After exhausting its other options, Enron (ENE) , once the king of deregulated power markets, pulled the plug Sunday and sought bankruptcy protection, leaving creditors scrambling and investors wondering how its staggering debt will affect trading Monday morning.
With nearly $25 billion in assets, Enron's bankruptcy is one of the largest in corporate history.
The Houston-based energy company filed for Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of New York Sunday afternoon. The company also filed suit against Dynegy (DYN) , its onetime crosstown rival, for "Dynegy's wrongful termination of its proposed merger with Enron," seeking at least $10 billion in damages. The suit asks the court to void Dynegy's option to acquire Enron's Northern Natural Gas pipeline business, which Dynegy has said it will exercise as a result of the merger termination.
While most market pundits predict that this is the end for Enron, its embattled chairman, Kenneth Lay, said that Enron's decision to file bankruptcy should help stabilize the company, whose stock closed at 26 cents Friday, down from its 52-week high of $84.63 on Dec. 24, 2000.
"While uncertainty during the past few weeks has severely impacted the market's confidence in Enron and its trading operations, we are taking the steps announced today to help preserve capital, stabilize our businesses, restore the confidence of our trading counterparties and enhance our ability to pay our creditors," Lay said in a statement announcing the filing.
Real Debt, Real Pain
With more than $13 billion in direct liabilities, Enron's list of creditors reads like a Who's Who of Wall Street and Louisiana Street, the road through downtown Houston that became synonymous with energy-trading firms. The bankruptcy filing does not list off-balance sheet and contingent liabilities.
That list begins with major commercial banks. According to Bankruptcy Creditors Service, Enron owes Citigroup (C) - Get Report at least $3 billion, J.P. Morgan Chase (JPM) - Get Report nearly $2 billion and Bank of New York (BK) - Get Report at least $2 billion. Also on the list of Enron creditors are scores of regional banks that are unlikely to be made whole. Some of the debt listed for the major commercial banks may be securitized, which would reduce the lenders' direct liability.
"It seems reasonable to expect the Enron credit is substantially written off by most bank creditors," says Christopher Marinac, managing director of financial services research at SunTrust Robinson Humphrey. "We hope this occurs in the fourth quarter, and it will very likely have an earnings impact. The legal actions and bankruptcy proceedings will extend for months, if not years."
In addition, investors will be closely eyeing other energy companies that are Enron creditors. Companies like Duke Energy (DUK) - Get Report , Williams (WMB) - Get Report , Mirant (MIR) , AEP (AEP) - Get Report and even Dynegy have said they have millions in credit exposure to Enron.
Even companies like Calpine (CPN) , which says it has little "net exposure" to Enron, could end up with losses as a result of Enron's bankruptcy if a bankruptcy judge doesn't allow universal offsets. Such transaction allow trading parties to offset all debits and credits between them even though they may be governed by different contracts. Barring universal offsets could increase losses at other energy trading companies.
7-11: A Matter of Convenience
While Enron filed for Chapter 11, which allows a company to reorganize its finances with court oversight and away from scavenging creditors, many Enron watchers think this may be a precursor to something else.
"This feels like it could become a liquidation," says Jeff Dietert, merchant power analyst at Simmons & Co., a Houston-based energy investment firm and a member of the TSC Energy Roundtable.
In its statement Sunday, Enron said it was in discussions with financial institutions to provide financing and credit support for some version of its current energy-trading business using the Enron Online platform. However, it isn't clear if such financing is available or whether Enron would have many willing customers for its beleaguered energy trading business. To bolster customer confidence, a re-energized trading business would likely have to be controlled by someone besides current Enron management.
"It's an interesting strategy to try to harvest some value from the Enron trading platform," says Dietert.
Most of its other businesses appear to be destined for either quick sale or mothballs. Without specifics, Enron said "substantial workforce reductions" were imminent and indicated that the layoffs "primarily will affect the company's operations in Houston, where Enron currently employs 7,500 people." Citing sources and analysts, the Houston Chronicle reported Saturday that Enron will cut 3,500 employees in Houston.
As for other business units, again the company refused to be specific. "The company will continue its accelerated program to divest or wind down noncore assets and operations," according to its statement.
As described last week , even if Enron were in liquidation mode, a Chapter 11 filing is typically the first step, providing a company time to determine its best course of liquidation and allowing existing management to retain some control of the liquidation process. Once the company files a petition for liquidation, under Chapter 7 of the federal bankruptcy code, a court-appointed trustee completes the liquidation process potentially without the consent of company management.
An Enron spokesman did not return calls seeking comment.
Enron's insolvency will be one of the largest and complex in bankruptcy history. Sunday's filing covers 14 of Enron's entities, including the parent company and its primary businesses involved in trading and marketing of energy and other commodities.
While the filing does exclude some Enron-related entities, including Northern Natural Gas Pipeline, Transwestern Pipeline, Florida Gas Transmission, EOTT, Portland General Electric and several international subsidiaries, one attorney familiar with Enron's structure and the bankruptcy process said all of Enron's assets will eventually be subject to jurisdiction of the bankruptcy court. And, several of Enron's European operations are already in "Administration" in the U.K., a process similar to domestic bankruptcy.
The Dynegy Dilemma
While the specifics of the Dynegy lawsuit may be weeks in the offing, Ken Lay sounds as if he feels betrayed by Dynegy Chairman Chuck Watson. In pleadings, Enron argues that rather than acting in good faith to make the deal happen, Dynegy "concocted reasons to terminate and took affirmative action to weaken Enron."
The major argument that Enron will face in its claim is the fact that Dynegy invested $1.5 billion in Enron as part of the agreement. Dynegy will likely say that the pipeline assets secured the investment. However, bankruptcy experts say the judge will likely scrutinize that investment and the merger agreement very carefully.
One thing's for certain: There's plenty here to be scrutinized.
Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds was long Mirant, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to Chris Edmonds.