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

(1) Eli Lilly and Other Improper Transactions
540. One example of Enron's improper abuse of mark-to-market accounting was its
accounting for a demand side energy deal with Eli Lilly (a company of which Lay was a board
member), in which Enron improperly accelerated $44 million in income.
541. On 2/26/01, Enron proudly announced a $1.3 billion, 15-year agreement between Eli
Lilly and EES, a subsidiary of Enron, in which EES agreed to provide energy and business-related
services to Eli Lilly. What Enron improperly failed to disclose however, was that to win the
contract, Enron had to pay and invest $168 million up-front, and that Enron knew it would lose
money on the deal. The contract called for Enron to pay Lilly $50 million up-front to get the deal,
spend another $94 million out of its own pocket to upgrade Lilly's facilities, and spend another $24
million to hire and train Lilly's employees.
542. Despite the fact that Enron managers knew that the Lilly contract would actually lose
money, Enron recognized approximately $44 million of the energy supply portion of the contract as
revenue, by inappropriately employing mark-to-market accounting, in the quarter the deal was
signed. In fact, as The Washington Post reported on 2/18/02:
Eli Lilly and Co., the Indianapolis pharmaceutical manufacturer, signed a $1.3
billion contract in February 2001 turning all its energy requirements over to Enron
for 15 years. But Enron paid Eli Lilly $50 million upfront to win the deal, according
to a former senior executive of Enron.
Eli Lilly spokesman Ed West confirmed that Enron had made an advance
payment but would not disclose the amount for business confidentiality reasons.
"We looked at it as Enron backing up their words with cash," he said.
Such upfront payments were not unusual, said Glenn Dickson, a former
EES director of asset operations. "It was fairly common on the really big deals to
pay the customer, to lose money, in effect, on the contract, whether you were
paying the customer or losing money you were charging less than it really cost."
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