Footnote 8

160. There was nothing inherently wrong with MTM accounting as such. As the EnronExaminer noted, “Setting aside valuation abuses, the problem was not that Enron used MTMaccounting, but rather that Enron resorted to financial engineering to address the effects of MTMaccounting.” Exam. II at 24 n.63. In fact, MTM accounting was a potent generator of earnings,earnings Enron could recognize on its financial statements long before the activities it was valuingactually generated cash. MTM accounting was such a successful earnings generator that byDecember 31, 2000, $22.8 billion – or 35% – of Enron’s total balance sheet assets were accountedfor using MTM accounting.b. Enron’s credit rating became vitally important.161. Enron’s use of MTM accounting grew as Enron discovered new ways to realize itsbenefits. Over time, Enron made huge investments in new technologies, as well as in businessespotentially capable of using those technologies, neither of which generated immediate earnings. Notsurprisingly, by mid-1999, Enron (in all its parts) had grown into a “voracious consumer ofcash” – cash it did not have. As an analyst at JP Morgan explained at that time:Unlike the typical domestic electric utility, ENE is not a cash flow story. It has notinvested in infrastructure during the past 100 years in order to rest on its depreciationlaurels. It is investing vigorously in its future. As such, operating cash flow is eatenup by the need for working capital and capital expenditures. Beyond that, ENE’sequity investments need to be funded via bank debt, debt and equity capital markets,and asset divestitures.JP Morgan Securities, Inc. Company Report on Enron Corp., July 9, 1999 at 7 (JP Morgan SecuritiesReport) (quoted in Exam. II at 17 n.47).162. Enron’s need for cash made Enron’s credit rating critically important. As explainedin Enron’s 1999 Annual Report: “Enron’s continued investment grade status is critical to thesuccess of its wholesale business as well as its ability to maintain adequate liquidity.” Enron’sgrowing emphasis on trading also implicated Enron’s credit rating. Absent a favorable rating, Enron604041v1/007457-40-