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."
If you had asked me a year ago what was morely likely, jets flying into WTC or Enron filing bankruptcy...I would have chosen the WTC.
Enron Corp. was very good to me in the 90's...sad to see her go.
What forms of energy does (did) Enron specialize in, ie. Oil, Coal, Uranium, Electricity, Hydrogen etc., or is this huge stock company a merely a storefront for trading.
All of this legal accounting gobbeldygook is interesting, but what does it mean?
Is this going to open a new market to foriegn energy companies in America?
Is this going to open a market for a new energy product, such as Hydrogen?
Could this event, or any event like it lead to stronger International Business Regulations?
I know this is a tough question, but Energy is a resource that is not easily Governed by a small greedy nation state.
Business Description:
Provides products and services related to natural gas, electricity and communications to wholesale and retail customers;
markets risk management and finance services worldwide;
develops power plants, pipelines and delivers high bandwidth communications
What went wrong? From my perspective, Enron's top most management were involved in a four-year scandelous program of misrepresentation, deciet, dishonesty, and criminal behavior while espousing the "Enron Values" of Integrity, Respect, Communication, and Excellence, and pontificating and diaplaying huge arrogance and smugness to everyone in general. Many corporate mind-numbed robots bought the line and firmly still believed in the leadership of the company till about two weeks ago when it really began to unravel. Today, there are still people that feel it will 'turn itself around'.
With 23,000 employees worldwide and $15+ billion in unpaid bills (with less that $2 billion in cash), countless deals with large counterparties/utilities/producers, our economy is going to take a huge it. No doubt about it.
What type of policy directive could effectively hold individuals responsible for the crimes that are comitted by their companies?
Who "bumped them off"?
Live by oil/gas futures, die by oil/gas futures.
They are the Natural Gas Utility in my town. They bought Entex(the old Gas utility) several years ago.
Understand, though, Chapter 11 does not save Enron like it does, say a furniture concern or other physical retailer. Enron lives (and has died) on their credit rating. The movement to junk status for their bonds today sent them over the abyss, from which there is no return. No one wants to od multi-million dollar deals with someone who will not pay up.
Bread and butter was Gas and Power, also did deals in Paper, pulp, lumber. water, bandwidth (one of the things that killed them), weather(temp and rain). equities, trucking cargo space, metals crude and refined products, currencies, ...the list was endless.
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.
The accounting "tricks" uncovered in just this quarter alone wiped out over $600 Million in profits from a year that saw only $900 Million in "dressed up" profits.
It's difficult to see in the articles above, but here is how just ONE of those accounting tricks was used:
The CFO formed his own private company. Enron funded the company and went in on 50-50 deals, with Enron co-signing the note for 100% of the debt. Per certain accounting rules (Gaap, perhaps), if your company doesn't own 50.1% of a venture, then you don't have to carry the debt on your books, but you do get to count 100% of the assets of the venture on your books.
So shareholders didn't realize the full extent of Enron's debt due to these and other such "tricks", and they were misled over the the actual real value of Enron's assets due to these same tricks.
The real rub is that a third-party audit (required for the 10-Q's) is supposed to document these transactions so that stock holders, employees, and stock brokers can view the full risk picture. Instead of red-flagging these and other tricks, Andersen buried them in long-winded paragraphs and acted as though they were no big deal.
This behavior allowed the big three credit rating agencies to issue inflated grades to Enron's known public debt, and those cheery ratings misled ordinary bond investors to get sucked into junk bonds thinking that they had "A" quality paper.
Also, if you will review Enron's campaign donations, you will see that they spread their donations almost evenly between Democrats and Republicans in 2000, so a political "payback" theory makes no sense.
How?
Credibility for what? I am make no claim here. Only stating my opinion. And yes, they are Whackos.
Chapter 11 Field
_ _ _ _ _ F I E L D
The Astro-Retractable-Ceiling Park
Compaq Center (formerly the Summit) is also in the market for a new name.
How long before Reliant Energy's $300million naming of the Astrodomain puts them into bankruptcy?
Nationally yes, but locally (Houston) no, BILLIONS of dollars have been siphoned off for downtown white democrat property owners with the public's full knowledge (and "support"). The re-election campaign for the mayor who is doing this is close and his largest support comes from impoverished black voters.
??
"From my perspective, Enron's top most management were involved in a four-year scandelous program of misrepresentation, deciet, dishonesty, and criminal behavior while espousing the "Enron Values" of Integrity, Respect, Communication, and Excellence, and pontificating and diaplaying huge arrogance and smugness to everyone in general. "
9 posted on 11/28/01 5:09 PM Pacific by Jalapeno
Unless you don't understand what "perspective" means it sounds like you am make a claim to me...Who are the "whackos" again.?
I don't see how these guys can make ends meet.
Taxpayer-supported international racketeering
"Other big donors were also invited to China. They also cut million-dollar deals and then sliced a percentage off for the DNC. Another news article kept by Ron Brown in his files listed Enron, Mission Energy, California Energy, Hughes, AT&T, Federal Express, Sprint and Chrysler as donating money to the DNC.
Ron Brown's Indonesia trip
"Furthermore, the EXIM bank under Brody financed over $4 billion dollars worth of gas deals with another energy company, Enron. Enron is also an Akim/Gump client. In fact, Enron executives traveled with Ron Brown in 1994 on trade missions to Russia, Indonesia and China, cutting EXIM and OPIC backed deals in each country. Enron is not only another Akin/Gump client but it is listed as one of forty-four such companies in which Rubin had "significant contact" with during his years at Goldman Sachs."
Who's who in the Commerce scandal
"Li Ka-Shing is not the only one to take advantage of the Clinton sponsored changes in the Maritime finance program. For example, two power barges for export to Indonesia made by Enron Corp., a large contributor to Bill Clinton, were also built through the DOT Maritime-funding program, and backed by $50 million in taxpayer financing. Another questionable ship deal included over $60 million to build a paddlewheel steam boat/casino. Still another deal landed millions in taxpayer supported loans for two floating combination hotel/casino barges.
Clinton Export Policy Helped India Hide The Bomb
"Another Brown document for the Russian trip, dated February 1994, lists Tamraz along with CEO's from Tenneco, Texaco, ARCO, Enron, Conoco, AT&T, Motorola, and Silicon Graphics. In 1994, Silicon Graphics, along with Tandem and several other major computer companies, hired Tony Podesta to lobby for them. Tony Podesta is the brother of John Podesta, Assistant to the President and Staff Secretary for Bill Clinton."
The power behind Kyoto
"But there are a few big corporations that favor some form of limits on so-called greenhouse gas emissions, and they are lobbying the Bush administration to be less implacable on the subject. The bad guy list includes Royal Dutch/Shell Group, BP, Cinergy, AEP, Entergy and Enron."
In 1988, he raised eyebrows by lobbying Argentina on behalf of a proposed Enron pipeline, again invoking Dad's name. Enron was headed by Bush family friend and Republican bankroller "Ken Lay".
From Here:
To represent its interests, Enron has employed former Secretary of State James Baker and former Commerce Secretary Robert Mosbacher from the Bush administration as well as former Clinton administration Treasury Secretary Lloyd Bentsen.
A 1993 New Yorker article reported that Baker and Bush's son Neil lobbied Kuwaiti officials that year to select Enron to rebuild a power plant destroyed in the Iraqi invasion.
Lay acknowledged that Baker was on an Enron retainer when he visited Kuwait in 1993 for ceremonies honoring the former president.
"I'm not sure [ Baker ] even mentioned our project while he was there," said Lay, who said the New Yorker article "was loaded with total inaccuracies and falsehoods."
The Nation magazine reported in 1994 that Bush's son George W. Bush phoned Argentina's public works minister in 1988 to ask him to award Enron a contract to build a natural gas pipeline.
"I felt pressured," the minister was quoted as saying. "It was not proper for him to make that kind of call." Enron later won the contract, the magazine reported.
Enron spokesman Mark Palmer said no member of the Bush family has ever had a financial or consulting relationship with the company. Palmer said George W. Bush, now governor of Texas, told Enron officials he never called the public works minister.
Enron's board of directors includes Wendy Gramm, wife of Sen. Phil Gramm (R., Texas). Wendy Gramm was appointed to the board in 1993, five weeks after resigning as chairwoman of the Commodity Futures Trading Commission, where she had supported Enron proposals to relax regulations on trading of energy futures. Enron and Gramm both said in published reports that there was no connection between her appointment and her actions as a regulator.
Tony Lentini, head of Apache Corp., a Houston oil and natural gas exploration company, said because Enron controls distribution of large supplies of energy, its futures traders have undue influence over prices.
"It's insider trading, but it's legal to have this superior knowledge and trade on it in the futures market," Lentini said. "Do the same stuff in the stock market, you go to jail."
Lay acknowledged that Enron, which invented several of the financial instruments now being used in the futures market, is a "very significant participant.
"I'm not sure that's the same as, quote, 'insider trading.' " Lay said. "We have a number of very strong competitors, including the major oil companies and the investment banking houses and electricity companies."
Last week, Enron's oil and gas subsidiary added to its board of directors Frank G. Wisner, who had reportedly helped Enron win a $2.8 billion contract for a power generating station as U.S. ambassador to India.
The New York Times reported in 1995 that Wisner "constantly cajoled" Indian officials and that the company also was aided by the Central Intelligence Agency, which assessed the strategies of the competing contractors.
Lay denied Enron received any assistance from the CIA: "To my knowledge, I don't think we've ever received any information from the CIA. When we go into these countries and bid on these projects, we rely solely on our own intelligence."
In July, Amnesty International issued a report accusing Indian police of beating and arbitrarily arresting opponents of the Enron project. The group accused police of "collusion" with Enron.
Enron officials acknowledge reimbursing the government for extra police at the site -- as it says it is required to do -- but denied any role in the alleged mistreatment. They said police were always under police control and not under the direction of Enron.
The project, the biggest international investment since India moved to open its economy in 1991, has become the object of protests by thousands of local residents who say the power-plant will take their homes and destroy their fishing grounds and coconut groves.
The opposition party won a state election in 1995 after a campaign in which it accused Enron of using bribery to win the contract. Although the accusers later retracted their bribery allegations, Enron was forced to renegotiate the deal at more favorable terms.
In Indonesia, Enron won a power plant contract through a partnership that includes the son of the country's president.
"There are very few large companies in Indonesia that do not have involvement with one or more members of the president's family," Lay said.
He insisted, however, that Enron abides by the U.S. Foreign Corrupt Practices Act, which bars companies from paying bribes abroad.
...Some analysts have suggested Enron has overextended itself financially in preparing for electric competition and could face ruin if deregulation stalls.
Lay insisted that won't happen.
[End of Partial Transcript]
DUBYA - From Oil to Baseball to the Governor's Mansion
an excerpt from "Enron: The Global Gospel of Gas":
In this country Enron has traditionally been a major supporter of the Republican party. Ken Lay, the chief executive of Enron, hosted the Republican national convention in Houston in 1992. After George Bush, the incumbent president, lost the 1992 election, Enron started to pump money into Democratic coffers such as Lloyd Bentsen, another Texan, and Clinton's first treasury. In one Senate election campaign, the Democrat received more than $14,000 from Enron. According to the Washington, D.C.-based Center for Responsive Politics, the amount is the second highest paid out by Enron to a political campaign.
Bentsen quit his job as Treasury Secretary at the end of 1994 and was succeeded by Robert Rubin, who worked closely with Enron when he was co-chair of Goldman Sachs investment bank. Clinton first hired Rubin to head his National Economic Council. Soon afterwards, Rubin wrote on Goldman Sachs stationery to former clients, including Enron, saying he "looked forward to continuing to work with you in my new capacity."
After this ethical lapse, Rubin filed a White House financial disclosure form that listed Enron among the names of 42 former clients with whom he had had "significant contact." Rubin pledged to recuse himself from any government dealings affecting these former clients for one year, a period that has since lapsed.
Enron's lobbying clout was demonstrated in its attempts to deregulate the energy futures markets that enhance its profits. Enron was one of nine energy companies that asked the U.S. Commodity Futures Trading Commission (CFTC) in November 1992 to exempt energy derivative contracts from federal government oversight as well as from fraud laws. The request was made right after Bill Clinton won the U.S. presidential election at a time when the political composition of the board was likely to change soon. The five-member commission is made up of three members from the ruling party and two from the majority party.
The deregulatory push was advanced by Wendy Gramm, the CFTC chair, who authorized the commission staff to begin the lengthy rule-making process required when a federal agency makes a major policy decision. Gramm, a former senior staff member of the Reagan White House, resigned as chair of the commission on January 21, 1993, as Clinton took office. Wendy Gramm is the wife of Phil Gramm, the ultra-conservative Republican Senator from Texas.
Five weeks after Gramm resigned, she was appointed to Enron's board of directors, just as the commission voted two to one to deregulate the energy derivative contracts business. President Clinton had yet to appoint anyone to the two vacant seats on the CFTC board; the commissioners who embraced deregulation were Gramm allies appointed during the Bush administration.
The regulatory exemption for energy futures was made retroactive to 1974 - when the CFTC was created - to remove any potential legal challenges to past energy contracts. The exemption from fraud legislation that the industry wanted was dropped in response to objections in Congress. Gramm and Lay say there is no connection between the CFTC decision and Gramm's appointment to Enron's board.
Enron has also been under fire for the environmental impact of its activities at a company power plant in Boston. Each day, for six weeks in the summer of 1995, a million litres of water were trucked to the plant just outside Boston to prevent the Charles river from shrinking to less than half its normal flow as a result of plant operations.
In the early 1990s Enron bid for a contract to rebuild Shuaiba North, a 400-megawatt power plant that supplied 5 percent of Kuwait's electricity before it was bombed during the 1991 Gulf war, according to journalist Seymour Hersh.
Hersh wrote in a 1993 New Yorker magazine article that Enron's price for supplying the power is 11 cents a kilowatt hour. The rival bid put forward by the German company Deutsche Babcock was six cents, while the state-subsidized rate is half-a-cent a kilowatt hour.
Despite the large price difference, Hersh noted that Enron's bid received favorable consideration after help arrived from former US president George Bush, a good friend of Enron founder and chief executive Kenneth Lay. Lay, raised funds for Bush's 1992 re-election bid and hosted the reception committee for the Republican National Convention that year.
In 1993 Bush visited Kuwait along with former U.S. Secretary of State James Baker. At the time Baker, former Commerce Secretary Robert Mosbacher, as well as Thomas Kelly, the director of operations for Bush's Joint Chiefs of Staff during the Gulf war, were on payroll working for Enron.
Hersh says in his New Yorker article that Baker, along with the former president's two youngest sons, Neil and Marvin, remained in Kuwait after Bush left to promote the Enron bid to rebuild Shuaiba with the Kuwaiti utility ministry. Their efforts apparently paid off initially. Hersh's sources told him that Enron's Kuwaiti business partners in the bid to rebuild Shuaiba had "obviously been hand picked" by the Kuwaiti prime minister. Enron calls the New Yorker article "completely incorrect." The company now says it has abandoned the project in Kuwait.
In Mozambique, the Philippines and Argentina, Enron has been accused of putting pressure on the local authorities through powerful figures in the United States government.
75 Posted on 01/11/2000 15:54:12 PST by Boyd
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