Petro-Canada stepped forward as the first Canadian natural-gas supplier to disclose its share of the impact from Enron Corp.’s collapse, while efforts got under way to minimize the damage north of the border. Petro-Canada told its stockholders it has made a provision for “outstanding receivables” that will cut its fourth-quarter earnings by about C$15 million (US$9.6 million). The company said that it has switched 115 MMcf/d of production away from Enron to other gas traders without disrupting operations.
Canadian producers won the right to abandon Enron contracts in Alberta Court of Queen’s Bench during the week following the Houston energy merchant’s bankruptcy declaration Dec. 2 in the United States. During a brief court fight in Calgary, counsel for the producers said they began switching merchants in accordance with provisions of their supply contracts as soon as Wall Street credit rating houses made it official that Enron was in deep trouble.
Enron Canada maintained it was solvent throughout the proceeding, and has launched a further effort to stay afloat rather than automatically follow its Houston parent into bankruptcy. The Calgary court was told that meetings were planned this week on the possibility of setting up a creditor committee to settle the Canadian end of the Enron crisis and potentially keep the operation going. No deadlines were set on the process.
Meanwhile, in New York bankruptcy court, Enron Corp. is expected to ask the judge on Wednesday to allow a bidding process to begin that will attract funding to maintain the operations of Enron’s wholesale trading group.
In Calgary industry circles, Enron Canada’s plight is seen as confirming the severity of a risk described by Moody’s Investors Services in a statement on a financial practice that played a role in the demise of the Houston parent company. The Wall Street credit watchdog said a “lethal” innovation in credit agreements known as “ratings triggers” is “becoming more prevalent globally.” The triggers are contract provisions that allow actions to be taken automatically if a debtor company’s credit rating is lowered.
Gas supply contracts with Enron Canada included an example that entitled producers to stop deliveries. Moody’s warned that such arrangements can cause unintended “mutually assured destruction” when they go beyond raising interest rates into allowing cancellations of contracts or demands on debtors for immediate repayment of all obligations.
Parties “who think they might be protected by a ratings trigger in their respective agreements may well find — as in recent cases — that there is no protection because the trigger could potential cause a default or bankruptcy, adversely affecting all creditors.”
Besides accelerating Enron’s demise, ratings triggers played a role in the high-profile hardship cases of Xerox Corp., Pacific Gas & Electric Co. and Southern California Edison Co., Moody’s said. The credit watchdog said it will incorporate investigations of ratings triggers into its corporate reviews, possibly causing “downward rating pressure depending on the severity of the triggers, the underlying facts and circumstances surrounding the credit and the rating level of the issuer.”
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