As the Enron debacle continues to unfold, energy companies, financial institutions and insurance firms are realizing exactly how exposed their respective companies actually are. Since the Dynegy/Enron Corp. merger was called off, companies have been eager to distance themselves, as well as confess to investors their exposure levels to the teetering giant.

Despite the heavy impact on the energy sector, the credit rating agency, Fitch, said that after a preliminary review, it anticipates no immediate changes in credit ratings or outlooks for rated energy companies in the sector as a direct result of the Enron situation. Fitch said it believes that most counterparties across the energy industry have made some progress in reducing credit exposures to Enron by “re-directing” transactions and trading out of positions as Enron’s credit profile deteriorated over the past few weeks. In addition, most major companies have halted all trading activities with Enron.

“In view of Enron’s worldwide involvement in energy marketing and trading, natural gas pipelines, merchant generation, retail energy services, and broadband communications, it is not surprising that the downgrade of the Enron credit has had financial impacts both within, as well as beyond the energy and utility sectors,” said Fitch.

Financial institutions, such as J.P. Morgan Chase & Co., Citigroup Inc. and ABN AMRO, have much greater exposure, according to the rating agency. Fitch said the three institutions could hold more than $1 billion in unsecured exposure and more than $3 billion in secured loans.

Fitch pointed out 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.

Fitch listed some of the other financial institutions 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.

Another source said the announced liabilities could be only the tip of the iceberg. There has been a report that some financial institutions are scrambling to come up with a way to buy Enron’s “book” of trading positions. One reason could be that some institutions would want to keep that book from being opened up to scrutiny in a bankruptcy proceeding. “There are some very high profile financial institutions which would be impaired by Enron bankruptcy,” the source said. Opening Enron’s books “could possibly uncover the size of derivative books the institutions had with Enron that may have not been known to their investors.” Those firms could suffer their own confidence crisis when their activities are laid bare. “There are some companies out there that want to do anything to keep Enron afloat,” the source said. “They were complacent. 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. “Now, [the purchase of Enron’s trading book] is not going to happen.”

Meanwhile, joining the ranks of energy companies that are distancing themselves from the Enron debacle, ONEOK Inc., PPL Corp., Allegheny Energy, Nicor Inc. and KCS Energy reported individual net exposures on Friday, sending total announced net exposure from energy companies up to approximately $662 million.

ONEOK Inc. announced that its net exposure to Enron based on New York Mercantile Exchange futures prices at the close of business on Thursday, Nov. 29, 2001, is less than $40 million pre-tax. This exposure is based on commodity transactions primarily for storage management and natural gas production hedges involving its energy marketing and trading and production segments.

ONEOK said it continues to pursue ways to mitigate this exposure, however, should Enron fail to perform its obligations, ONEOK’s current net delivered physical commodity exposure is estimated to be less than four million dollars. The financial exposure due primarily to storage management and natural gas production are approximately $36 million.

The company said if Enron performs its current obligations the total exposure would drop to less than two million dollars pre-tax after Jan. 4, 2002. There are no amounts past due from Enron at the current time.

PPL said it has a current net exposure of less than $10 million with Enron Corp. from trading activities. Additionally, if Enron does not fulfill its contractual obligations, PPL said it has a “mark to market” exposure in future years that averages about $6 million annually under several long-term electricity supply contracts that extend through 2006. PPL added that it has discontinued sales to Enron and has requested collateral from Enron, as provided by the terms of its energy sales agreements.

John Biggar, CFO of PPL Corp., noted that the company plans to increase its reserve related to its credit exposure to Enron to appropriate levels. “Even with this increased reserve,” said Biggar, “we are reaffirming our earnings forecast in excess of $4.00 per share for 2001.” If the company hits this goal, it would be the highest annual earnings in the company’s history. For 2002, PPL continues to forecast little, if any, change in that level of earnings per share.

One day after American Electric Power (AEP) reported less than $50 million in exposure to Enron, the company went public to say it has confidence in the wholesale energy marketplace. The company also said it took “prudent measures” in recent weeks to limit its exposure.

“The wholesale energy marketplace is bigger and stronger than any one company,” said Eric van der Walde, AEP executive vice president — trading and marketing. “The market has performed well during these weeks of uncertainty about Enron’s future. We are confident that AEP and other leading wholesale energy providers can fill any market needs that may arise.

“Enron’s wholesale energy trading and marketing strategy didn’t lead to the company’s difficulties,” van der Walde said. “Instead, Enron’s problems are linked to decisions related to other business lines, financing and disclosure issues.”

Allegheny Energy Inc. also explained its current net exposure to Enron The Hagerstown, MD-based diversified energy company said its exposure is less than $5 million, based on current market prices. Much like the rest of the industry, Allegheny said it has been taking steps to reduce its exposure to Enron, including restricting trading activity as that company’s credit ratings have been downgraded.

Allegheny Energy said its internal risk management systems and procedures have performed as expected as the Enron credit situation has deteriorated. The company expects that its operations will in no way be affected by this minimal exposure.

Naperville, IL-based Nicor Inc. also listed its potential financial exposure to Enron at less than $5 million. The company said the exposure stems from existing receivables for natural gas sales, hedging and trading activities. It added that after considering existing obligations to Enron, the company has a net current liability to the Enron companies.

Nicor’s principal businesses are Nicor Gas, one of the nation’s largest gas distribution companies, and Tropical Shipping, a containerized shipping business in the Caribbean region.

KCS Energy Inc. that it stands to lose approximately $3.8 million due to the Enron situation. The company said it has contracts with Enron for derivative instruments covering 6,390,000 MMbtu of gas production, with terms beginning in December 2001 and extending through October 31, 2002, and basis swaps covering 120,000 Mmbtu for the first quarter of 2002.

Based on Thursday’s closing NYMEX prices, if Enron is unable to fulfill its obligations, the company said the impact would be approximately $0.4 million on the 4th quarter of 2001 and $2.4 million on 2002. In addition to these hedges, KCS is uncertain whether it will receive full payment for oil and gas sold through Enron entities in the fourth quarter. The company’s exposure related to this uncertainty is currently estimated to be approximately $1.0 million. KCS has ceased all sales of oil and gas to Enron due to the uncertainty of Enron’s ability to perform under its contracts.

Although many stressed the impact to their individual companies was minimal, taken in total the financial hit to the industry was large. The incomplete line-up of energy companies reporting exposure from Wednesday and Thursday included Duke Energy ($100 million), Williams (less than $100 million), Reliant ($80 million), Dynegy ($75 million), Mirant ($50-60 million), El Paso ($50 million), Aquila Inc. (less than $50 million), AEP (less than $50 million), Dominion (more than $11 million), Northern Border ($9 million), Western Gas ($2.6 million) and NRG (less than $10 million). Calpine claims its deals with Enron net out to zero.

In addition to financial institutions and the energy sector, Fitch said the collapse of Enron could cost the insurance industry $2 billion or more according to preliminary estimates. The ratings agency said these losses are expected to be manageable if they are well diversified among insurers and reinsurers.

“Lines of coverage that are likely to face the most significant claims related to this event are directors and officers (D&O) liability coverage provided to Enron and possibly Dynegy; professional liability coverage provided to Enron’s auditor, Arthur Anderson; and the financial guarantee coverage provided on Enron’s projects by non-monoline financial guarantors,” Fitch said. “In addition, any insurers that have made investments in Enron will need to write-down these assets on their balance sheet. It is too early to assess individual company exposures. Coming in the wake of the events of September 11th, Enron’s problems will only serve to further ‘harden’ insurance rate activity.”

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