Sues dynegy for $10bn damages; Chapter 11 plea seeks cover from $16.8bn debt

Enron files for bankruptcy

Houston, Dec 3: Shattered energy trader Enron Corp has filed for chapter 11 bankruptcy and hit the rival and one-time suitor Dynegy Inc with a $10-billion breach of contract lawsuit for pulling out of a last-ditch rescue merger. The filing in the Federal bankruptcy court in the southern district of New York on Monday seeks protection from creditors while Enron, burdened with at least $16.8 billion in debt and obligations, tries to reorganise its ruined finances.

Under chapter 11 of the US bankruptcy code, a company can continue to operate while it and creditors work out a reorganisation plan. The lawsuit, filed in the same court, accuses Dynegy of wrongfully terminating a $9- billion merger deal last Wednesday. The suit also seeks to stop Dynegy from exercising its option to obtain Enron’s Northern Natural Gas Pipeline. However, the units that own Enron’s pipelines are not part of the bankruptcy filing.

“We are taking the steps announced today to help preserve the capital, stabilise our businesses, restore the confidence of our trading counterparties, and enhance our ability to pay our creditors,” Enron chairman and CEO Kenneth Lay said in a statement.

Enron’s dramatic crash has seen its market capitalisation go from more than $80 billion a little more than a year ago to about $220 million (based on its Friday closing price of 26 cents on the NYSE). That is a far cry from its high of $90.56 reached in August, 00.
To help it recapitalise its once-esteemed North American trading business, Enron said it is in negotiations with banks and FIs to get credit to back any trades.

The fallen giant also said it will provide traders and back-office support staff, and will operate through its online trading platform.
Fourteen of Enron’s subsidiaries are included in the filing, which must be accepted by the bankruptcy court before it can proceed.

Enron files for bankruptcyEnron’s Portland General electric utility subsidiary, which is being sold to Northwest Natural Gas for $1.8 billion and $1.1 billion in assumed debt, is not included in the filings.
The breach-of-contract suit against Dynegy, another expected legal salvo, has at its heart a valuable asset that is a steady cash flow generator and constitutes more than half of Enron’s 30,000 miles of pipelines.

One longtime Enron observer questioned the company’s chances of proving its claim. “The Dynegy lawsuit is going to make interesting reading, but I don’t think they are going to get very far with it,” Sanders Morris Harris, an analyst with John Olson said.

Dynegy spokesman John Sousa said his company has not yet had time to review the lawsuit, but said it remains confident in its position that Enron’s post-merger announcement disclosures constituted a “material adverse change” in Enron’s businesses, and that such a change allows Dynegy to pull out.

“We believe that we are within our legal rights to exercise this provision and it would have been a breach of our fiduciary responsibility to our shareholders not to do so,” Mr Sousa said.
The $1.5-billion in cash that Dynegy and its minority owner Chevron Texaco pumped into Enron on the merger announcement day is secured by an option to buy the 16,500-mile pipeline, which Dynegy exercised Thursday last.

Dynegy chairman and CEO Chuck Watson said Enron’s disclosure, made in a November 19 regulatory filing, that it had less cash than previously thought and that it would immediately have to pay off a $690 million, started the downfall of the merger.

“The next day the market killed them. And guess what? So did the counterparties. So they start leaving them in droves. So the business came crashing down with the stock price,” Mr Watson told the Reuters in an interview last Friday, adding Enron then frantically began searching for more cash to staunch the bleeding, but could not find it. He also said when Standard & Poor’s cut Enron’s credit to junk status on November 28, he and his board decided to terminate the merger deal.

However, observers feel that Enron will dispute that version of events, and most observers expect it to claim that Dynegy entered the agreement in bad faith, as a way to eliminate its bigger rival.
Layoffs coming: Enron said it will implement “substantial workforce reductions,” primarily from among the 7,500 workers employed at its Houston headquarters. It gave no firm numbers, but sources said the number of cuts, expected in the thousands, will be made clear on Tuesday.

Enron will also continue its previously planned campaign to sell off non-core and underperforming assets, many of them global holdings that are valued around $6 billion. The company is also working with lenders to obtain debtor-in-possession financing to help maintain its payroll and other operational expenses. Discussions are expected to be done shortly, the company said.

Enron was the top US energy trader with $100 billion in revenues and $1 billion in profit last year, but has unraveled with stunning speed since mid-October when it declared a Q3 loss and $1 billion cut in shareholder equity linked to questionable off-balance sheet deals. The piecemeal disclosures about problems never seemed to end, and each one chipped away at Enron’s credibility and destroyed and destroyed the investor confidence. Its fall into bankruptcy was hastened as partners fled its key energy trading business and was all but sealed when Dynegy pulled out.

Enron is by no means out of the woods yet. The Securities and Exchange Commission is investigating the off-balance sheet deals, while two Congressional inquiries are expected as well. Its legal adviser on the bankruptcy is New York firm Weil, Gotshal and Manges, and its adviser on the restructuring is the Blackstone Group LLC.

— Reuters