Last week, Enron Corp. saw things go from bad to worse, with its stock price continuing to plummet, a formal probe launched by the U.S. Securities and Exchange Commission, downgrades by credit ratings agencies and energy analysts, and finally, a letter to the board from one of its largest shareholder groups urging the energy trader to begin making reforms in its practices to restore some investor confidence.

Rumors also circulated last week that Enron would soon be taken over or would merge with another company or even go bankrupt. None of those things, however, seemed likely to happen in the near term, and it managed to secure more funds to maintain its credit line and continue its massive energy trading operation. Enron still boasted that its online trading arm, EnronOnline, continued to surpass previous trading records as it has done since its inception a year ago. There also seemed to be no companies moving away from doing business with the global trader, although the concern persisted all week. However, one source said the company was actively attempting to sell at a substaintial discount one of its forward books (for years 2003-2006), with an estimated value of $100 million.

When the dust had finally settled on Friday, Enron’s stock had reached another new low to end the week at $11.21. It began the month of October at $29.15 and began the year on Jan. 2 at $79.87.

On Thursday Enron got some good news, announcing that two of its banks, JPMorgan, the investment banking arm of JP Morgan Chase & Co., and Salomon Smith Barney Inc., the investment banking arm of Citicorp Inc., had agreed to provide incremental credit lines totaling $1 billion, secured by Enron’s Northern Natural Gas Co. and Transwestern Pipeline Co. assets. The funds will be used to supplement short-term liquidity and to refinance maturing obligations.

However, the news was tempered with criticism from energy analysts and credit ratings agencies alike, with many remaining dubious about Enron’s long-term ability to secure cash to operate.

Standard & Poors, which had already cut its ratings on the company, cut long- and short-term ratings again on Thursday and warned another reduction may be called for because of the “uncertainties” surrounding Enron and problems in the capital markets. S&P cut Enron’s senior unsecured debt to “BBB,” which is two notches above junk status, from “BBB-plus,” and reduced its commercial paper rating to “A-3” from “A-2.” Last week, Moody’s Investor Service cut Enron’s long-term debt to “Baa2,” which is also two notches above junk status and warned of a possible reduction to Enron’s “Prime-2” commercial paper rating (see NGI, Oct. 29).

The credit rating downgrades make it more difficult for Enron to run its day-to-day operations because companies could demand more collateral. If Enron’s credit ratings were to fall to junk status, the once mighty company could be forced to issue more shares and thus devalue its stock even more.

The credit ratings reductions came on the heels of a move by the SEC Wednesday to move its inquiry to formal status, launching an investigation of the Houston-based energy trader’s related-party transactions. The change to an investigation, which has been moved to Washington, DC, will give the agency the power to subpoena documents. In response to the formal probe, Enron secured legal counsel and set up a special committee to assist the board with the investigation.

Still, Kenneth Lay, chairman and CEO of the flailing company, avoided direct response with the media but did issue several press releases last week in an attempt to bolster investor confidence. Of the $1 billion secured from JPMorgan and Salomon Smith, Lay said the “additional credit capacity will further solidify Enron’s standing as the leading market maker in wholesale energy markets. We very much appreciate the support of two of our longstanding banking partners, JPMorgan and Citigroup.”

Enron CFO Jeffrey McMahon called the credit security “yet another step in our efforts to enhance market and investor confidence,” and said the company was “moving aggressively to strengthen our balance sheet and maintain our investment grade credit rating.” In the written statement, Enron said that copies of the commitment letters will be filed with the U.S. Securities and Exchange Commission in a Form 8-K filing soon. The SEC did not comment.

However, after Enron had issued the written statements, analysts followed with their perception of the company. Merrill Lynch downgraded the stock to “neutral” from “accumulate” while UBS Warburg lowered its 2001 recurring earnings per share estimate to $1.75 from $1.80. UBS analyst Ronald Barone said “though Enron’s wholesale and retail franchises appear alive and well, the reductions reflect the likelihood that the company will experience increased overall borrowing expenses, some level of decreased employee productivity and some decline in transactional margins as certain counterparties may opt for shorter duration transactions.”

Barone also spelled out the risks involved in investing in the acknowledged energy trading leader, noting before it had been done Thursday afternoon that “we would not be surprised to see S&P and Fitch lower their debt ratings on Enron a notch or so to a level still within investment grade status” and said that “another one notch move by Moody’s can also not be ruled out.”

Merrill Lynch’s energy analyst Donato Eassey noted, “ultimate outcome and underlying fundamentals aside, we believe significant pressure and uncertainty will remain for Enron until the [SEC] investigation concludes.”

The end of the week was met with a crashing thud, as a shareholder letter was sent on Friday to Enron’s board of directors, by the AFL-CIO and the Amalgamated Bank, calling on the struggling company to expand the mission of its newly created special committee, urging the board to adopt a package of reforms to restore investor confidence. The union trade group and the bank said they sent the letter because “America’s working families are significant shareholders of Enron stock through their pension, health and welfare benefit funds.”

Enron formed the special committee to communicate with the SEC and recommend to the Enron board “any other actions it deems appropriate.” To head up the committee, the board elected a new member, William Powers Jr., who is dean of the University of Texas School of Law in Austin.

Powers will be joined on the committee by independent directors Frank Savage, CEO of Savage Holdings LLC, Paulo Ferraz Pereira, executive vice president of the Brazilian-owned investment bank Group Bozano and Herbert S. Winokur Jr., CEO of Capricorn Holdings Inc.

Powers currently holds the John Jeffers Research Chair in Law and the Hines H. Baker and Thelma Kelley Baker Chair in Law at the UT School of Law, where he teaches torts, products liability, jurisprudence, legal process, civil procedure and contracts. The Enron special committee also has retained William. R. McLucas, a partner in the law firm of Wilmer, Cutler & Pickering as counsel. McLucas is the former head of the Division of Enforcement at the SEC. Wilmer, Cutler also has retained Deloitte & Touche to provide independent accounting advice.

The letter from the AFL-CIO and Amalgamated Bank urged the Enron board to expand the special committee’s mandate to the following:

“The special committee’s mandate is far too narrow to address the current crisis,” said Richard Trumka, secretary-treasurer of the AFL-CIO. “In light of Enron’s recent balance sheet write-downs, share price decline, and credit rating deterioration, the special committee must be forward looking and consider sweeping governance reform measures.”

Gabriel Caprio, CEO of the Amalgamated Bank, added, “in this time of crisis, outside directors must reform Enron’s traditional lack of transparency and communicate directly with shareholders. This is particularly important since several outside directors have apparent conflicts of interest that compromise their objectivity.”

AFL-CIO affiliate unions sponsor benefit funds with more than $400 billion in assets and they hold an estimated 3.1 million Enron shares. The Amalgamated Bank is the trustee of the LongView Funds, which hold 251,304 shares of Enron. The Amalgamated Bank’s Longview Funds are collective investment trusts that manage equity assets on behalf of workers’ benefit funds.

A copy of the letter sent to Enron board is available online at www.shareholdervalue.org.

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