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

* * *
The deal enabled Enron to book a sale and avoid recording a loss on the dark
fiber assets, whose value in the open market had dropped far below the price on
Enron's books.
531. One dark fiber deal was with LJM2. In 6/00, Enron sold dark fiber optic cable for
a price of $100 million to LJM2. LJM2 paid Enron $30 million in cash and the balance in an
interest-bearing note for $70 million. Despite the fact that the dark fiber was not worth anywhere
near $100 million, Enron recognized $67 million in pre-tax earnings in 00 related to the asset sale.
Another deal with LJM occurred in the 3rdQ 00 worth more than $300 million. This deal did not
follow normal protocol as even network developers and traders did not learn about the deal until
after the fact. The sole reason for the deal was for Enron to make its numbers.
532. Additionally, broadband traders actually traded among other Enron entities, and
turned a single broadband transaction into eight just to show the Street that the volume of deals was
increasing. One former employee commented, "It's more than double accounting. One transaction
they break down into four local loop deals, plus two long haul deals, plus two storage deals."
F. Enron's Abuse of Mark-to-Market Accounting
533. To improperly and prematurely accelerate revenue recognition, Enron grossly abused
mark-to-market accounting on many of its energy trading contracts and broadband transactions.
534. Under conventional accounting, energy companies record revenue from long-term
contracts as the revenue is earned over the contract period. Under mark-to-market accounting
however, in certain specified circumstances, revenue to be received under a long-term contract
(discounted to present value) may all be recognized up front. Pursuant to GAAP, as set forth in EITF
No. 98-10, Accounting for Contracts Involved in Energy Trading Risk Management Activities, a
non-derivative energy trading contract is "mark-to-market" with gains and losses included in
- 365 -