Posted on 11/28/2001 2:14:15 PM PST by RightWhale
Enron Near Collapse After Dynegy Pulls Out
By C. Bryson Hull
HOUSTON (Reuters) - Energy trading behemoth Enron Corp. tottered at the edge of one of the biggest corporate collapses in U.S. history on Wednesday as its rescue by rival Dynegy Inc. blew apart.
Shares of Enron, which was only recently ranked No. 7 on the Fortune 500 list of the biggest U.S. corporations, slumped 85 percent to an all-time closing low of 61 cents. Major credit rating agencies slashed their ratings on Enron's bonds to junk status, triggering expectations a company that was a darling of Wall Street just a year ago will be forced into bankruptcy.
The dizzying plunge in Enron's fortunes shook financial markets worldwide, rocking the London Metal Exchange and weighing on U.S. stocks as it left creditors, such as banking giants J.P. Morgan Chase and Citigroup Inc., facing substantial losses.
Enron's latest crash marked another low in a stunning free-fall that began with a $638 million quarterly loss six weeks ago. Surprise disclosures, including the admission it overstated earnings by almost $600 million since 1997 and kept huge debts off its books, led investors to rapidly lose faith in a company valued at almost $80 billion a little more than a year ago.
After trading Wednesday, Enron's market value was barely $450 million. A U.S. regulatory probe into its murky off-balance sheet dealings and the unexpected departures of a chief executive in August and a chief financial officer in October helped fuel the fall.
Enron "entrapped the sophisticates," said Robert Stovall, senior strategist at Prudential Securities, referring to what was once an almost fawning admiration for Enron by institutional investors. "I think this is going to become a classic case."
Stovall, with nearly 50 years of Wall Street experience, said he could not recall any previous corporate unraveling that could match Enron's.
"You would have to go to pre-SEC days for that," he said, referring to the creation of the U.S. Securities and Exchange in the aftermath of the stock market crash of 1929.
Enron set a New York Stock Exchange record with 181.86 million shares changing hands, almost 33 percent more than the previous record set by Lucent Technology on Jan. 7, 2000.
The U.S. Treasury Department said it was monitoring Enron, but said it has yet to see "anything extraordinary."
ENRON LIKELY HEADED TO COURT
Dynegy accused Enron of breaching representations it made when a takeover agreement was negotiated on Nov. 9, invoking an escape clause that let it pull out of the all-stock deal valued at $9.3 billion at the time. Enron said it would cease payments on all but its core operations.
Already awash in some two dozen shareholder and employee lawsuits alleging misrepresentation, Enron on Wednesday founded a litigation committee that was certain to take aim at Dynegy's pullout.
Enron can expect more lawsuits, especially from big investors like mutual and pension funds, Baylor University investments professor William Reichenstein said.
"The big question now is whether there is anything left to go after. That remains very much in doubt," he said.
The loss of Enron's investment-grade credit rating forces some $3.9 billion in debts to come due immediately, a major problem for a company that has spent most of the $5.5 billion it sought in recent weeks to stay afloat. Enron said in a recent regulatory filing that it was unlikely to "continue as a going concern" were its credit rating to be slashed to junk status.
Dynegy apparently took that warning to heart.
"We knew when to say 'no' and this morning we said 'no,"' Dynegy Chairman and Chief Executive Officer Chuck Watson said during a brief conference call with investors.
Dynegy said it would exercise an option to buy Enron's Northern Natural Gas Pipeline with the $1.5 billion it and partner ChevronTexaco Corp. put into the deal. Enron said it was reviewing Dynegy's actions, including its "assertion that it is entitled" to buy the pipeline.
Sources close to negotiations late Tuesday on efforts to lower the value of Dynegy's deal by about half said it became increasingly clear that Enron's tricky and often indecipherable accounting was becoming a sticking point,
Dynegy said it stopped trading with Enron Wednesday morning, pegging its exposure at $75 million. Others traders said they would deal with Enron on a cash-only basis, a virtual death sentence for a trading outfit that has $16.86 billion in debt and other obligations -- and less than $2 billion in cash on hand.
Operations were suspended indefinitely at Enron's once highly lucrative online trading system, EnronOnline. The unit accounted for up to 90 percent of Enron's earnings, and was considered the jewel of the trading franchise that Dynegy coveted most.
RISK MANAGEMENT FAILURES
Enron, which touted itself as an agile risk manager, found its credit and debt had spiraled out of control as a series of partnerships designed to hide debt off of its balance sheet became public in recent weeks.
The partnerships, which included top Enron executives, provided financing in exchange for guarantees that Enron's stock stay above certain levels and its credit remain investment-grade. But they came back onto the balance sheet with a vengeance, as Enron found it would have to meet massive debt obligations as its shares and credit fell.
The stock peaked at $90.56 in August 2000, riding high on the cresting wave of the technology boom after Enron took its trading outfit online and promised to bring its business model into the broadband communications arena.
Andre Meade, a Commerzbank analyst who has been consistently bearish on Enron and the deal, said its core business deteriorated at an increasing pace in recent weeks, and the ratings agencies could not find the liquidity they wanted inside Enron.
"The numbers were not enough to soothe them," said Meade, who downgraded Enron to "sell" from "hold" on Wednesday. "This company should have been downgraded to junk weeks ago. The ratings agencies had given them several weeks, and they just couldn't hold out anymore."
The week before he quit in August, thee was an explosion near London at the Teeside Power plant, owned by Enron. Tow employees were killed, both with families of small kids. When he resigned the following week, he had the audacity to sight their deaths as his 'realization that life is to pprecious to work so hard'.
It was obvious that the real vision was "life is to precious to pend it in jail." He defintely was a sleazy, low character type.
It is unfortunate about the California thing. Enron was on the right side of the argument for that. I am sure Davis and those other welfare whackos out there will try to do a 'see I told you so' somehow.
Sounds like their could be some criminal investigations as a result of some of the accounting information, etc. being cooked.
The company my father works for (30-odd years, 3 years from retirement) is filing chapter 11. No higher up's seem concerned, so we figure it's likely to be business as usual. Does this just give protection from creditors?
There are companies that have been running under Chapter 11 for years and years. The idea is to eventually get back to business health. Doesn't always happen, sometimes they sell the assets and fold their tent.
Alliance Capital: 42.9 million shares
Janus Capital: 41.4 million shares
Putnam: 23.1 million shares
Barclays Global: 23.1 million shares
Fidelity: 20.8 million shares
Smith Barney: 19.4 million shares
State Street: 16.1 million shares
Aim: 14.0 million shares
Vanguard: 11.4 million shares
Morgan Stanley: 10.1million shares
Not to mention the rumor that JP Morgan and Citigroup hold about 800 Million shares of ENE, each. With 300/400 Million of those unsecured. Ugly for sure. apparently this will cost in the neighborhood of .05 to .10 for their earnings.
Uh huh, and there are still morons who don't believe Enron manipulated the market and gouged California citizens during the phony deregulation/energy fiasco last year.
It is unfortunate about the California thing. Enron was on the right side of the argument for that...Right side of the argument for what?...By whose standards...Enrons?
Oh yeah, everything else was dirty dealing ,all the upper managment was crooked for 4 yrs, including the low life CEO that resigned after one month was crooked, but that one deal screwing Californiains...well that was on the up and up.
BTW the "welfare whackos" (as you call us) of California happens to be about the 6th largest economy in THE WORLD...You can't tell me your crooked bosses (your words) at Enron weren't trying their underhanded tricks to get a piece of that huge pie too.
If you can pierce the corporate veil. It all depends on how they conducted themselves. They may very well be able to keep every million - provided they got such sums - if it was paid out properly.
They'll be able to get a federal government job. Maybe the FBI or something.
Note that the SEC has implied that Enron is playing ball and has taken steps to show it's getting its act together. Second, note the following quote:
The U.S. Treasury Department said it was monitoring Enron, but said it has yet to see "anything extraordinary."
The above quote confirms why your first question and observation is so good. I've been following this story fairly closely for a few weeks now. It really doesn't add up other than a temporary dive in some IT side investing. But just about everyone is shell shocked over IT spinouts, it's not isolated to Enron. Enron can still make a lot of money.
You asked the right question.
I personally suspect some payback politics.
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