The bankrupt Enron Corp., Houston, still faces a myriad of unresolved issues, including lawsuits and various hearings in Washington, DC, but it settled one legal dispute by agreeing that Houston-based Dynegy Inc. can exercise its option to buy Enron's Northern Natural Gas Pipeline unit.
That settlement does not affect the rights of either company in their continuing legal battle over Dynegy's Nov. 28 decision to abandon its Nov. 9 agreement to merge with Enron.
The deal was curtailed shortly after credit ratings agencies began downgrading Enron to below an investment-grade ranking. Consequently, Enron filed for Chapter 11 bankruptcy protection on Dec. 2 in a federal court in New York City.
Meanwhile, Enron's implosion and its aftermath are becoming increasingly politicized as US congressional committees kick off hearings on various aspects of the debacle.
Legal woes updated
As of presstime last week, a judge was deliberating whether to grant the motion of some creditors that the bankruptcy case should be moved to Houston. Also last week, Enron's energy-trading business was to be sold by auction in a federal bankruptcy court
Once the world's largest gas and electricity trader, Enron filed the largest-ever US Chapter 11 bankruptcy, in which it listed $31.1 billion in liabilities-excluding off-balance-sheet transactions-and $50 billion in assets.
The bankruptcy filing affects 14 affiliated entities but doesn't affect some of Enron's core businesses, including Northern Natural Gas.
Dynegy's exercise of its option to buy the pipeline requires payment of $23 million at closing, subject to working capital adjustments. Dynegy agreed to extend Enron's option to repurchase the pipeline to June 30 from a previous deadline of May 9.
Meanwhile, Enron will provide transition services for safe and reliable operation of the pipeline system through June, while Dynegy assumes control of the system.
"We acquired the pipeline under the terms originally agreed upon by the two companies with the exception of the date extension," said Chuck Watson, Dynegy's chairman and CEO.
In a separate lawsuit, Enron seeks $10 billion in damages from Dynegy for the termination of the merger agreement. Dynegy executives said they intend to pursue their earlier countersuit against Enron for alleged breaches of that agreement.
Dynegy earlier paid $1.5 billion to acquire preferred stock and other rights in an Enron subsidiary that owns the pipeline. Following the termination of that merger agreement, Dynegy exercised its rights to acquire the common equity of the pipeline's parent.
Northern Natural Gas provides natural gas transportation and storage services to its customers along with cross-haul and grid transportation between other interstate and intrastate pipelines in the Permian, Anadarko, and Hugoton basins and elsewhere in the Midwest.
Its 16,600 miles of pipeline extend from the Permian basin in West Texas to the upper Midwest with service to major utilities and industrial customers. It has a market area capacity of some 4.3 bcfd and storage capacity totaling 590 bcf of gas.
Stan Horton, chairman and CEO of Enron Transportation Services Co., said the settlement on the pipeline "ensures continuity of quality service to the customersellipse[and] employees" of Northern Natural Gas.
UBS Warburg LLC analyst Ronald J. Barone called the pipeline "a solid asset" that he believes will "enable Dynegy to further leverage the value in its energy delivery network while providing the kind of predictable cash flow the ratings agencies favor."
Dynegy's financial status
Dynegy plans to fully consolidate the pipeline's operating income statement beginning Feb. 1, Barone said.
Last month, Dynegy reinforced its capital structure, slashed its expected growth rate for 2002, and took a $125 million charge for fourth quarter 2001. It said a new corporate capital structure and a continued slowing economy will reduce growth for 2002 to 10-12% vs. the usual annual growth rate of 20-25%.
In a Dec. 17 conference call, Watson said, "Things have changed as a result of Enron. But this is no time to panic. There is no panic at Dynegy."
Dynegy attributed its fourth quarter charge to exposure from Enron and its bankruptcy, costs associated with the terminated merger with Enron, and restructuring of Illinois Power, its merchant power company.
Moody's Investors Service downgraded Dynegy's credit ratings last month (OGJ Online, Dec. 16, 2001).
In response to the downgrade, Dynegy announced a $1.25 billion revision of its capital structure. All three rating agencies still list Dynegy as investment grade, but Moody's has the company under review for possible further downgrades.
Watson said, "The balance sheet to execute the merchant energy business needs to be improved. I think this is a permanent move for companies in this sector."
Dynegy executives said the company is aiming for a 45% debt-to-capital ratio, down from the current 50%. The changes Dynegy aims to accomplish include issuing $500 million of common equity within 6-9 months, a $375 million reduction in capital spending, and the sale of another $375 million in assets by the end of 2002.
Moody's cited uncertainty surrounding the litigation with Enron as one reason for its downgrade of Dynegy's ratings.
Rob Doty, Dynegy chief financial officer, said, "In the very worst-case scenario, we could fully collateralize our entire risk management book for $350 million."
As far as risks to the company's equity and liquidity from further downgrades, Doty said $270 million of debt is subject to payment if Moody's and Standard & Poor's were to downgrade the company below investment grade.
Enron's collateral damage
"This is collateral damage, Chapter 2," said John Olson, analyst with Sanders Morris Harris in Houston. "Any company with a leveraged balance sheet and a business subject to credit ratings [like Enron's] is being marked down."
After the pipeline agreement was announced on Jan. 3, Standard & Poor's maintained its Dynegy credit rating as on "credit watch with negative implications" and cited the continuing legal battles with Enron as causing "uncertainty."
Enron's bankruptcy also has had an impact on Wall Street. The entire energy merchant trading sector finds itself pressured by investors moving stocks down and bond yields up, analysts said.
Rating agencies have imposed more-conservative capital requirements, prompting some companies to shore up balance sheets to help restore investor confidence.
El Paso Corp. also announced a capital restructuring plan in reaction to tougher capital requirements being enforced by the ratings agencies. But El Paso's ratings were not downgraded.
Investors worry that the same thing that happened to Enron could happen to another energy merchant company, said Michael Heim, analyst with A.G. Edwards in St. Louis.
"Uncertainty is still there," he said.
Jon Cartwright, analyst with Raymond James & Associates Inc. said the market keeps acting "scared" about buying the securities of these companies.
"This is mostly unfair," Cartwright said. "The energy trading and marketing business is sound because producers of electricity and natural gas and buyers need to match up, and the best way to provide the lowest prices is with a market. Marketers and traders provide that market."
While the basic business may be sound, its contribution to earnings will be lower next year, said Heim. Economics will improve for the sector as the Enron bankruptcy proceedings progress and the uncertainty level declines, he added.
Hearings scheduled
Several committee leaders in both the Republican-led House and Democratic-controlled Senate want an investigation of why Enron collapsed so abruptly. Several hearings have been held, and more are expected. (OGJ Online, Jan. 3, 2001).
Senate Governmental Affairs Committee Chairman Joe Lieberman, (D-Conn.) said his committee will hold hearings Jan. 24 on whether government agencies could have done more to protect shareholders and businesses hurt by Enron's dramatic stock price plummet to less than $1/share from as high as $90/share last year.
Senate Permanent Subcommittee on Investigations Chairman Carl Levin, (D-Mich.) said he will issue subpoenas and hold separate hearings later in the year.
"The collapse of Enron has enormous consequences for Enron stockholders and employees, the overall investing community, and the US economy as a whole. Thorough investigations are needed-and from different perspectives-to determine whether current law was violated and where current law is inadequate to protect the public interest. Our role in Congress is to understand what went wrong and why, so we can make sure this does not happen again," Levin said.
The Securities and Exchange Commission is conducting an investigation, and two senators have urged the Federal Trade Commission to determine if the energy marketer tried to deceive its customers. The FTC does not have the kind of authority to investigate illegal actions that the SEC has.
Also, the White House is considering establishing an interagency task force that could respond to congressional questions on the role of government in regulating Enron's controversial off-balance-sheet partnerships, US officials said.
Agencies represented in the interagency effort might include SEC, FTC, the Federal Energy Regulatory Commission, and the Commodities Futures and Exchange Commission.
Arthur Andersen LLP, Enron Corp.'s auditor, admitted an error in judgment in 1997 was responsible for 20% of Enron's restated earnings, but Andersen executives claimed the oversight wasn't the cause of the Houston energy giant's downfall.
C.E. Andrews, managing partner of Andersen's Global Audit Practice, testified Dec. 18 before the Senate Commerce Committee on Enron's collapse.
"We made an error in judgment that accounted for 20% of the restatement. This did not cause Enron's collapse," said Andrews. Enron restated 5 years of earnings in November.
He said the mistake involved the independent outside equity ownership of the off-balance-sheet special-purpose entity (SPE) transactions. SPEs must have an outside equity investment equal to 3% of the value of the entity. All debt is then required to be off the parent company's books.
"In October, we found we had made an error when information was reviewed in 1997," said Andrews.
He said his company was stepping forth to acknowledge any errors and restore public confidence in the firm. "The firm must restore public trust, and Andersen will have to change to restore that confidence. The accounting profession will also have to change as well as the analysts," he said.