Thursday, November 29, 2001

From combined dispatches
Energy giant Enron Corp. swooned at the edge of one of the biggest corporate collapses in U.S. history yesterday as its rescue by smaller rival Dynegy Inc. blew apart.
In quick succession, two rating agencies dropped the Houston company’s credit rating to “junk,” obliging it to make good on billions of dollars of debt it probably can’t pay. Dynegy immediately backed out of an $8.4 billion acquisition plan that was already being renegotiated.
Shares of Enron fell to 61 cents yesterday from a high of $90.56 in August 2000, as the New York Stock Exchange halted trading of the stock twice before announcements about the company.
Investors went on a record one-day rush to unload shares 339 million of them and sent Enron stock down 85 percent from Monday’s close of $4.11. The company had 743.9 million shares outstanding as of Oct. 31.
The news helped send the Dow Jones Industrial Average down 161 points, with the utility and financial sectors hit hard.
Enron, which just months ago was the country’s seventh-largest company in terms of revenue, is the biggest trader and marketer of electricity and natural gas in North America. Traders buy contracts for electricity or other energy sources, based on supply and demand similar to stock trading. It also runs an online energy-trading system, owns a lucrative natural gas pipeline, produces electricity and natural gas, and builds energy facilities.
The company’s collapse made bankruptcy seem inevitable for a company that began a stunning free fall six weeks ago with an announcement of a $638 million quarterly loss. Surprise disclosures, including the admission it overstated earnings by almost $600 million since 1997 and kept huge debts off its balance sheet, led investors to rapidly lose faith in a company valued at almost $80 billion a little more than a year ago. The Securities and Exchange Commission is investigating the disclosures.
Enron’s market value yesterday was less than $500 million and one Enron share was worth less than one-sixth the price of a hot dog at Enron Field, the name of the Houston Astros baseball stadium. Astros President Tal Smith said yesterday the stadium will keep the name of the company, which is paying $3.3 million a year for 30 years for the privilege.
Kenneth L. Lay, Enron’s chairman and chief executive, said the company is evaluating and exploring other options to protect its core energy businesses.
Mr. Lay, prior to Enron’s financial trouble, had emerged as a major powerbroker in politics as well as energy. Mr. Lay is a longtime friend and supporter of President Bush, going back to Mr. Bush’s days as a Texas oilman. He served as an unofficial adviser to the president on energy matters in the early days of the Bush administration. The company and its employees have been the biggest group of contributors to Mr. Bush’s Texas and national campaigns.
Robert Stovall, senior strategist at Prudential Securities with nearly 50 years of Wall Street experience, said he could not recall any previous corporate unraveling that matches that of Enron.
“[Enron] entrapped the sophisticates,” he said, referring to what was once an almost fawning admiration for Enron by institutional investors. “I think this is going to become a classic case.”
In calling off negotiations yesterday, Dynegy accused Enron of breaching the representations it made when a takeover agreement was negotiated Nov. 9, invoking an escape clause that let it pull out of the all-stock deal valued at $9.3 billion at the time.
Both Dynegy and Enron amassed huge profits during Califorinia’s blackout-riddled energy crisis in the summer of 2000. Both companies, however, drew heavy fire from politicians and consumer advocacy groups who portrayed them as price gougers.
In response to Dynegy’s announcements and credit rating downgrades, Enron said it will temporarily suspend all payments other than those necessary to maintain its core operations.
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.
It became increasingly clear, as Dynegy sought to renegotiate the deal, that Enron’s tricky and often indecipherable accounting was becoming a sticking point, sources close to the negotiations said.
Dynegy said it would exercise its option to buy Enron’s lucrative Northern Natural Gas Pipeline with the $1.5 billion it and partner ChevronTexaco put into the deal.
Dynegy said it stopped trading with Enron as of yesterday morning, pegging its exposure at $75 million.
A bad sign came earlier yesterday, as energy traders said operations had stopped at Enron’s once-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 in its planned takeover.
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 its balance sheet caused investors to lose faith in recent weeks.
The partnerships, which included top Enron executives and are the subject of an SEC investigation, 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.
Enron’s 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.
The money-losing broadband unit and power operations in India and Brazil are now up for sale.
Some of the company’s 20,600 employees trickled out of Enron’s downtown Houston headquarters yesterday afternoon, across the street from the company’s new $200 million, 40-story glass tower, saying they couldn’t predict Enron’s future or their own.
Dynegy’s stock, meanwhile, fell $4.92 yesterday to close at $35.97 on the NYSE.

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