Enron_and_his_SPEs - I. BACKGROUND: ENRON AND SPECIAL...

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BACKGROUND : ENRON AND SPECIAL PURPOSE ENTITIES During the l ate 1 990s , Enr on gre w r a pi d ly an d m o ve d in t o areas i t be li eved fi t it s basic business plan: buy or develop an asset, such as a pipeline or power plant, and then expand it by building a wholesale or retail business around the asset. During the period from 1996 to 1998, we are told, approximately 60 % of Enron's earnings were generated from businesses in which Enron was not engaged ten years earlier, and some 30% to 40 % were generated from businesses in which Enron was not engaged five years earlier. Much of this growth i n volved large initial capital i n vestments tha t were not expected to generate significant earnings or cash flow in the short term. While Enron believed these investments would be beneficial over a period of time, they placed immediate pressure on Enron's balance sheet. Enron already had a substantial debt load. F unding the n e w in v e s tment s by iss u ing ad diti ona l de b t w as unattr a cti v e because cas h flow in the early years would be insufficient to service that debt and would place pressure on Enron's credit ratings. Maintaining Enron's credit ratings at investment grade was vital to the conduct of its energy trading business. Alternatively, funding the investments by issuing additional equity was also unattractive because the earnings in the early years would be insufficient to avoid "dilution' U -- that is, reducing earnings per share. One perceived solution to this finance problem was to fin d outside investors willing to enter into arrangements that would enable Enron to retain those risks it believed it could manage effectively, and the related rewards. These joint investments typically were structured as separate entities to which Enron and other investors contributed assets or other consideration. These entities
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Enron_and_his_SPEs - I. BACKGROUND: ENRON AND SPECIAL...

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