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

(a) Enron Guarantee Fee
443. Enron guaranteed the $240 million unsecured subordinated loan by Barclays to
Chewco in 12/97. In exchange, Chewco agreed to pay Enron a purported guarantee fee of $10
million up front (cash at closing) plus 315 basis points annually on the average outstanding balance
of the loan. This fee was not calculated based on any analysis of the risks involved in providing the
guarantee, but rather it was calculated based on the beneficial financial statement impact it would
have for Enron. During the 12 months that the subordinated loan was outstanding, JEDI, through
Chewco, paid Enron $17.4 million under this fee agreement. Enron characterized these payments
as "structuring fees" and recognized income from the $10 million up-front fee in 12/97. These were
not in fact "structuring fees," but instead really amounted to improper transfers from one Enron
pocket to another. Pursuant to GAAP, they should never have been recognized.
(b) "Required Payments" to Enron
444. The 12/97 JEDI partnership agreement required JEDI to pay Enron (the general
partner) an annual management fee. Pursuant to GAAP, Enron was allowed to recognize income
from this fee only when services were rendered. See FASB Statement of Concepts No. 5, 83-84.
In 3/98, however, Enron and Chewco amended the partnership agreement to require that 80% of the
annual management fee was to be a "required payment" to Enron. Although this amendment had no
effect on the amount payable to Enron, Enron used it to accelerate the recognition of revenue. As
of 3/31/98, Enron recorded a $28 million asset and recognized $25.7 million in income.
(c) Recognition of Income from Enron Stock
445. From the inception of JEDI in 93 through the 1stQ 00, Enron picked up its contractual
share of income or losses from JEDI using the equity method of accounting. JEDI carried its assets
at fair value, and changes in fair value of the assets were recorded in JEDI's income statement. Since
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