthur
Andersen LLP’s audit work for the company.

Keeping the Lights On

Enron is maneuvering to continue operating as it seeks to reorganize under Chapter 11 bankruptcy
protection. In the latest developments:

169

01300000000287


Mr. Fleischer, whose firm also has served as an investment banker to Enron, calls his holding “a
meaningful investment" that is “not small.” But he disputes any suggestion that his objectivity is
compromised. Mr. Fleischer says his clients “are happy to know" he has a stake in Enron, because it
shows he puts his money where his mouth is.

In his research note Wednesday, Mr. Fleischer called for complete disclosures of Enron's off-balance
sheet partnerships. Despite the resulting difficulty he acknowledged facing in developing financial
models for the company, he wrote that he and many other investors historically "have given Enron
the benefit of doubt because of its strong growth in earnings" and position as an industry leader.

“There's not information to really model this and be able to predict accurately where revenues are
going to come from and where they're going to make their money, but every quarter they do,” he
says. "It's hard to get inside to know all the transactions, but they do deliver.”

CSFB's Mr. Launer also has been a longtime defender of the company, occasionally issuing research
reports to rebut critical stories about Enron in the financial press. On Monday, he wrote that he
expects questions about Enron's partnerships and accounting disclosures to continue, but that he
remains "confident in the businesses and operating growth prospects for [Enron] and an ultimate
recovery in the share price.”

“| know I'm wrong on the stock,” Mr. Launer says. But he says that at these prices, he isn't ready to
throw in the towel because he figures that even in a worst-case scenario — under which he envisions
Enron having to issue as much as $2 billion worth of shares, diluting current holders -- the stock
doesn't have much further to fall.

Clearly, Messrs. Launer and Flesicher aren't alone. “Even in relative terms, analysts remain very
bullish on this stock,” says Chuck Hill, director of research at Thomson Financial/First Call. The
average rating for a stock on Wall Street is 2.2, or slightly shy of a “buy” rating, Enron scores a 1.6.
“This may turn into a classic case of locking the barn door after the bad news is out," Mr. Hill says.

In downgrading the stock this week, Prudential analyst Carol Coale bumped it to "sell" from "buy,"
with a brief stop at "hold." While she is the only analyst to recommend investors sell the stock, she
openly concedes her recent downgrades come “too little, too late.”

Ms. Coale says Enron has been difficult to cover for years, She says the company's disclosure
practices fall far short of ideal, and senior executives are often evasive, even when presented with
direct questions. For instance, she says three weeks ago she asked Enron management if the
company was under investigation by the Securities and Exchange Commission. They said “no,” she
says.

In light of the company’s acknowledgment this week of an SEC "inquiry," she asked Enron about the

previous denial. "They told me it is an inquiry, not an investigation,” she says. An Enron
spokeswoman says the company learned of the SEC's inquiry only last Wednesday.

Write to Susanne Craig at susanne.craig@wsj.com <mailto:susanne.craig@wsj.com> and Jonathan
Weila

01300000000169


seem straightforward enough, Among other things, companies must describe the “information
deemed necessary to an understanding of the effects of the transactions on the financial
statements.” But the nation's accounting-standard setters never have offered any clear guidance on
whether companies’ disclosures should be understandable to a broad audience or merely to
financially sophisticated individuals with specialized training. And even sophisticated investors are
prone to being stumped now and then.

To be sure, the adequacy of a company’s related-party disclosures can be determined only when all
the information about the transactions is out in the open. For its part, Enron -- which is hardly the
only large energy company with complex partnership dealings -- maintains its off-balance-sheet
transactions were legal and properly disclosed. “They comply with reporting requirements,” says
Enron spokeswoman Karen Denne, adding that Andersen was aware of the transactions and
reviewed them. "To the extent that an investor doesn't understand them, they are able to ask
questions." And in the end, she notes, investors who didn't understand the transactions didn't have to
buy Enron stock.

Enron's disclosure practices stand out, however, because they have been a source of complaints for
so long. Even some top-flight accounting professors say they can’t make heads or tails of the
company’s transactions with Mr. Fastow or Enron's motives for entering them. If they can't figure
them out, it raises the question of whether any outsider could.

One thing is certain: The stakes for Andersen could be high. Since Enron's disclosure of the
reduction in shareholder equity, its stock has plunged 67% to $11.30 as of 4 p.m. in New York Stock
Exchange composite trading Friday -- a drop that wipes $20 billion off the company's market value
and potentially exposing Enron and Andersen to massive shareholder liability, Already, Enron's
dealings with the partnerships are the subject of a formal investigation by the Securities and
Exchange Commission. That creates the possibility that Andersen itself could become a focus of the
probe at some point, should regulators find Enron's accounting and disclosure practices deficient.
Meanwhile, the law firm for a special committee set up by Enron's board has hired accounting firm
Deloitte & Touche LLP to help review the partnerships’ activities.

An Andersen spokesman, David Tabolt, says the firm “will continue to cooperate with [Enron's]
special committee, lawyers and accounting advisers" and "will also cooperate with other official
investigations as requested." So far, he says, the SEC hasn't told Andersen it is a subject of the
Enron probe. Beyond that, he declines to comment on Enron, citing client-confidentiality obligations.

How murky are the related-party disclosures in Enron's audited financial statements? Here is 4
summary of a section in Enron's 2000 year-end financial statements describing certain transactions
with the Fastow-operated partnerships. The company said it transferred assets valued at $1.2 billion,
including $150 million in notes payable, 3.7 million restricted Enron shares and the right to receive as
many as 18 million Enron common shares in March 2003, subject to certain conditions. It also
transferred to the partnerships other assets valued at $309 million, including a $50 million note
payable and "an investment in an entity that indirectly holds warrants convertible into common stock
of an Enron equity method investee.”

In return, Enron said it received “economic interests in the entities," $309 million in notes receivable
and an additional $1.2 billion in notes receivable as part of a “special distribution." The disclosure
went on to mention a series of purchases by Enron of "share-settled options from the entities" on
shares of Enron common stock.

The raw numbers may all be there. But “any objective person would be hard pressed to understand
the effects of these disclosures on the financial statements,” says Douglas Carmichael, an

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As a condition of the financing package, Enron will use some of the cash injection to repay a $550
million loan backed by Enron's Transwestern Pipeline, the person familiar with the matter said.

That will allow Enron to use cash flow from that pipeline to finance its operations rather than have it
be part of the bankruptcy estate and thus reserved for creditors.

The structure also allows J.P. Morgan Chase and Citigroup to recoup some of their loan exposure to
Enron since DIP financing is senior to all other claims in bankruptcy court.

Enron's DIP financing was approved by a bankruptcy judge in an initial court hearing late Monday,

The person familiar with the matter said J.P. Morgan Chase and Citigroup will move to syndicate all
of the loan. Disbursement of the last $1 billion is expected in about a month.

Enron, which has filed for bankruptcy-court protection, employs about 21,000 workers, with two-
thirds of the staff in the U.S. and one-fifth in the United Kingdom. The energy trader has employed
7,500 workers in Houston, where it is based.

The company plans to ask a bankruptcy court to provide its workers with medical and other benefits,
plus $4,500 each in severance, the Enron spokeswoman said. She wouldn't elaborate on layoffs at
the company’s U.K. operations.

Enron Europe Ltd. cut roughly 1,100 jobs in the U.K. after its European energy-trading arm last week
sought protection from creditors by appointing PricewaterhouseCoopers as an administrator to
Enron's European holding company.

The U.K. job cuts came as analysts said that the suspension of Enron Europe from trading on a
number of power markets could make it more difficult for the already struggling energy company to
get out of its positions as it seeks to unwind operations.

On Sunday, Enron filed for protection from creditors in a New York bankruptcy court, the biggest
such filing in U.S. history.

The petition came less than seven weeks after Enron began a calamitous fall that led to the collapse
of its once-fofty stock price into penny-stock territory. The decline reflected a loss of confidence in the
company caused by big losses in the third quarter, repeated restatements of earnings and
revelations, now being investigated by the Securities and Exchange Commission, that some of its
employees participated in partnerships designed to keep debt off the balance sheet, but which
produced still more losses.

Besides Enron, 13 major subsidiaries are named in the filing under Chapter 11 of the U.S.
Bankruptcy Code in the Southern District of New York.

Though based in Houston, Enron picked the New York court because it has enough room on its
calendar for a complex case and because it has handled other high-profile bankruptcy filings,
including Armstrong Holdings Inc., Bethlehem Steel Corp. and Iridium LLC, an Enron attorney said.

Simultaneously, Enron has sued crosstown rival Dynegy Inc. for "not less than $10 billion,” accusing
it of wrongfully terminating a merger deal last week that the two firms had reached just two weeks
earlier.

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Nickoloff, Peter

From: Carleton, Norman
Sent: Monday, December 03, 2001 12:12 PM
To: Baw, Sheila; Berardi, Steve; Bitsberger, Timothy; Cetina, Jill; Eichner, Matthew; Gabilondo,

Jose; Gross, Jared; Hammer, Viva; Lori Senatamorena (E-mail); Nickoloff, Peter; Novey,
Michael; Pietrangeli, Fred, Roseboro, Brian; Schultheiss, Heidilynne; Sharer, James; Whaley,
Jean; Wiedman, Mark

Subject: WSJ: Energy Traders Scramble to Pick Up Market Share After Enron's Collapse

December 3, 2001

Energy Traders Scramble to Pick Up
Market Share After Enron's Collapse

By ALEXE! BARRIONUEVO and SILVIA ASCARELLI
Staff Reporters of THe WALL STREET JOURNAL

A half dozen of Enron Corp.'s biggest former rivals are gearing up to grab chunks of the dominant
share the energy concer held in the natural gas and power-trading markets.

But, the benefits could flow more slowly than those companies hope, analysts say, because Enron's
demise likely will put the brakes on the fast-growing energy-trading industry and make some big
energy customers more reluctant to rely on trading firms to guarantee supply and manage risks.
Energy-trading companies play the role of middleman between producers and wholesale purchasers,
moving and delivering commodities and managing price risks for customers.

“Eventually there will be winners, but until then, you will have a lot of turmoil,” says Michael Barbis, an
analyst at research and brokerage house Fulcrum Global Partners LLC. "A lot of players, such as
utilities and hospitals, will be reluctant to sign long-term contracts with these trading companies, after
seeing the best-capitalized player go out of the market."

Enron became a marketing colossus without spending on such hard assets as power plants or
pipelines: instead, it mostly relied on locking up contracts with other parties for supply, capacity and
storage that it would use for its trading operations. Now, the companies most likely to benefit from
Enron's collapse will be those that have strong asset bases, putting investors, customers and
creditors more at ease.

“Right now, the name of the game is credit-quality,” says Paul Patterson, an analyst with Dutch
investment bank ABN-Amro. “A balance sheet that is based upon assets is easier for creditors and
investors to value than one based on intangibles."

When the Enron dust settles, top marketing firms such as American Electric Power Inc., of
Columbus, Ohio; Duke Energy Corp., of Charlotte, N.C.; Williams Cos., of Tulsa, Okla., and Enron's
crosstown neighbors in Houston -- El Paso Corp., Dynegy Corp. and Reliant Energy Inc. - are best-
positioned to grab pieces of Enron's 20% to 25% share of energy-trading volume.

In Europe, where Enron was considered one of the two biggest players in the Continent's nascent

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Write to Alexei Barrionuevo at alexei 5} a
and Silvia Ascarelli at silvia.ascarell i@wsi.com <mai ait: silvia, ascarelli@wsi.co

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Exchange, Enron was down 95 cents at $15.40. Enron has fallen 50% in the past two weeks and is
down 83% from a Sept. 18, 2000, high of $89.63.

Late last week, Enron tapped its existing credit lines, with part of that money being used to redeem
nearly $2 billion of its outstanding commercial paper, or short-term corporate |OUs. Ron Barone of
credit-rating agency Standard & Poor's said he believes that Enron was “getting a bit more
resistance” recently in rolling over its commercial paper as it came due, Thus, Enron probably
decided it would be easier simply to redeem the paper outstanding, he said.

The Enron spokesman Sunday said that paying off the commercial paper and still leaving the
company with an additional roughly $1 billion cash on hand would give it more financial flexibility.

Also last week, credit-rating agencies warned investors they were reviewing Enron's debt and
commercial-paper ratings for a possible downgrade. A lower rating could hamper Enron's core
trading businesses.

Behind the worries among these agencies, in part, is the loss of investor confidence, which one of the
rating companies, Fitch, said in a report last week could impair “Enron's financial flexibility and
access to capital markets, therefore impacting its ability to conduct its business.”

The Enron spokesman said the company's trading partners are doing business with Enron on
“essentially the same terms” as they have in the past. "There has been no significant change in the
credit conditions," he said. Trading partners demanding significantly stricter terms from Enron would
be a sign of further deteriorating confidence in the energy giant's finances. The banks involved in the
negotiations, including J.P. Morgan Chase & Co. and Citigroup Inc., are asking Enron for stricter
covenants on the new credit line than they had asked for in the past, one official said.

Bankers involved with the company say the goal of the new credit line is to show the investment
community that Enron can meet its commitments. “Confidence in this company was lost," said one
bank official involved in the negotiations for a new credit line. "But confidence will be restored.”

Corporations of Enron's size commonly establish credit lines only to demonstrate to the investment
community that in case of an emergency, they have access to cash. In practice, few companies
actually make use of these lines. Thus, drawing down credit lines, while providing immediate cash,
also illustrates the pressure Enron is feeling.

Write to Jathon Sapsford at jathon.sapsford@wsj.com <mailto: ford: j.com> and John

01300000000156


how much creditors might receive if the company does seek bankruptcy-court protection.

Enron spokeswoman Karen Denne said the company is exploring its options and wouldn't comment
on whether it has retained bankruptcy counsel.

The fallout in Asia was felt immediately on Thursday, The biggest news was in Sydney, where Enron
Australia said it was suspending operations pending further developments regarding its U.S. parent.
“We are now waiting for clarification about Enron's situation globally and will advise the local market
once we have received that advice," legal counsel Rob McGrory said.

The announcement followed a warning by Standard & Poor's about counterparty exposure in the
Australian electricity market, citing the overnight downgrade of Enron. “The recent developments
with Enron serve as a further example of the credit risks faced by energy market participants as they
seek to manage their market risks in Australia’s volatile power market," said Laurie Conheady, an
associate director at Standard & Poor's.

Similarly, Enron's presence in South Korea appears to be nearing an end. According to officials at SK
Corp., Enron plans to sell its 50% stake in joint venture energy distribution firm SK-Enron Co, SK-
Enron was formed in 1999, and controls about 25% of South Korea's natural-gas market, according
to the firm's Web site.

Analysts said that Enron had offered to sell its stake to SK Corp., yet the Korean partner said it has
no plans to buy the shares. “We already hold 50% ... we don't need the rest," said a company
spokesman, Daniel Youn.

Enron was also considered a potential buyer of power generation assets from South Korean
govemment-controlled Korea Electric Power Corp. Kepco is looking to sell assets as past of a wider
privatization drive.

Pressure elsewhere in the region was felt primarily in the financial markets. In Tokyo, the value of
money management funds Nikko Asset Management Co., UFJ Partners Asset Management Co.,
Japan Investment Trust Management Co. and Sumisei Global Investment Trust Management Co.,
fell due to their exposure to Enron debt, which amounted to about 40 billion yen ($324.9 million).
Enron news also sparked volatility in the copper and U.S. dollar market, according to traders.

Other financial backers of Enron were negatively effected as well. J.P. Morgan Chase and Citigroup,
which have invested hundreds of millions of dollars in hopes of keeping the Enron-Dynegy deal alive,
saw their stocks fall on Wednesday trading in the U.S. On Thursday morning Citigroup shares posted
slight gains, rising 19 cents to $47.99, while J.P. Morgan Chase shares were flat at $37.50, J.P.
Morgan Chase said in a statement it has about $500 million of unsecured exposure to Enron entities,
including loans, letters of credit and derivatives. It said it also has secured exposures, including $400
million in loans secured by Enron pipelines.

Besides banks and bondholders, dozens of companies, municipalities and utilities in the U.S. that
had signed multiyear power contracts with Enron may be left in the lurch. Over the years, the likes of
retailer J.C. Penney Co., and shopping-mall company Simon Property Group signed on with Enron,
as it undercut local utilities in newly deregulated markets.

-- Rebecca Smith and Robin Sidel contributed to this article.

Write to Jason Booth at jason.booth@awsj.com <mailto:jason,booth@awsj.com>, Henny Sender at
henny.sender@wsj.com <mailto:henny.sender@wsj.com> and Richard B. Schmitt at

irra

01300000000245


the general partner's wealth," according to this document.

In a written statement in response to questions, Enron, based in Houston, said “there never was any
obligation for Enron to do any transaction with LUM. Enron and its Board established special review
and approval processes with its senior management and external audit and legal counsel to ensure
that each transaction with the LJM partnership was fair, in the best interest of Enron and its
shareholders, and appropriately disclosed.”

Mr. Fastow, through an Enron spokesman, declined to be interviewed.

In announcing the third-quarter loss, Enron said the partnership-related write-offs were part of a
larger $544 million charge related to the diminished value of investments in a retail-power business,
broadband telecommunications and technology. In addition, there was also a $287 million write-off
resulting from its investment in Azurix Corp., a water company Enron spun off and then repurchased.
In all, Enron posted a third-quarter loss of 84 cents a share, compared with a gain of 34 cents a
share in the year-earlier period. Revenue rose 59% to $47.6 billion,

At 4 p.m. Tuesday, Enron's stock was up 67 cents a share to $33.84 in composite trading on the New
York Stock Exchange, but remains far below its 52-week high of $84.88. On Monday, the day before
the earnings announcement, Enron stock dropped by about 7%.

[Enron]

In an interview, Enron's chairman and chief executive, Kenneth Lay, said the write-offs were
designed as part of an effort to “find anything and everything that was a distraction and was causing
a Cloud over the company."

The quarterly loss is the latest in a series of setbacks faced by Enron recently after years of almost
unbroken success. There have been mounting problems from expensive moves into the water and
telecommunications businesses.

And there has been a steady stream of executive departures, most notably the surprise resignation in
August of Enron's president and chief executive, Jeffrey Skilling, who said he left for personal
reasons and because of the fallen stock price.

The partnership arrangement involving Mr. Fastow, the highly regarded chief financial officer, first
surfaced in an Enron SEC filing in 1999, but only recently has it attracted Wall Street's concern. In
late July, Mr. Fastow severed his relations with the partnerships, according to a company SEC filing.
Company officials said that move was partly related to questions raised by analysts and large Enron
shareholders.

Little about the inner workings of the LJM partnerships has been disclosed to date. Private
partnership documents reviewed by The Wall Street Journal indicate that Enron agreed to a
partnership arrangement with potentially huge financial rewards for Mr. Fastow.

The LJM Cayman partnership raised a relatively modest $16 million, according to the documents.
The more ambitious LJM2 aimed to raise at least $200 million, the documents show. Among
investors were Credit Suisse Group's Credit Suisse First Boston, Wachovia Corp. and General
Electric Co.'s General Electric Capital Corp. The Arkansas Teachers Fund committed $30 million, of
which $7.4 million had been tapped by late last month. Bill Shirron, a fund manager there, said the
LJM arrangement had “already retumed $6 million to us." It's been “a home run so far,” Mr. Shirron

a7

013000000001390


Nickoloff, Peter

From: Carleton, Norman

Sent: Wednesday, December 05, 2001 2:52 PM

To: Roseboro, Brian, Bitsberger, Timothy, Gross, Jared; Wiedman, Mark; Nickoloff, Peter;
Schultheiss, Heidilynne; Pietrangeli, Fred

Subject: Letters on Berardino’s op-ed

Voices

Enron's Alarm

RE: ("Enron: A Wake-Up Call") Mr. Berardino misses the point. Our financial accounting model is not
broken, it is being abused. Sure Generally Accepted Accounting Principles (GAAP) are complicated,
so is our economy. Focusing on historical performance is what we do in our profession; speculating
on future performance is not. Personal integrity and character are what we should focus on.
Companies that engage in off-balance-sheet transactions to subvert GAAP and mislead the financial
community should be exposed, not praised for creating “sophisticated financing vehicles." Company
executives holding equity positions in partnerships that compete with and benefit from transactions
with their employer corporations are guilty of a clear conflict of interest. They should be discredited
and legally pursued when they put their interests above the interests of the stockholders’, whose
assets they are entrusted to manage. Performing audits for clients like these can only end badly for
auditors.Financial analysts who can't understand complex disclosures should admit it and get out of
the business. Finally, any investor who hears the word "sophisticated" associated with an investment
should immediately substitute the word “speculative,” and adjust their expectations and investment
strategies accordingly.

Robert L. Paretta, Ph.D., CPA

The writer is an associate professor of accounting and MIS at the University of Delaware

Mr. Berardino presents a dispassionate and reasoned response to the titanic misrepresentations of
the financial circumstances surrounding the “sinking” of the good ship Enron. | can only believe that
the style is a attempt to pre-empt outrage from investors and employees. Declaring a need for the
good old boys in the accounting profession to get together on a solution after an $80 billion dollar
“error” understates the nature and magnitude of the crime. If the accounting industry knows how to
reduce the misrepresentations, as stated in the editorial, then why weren't controls put in place long
ago. Compare this situation to safety in manufacturing plants, where laws with teeth assure that
safety issues receive appropriate management attention and capital investment, and get priority over
profitability. Rather than a need for a wake-up call, | would ask: Who audits the auditors?

203

01300000000312


Nickoloff, Peter

From: Carleton, Norman
Sent: Monday, December 03, 2001 2:38 PM
To: Salladin, Anne, Bair, Shella; Berardi, Steve; Bitsberger, Timothy; Cetina, Ji; Eichner,

Matthew; Gabilondo, Jose; Gross, Jared; Hammer, Viva; Lori Senatamorena (E-mail);
Nickoloff, Peter; Novey, Michael; Pietrangeli, Fred; Roseboro, Brian; Schullheiss, Heidilynne;
Sharer, Jarmes; Whaley, Jean; Wiedman, Mark

Subject: DJ: Enron Canada To Ask Court To Enforce Energy Contracts

December 3, 2001

Enron Canada To Ask Court To Enforce Energy Contracts

By Dina O'Meara
Of DOW JONES NEWSWIRES

CALGARY -- Enron Canada Corp. will ask an Alberta court Wednesday to prevent its trading

counterparties from exiting their contracts for 30 days, according to documents obtained by Dow
Jones Newswires.

The action is needed to ensure Enron Canada - which wasn't included in Enron Corp.'s (ENE) filing
for bankruptcy-court protection Sunday - can continue to operate, Rob Milnthorp, president and CEO
of the Calgary-based company, said in a Dec. 2 letter to counterparties.

"Enron Canada is solvent and is able to continue to pay its obligations as they become due, provided
the arms-length counterparties who have entered into contracts with us continue to perform their
obligations,” Milnthorp said.

Enron Canada first sought a stay from the Court of Queen's Bench of Alberta on Friday, but was
ordered first to notify its counterparties.

If the court doesn't grant the stay, Enron Canada may request an order appointing a liquidator under
Canadian law, a lawyer for Enron Canada said in a letter to the court.

158

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specifically, But he said he expects the board will face increased calls to revise its standards for
consolidations of affiliated entities and its disclosure requirements for companies reporting unrealized

gains from derivative contracts.

Write to Jonathan Weil at jona

01300000000252


Although Meade said it was no secret that businesses such as Azurix and broadband services were
experiencing difficulties, the charge "certainly calls into question (Enron's) ability to add to their
successful" core wholesale energy business, he said. "They have invested in steel and pulp and
paper, and we have no indication that they will create value in these businesses.”

Enron shares were recently trading at $33.79, up 62 cents, or 1.9%, which is down from its intraday
high of $34.90.

In the wake of the departure of Enron's Skilling, the company had promised to provide more detail in
its earnings reports, and the third quarter was its first chance to put the plan in action.

Many believe Enron delivered on the promise. The company broke down the reporting of its
wholesale services business into two segments, Americas and Europe and other commodity markets.

In the Americas, third-quarter income before interest, minority interests and taxes rose 31%, driven
by a 6% increase in natural gas volumes and 77% surge in power volumes. In Europe and other
commodity markets, Enron said low volatility in the gas and power markets caused profitability to
remain flat.

However, Enron stopped providing detail about the value of contracts it is signing in its retail services
segment, where third-quarter income before interest and taxes rose to $71 million from $27 million a
year ago.

J.P. Morgan Chase analyst Anatol Feygin said the detail was "a very good metric" to measure future
earnings potential.

Others who follow the company were also pleased with Enron's changes.

"There was clearly a need to increase the level of transparency," said Glen Hilton, manager of the
Montgomery New Power Fund, which has 2% of its approximately $100 million in assets invested in
Enron. “This is @ pretty good step in the right direction.”

The third quarter also marked the first time Enron broke out its global assets into a separate
category, and the company provided additional information about its pipeline business.

Still, Enron investors and analysts continue to be concerned about the potential for future charges
because of continuing losses in Enron's broadband services unit and other uncertainties.

Montgomery Asset Management's Hilton said the third-quarter charge is "clearly not the last.”

During the company’s conference call, Enron's Lay agreed uncertainty remained at broadband
services as well as with the lingering issues related to the California power crisis, and in India, where
Enron is locked in a dispute with Dabhol Power Co.'s sole buyer, the Maharashtra State Electricity
Board. However, Lay said charges weren't needed for these areas because Enron's exposure to
California is "adequately reserved,” and it is “actively pursuing” its legal remedies in India.

At Enron Broadband Services, third-quarter losses before interest and taxes widened to $80 million

from $20 million a year ago, reflecting lower investment-related income and lower operating costs,

Lay said the broadband market conditions continue to be hurt by the "lack of creditworthy

counterparties.”

UBS Warburg analyst Ronald Barone said he is concerned by the cash-burn rate of the unit. Enron
cr)

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