SACRAMENTO, Calif. - You wouldn't know it now, but just over a year ago, Enron Corp. was virtually a poster child for CalPERS' pioneering alternative investments program.
Indeed, Enron was the first corporation with which the alternative investments team at the $144 billion California Public Employees' Retirement System, Sacramento, chose to form a partnership.
In toto, the pension fund invested more than $400 million in two joint ventures with Enron, earning double-digit returns. In addition, the pension fund owns 3 million shares of Enron stock through various index strategies.
Now, the giant pension fund might be squaring up for a legal battle with Enron, which is fighting for survival after filing for reorganization under Chapter 11 of the Federal Bankruptcy Code.
The second joint venture has been frozen since last year, and the value of CalPERS' Enron shares has plunged 99% since their 52-week peak of $256 million.
On Dec. 17, CalPERS' investment committee will debate its legal strategy toward Enron. All options are on the table, including filing a lawsuit, joining in a suit filed by others, or joining the bankruptcy committee, said Brad Pacheco, a CalPERS spokesman.
Others enter fight
Other investors already have jumped into the fray: Amalgamated Bank, New York, has charged that Enron executives and directors pocketed $1.1 billion from the sale of Enron stock over the past three years, and wants other institutional investors join its suit. And other pension funds, including the $112 billion New York Common Retirement Fund, Albany, reportedly are considering suing Enron.
Only a year ago, however, relations between the giant pension fund and the Houston energy power were rosy.
Andrew Fastow, Enron's then-chief financial officer, and Shirley Huddler, the Enron official dedicated to the CalPERS relationship, "have made CalPERS and the system hundreds of millions of dollars in profits over the last two years," Rick Hayes, now head of CalPERS' alternative investments program, told the CalPERS investment committee last fall.
Indeed, CalPERS' 1998 $80 million co-investment with Enron to purchase three New Jersey power plants likely was the single highest-returning investment made by the fund's alternative investment program, generating an internal rate of return of 5,000% after the plants were sold later to El Paso Power Co.
And CalPERS officials were excited then about investing in Enron's latest initiatives, including its now-failed effort to create a market for trading bandwidth capacity. "We believe... this is the future of the Internet," Mr. Hayes told the committee, according to a transcript of the Oct. 16, 2000, meeting.
CalPERS entered its first corporate partnering program with Enron in 1993, forming the first of two joint ventures that produced double-digit returns for the California pension fund.
The idea: CalPERS and Enron would ante up an equal of amount of assets into funds that invested in energy companies. This way, CalPERS benefited from Enron's expertise in the industry, while Enron was able to keep these more speculative ventures off its books.
In fact, of the $60 billion in direct investments Enron had as of a year ago, $27 billion represented ventures with other partners, Mr. Fastow told the CalPERS investment committee, according to a transcript of the October 2000 meeting.
"But, as a public company, we tend to have to worry about short-term financial reporting," he said. "So one thing we're concerned about is our credit rating." Credit quality was critical to Enron's running its market in energy.
Mr. Fastow's management of outside partnerships with Enron drew heavy criticism when revealed this fall and ultimately led to his ouster from the company.
In the first joint venture, known as the Joint Energy Development Investment program, or JEDI, CalPERS and Enron each ponied up $250 million. The joint venture was closed in 1997, with CalPERS racking up a net annualized internal rate of return of 22.2%.
Following on the heels of that success, the two giants formed a successor joint venture, JEDI II. This time, CalPERS and Enron each committed $500 million. Of that amount, CalPERS still had invested $156.5 million as of last June, when pension officials pulled the plug on the fund because of the uneven outlook for energy projects in California.
In the meantime, however, CalPERS has chalked up a 62% annualized gain on realized investments since the joint venture's inception in January 1998.
The investments had been so successful that staff amended the structure of the JEDI II agreement, allowing CalPERS to participate in Enron's broadband and Net Works units, where Enron officials sought to take "old economy" companies and create commodity-type markets for the products.