Bankruptcy of Energy Trader May Hurt Many
Millions of individuals and hundreds of companies--from suppliers to holders of mutual funds--will be directly or indirectly touched by Enron Corp.’s bankruptcy filing Sunday.
Who might be affected and how? Here are some answers.
Question: What is Enron and why do its troubles matter?
Answer: Enron was once the world’s largest energy trader, handling one of every four electricity and natural gas deals. The Houston conglomerate--the seventh-largest U.S. public company with $100 billion in revenue last year--wielded enormous political influence in Washington and California, pushing a vision of competitive markets for electricity, natural gas and other commodities. Enron’s bankruptcy is the biggest ever filed and probably will prove to be one of the most costly and complex.
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Q: Will Enron’s bankruptcy affect California consumers?
A: It could. Enron is a big supplier of electric power to industry, providing up to 1,400 megawatts of power to large customers in the state, or enough to serve more than 1million homes.
The company also brokers power, buying electricity and natural gas and reselling those commodities on its largely unregulated Internet trading operation, EnronOnline. If Enron could no longer supply power to its industrial customers or fulfill contracts as an energy middleman, California could have difficulty meeting the surge in demand, state officials said.
In a state notoriously short of power production, that could lead to a repeat of the blackouts that occurred last winter and spring.
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Q: How likely is that?
A: At this point, no one can say for sure. Enron said it plans to continue operating. In past utility bankruptcies--such as the April Chapter 11 filing of PG&E; Corp.’s Pacific Gas and Electric--consumers saw little power disruption. However, Enron’s actions will be dictated to a great extent by a bankruptcy judge in New York.
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Q: I understand California’s public employee pension funds own stock in Enron. Is that going to affect the pensions state teachers and other government workers receive?
A: That’s unlikely. Although the California Public Employees’ Retirement System owns 3 million Enron shares, that accounts for less than one-tenth of 1% of the fund’s total holdings, a CalPERS official said last week. The California State Teachers Retirement System owns 2 million Enron shares. These pension funds have taken losses on Enron, but the pension funds are diversified and shouldn’t be dramatically hurt by the losses.
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Q: What about individual holders of Enron stock?
A: By and large, individual holders of company stock are out of luck. Bankruptcy puts all unsecured creditors--anyone who has a claim that is not secured by a specific asset, such as a car or a home--in a line. Employees are at the front of that line, along with vendors, retirees and creditors. Stockholders come last, getting repaid only if there are assets to spare.
Enron’s stock price Friday was a stunning 26 cents a share, down from nearly $85 a year ago and $33 in mid-October, when the barrage of bad news began. That price reflects the massive defection by shareholders who have, in essence, already taken their losses.
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Q: What’s the chance of anyone getting repaid?
A: Slim for creditors that don’t have a claim on company assets, as the big banks do. But to some degree, the answer will depend on what happens in a variety of lawsuits against the company’s accountants, advisors and former merger partners.
Enron filed a $10-billion suit against Dynegy Inc., a former competitor that recently backed out of a deal to buy the firm, in conjunction with its bankruptcy filing, pledging to give any proceeds to creditors. Meanwhile, shareholders have suits against the company’s officers, directors, accountants and advisors.
The Dynegy suit goes to U.S. Bankruptcy Court, and the others are considered pre-petition claims and are on hold, said an Enron spokeswoman. It should be weeks before shareholders know whether and how these claims will be allowed to proceed.
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Q: What about people who are owed money by Enron, either because they have supplied products or have lent the company money by buying bonds?
A: Vendor and bondholder claims for the 14 Enron entities that filed for bankruptcy protection Sunday are sent into Bankruptcy Court, where vendors and bond owners often are invited to serve on creditor committees to have a say in how the company’s discretionary income is allocated.
Generally speaking, new obligations--the cost of purchasing goods and services after the bankruptcy filing--are given higher priority than old claims.
However, companies usually attempt to pay all or part of what is due to vendors and bondholders either in cash or equity in a surviving company.
But payments to bondholders and vendors can be suspended or reduced if there isn’t enough cash to go around, and exactly how Enron will treat existing creditors remains to be seen.
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Q: How long could a bankruptcy take?
A: Some bankruptcies take only a matter of weeks to complete, but cases this big and complex commonly take years.
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Q: What about workers? How will they be affected?
A: Enron has said it plans to cut costs and reorganize, which could cause significant layoffs. A company spokeswoman said most of those layoffs are likely to be in and around the company’s headquarters in Houston. Other details were not yet available.
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Times staff writer Nancy Rivera Brooks contributed to this report.
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Going Broke
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