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

dollar contracts which allowed it to exceed Enron's internal forecasts and, later, that this division had
turned profitable in the 4thQ 99 and was achieving substantial gains in its profitability thereafter.
38. However, in fact, EES was actually losing hundreds of millions of dollars. This was
because in order to induce large enterprises to sign long-term energy management contracts and
"jumpstart" this business so it could appear to obtain the huge contract volumes Enron was
promising, Enron was entering into energy management contracts which it knew would likely result
in huge losses. Worse yet, many of these contracts required Enron to make large up-front
expenditures for more efficient energy equipment, etc., which only served to exacerbate Enron's
ever-increasing cash shortfalls. However, by the misuse and abuse of mark-to-market accounting,
Enron grossly overvalued the ultimate value of these contracts and created greatly inflated current
period profits from transactions which generated little, if any, current period cash, and which Enron,
its accountants and lawyers knew would likely actually result in long-term losses. In order to conceal
the true nature of the large, multi-million dollar losses being suffered by EES, Enron moved those
losses over into its much larger wholesale energy operation and covered up the losses there by the
abuse of mark-to-market accounting and phony hedging transactions with SPEs. As a letter written
in 8/01 to Enron's Board by an EES manager stated:
One can only surmise that the removal of Jeff Skilling was an action taken by
the board to correct the wrongdoings of the various management teams at Enron ....
(i.e., EES's management's ... hiding losses/SEC violations).
* * *
... [I]t became obvious that EES had been doing deals for 2 years and was
losing money on almost all the deals they had booked.
* * *
... [I]t will add up to over $500MM that EES is losing and trying to hide in
Wholesale. Rumor on the 7th floor is that it is closer to $1 Billion.... [T]hey decided
... to hide the $500MM in losses that EES was experiencing.... EES has knowingly
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