Enron failure is third largest

Mark Babineck

Monday, Dec. 3, 2001 | 9:48 a.m.

HOUSTON -- Enron Corp. isn't going down without a fight.

The one-time energy trading giant capped its six-week tailspin by filing to reorganize under Chapter 11 bankruptcy protection Sunday, in one of the largest U.S. corporate bankruptcies ever. Enron also sued rival Dynegy Inc. for $10 billion, claiming the fellow Houston-based company had no grounds to scuttle a proposed buyout.

In its filing, Enron asserted that Dynegy breached a merger agreement by backing out of its Nov. 9 deal to buy Enron less than three weeks later. Enron also says Dynegy has no right to exercise an option on its large Northern Natural Gas pipeline in return for a $1.5 million investment.

Dynegy chairman and chief executive Chuck Watson called Enron's lawsuit "frivolous and disingenuous."

He said it was an example of Enron refusing to take responsibility for its decline.

"The reality is, Enron invited Dynegy to participate in merger negotiations. Dynegy entered those negotiations in good faith and provided $1.5 billion in cash to Enron. Despite assurances that Enron's liquidity situation had stabilized, the cash was gone in less than three weeks, and Enron has had difficulty providing an accounting as to where it went," said Watson.

Enron listed $24.7 billion in assets; combined with the total assets of the 13 Enron units filing totals just under $50 billion. Texaco Inc. filed the largest bankruptcy in history in 1987 when it had $35.9 billion in assets, according to BankruptcyData.com. Adjusted for inflation, that amount would be about $56.4 billion today, the Boston-based company said.

Enron's bankruptcy is the third-largest on record, behind Texaco's and the $33.9 billion filing of Financial Corp. of America in 1988.

Enron listed $13.1 billion in liabilities, with its subsidiaries adding another $18 billion, according to the filing.

Enron would use any proceeds from the Dynegy lawsuit to repay its creditors. In the meantime, the company said an undetermined number of workers, mostly among the 7,500 in Houston, would be laid off.

Both the bankruptcy and the lawsuit were filed in Bankruptcy Court for the Southern District of New York.

Enron also said it is in "active discussions" with several financial institutions to secure credit for the continued operation of its wholesale energy trading business, as well as additional funding to keep the rest of the company operating.

Morgan Stanley Dean Witter analyst Jim McAuliffe said Enron's ability to win new financing will be crucial to a successful reorganization.

"That's going to be the tricky one," he said.

A cash and credit crunch following disclosures in mid-October of questionable financial partnerships has made it difficult for the once-mighty energy trader to continue doing business.

Several energy companies have stopped making trades with Enron for fear they won't be paid. Some have revealed they have multimillion-dollar exposures to Enron.

Enron Chairman and Chief Executive Kenneth Lay said Sunday's filings will help the company regain lost confidence.

"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.

"From an operational standpoint, our energy businesses -- including our pipelines and utilities -- are conducting normal operations and will continue to do so," he said.

McAuliffe, the Morgan Stanley analyst, said he was surprised Enron hadn't nailed down its debtor-in-possession financing before the announcement.

"That's going to be the tricky one. That comes well ahead of all unsecured creditors and all secured creditors," he said.

Enron said it would ask the court to consider several motions to continue payments for its workers' payroll and health benefits, as well as keeping vendors paid.

Shares of Enron had plunged to 26 cents Friday on the New York Stock Exchange, down 10 cents from the previous close. A year ago, shares were trading near $85 apiece.

Dynegy says it is entitled to the pipeline, a 16,500-mile system stretching from Texas to the Great Lakes, in exchange for the $1.5 billion Dynegy stakeholder ChevronTexaco pumped into Enron as part of the merger.

Enron's loss of credibility in the market stemmed from revelations that its former chief financial officer was running partnerships that allowed the company to keep half a billion dollars in debt off its books. In early November, Enron restated its earnings back to 1997, eliminating more than $580 million in reported income.

Smaller rival Dynegy descended to rescue its downtown neighbor, but even its top officials were surprised when Enron later disclosed it had a $690 million debt due within a week.

Amid negotiations to reduce the purchase price, the Dynegy-Enron deal fell apart after Enron's credit was reduced to junk status.

Congressional leaders are calling for hearings into the Enron fallout, the Securities and Exchange Commission is investigating. Both investors and employees have filed several lawsuits.

Enron sought bankruptcy protection for itself and 13 subsidiaries, including Enron North America Corp., its wholesale energy trading business; Enron Energy Services, the company's retail energy marketing operations; Enron Transportation Services, the holding company for Enron's pipeline operations; Enron Broadband Services, the company's bandwidth trading operation; and Enron Metals & Commodity Corp.

Companies not included in the filing were Northern Natural Gas Pipeline, Transwestern Pipeline, Florida Gas Transmission, EOTT, and other Enron international entities. Also not included is Enron's Portland General electric utility, which is being bought by Northwest Natural Gas Co.