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

practice was common in all trading areas of the Company. One natural gas deal was adjusted in the
4thQ 00 to create income of $20 million. This was reversed in the 1stQ 01. Because most DSM
deals were losing money when their curves were re-marked, Enron had to keep signing new contracts
each quarter to show a profit – what a DSM manager described as "feeding the beast."
538. Although mark-to-market created very attractive earnings for Enron, actual cash flow
was anemic compared to reported earnings because the cash stream was only coming in
incrementally over the life of the contract, or in the case of the assets, not until the asset was actually
sold. In some contracts, Enron actually experienced net cash outflows as EES would actually pay
customers to win contracts, as alleged herein. To compensate for the insufficient cash flow, Enron
devised a Contractual Asset Securitization Holding trust (also referred to as "CASH"), which is
essentially the same as factoring receivables. In essence, Enron would sell – or monetize – its
various contracts to third parties, typically banks, and would then transfer these cash payments to the
banks as Enron received the regularly scheduled payments from the counterparties.
539. Because Enron was recognizing earnings for long-term contracts in a single quarter
when a contract was signed, it forced Enron to close more and more long-term deals every quarter
in order to maintain profitability and growth. But doing this forced Enron into ever more aggressive
and riskier postures, culminating in huge accumulations of off-balance-sheet debt, contingent
liabilities (such as the LJM and Raptor partnership transactions) and, by early 01, greatly diminished
opportunities to re-finance and re-structure old deals and create new deals because Enron had
effectively saturated the capital markets with its transactions in 97, 98, 99 and 00.
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