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Enron Inflated Assets Of Driller, Sources Say

Sep 21, 2002 | The Houston Chronicle

The reserves of an oil and gas subsidiary that is now one of Enron's most valuable remaining assets were regularly overestimated to help the company inflate its earnings, sources have told the Houston Chronicle.

Most of the wrongdoing unearthed so far at Enron concerns the off-the-books partnerships that existed largely on paper. But such ephemera weren't Enron's only means of fattening the bottom line.

Several former employees told the Chronicle that Enron fabricated profits by regularly inflating the assets of Mariner Energy Inc., a deepwater driller.

"Mariner was referred to as a honeypot, where people would go to when quarters were tough," said a former employee of Enron's watchdog Risk Assessment and Control Group. "Everyone knew that Mariner would turn out to whatever they wanted it to be."

Mariner is on a list of assets Enron has put up for bids to compensate creditors in its bankruptcy. It now values the company at $275 million, but in Mariner's 2001 annual report it was said to be worth $363 million.

That's more than twice the $185 million Enron paid in 1996 for a 96 percent stake in Mariner, then known as Hardy Oil & Gas USA Inc., headquartered in a Houston suburb.

The value of Mariner, and other oil and gas assets, was calculated by an Enron unit called Energy Capital Resources.

In 2000, the price of natural gas was rising and so were the estimated gas reserves under Energy Capital Resources. Most of the added value came from Mariner.

Several former Enron employees familiar with the valuation process -- all of whom asked not to be identified, out of fear of retaliation -- now say that much of the increase was nothing more than a deliberate overvaluation of the gas reserves and other assets.

The overvaluation was accomplished through an accounting method known as mark-to-market, which allowed estimated future gas sales to be reported as current profits.

When Mariner's assets were inflated, Enron would mark them to market as higher projected gas revenues, former employees said.

One former employee said Mariner was overvalued $100 million to $150 million in 2001.

Another former employee said that although Mariner was not one of Enron's largest holdings, it was one of the largest that was marked to market.

"It was big, relative to other things that might have been valued," he said. "Mariner was small compared to the international deals, but international deals typically are not marked to market."

Analysts were pressured to come up with estimates that were highly improbable, the former employees said.

Gas wells run out quickly, so money made on the first well is usually invested in another well, said one former employee who worked in the watchdog RAC. Thus, volume assumptions were often made on the basis of wells to be drilled and gas found in the future, he said.

"That's what could be manipulated the easiest," he said.

The asset inflation continued through 2000, when gas prices climbed from $2.28 per thousand cubic feet to more than $9 at year's end, adding to Enron's asset strength, said another former employee with access to those valuations.

"Their total goal was to make sure the portfolio wouldn't decrease," the employee said.

When gas prices began falling in 2001, dropping from $9.80 per thousand cubic feet in January to $1.74 in October, Energy Capital Resources should have written down the value of its stake in Mariner.

Instead, it simply inflated the estimated volume of gas reserves, former employees said.

"I basically knew that the directions came from above, basically from the top of the company," one of the employees said. "The pressure was to maintain the value of the portfolio.

"They weren't real earnings, they were paper earnings."

The group questioned the gas-reserve estimates, but pressure from above made it clear that careers were at risk if the numbers were not approved, several employees said.

A former Enron employee who had dealings with RAC employees said, "They were overruled from above. Even the vice presidents in the group were given orders from above. They were told, `That's too bad, the company needs to make earnings and we cannot take a hit.' "

Former employees confirmed that RAC was under constant pressure to approve questionable deals and valuations. RAC found it difficult to veto those transactions because the company was dominated by traders and dealmakers, several former employees said.

"It was difficult to say no. You risked your career. This was the culture Skilling created," a former RAC employee said, referring to former Enron Chief Executive Officer Jeff Skilling.

Energy Capital Resources was headed by two men Skilling brought in to co-manage the unit -- Scott Josey and C. John Thompson.

Josey, who now heads Mariner, did not respond to requests for comment.

Thompson would not comment for this story.

To avoid being blamed for questionable asset values and unworkable deals, RAC came up with a system that computed a range of possible values. For example, RAC once estimated Mariner's worth at between $80 million and $350 million, a former RAC employee said.

That system left management free to take the higher number.

Energy Capital Resources, like all units in Enron, was required to produce quarterly income statements, and managers' bonuses depended on the reported earnings.

If the value of Mariner gas reserves had been valued down when gas prices dropped in 2001, the bonuses would have evaporated, employees said.

"They would write an asset up but wouldn't write it down," one of the employees said.

Robert E. Henderson, who headed Mariner until mid-2001, said overvaluing Mariner's assets would explain why Enron shelved its plans to make Mariner a publicly traded company.

"The last thing they would have wanted to do was take us public because that would have meant a write-off,'' Henderson said.

"I think Enron pushed the envelope on everything," the former Mariner chairman said, recalling some ill-fated Enron deals. "If they did that, if that was the mindset, there is no telling what they did with the deepwater assets" owned by Mariner.

"You can get a big range of assets on deepwater assets," he said.


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