Anxious Houston-based employees Friday were waiting for formal news that their employer, Enron Corp., had filed for bankruptcy, expected to be the largest in U.S. history, and also to learn whether layoffs will begin in the United States as they have in Europe. Across the country, others kept an eye on whether Enron would file a lawsuit against its short-term merger partner Dynegy Corp. for backing out of the transaction last week. Meanwhile, companies that had once dealt with the former trend-setting energy trader continued tallying their own expected losses should Enron go under, and analysts began looking at the pieces, attempting to comprehend and explain a situation gone terribly wrong.

Rumors abound as to when Enron may file for bankruptcy, with most pointing to early Monday or Tuesday, as the company attempts to pull rabbits out of its threadbare hat. Though it could not be confirmed, one rumor suggested Enron was negotiating with its banker consortium, led by JP Morgan Chase Co. and Citibank, to take over its once untouchable trading portfolio, the notional “book” of energy and commodity trading positions and undoubtedly the company’s most valuable asset.

Sources, however, said it was too late for other parties to do due diligence, and besides the book was already unwinding as companies were beginning to cancel transactions. Some financial institutions that can ill afford to see Enron’s trading operations unveiled in bankruptcy court “were complacent,” the source said. “They thought Dynegy was going to pull their chestnuts out of the fire. It was a bona fide offer with a viable partner. But, once it fell apart and the ratings dropped, it was too late” to do anything else. Others pointed out Enron suffers from being in a business that few understand or can evaluate.

Enron’s stock closed out the week at $0.26 per share. The Fitch ratings agency tentatively estimated that in the event of a bankruptcy unsecured creditors might hope to get 20 to 40 cents on the dollar, but that depends on a whole range of contingencies. In Washington the Securities and Exchange Commission , as part of its continuing formal investigation into Enron, has subpoenaed the financial records and documents of the failed energy marketer from its auditor, Arthur Andersen LLP (see separate story).

Overseas, Enron’s European employees received their bad news Friday morning, as Enron Europe managers informed most of the 5,000 based there that they were “redundant,” although some managers were expected to be kept on short term. One employee, leaving the Enron Europe headquarters in London, told Reuters, “Everyone has been fired from the companies that have been put under administration (of PriceWaterhouseCoopers) although there will be some staff kept to help administration.”Enron employs 1,400 in London.

It also was not a good week for Dynegy, which lost momentum in the stock market and faced possible downgrades of its credit rating. Enron’s stock continued to lose ground Friday, closing down 10 cents to barely stand at 26 cents. Dynegy lost almost 10% of its value as well, closing down on Friday at $30.35. Moody’s Investors Service last week kept the ratings of Dynegy and its subsidiaries under review for a possible downgrade, after it announced it would terminate its merger agreement with Enron.

“Despite Dynegy’s termination of the merger agreement with Enron, is remains uncertain whether or not the company will face legal challenges from Enron. In its rating review, Moody’s will continue to monitor any potential consequences of the merger termination and any subsequent impact on Dynegy’s capital structure and liquidity,” said Moody’s.

However, Dynegy has no intention of giving up Northern Natural Gas Co., an Enron subsidiary that it obtained during merger negotiations (see Daily GPI, Nov. 12). Dynegy’s CFO Rob Doty warned Enron not to try and prevent Dynegy’s plans to buy the pipeline subsidiary. In a statement, Dynegy said Enron could not seek bankruptcy court protection on the pipeline “without the consent of Dynegy as a preferred stockholder.” Said Doty, “Dynegy had contacted Enron to begin a transition of the pipeline’s management and expects Enron’s full cooperation.”

Doty also said it still has the right to buy all of the common stock of Northern Natural, and intends to close on the transaction on Dec. 12. As part of its proposed merger with Enron on Nov. 9, Dynegy injected $1.5 billion into Enron and in exchange, received 100% of the preferred stock in Northern Natural, a 16,500-mile interstate pipeline company.

“Our preferred stock in Northern accrues a 6% annual dividend from the date of issue on Nov. 9, 2001,” Doty said in a written statement. “As a result of this purchase, Northern Natural Gas cannot take certain actions, including seeking bankruptcy court protection.” He also stated that it has exercised its option to purchase 100% of the equity in the pipeline. “Upon closing, approximately $950 million of Northern Natural Gas debt will remain in place.”

Formerly part of InterNorth, which merged with Houston Natural Gas Co. in the mid-1980s to form Enron, Doty stated that Northern Natural “has been a separate entity for more than 20 years and operates as a separate business, with separate FERC tariffs, offices, management and customers.”

Said Doty, “Northern Natural Gas will be an excellent addition to our asset-backed customer-focused energy delivery network. This network enables us to provide reliable supply, risk management and logistics to our customers, as we have done for the past 16 years.”

Although Enron has yet to lay down its hand, analysts are delivering the obituaries, and credit ratings analyst Fitch noted that with total assets of $62.8 billion on Sept. 30, 2001, Enron would become the largest bankruptcy in U.S. history. However, Fitch anticipates a “lengthy and contentious” battle over the assets, with several key issues for creditors, including the following:

Enterprise Value: With 75% of Enron’s total 2000 income before interest, minority interests and taxes generated by its wholesale services segment — mostly energy trading — and with recent refusals of trading partners to accept the company as a counterparty, “Fitch believes significant doubt has been cast upon Enron’s ability to continue to operate this business at its previous scale. Further, previous valuations of bankrupt trading businesses have been quite low.” And, “if the wholesale operations remain shut down, the future cash flow generation ability of the retail segment may be materially impaired.”

Allocating Assets: If there is a bankruptcy, Fitch found in a preliminary analysis roughly $1 billion of residual value from the pipeline assets following secured and unsecured claims and Dynegy’s claims. It also has various other assets to monetize to satisfy unsecured creditor claims, including Portland General Electric Co. and another $800 million in merchant assets expected to close before the end of this year. Outstanding senior unsecured debt is estimated to be about $11 billion, excluding “possible liabilities” from certain trust structures. “Unsecured creditors would realize recoveries in the 20-40% range,” considering the “deterioration in the value of the wholesale trading business, the pledge of flagship assets to secured creditors, the uncertain cash flow generation prospects of the retail segment, the opaque and uncertain accounting and off-balance sheet liability issues, and other unexpected liabilities.”

Continuing Operations: Fitch believes Enron would require a “sizable debtor in possession facility to fund ongoing operations and induce counterparties to resume business,” and it is “uncertain whether Enron has adequate unencumbered or over-collateralized assets to obtain a DIP large enough to enable the resumption of wholesale operations.”

Marlin Water Trust II and Osprey Trust: For these trusts, two of Enron’s dubious off-balance sheet related-party transactions, Fitch said the ratings of both rely on the support of Enron. “A liquidation of the underlying assets is the primary source of repayment. A shortfall in liquidation proceeds would become a claim against Enron, which may be subject to subordination to the claims of other creditors in a bankruptcy.”

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.