Enron Corp. - University of California | Office of The President

ecognized a multi-million dollar profit when the deal closed, even though it was known this deal
would likely lose money for EES. When CitiGroup and other money-losing EES deals were
discussed inside EES, people said "EES always sells at a negative"; and
(iv) In connection with EES's huge Eli Lilly deal – $1.3 billion over 15
years announced in 2/01 – the contract called for Enron to provide Lilly its commodity energy needs
($595 million), plus operation, maintenance and repair ("OMR") ($510 million), and demand-side
management – DSM – ($195 million). Enron recognized over $40 million of the commodity portion
of the contract as revenue in the 1stQ 01 without any basis in fact. A special $50 million cash
"special distribution" payment to Lilly, to be paid on 2/23/02, related to Enron's DSM savings
anticipated for Lilly over the course of the contract. But to provide the DSM to Lilly – making
Lilly's facilities more energy efficient – Enron first had to spend $94 million to upgrade Lilly's plants
in the hope that it would recoup large energy savings as a result of modernizing the Lilly plants.
Moreover, to realize OMR savings, Enron had to train and deploy 250 workers to replace Lilly
personnel. For Enron to ever make a profit, it had to recover its up-front investment – $50 million
in cash to do the deal, $94 million for facility upgrades, and $24 million in labor costs (training and
transfers). And Enron had to pay Lilly if the anticipated savings fell short of projections. For Lilly,
the Enron EES contract was a win-win situation: all its factories would be upgraded at no cost, a new
work force would be hired and trained at substantially lower labor costs to Lilly, plus it got $50
million up-front cash just to sign the contract. Even though Enron claimed the Lilly deal was a
$1.3 billion deal, it was actually only worth $267 million because Enron did not disclose that to win
the Lilly contract it had to invest $168 million up-front, and was, in fact, a contract on which Enron
would suffer a loss.
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