Posted on 10/20/2002 7:19:36 AM PDT by Libloather
Enron Anniversary No Cause for Celebration
Sat Oct 19, 7:25 AM ET
By Paul Thomasch and Carolyn Koo
NEW YORK (Reuters) - Enron Corp.'s bombshell decision a year ago to cut its equity by $1.2 billion initially got a singular response from the financial community: Silence.
By and large, analysts and reporters missed the energy trader's Oct. 16, 2001 statement that it would write down equity to account for dubious partnerships -- partnerships that would drive it into a then-record bankruptcy and cast doubt on the whole power industry.
Granted, Enron's write-down was easily overlooked. It was not mentioned in that day's earnings release and barely alluded to during a subsequent conference call.
It wasn't until two days later when an article appeared in the Wall Street Journal that the write-down was publicized and understood: for years Houston-based Enron (ENRNQ.PK) had used stock to create partnerships that misled the public about its health.
"After the conference call, people were asking more and more questions," recalls James Elliott, a Dominick & Dominick Advisors fund manager. "Things didn't add up. For instance, no one understood where the equity write-down came from."
Even before the write-down was publicized there were concerns about the company. The stock was down sharply; its chief executive had quit; and it had just posted its first quarterly loss in more than four years.
A year later, analysts see the write-down as the event that paved the way for a spectacular corporate collapse that would profoundly alter the power industry.
"PERSONAL JIHADS"
Just six weeks later Enron had filed for bankruptcy after an aborted takeover by Dynegy Inc. (NYSE:DYN) and rapid-fire revelations about its finances.
"That whole time was a period where you could not think the leading energy company in the country had resorted to such stupid frauds," said John Olson, an analyst in Houston with Sanders Morris Harris.
Suddenly, the same financial community that missed the Oct. 16 write-down was scrutinizing the finances of nearly every energy trading company.
Federal investigators started probing energy trades, rating agencies made sweeping cuts to the credit of debt-laden companies and Congress called hearings featuring the now infamous Kenneth Lay, Andrew Fastow and Jeffrey Skilling.
"Enron exposed the vulnerability of the industry," said Paul Patterson, an analyst with Glenrock Associates. "It may have accelerated the rating agencies tightening their standards with respect to the merchant energy sector, but sooner or later the party would have ended."
Moody's Investors Service and Standard and Poor's both took a hard line with power traders after criticism that the financial community had not delved deeply enough into Enron's books.
Dynegy, Mirant Corp. (NYSE:MIR) and Williams Cos. Inc. (NYSE:WMB) -- among the companies vying to succeed Enron as the nation's premier energy trader -- eventually had their credit cut to "junk."
"Nowadays, rating agencies have gone on personal jihads to be the first out with bad news and put companies on immediate credit watch," said Olson. "That has resulted in this terribly deflationary oppressive capital market climate."
DEVASTATION SPREADS
The trading business itself has also come under fire for revelations that companies reported deals that artificially inflated volumes and revenues. By May, Reliant Resources Inc. (NYSE:RRI) and CMS Energy Corp. (NYSE:CMS), among others, had admitted to "round trip" trades that would become the subject of numerous investigations by federal regulators.
What's more, American Electric Power Co. (NYSE:AEP) and others have pored over internal documents to determine whether their traders provided false pricing information to publications in an apparent attempt to manipulate the wholesale markets.
The fallout has reached the highest levels of the industry's top companies, as a string of senior executives have stepped down in the face of scathing criticism. The casualties include Dynegy's Chuck Watson and Steve Bergstrom, CMS's William McCormick, AES Corp.'s (NYSE:AES) Dennis Bakke and Aquila Inc.'s (NYSE:ILA) Robert Green.
Today, the devastation is even spreading to old-line utilities that had little in common with Enron. TXU Corp. (NYSE:TXU), for instance, backpedaled this week and announced an 80 percent dividend cut to shore up its balance sheet. And Allegheny Energy Corp. (NYSE:AYE) may stop paying a dividend after defaulting on some key credit agreements.
"Now you have trap doors opening up and sucking companies down," Olson said, reflecting on the year that has passed since Enron first mentioned its write-down. "What we are seeing is a good old-fashioned purge. It's worse than a capitulation, worse than a correction."
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