In the continuing saga of what has been described as “one of the world’s biggest ever corporate failures,” Enron Corp.’s European arm filed for protection from its creditors Thursday, while major energy industry players rushed to reassure investors that their individual exposures to the troubles of Enron Corp. were minimal. The companies attempted to boost confidence in the energy sector as Enron stock dropped another 25 cents to close at 36 cents Thursday on trades of nearly 265 million shares.

Enron’s stock was the volume leader on the New York Stock Exchange again Thursday after breaking the all-time record volume Wednesday with more than 342 million shares changing hands (see Daily GPI, Nov. 29).

Most were expecting the other shoe to drop soon with a filing for Chapter 11 protection for Enron’s U.S. operations, but there was no word of any court action. Market analysts said if Enron files for bankruptcy, it will be the largest in history. The company lays claim to about $61 billion in assets. It also could take a chunk out of the wholesale market, although most were expecting aggressive competitors to step in and pick up Enron’s estimated 20% share.

Responding to questions, an Enron spokesman said company employees had been assured they would receive their paychecks as usual Friday and no lay-offs have been announced. Beyond that the company is continuing to work on restructuring around its core businesses, he said.

In Europe, accounting firm PriceWaterhouseCoopers said it had been appointed administrator of Enron’s European operations, which are staffed by about one quarter of Enron’s 21,000 employees.

Enron’s failure would be a blow to the Houston economy since about 7,500 of its employees are located there and the company has been a stalwart corporate citizen and highly visible through its ownership of baseball’s Enron Field.

While many of the energy stocks that dropped yesterday on the news of Enron’s downfall, rebounded today, Dynegy, its partner in a rescue merger that fell through Wednesday, saw its stock continue down, falling more than 6% to about $33.65.

The company’s once dominant electronic trading platform, EnronOnline, was back up Thursday, the company said, but only as a means to “manage Enron credit exposure.” And traders worried about the impact of the Enron debacle on the start of December deliveries on Saturday. One veteran expected to see some non-performance, but noted there are plenty of supplies available to make up lost gas (see separate story).

On another front, Enron announced that, consistent with Wednesday’s statement that it is taking actions to preserve value in its core energy businesses, the company is evaluating whether previously declared dividends will be paid on the corporation’s common stock, the Cumulative Second Preferred Convertible Stock, the Enron Capital LLC 8% Cumulative Guaranteed Monthly Income Preferred Shares, and the Enron Capital Resources, L.P. 9% Cumulative Preferred Securities, Series A.

On Thursday, the New York Mercantile Exchange restricted trading with Enron, requiring written authorization for trades from an exchange clearing member.

The exchange also said it had a record day on Wednesday in natural gas futures trading with a volume of 228,728, surpassing the previous record of 203,807 futures traded on July 23, 1999.

“Yesterday’s trading session is a clear demonstration of the desire of the trading community for a safe, reliable venue to lay off risk and the recognition by the marketplace of the financial safeguards of the exchange and its clearinghouse that provide a uniquely secure environment,” said Exchange President J. Robert Collins, Jr.

Meanwhile, there was a growing list of energy companies detailing their net exposures to Enron Thursday (see Daily GPI, Nov. 29). Although many stressed the impact to their individual companies was minimal, taken in total the financial hit to the industry was large. The line-up so far includes:

Merrill Lynch utilities analyst Steve Fleishman assessed the energy companies’ announcements of net exposure to Enron for the most part as “modest, but we take these numbers with a grain of salt. An Enron bankruptcy would be complicated…there are precedents to hold up claims,” but he said Merrill Lynch did not think that all of the companies announcing their amount of exposure had calculated the numbers correctly because he said, “you cannot often net trading positions with physical positions.”

There also will be re-investment risks for those companies holding long-term contracts with Enron using long-term collateral. “They could take the collateral, but they could lose the attractive contract and the use of the contract with collateral is a re-investment issue. On the net it could be okay, but it also could affect earnings” down the line, said Fleishman.

Even Capitol Hill had something to say with various law-makers raising their typical cry for investigations and hearings (see related story). Yet to be assessed, but much feared by the advocates of competition, is the impact the Enron calamity will have on the march to a competitive power market.

Both Federal Energy Regulatory Commission Chairman Pat Wood and Dynegy’s Regulatory Counsel Peter Esposito told the annual meeting of the Energy Bar Association Thursday the movement has taken a one-two punch with the California and Enron Crises. Wood called it a “black-eye year for competition,” adding that the Commission is most interested in making sure that physical deliveries of natural gas are not impeded by Enron’s problems (see related story, Power Market Today, Nov. 30).

Dynegy’s Esposito said “what’s happened in the last year in this world is staggering… Competition has two strikes on it right now. Deserve it or not, it has been called. And the fast ball is coming from the mound at about 100 miles an hour. There is strong evidence that the industry is turning backward, away from competition and toward re-regulation,” he warned (see related story in Power Market Today, Nov. 30).

Duke Energy said Thursday morning that it has taken steps to manage its exposure to the industry leader, including stopping trading with Enron. The company also expressed confidence in the vitality of the energy sector.

“Although we didn’t completely cease trading with Enron until yesterday, in the course of our normal credit practices we took steps to limit our exposure to Enron,” said Richard J. Osborne, executive vice president and chief risk officer for Duke Energy. “We currently have approximately $100 million in non-collaterized exposure to Enron. We are closely monitoring this unfortunate situation to determine if a provision against earnings is appropriate.

“The market is larger than any one player and is very resilient,” Osborne continued. “Enron’s role and activities in the energy market have significantly diminished over the past several weeks. And market liquidity is provided by many active trading and marketing companies that have effective risk management practices and sound capitalizations.”

Williams said it expects to meet or exceed all of its previously announced earnings targets. “We are traditionally conservative in managing our risk, so we currently believe our net exposure related to Enron will be less than $100 million,” said Steven J. Malcom, president of Williams. “Our expected earnings growth further validates our strategy of a balanced approach — investing in strategic energy assets while deploying a marketing company that is focused on offering customers risk management products, versus relying on pure trading activities.

The New Power Company (TNPC), which received significant start-up assistance and supply and risk management help from Enron, also reaffirmed its earnings and business plan, while making clear that it is an independent and separately held company from Enron. TNPC said it has sufficient cash and liquidity to conduct business at least through the second quarter of 2002, at which time additional financing may be required for building up natural gas inventories for the 2002-2003 winter heating season. The national residential and small business energy provider said that it is still on course to deliver a fourth quarter 2001 loss per share of $0.65 to $0.73. The company added that it is in active discussions with several asset-backed lenders for the financing post-2Q 2002 and believes that a transaction will be in place when needed.

“NewPower is an independent and separately held company from Enron. It is traded on the New York Stock Exchange and has its own financial resources, management team and board of directors,” said CEO H. Eugene Lockhart. He also stated that while Enron is a major counterparty, NewPower has a diversified array of supplier relationships and the ability to trade with, and be supplied by, 14 other counterparties. He added, “We are confident that we will not only meet our customer energy delivery obligations, but that we will continue our aggressive efforts to sign up new customers in all of our target markets.”

Northern Border Pipeline Co., managed by a partnership owned by Enron and Williams, said that its management believes that Enron’s recent problems should not have a “material adverse impact” on the pipeline’s financial condition. However, the company warned that it was too early to determine with certainty the extent to which it will be impacted by these events.

Northern Border has a number of ties with Enron and its subsidiaries. For example, Northern Plains Natural Gas Co., a wholly-owned subsidiary of Enron, provides operating and administrative services for Northern Border. It believes that Northern Plains will continue to be able to meet its operational and administrative services obligations under the existing agreements.

Northern Border said it has an aggregate financial exposure over the next 12 months of $9 million (2.8%) of revenues under its firm transportation contracts with Enron North America (ENA), a wholly owned subsidiary of Enron. Even if ENA fails to perform its obligations under the firm transportation contracts, the pipeline does not believe that the failure will have a material adverse impact on Northern Border’s financial condition. In addition, the pipeline said it has the right to re-market this capacity to other shippers under certain conditions.

Adding another vote of confidence for the industry, Reliant Resources Inc. said it believes the wholesale energy markets will work through the current Enron troubles. Saying the deterioration in Enron’s credit position has occurred over a period of weeks, Reliant said the market and its participants have had opportunities to prepare for such an event. Reliant said its current exposure to Enron is $80 million, primarily from power sales from the company’s asset portfolio and natural gas sales from its trading portfolio. Reliant added that it has already seen additional market opportunities as a result of the situation and is increasing its efforts to serve new and existing customers.

Dominion also distanced itself from Enron on Thursday, reporting that it has pre-tax credit exposure to Enron of $11 million for past sales. Dominion said it has forward commodity sales contracts with Enron that represent an exposure of less than 5% of earnings, based on today’s forward prices. Dominion reaffirmed its public operating earnings per share targets of $4.15 or better in 2001, $4.90 to $4.95 in 2002 and 10% annual earnings growth after 2002.

Denver-based Western Gas Resources Inc. allowed that it has pre-tax credit exposure to Enron of $2.3 million for currently outstanding transactions. The company has forward natural gas liquid (NGL) sales contracts with an Enron affiliate that represent an exposure of approximately $300,000 on a pre-tax basis. Western Gas said it also has physical NGL purchases and sales with an Enron affiliate in future months, which on a net basis, represent an immaterial exposure.

Also weighing in on its exposure was San Jose, CA-based Calpine Corp., which expressed no concerns with its exposure to future impact from the demise of Enron Corp. and its prospect for possible bankruptcy, during a conference call Calpine’s senior management held for the investment community. The company’s year-old netting agreement with Enron on their mutual trading activity would be continued unaltered in the event of a bankruptcy filing by Enron, Calpine’s official emphasized.

On a more macro basis, Calpine’s leaders do not see a new national and international energy “market-maker” of Enron’s previous stature emerging, although they see “niche” players developing in regional markets, and see Calpine as a potential market leader in California in the wake of the Enron unraveling.

“There will be no negative financial impact on Calpine as a result of Enron’s problems,” said Peter Cartwright, Calpine’s CEO/founder. “The news that the merger with Dynegy was not going forward was surprising and disappointing. It did unfortunately have a negative and totally unwarranted impact on Calpine’s stock (down $2.19 to close at $21 Wednesday).”

Cartwright emphasized “the Calpine business model” is much different than other players in the industry, focused on the building and ownership of “low-cost” electric generation plants. Calpine considers itself the leading developer, owner/operator of power plants in North America with 61 plants in operation totaling 11,400 MW, and its ongoing construction program is the largest in the industry (estimated to total $4.5-$5 billion in capital construction in 2002). Calpine does not expect any adverse impact for the 30 power plants (totaling 17,100 MW) it currently has under construction.

As of Wednesday, Calpine owed Enron a net $145 million under the so-called netting agreement, according to former Enron executive, Paul Posoli, now senior vice president at Calpine Energy Services. He added that Calpine has been moving to deals that cut out the middlemen and deal directly with load-serving entities. Generally, Calpine’s position with Enron in deals like its long-term power contracts with California’s Department of Water Resources (DWR) vary with the price of gas.

“I don’t expect to see any one entity step up and be a global market-maker (to replace Enron) in the short-term,” Posoli said. “On a market-by-market basis, companies that have dominant physical assets and strong trading organizations will emerge as market-makers in those markets. A good example is Calpine’s west desk in California. So, we’ll continue with our business model, and we do not expect to have any negative effects on our core business.”

Merrill Lynch expects investors to scrutinize the profits of trading companies more closely going forward. “There’s clearly a focus on accounting of business and sustainability of growth,” said Fleishman. “We want to get some clarity” on whether the U.S. Securities and Exchange Commission reviews the trading aspects within Enron’s transactions, and “if they do that at all, it’s something to keep a close eye on.” He said he expects companies to “step up their disclosure…it’s critical to get back to valuations of the past.”

Fleishman said, “we’d really be surprised if we didn’t see some regulation of this business” now. “We hope it would be financial, like margin requirements, capitalization. We would not like to see FERC get more involved in the financial dynamics of this business. They are already quite involved in market-based issues. More FERC involvement would be a negative.”

There are some positives, he noted, including more consolidation within the industry. “Size will matter,” said Fleishman. “This will take out the more marginal players. We hope to see increasing consolidation in 2002.”

Companies expected to benefit from the current situation, according to Merrill Lynch, are TXU and Entergy Corp. Both, said analysts, have “strong balance sheets, strong cash flow, they are well positioned and they have limited exposure,” said Fleishman. He noted, for example, that TXU has separated its European business from its U.S. business, limiting problems on either side.

Speaking about Enron’s former merger partner Dynegy Corp., analyst Donato Eassey said Dynegy had “paid a fair price” when it collateralized its proposed merger with the $1.5 billion investment into Enron. “Some banks signed off…that’s going to be a key point. That’s the most important point.” He said Dynegy had “represented themselves very well and they have a good leg to stand on.”

This is also going to give many companies the ability to gain market share, said Eassey. “Believe me they will. All of these [companies] are going to have an extra opportunity to gain.”

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