Following Enron Corp.’s inevitable Chapter 11 bankruptcy filing on Sunday, reports of exposure to possible losses due to the energy giant’s failure continue to come in from companies and financial institutions around the world, reflecting the broad reach both of the company’s business and its stock.
Adding to the growing list of companies and institutions with sizeable exposure to Enron, John Hancock Financial Services Inc. said early Monday that it has a net investment exposure to Enron and its affiliates of approximately $320 million. To account for it, the company said it expects that it will take a fourth quarter write-down in the form of a capital loss of $100-$125 million after tax.
Although the financial group did not detail its positions with Enron, it said it also has investments in other entities in which Enron has some ownership, including Florida Gas Transmission Co., Citrus Corp., Centragas Pipeline, Northern Natural Gas Pipeline and DPC Ponderosa. Despite these interests, Hancock said it does not currently anticipate the need to take any write-downs on these investments.
In light of the events, Hancock also confirmed its previously issued operating earnings guidance of 10-12% growth in earnings per share for both the full years 2001 and 2002. As of Sept. 30, John Hancock and its subsidiaries reported total assets under management of $118.8 billion.
The credit rating agency, Fitch, pointed out late last week that J.P Morgan Chase and Citigroup are the most affected because they were involved in the Enron-Dynegy transaction gone bad. Fitch estimated that J. P. Morgan Chase has exposure of approximately $500 million unsecured, plus additional secured exposure of least $400 million. Citigroup has exposure of approximately $800 million, with estimated $300 million unsecured and $500 million secured.
Exposure to the Houston-based company is not contained to the United States; financial institutions all over the World are also dealing with offshoots of the debacle. Fitch also listed some of the financial institutions abroad with possible secured and non-secured exposure to Enron, including Abbey National plc ($165 million), ABN Amro Holding NV of the Netherlands ($100 million), National Australia ($200 million), other Australian lenders ($250 million), Credit Lyonnais SA of France ($125 million), Dresdner Bank AG of Germany (less than $100 million). In addition, Fitch said it is expected that more disclosures will be forthcoming from international banks within the next week.
According to Reuters, Asia is also feeling the pinch. The news service reported Monday that Mitsubishi Tokyo Financial Group Inc indicated that at the Bank of Tokyo, Mitsubishi’s loan exposure to Enron Corp. and its related businesses totaled 30.6 billion yen ($248.1 million). In addition, Reuters reported that Sumitomo Mitsui Banking Corp., Japan’s second-largest banking group, said its exposure totaled $210 million. Due to concerns over credit risk, Tokyo stocks lost more than 3% in trading on Monday.
Meanwhile, joining the ranks of the “who’s who” in energy companies that are distancing themselves from the Enron debacle, UtiliCorp United, XTO Energy Inc., TXU and Spinnaker Exploration Co. jumped on board Monday. Total announced net exposure to date from energy companies is up to approximately $752 million (see Daily GPI, Dec. 3).
Petrie Parkman analyst Stu Wagner warned that the industry could see a possible domino effect. “Companies don’t know what they don’t know,” Wagner explained. “In other words, [a company] may have a deal with some marketing company that then turned around and laid the risk off to somebody else who turned around and did a deal with Enron through a derivative or something.
“If that collapses, then that party is stuck,” he said. “If that party can’t perform, then it starts to make its way back. So you don’t know exactly what everybody’s exposure is because there is a lot of turmoil in the market.”
Wagner said this situation could be good news or bad news. “It might be the hedge that may be sold below the market, and today, if they were to retrade the deal, they would get a better price for that gas, or vice-versa,” the analyst said. “It seems to me that Enron’s decision to go into Chapter 11 at a minimum buys some time for some of these contracts to be reworked. It will give them time to retrade deals, particularly for the shorter-term deals, so that some of that daisy chain effect can be avoided. I am more concerned about longer-term deals — something that goes out 2, 3 or 4 years — because it is not a very liquid market. It’s my guess that it is going to be much more difficult to rework long-term contracts than it will the near-term.”
Following Aquila’s exposure announcement last week, UtiliCorp reported that it has $31.5 million on the line, given as consideration to enable UtiliCorp to participate in the cash flows of Enron’s Northern Border Pipeline. The company also said it is evaluating whether Enron’s demise will have an effect on Midlands Electricity plc and its generation-related investments, which could have relevance to the closing of that pending acquisition from FirstEnergy Corp. Aquila also revised its exposure limit, from less than $50 million to less than $40 million.
“As Enron goes through the logical next step in its evolution, we plan to continue to grow according to our game plan,” said Robert K. Green, UtiliCorp president. “We’ll use this market dislocation as an opportunity to increase the clients that we serve, as well as to help them through the market dislocation. We also expect to increase our presence in natural gas, power and other energy markets in North America and around the world.”
Ft. Worth, TX-based XTO Energy Inc. said that despite its $30 million in pretax exposure, its 20% gas production growth projections and solid financial performance should not be materially affected by transactions with Enron. Of the 80% of XTO Energy’s 2002 gas production that is hedged at $3.88/Mcf with a portfolio of counterparties, the company said Enron is a counterparty on about 15% of those volumes.
TXU joined the club Monday by announcing that its potential earnings exposure to Enron is less than $20 million (after tax). The company said it continues to take necessary actions to reduce this immaterial exposure. The company pointed out that on a cash basis, it has no net exposure to Enron. In most instances, TXU said it has netting agreements that allow it to offset the amounts owed by Enron to TXU with the amounts TXU owes Enron. The company said it will continue to assess developments involving Enron as they occur and evaluate its positions on a region by region basis.
The AES Corp. said late Monday that including its subsidiaries and affiliates, the company has less than $15 million in exposure to Enron under existing power and gas supply contracts. “We consider our current trading exposure to Enron as minor,” said Barry Sharp, CFO. “As the depth of Enron’s financial difficulties became more evident, we reviewed our exposure and took the necessary steps to ensure that our exposure remained limited.”
AES also said that Enron affiliates are acting as engineering, procurement and construction (“EPC”) contractors for three of AES’s projects currently under construction. AES reported that construction of all three projects has continued, although it said it still continues to actively monitor and review the progress and performance of the contractors and assess potential options available to its subsidiaries.
Spinnaker Exploration Co. announced that it has pre-tax exposure of $3.4 million (after-tax $2.2 million, or $0.08 per diluted share) to Enron. This exposure includes fixed price swap contracts totaling $2.1 million, intended to hedge December gas sales, and $1.3 million related to November gas production sold through Enron entities. The independent energy company said it has no other Enron exposure. Spinnaker said it anticipates that it will reduce fourth quarter 2001 net income by these amounts. This exposure is expected to reduce total 2001 cash flows by less than 2%.
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