New York Times - 3 Dec 01

Prof. Robert B. Laughlin
Department of Physics
Stanford University, Stanford, CA 94305
(Copied 10 May 09)


Published: Monday, December 3, 2001

Enron, which became one of the world's dominant energy companies by reshaping the way natural gas and electricity are bought and sold, filed the largest corporate bankruptcy in American history yesterday and blamed the company that had presented itself as its rescuer.

The Enron Corporation sued Dynegy, a crosstown Houston rival that had agreed to acquire Enron on Nov. 9, for backing out last week after citing what it called Enron's rapid deterioration and misrepresentations. Enron immediately collapsed, making a bankruptcy filing all but certain.

Once the world's largest energy trader, Enron is now seeking $1 billion or more in loans and a partnership with a major bank to allow it to stay in business.

Given Enron's size, as the nation's seventh-largest company in revenue last year, and its baffling complexity, creditors, which include major financial institutions around the world, are likely to face drawn-out proceedings to receive repayment.

The lawsuit demands at least $10 billion in damages from Dynegy and a court order blocking the company from seizing a natural gas pipeline that is one of Enron's most prized assets. Dynegy says its actions were entirely legal. Under the terms of its agreement with Enron, it says, it plans to take control of the pipeline on Dec. 12 in return for its $1.5 billion investment in Enron.

Although Enron's energy-trading operation was widely thought to be near collapse before Dynegy agreed to the acquisition, Enron's lawsuit essentially accuses Dynegy of using the merger as a ploy to weaken Enron even further. By calling off the deal, Dynegy "sought to put an end to Enron as a competitive force" and therefore bolster its own business, the lawsuit said.

Dynegy's chairman, Chuck Watson, said last night that Enrons lawsuit is "frivolous" and that his company "intends to pursue an action for the damages that Enron has caused Dynegy."

"Enron's charges against Dynegy are false, and the public should be wary of Enron's efforts to deflect attention from the facts," Mr. Watson added.

Enron's bankruptcy filing, and its indication that creditors' best hopes for recovery may come partly from litigation against its onetime merger partner, ends the company's downfall. Its stock, worth $90 at its peak last year, is now nearly worthless, and other traders quit doing business with it last week for fear they would not be paid.

In filings with the Federal Bankruptcy Court in New York, Enron sought Chapter 11 protection from creditors while it reorganizes. The filings by Enron and its affiliates included its energy trading business and 12 of its other units, but not its pipelines. The company lists assets of $49.8 billion and debts of $31.2 billion, but these debts do not include many items not listed on its financial statements.

The largest previous bankruptcy filing, measured by assets, was Texaco's 1987 filing, which listed $35.9 billion in assets. That filing came after Pennzoil won a large judgment from Texaco for breaking up Pennzoil's merger with Getty.

In its struggle to remain a functioning business and avoid liquidation, Enron said it was in advanced talks to obtain new loans. People close to the talks said the loan agreements, probably for more than $1 billion, might be completed by the end of today.

Enron is also preparing for large-scale layoffs, primarily in Houston, where it employs 7,500.

Enron said it was also talking with leading financial institutions to restart its huge trading operations through a new joint venture. Under this strategy, the partnership would use the institutions' financial strength to guarantee that Enron would pay its bills, thus giving other energy traders confidence to resume doing business with Enron.

People close to the talks said that Enron's two leading banks, J. P. Morgan Chase and Citigroup, were among the institutions discussing the joint venture. "Enron would be the muscle; the banks would be the money," an executive close to the talks said.

In an interview yesterday, Jeff McMahon, Enron's chief financial officer, said that establishing a joint venture makes the best sense for creditors. While Enron has a large pipeline business and other tangible properties, its core energy-trading operation was by far its most valuable franchise and the biggest generator of profits.

"We're having multiple discussions with multiple potential joint-venture partners, and each one of the options are different," he said.

Enron said that it would provide the new operation with traders, technology and a back office. Trades would be done through EnronOnline, the Internet platform that was until recently the industry's largest market maker. Any joint venture would be subject to the approval of a bankruptcy judge.

Enron's lawsuit illustrates how acrimonious the merger effort became. The suit had to be filed quickly because Dynegy was preparing to take control of the Northern Natural Gas pipeline, Enron's largest. Dynegy had given Enron $1.5 billion as part of its merger agreement to help stabilize Enron's business, and it received an option to acquire the pipeline if the merger was terminated. Dynegy says it has exercised that option, but Enron says that the merger termination was illegal.

Several major credit-rating agencies have said they are continuing to consider downgrading Dynegy because of the risk of litigation with Enron. But some analysts say Dynegy is on firm legal ground, both in its defense of the lawsuit and its right to take over the pipeline.

Jeff Dietert, an analyst with Simmons & Company in Houston, said he believed that since the signing of the merger, additional shareholder lawsuits, credit-rating downgrades, disclosures of additional debts and the deterioration of the trading business had all harmed Enron's value.

"It seems like a number of things are contributing to material changes at Enron," Mr. Dietert said.

But Enron says that soon after it signed the deal, Dynegy began to undermine Enron by publicly wavering in its commitment to the merger and by dragging out negotiations on revising the merger terms. Specifically, the complaint says that Dynegy helped push Enron under by taking "affirmative action, through on-the-record and off-the-record comments, to create substantial doubt and uncertainty concerning its willingness to consummate the merger." Part of this plan, Enron said, was Dynegy's tactic of proposing and then rejecting terms for the merger.

Dynegy's own business "stood to gain dramatically if Dynegy could push Enron into a collapse," Enron argued.

"Thus, by creating instability for Enron," Enron said, "Dynegy seized on the opportunity to grab a substantial portion of the enormous market share of Enron as the company was incapacitated."

Dynegy has said part of the reason it backed out was Enron's disclosure of debts in a securities filing on Nov. 19 that revealed information far different from what Dynegy had known. This included a $690 million debt that suddenly became due the end of November because of a credit rating downgrade three days after the merger.

But in its lawsuit, Enron disputed that it had misrepresented its finances, that Dynegy knew about the $690 million before the merger agreement was signed and that the accelerated payment of the debt was set off only after that date.

Outside lawyers have said that a judge would be likely to take a hard look at a recent case involving Tyson Foods and IBP, a beef producer. A judge in Delaware ordered Tyson to complete its buyout of IBP after their proposed combination collapsed. Tyson, like Dynegy, had argued that it was not fully informed about IBP's financial problems when it negotiated to acquire the company.

Enron's bankruptcy filings list 50 pages of creditors, including some of the nation's largest banks. The Citibank unit of Citgroup is owed $3 billion, although that number apparently reflects money owed to other banks on loans that Citibank arranged.

Among the other notable debts are almost $2 million owed to Arthur Andersen, Enron's auditors, and $44.2 million in debts to Dynegy itself. It also reported owing $35.5 million to the California Power Exchange, which bought electricity for use in that state.

Some of the largest financial institutions in the world were owed large amounts by Enron subsidiaries when the filings were made. In addition to billions in bonds and bank debts, Enron said it had trade debts of $185 million to two offices of the Chase Manhattan Bank, of $126 million to Barclays Bank, of $74 million to UBS and of $71 million to Credit Suisse First Boston.

Enron 2 Dec 01 $49.8 billion
Texaco 12 Apr 87 $35.9 billion
Financial Corporation of America 9 Sep 88 $33.9 billion
Pacific Gas and Electric 6 Apr 01 $21.5 billion
MCorp 31 Mar 89 $20.2 billion
First Executive 13 May 91 $15.2 billion
Gibralter Financial 8 Feb 90 $15.0 billion
HomeFed 22 Oct 92 $13.9 billion
Southeast Banking 20 Sep 91 $13.4 billion
Reliance Group Holdings 12 Jun 01 $12.6 billion
The Biggest Bankruptcies: Enron replaced Texaco as the company with the largest reported assets when it filed for bankruptcy. (Enron assets include only 13 Enron subsidiaries. Sources: and Enron).