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 early last week, companies have been eager to distance themselves, as well as confess to investors their exposure levels related 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 that 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.”

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), ONEOK Inc. (less than $40 million), Dominion (more than $11 million), NRG (less than $10 million), PPL Corp. (less than $10 million), Northern Border ($9 million), Allegheny Energy (less than $5 million), Nicor Inc. (less than $5 million), KCS Energy Inc. (almost $3.8 million) and Western Gas ($2.6 million). Calpine claims its deals with Enron net out to zero. For anyone counting, that’s a rough total maximum exposure of about $662 million from this incomplete list of affected energy companies.

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.

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 Co. — another company with sizeable exposure — 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.”

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.

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 possible 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.

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.

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.”

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 Andersen; 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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