Enron (ENE:NYSE - news - commentary - research - analysis) held a special conference call Tuesday to address investor concerns that have weighed heavily on its stock.

But worries may persist after the energy trader offered few new details and the CEO publicly sparred with a gadfly investor over a shadowy off-balance sheet transaction.

The transaction that has drawn most attention in the past week is a complex financing that Enron entered into with a partnership called LJM2, which was led by Enron's finance chief Andrew Fastow. Terminating this arrangement led to a $1.2 billion equity reduction in the third quarter. Monday, Enron stock plunged 20% after the company said the Securities and Exchange Commission is probing "related party transactions." Executives declined to respond to questions about Fastow's role in the LJM2 partnership on the Tuesday call.

Another key issue is the impact of the equity reduction. The company said on the call that its share count would decline by 60 million in the fourth quarter, due to the termination of the LJM2 financing. But CEO Ken Lay said the company wouldn't be increasing its earnings guidance of $1.80 a share for 2001 and $2.15 for 2002.

Steepening Enron's slide accelerates

When a share count drops, earnings per share should normally increase, assuming the earnings number stays constant. The 60 million shares are equivalent to about 6.5% of the company's diluted total in the third quarter. As a result, Enron should have raised its per-share profits forecast by about that much, assuming constant earnings.

When asked on the call if earnings per share guidance would be increasing, CEO Lay replied that the company had previously increased its guidance for this year. He then affirmed the 2002 number.

Now, to be fair, Enron may not be forecasting lower earnings. The planned reduction in shares may simply bring the total share count back close to a level in the fourth quarter and 2002 that analysts had originally expected. Notably, the share count in the third quarter jumped by 20 million, meaning a fourth-quarter reduction might not change matters that much. Alternatively, Enron may beat fourth-quarter estimates by 6.5%; perhaps the company has simply chosen not to increase guidance at this stage, given uncertainties in the economy. In any case, more clarity on this matter is clearly needed.

Calls to Enron weren't immediately returned. The stock edged up 2% Tuesday after falling nearly 40% since last week amid worries about complex off-balance sheet deals.

The call, arranged after Enron's Monday plunge, contained a lot of queries about two trusts, called Marlin II and Whitewing, against which Enron borrowed some $3.4 billion. Lay became testy after questioning by Richard Grubman of Boston-based hedge fund Highfields Capital Management. Grubman, who was called an "a--hole" by Enron's former CEO Jeff Skilling on an April conference call, was trying to find out the value of water assets held by Marlin II. The optimal way of paying back money borrowed through the trust is to sell the water assets.

Grubman's line of questioning implied that the Marlin assets were worth only about $100 million, meaning Enron would have to find about $900 million to pay off the Marlin II-related debt. Grubman arrived at $100 million after factoring in what he saw as the effects of a third-quarter writedown to water assets, some of which are included in Marlin II.

Lay disputed the $100 million number. At one point, he accused Grubman of driving Enron's stock down and monopolizing the Tuesday conference call. In the middle of Grubman's comments, Lay told the call operator to go to the next caller.

Grubman didn't immediately return a call seeking comment.

If Enron has to find $900 million, this can be done by issuing stock or raising cash on its balance sheet. If the latter route is taken, Enron says it's likely to use asset sales to generate the cash. Enron executives said liquidity would be sufficient and detailed at least $3.35 billion in available credit lines.

But if Enron's debt-to-capital ratio exceeds 65%, the covenants on some of those lines are broken. After the $1.2 billion equity writedown and other charges taken in the third quarter, that ratio is probably about 50%-55% (Enron hasn't released a third-quarter balance sheet to arrive at an exact calculation). It would take $3 billion in further writedowns or charges to push Enron's debt-to-capital ratio up to 65%.