The mood around Enron Corp.’s Houston headquarters Monday was resolve as much as anything else, as thousands of employees prepared for the inevitable pink slips following the weekend Chapter 11 bankruptcy filing by what was the world’s leading energy trader just a few weeks ago. With almost 21,000 employees worldwide, Houston’s offices will take the largest hit, with more than 4,000 of the 7,500 employees expecting to be let go this week.
One employee told a Houston TV station, KPRC Channel 2, (https://www.click2houston.com), he and others had been told to take their personal belongings with them and wait to hear whether they would be called back. As to severance, some employees said they were told to “expect the worst,” that it will depend on what the bankruptcy court allows. One said he was told he might receive as much as $4,500 in severance. Employees also have not been told what they can expect in regards to continuing health benefits.
While a number of employees said they had been expecting this for weeks, others pointed out the proximity of the holiday season. Ironically, there seemed to be little acrimony, despite the Securities and Exchange Commission investigation, a launch by Congress into Enron’s business practices, and the loss of almost 100% of its share value in two months time. In fact, several employees said they continue to think Enron is a good company that got some bad breaks.
However, not everyone who has had dealings with Enron feels as charitable. In a one-hour conference call Monday morning in which he called Enron’s $10 billion lawsuit against his company “frivolous and disingenuous,” Dynegy Corp. CEO Chuck Watson made one point clear: “either Enron’s going to turn over Northern Natural Gas (Pipeline Co.) or it’s going to repay us the $1.5 billion” it invested in the company when it signed a merger agreement Nov. 9. The call came less than a day after Enron officially filed for bankruptcy protection and filed its multi-billion lawsuit against Dynegy for breach of contract.
In Enron’s Chapter 11 petition, filed Sunday in the U.S. Bankruptcy Court for the Southern District of New York, the company listed $24.759 billion worth of assets and $13.152 billion worth of debts. Debt securities held by more than 500 holders were listed at zero. The total number of shares of preferred stock was listed as 1.57 million. Enron also listed 743.9 million outstanding shares of Enron common stock; 85.479 million shares of Enron common stock reserved for issuance upon exercise of outstanding shares; 6.4 million shares reserved for issuance upon exercise of an option by Bank of America; and 167 million shares of common stock reserved to convert outstanding Enron convertible or exchangeable securities.
Listed as anyone “who directly or indirectly owns, controls or holds with power to vote 5% or more” of Enron’s voting securities were AXA Financial Inc., owning 5.75% and Janus Capital Corp., which owns 5.54%. Affiliated entities filing for bankruptcy with Enron Corp. were Enron Metals & Commodity; Enron North America Corp., Enron Power Marketing Inc.; PBOG Corp.; Smith Street Land Co.; Enron Broadband Services Inc.; Enron Energy Service Operations Inc; Enron Energy Marketing Corp.; Enron Energy Services Inc.; Enron Energy Services LLC; Enron Transportation Services Co.; BAM Leasing Co.; and ENA Asset Holdings LP.
Last Wednesday, Dynegy called off its merger with Enron, citing “breaches of representations, warranties, covenants and agreements” (see Daily GPI, Nov. 29). Subsequently, Enron’s business continued to falter, and over the weekend, the company filed for bankruptcy protection. It also filed the lawsuit against Dynegy, claiming its rival caused Enron’s business to disintegrate for its own gain. As part of the reorganization process, Enron alleges breach of contract, accusing Dynegy of wrongful termination of its proposed merger. The Enron lawsuit also seeks the court’s declaration that Dynegy is not entitled to exercise its option to acquire an Enron subsidiary that indirectly owns Northern Natural Gas Pipeline (NNG).
Dynegy fired back Monday, filing a lawsuit against Enron to protect its interests in NNG, with a lawsuit against “several Enron subsidiaries that are not in bankruptcy.” Watson said the lawsuit “demands that these companies live up to their contractual obligations related to Northern Natural Gas (NNG),” said Watson. “Because of Enron’s disingenuous lawsuit, we have protected the pipeline even if we can’t get ownership right away. We are maintaining the value until we own it. It is irritating, but make no mistake, we have a clear and unambiguous right to NNG, and until we take control, we will protect our shareholders’ interests.”
As part of the last-minute rescue merger agreement with Enron on Nov. 9, Dynegy became a preferred shareholder in NNG by investing $1.5 billion in the pipeline through Dynegy’s shareholder ChevronTexaco (see Daily GPI, Nov. 12). In the event that the merger fell apart for several reasons, including material adverse change for Enron, the agreement provided that Dynegy could take control of the pipeline unless Enron repurchased it. In the lawsuit filed in a Houston court Monday, Watson said Dynegy is demanding “immediate control and ownership” of NNG. Enron “has the ability to reclaim Northern Natural simply by repaying Dynegy,” said Watson.
“This is a demonstration of the sheer desperation that Enron would attempt to keep both Dynegy’s $1.5 billion and the pipeline. Under terms of the merger agreement, Dynegy had the right to terminate if there was a material adverse change in Enron’s business or financial condition,” Watson said, who then detailed what happened between Nov. 9 when the merger was announced and last Wednesday, when Dynegy withdrew from the agreement.
“We had no choice but to act to protect our shareholders’ interests,” said Watson. “Enron’s charges against Dynegy are false and the public should be wary of Enron’s efforts to deflect attention…[it is] one more failure of Enron’s to not take responsibility in its own demise. Enron’s rapid disintegration was in general the result in a loss in leadership and credibility…Then the pilot light went out, precipitated by the startling disclosures by Enron on its 10Q [filed on] Nov. 19 and on new and adverse information.”
Watson explained that following the 10Q filing, Enron disclosed to Dynegy on the Friday after Thanksgiving that “their core business in the United States and Europe was almost shut down…they needed billions in equity.” Over the Thanksgiving weekend, Watson said Dynegy “worked with Enron and the banks to put the deal back together.”
Watson disclosed that the lenders came up with a $3 billion liquidity package, and asked Dynegy to participate for one third of that. “After some consultation…for less than an hour, Dynegy agreed.” Subsequent to that agreement, Watson said the package fell apart, slipping first to $1 billion from the banks and then to $500,000 million, “and at the same time, Enron’s cash continued to fall sharply.”
Last Monday (Nov. 26), Watson said, “in one and a half business days, Enron’s cash declined to $880 million, and the next day, it was $700 million or less. The liquidity in this company needed fixing and the long-term viability of its balance sheet needed restoring. None of those things was forthcoming.”
What also “irritated” Watson came from Enron’s lack of communication with its merger partner. “Another important point, and simultaneous to all this, is that Dynegy’s management team was pursuing an accelerated plan to integrate operations and employees. Enron’s management refused to cooperate with that entire process. In fact, Dynegy’s management was never allowed to talk with Enron’s leadership team or Enron employees. So, unfortunately, it became very clear…our efforts were not enough to overcome Enron’s financial and business issues. Dynegy will not lose Enron’s frivolous case and intends to pursue an action for the damages that Enron has caused Dynegy,” said Watson.
Despite the lawsuits and counter-lawsuits, Watson also made it clear that his company will meet its earnings expectations for 2002, announcing that it has come to terms with its 26% shareholder ChevronTexaco to market Texaco’s equity natural gas production beginning Jan. 1. “I think that is a fairly ringing endorsement on Texaco’s strategic relationship with Dynegy,” Watson said. Dynegy has long marketed Chevron’s natural gas production; Chevron was one of Dynegy’s founders.
Watson also reiterated that Dynegy’s 2002 earnings will be between $2.50-$2.60 per share, the same figures the company announced earlier this year. “We were pretty strong going into 2001…our earnings are up, and we forecasted a 25% growth rate next year. We have every reason to believe that notwithstanding our investment in NNG and our original forecast that planned for the recovery of the economy in the second half of 2002, we fell very comfortable to reiterate our earnings forecast.”
Along with the bankruptcy petition, Enron issued a press release that it is in active discussions with various leading financial institutions to provide credit support for, recapitalize and revitalize that business under a new ownership structure. Enron would continue to have a significant ownership share and provide it with traders, back office capabilities and technology from its North American wholesale energy business. The new entity would conduct counterparty transactions through EnronOnline. Any such arrangement would be subject to the approval of the Bankruptcy Court.
“If these discussions are successful, they could result in the creation of a new trading entity with a strong and unencumbered balance sheet, the industry’s finest trading team, and its leading technology platform, all backed by one or more of the world’s leading financial institutions,” said Greg Whalley, Enron COO. “We understand that it may take time for counterparties to resume normal trading levels with this entity, but we are confident that this business can be put back on a solid footing. Obviously, our potential partners share our confidence or they would not be at the table with us. We intend to take steps to retain employees who are key to the future success of our wholesale energy trading business and to regain the support and confidence of its trading counterparties.”
Enron Chairman and CEO Kenneth L. Lay said, “From an operational standpoint, our energy businesses — including our pipelines and utilities — are conducting normal operations and will continue to do so. While uncertainty during the past few weeks has severely impacted the market’s confidence in Enron and its trading operations, we are taking the steps announced today to help preserve capital, stabilize our businesses, restore the confidence of our trading counterparties, and enhance our ability to pay our creditors.”
In connection with the company’s Chapter 11 filings, Enron is in active discussions with leading financial institutions for debtor-in-possession (DIP) financing and expects to complete these discussions shortly, the company said. Upon the completion and court approval of these arrangements, the new funding will be available immediately on an interim basis to supplement Enron’s existing capital and help the company fulfill obligations associated with operating its business, including its employee payroll and payments to vendors for goods and services provided on or after Sunday’s filing.
Enron-related entities not included in the Chapter 11 filing are NNG, Transwestern Pipeline, Florida Gas Transmission, EOTT, Portland General Electric and numerous other Enron international entities. To conserve capital, Enron will implement a “comprehensive cost-saving program” that will include substantial workforce reductions, primarily in Houston. In addition, the company will continue its accelerated program to divest or wind down non-core assets and operations.
In conjunction with Sunday’s petitions for Chapter 11 reorganization, Enron will ask the Bankruptcy Court to consider a variety of “first-day motions” to support its employees, vendors, trading counterparties, customers and other constituents. These include motions seeking court permission to continue payments for employee payroll and health benefits; obtain interim financing authority and maintain cash management programs; and retain legal, financial and other professionals to support the company’s reorganization actions. In accordance with applicable law and court orders, vendors and suppliers who provided goods or services to Enron Corp. or the subsidiaries that have filed for Chapter 11 protection before today’s filing may have pre-petition claims, which will be frozen pending court authorization of payment or consummation of a plan of reorganization.
Enron’s principal legal adviser with regard to the proposed merger with Dynegy, Enron’s Chapter 11 filings, the Dynegy lawsuit, and related matters is Weil, Gotshal & Manges LLP. Enron’s principal financial adviser with regard to its financial restructuring is The Blackstone Group.
When asked during the conference call why Dynegy had moved forward with the merger as long as it did despite the continuing bad news from Enron, Watson said he thought it was a “good strategic merger from day one.” He said that he believed Dynegy would be able to close the merger despite some of the bad news, with support from the market, counterparties and customers. “All seemed to believe in it and were very supportive of the merger.”
Even after Enron released its damaging 10Q statement, “even at that point, Dynegy didn’t give up,” but Watson admitted that “clearly, there were further ramifications that the market had just about had enough of the disclosures.” He said as late as Nov. 28, when he was “getting calls at 2-3 in the morning to find solutions,” they were still trying to come up with liquidity answers,” and it wasn’t until Moody’s Investor Services downgraded Enron to junk status that day that Watson knew the deal was dead.
On Monday, Fitch lowered Enron’s senior unsecured, subordinated debt, and preferred stock ratings to “D” and removed them from Rating Watch. The commercial paper rating of “C” had previously been withdrawn. The “CC” rating of pipeline subsidiaries NNG and Transwestern Pipeline were maintained because they were not included in the bankruptcy petition, and they remain at Rating Watch Negative. Moody’s also downgraded Enron’s senior unsecured debt to “Ca” from “B2.”
Reaction to the bankruptcy filing by Enron and the lawsuits and counter-lawsuits brought expected analyst reaction. Credit Suisse First Boston analyst Curt Launer said Dynegy will be impacted by the lawsuits “for some time,” noting that Dynegy will gain market share in its “regular way and electronic trading.” The company’s electronic platform, Dynegydirect’s, business is up about 20% since Oct. 1. “”In our opinion, the Material Adverse Change clause in the deal will be the crux of the legal proceedings.”
As for Enron, Launer said that “we believe history will be written that its failure resulted from an over-leveraged balance sheet combined with aggressive accounting.”
Interestingly, Enron’s stock rose on Monday while Dynegy’s, which has fallen slowly for the past week, took a dive. Enron, which closed at 26 cents on Friday, was up to 40 cents at close. Dynegy, which had risen on the merger announcement in early November but has fallen since its pull-out last week, was down 10.48% Monday, losing $3.18 to close at $27.17.
Â©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.
© 2023 Natural Gas Intelligence. All rights reserved.
ISSN © 1532-1231 | ISSN © 2577-9877 |