Case 3. (Learning Objectives 2, 3, 4, 5: Evaluating financial position and profitability)

At December 31, 2000, Enron Corporation reported the following data (condensed in millions):

During 2001, Enron restated company financial statements for 1997 to 2000, after reporting that some data had been omitted from those prior-year statements. Assume that the startling events of 2001 included the following:
■ Several related companies should have been, but were not, included in the Enron statements for 2000. These companies had total assets of $5,700 million, liabilities totaling $5,600 million, and net losses of $130 million.
■ In January 2001, Enron’s shareholders got the company to give them $2,000 million of 12% long-term notes payable in return for their giving up their ordinary shares. Interest is accrued at year-end.
Take the role of a financial analyst. It is your job to analyze Enron Corporation and rate the company’s long-term debt.
Requirements 1. Measure Enron’s expected net income for 2001 in two ways:

a. Assume 2001’s net income should be the same as the amount of net income that Enron actually reported for 2000. (Given)

b. Recompute expected net income for 2001 taking into account the new developments of 2001. (Challenge)

c. Evaluate Enron’s likely trend of net income for the future. Discuss why this trend is developing.
Ignore income tax. (Challenge)
2. Write Enron’s accounting equation in two ways:

a. As actually reported at December 31, 2000.

b. As adjusted for the events of 2001. (Challenge)
3. Measure Enron’s debt ratio as reported at December 31, 2000, and again after making the adjustments for the events of 2001.
4. Based on your analysis, make a recommendation to the Debt-Rating Committee of Moody’s Investor Services. Would you recommend upgrading, downgrading, or leaving Enron’s debt rating undisturbed (currently, it is “high-grade”)? (Challenge)

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Total assets....... $65,503 Total liabilities.......... 54,033 Shareholders' equity. 11,470 Net income, as reported, for 2000.. 979