Enron woes may mean tougher US scrutiny for future energy mergers

Nov. 21, 2001
Policymakers may take a longer look at energy mergers in light of growing stockholder concerns over Enron Corp.'s accounting methods, US officials and financial analysts said Wednesday.


Maureen Lorenzetti
OGJ Online

WASHINGTON, DC, Nov. 21 -- Policymakers may take a longer look at energy mergers in light of growing stockholder concerns over Enron Corp.'s accounting methods, US officials and financial analysts said Wednesday.

"Regulators want to make sure there aren't other Enron's out there," said one analyst.

The US Securities and Exchange Commission is investigating if Enron broke the law in a series of complicated financial transactions that later were found to distort earnings. With no end to that investigation in sight, it may prove difficult for federal regulators to let a possible merger between Dynegy Inc. and Enron proceed as quickly as the companies would like, said legal experts and US officials speaking on condition of anonymity.

The proposed, but still uncertain merger must be reviewed by at least four federal regulatory bodies: the Department of Justice, the Securities and Exchange Commission, the Federal Energy Regulatory Commission, and the Federal Trade Commission. At least one state agency, the Illinois Commerce Commission is expected to also weigh in because Dynegy owns the Illinois Power Co.

The feeling among Wall Street analysts is that Enron can't afford to sit through a protracted approval period. Enron sought to allay those fears Wednesday by closing on the remaining $450 million of a previously announced $1 billion in secured credit lines (OGJ Online, Nov. 21, 2001). Yet the company still needs to repay $9 billion in obligations by the end of next year, according to some Wall Street estimates. Without the merger, Enron could go bankrupt.

But the political pressure still clearly is on federal regulators to take a harder look on what shareholders, and the general public would be gaining from a deal.

US Rep. John Dingell (D-Mich.) the ranking Democrat on the House Committee on Energy and Commerce, this week said he wants a private accounting oversight group to decide if Arthur Andersen LLP violated conflict of interest rules when it audited Enron and another client, Waste Management Inc.

Dingell said Anderson may have not wanted to disclose accounting irregularities because it also had large consulting contracts with the two companies. He said another accounting firm, Deloitte and Touche, may also have been negligent because it assisted Enron in helping prepare for an SEC investigation at the same time it was conducting a peer review of Anderson.

"The best accounting standards in the world are meaningless if the accounting and audit processes are so inept or corrupt that they produce unreliable numbers and untruthful reporting," Dingell said in a letter to the Public Oversight Board.

Consumer advocates argue that the self-policing POB has not changed its rules to reflect the consolidated nature of today's big accounting firms. Most large accounting companies also offer consulting in addition to traditional auditing for their clients.

What this scrutiny means for other energy companies planning or in the midst of mergers is uncertain.

Dynegy is a winner no matter what happens: if the merger doesn't go through, it will likely get Enron's Northern Natural gas pipeline. Dynergy gave Enron $1.5 billion for preferred stock in the line earlier this month.

Observers say the recent deal between Phillips Petroleum Co. and Conoco Inc. will likely be approved although the companies may have to divest some overlapping downstream assets. US regulators have already given their blessing to much larger unions, including those that created ExxonMobil Corp., ChevronTexaco Corp., and BPAmoco (now BP PLC).

Nevertheless, the review period could last a year or longer, because the Enron problems will make regulators scrutinize each company's balance sheet even harder.