Enron’s Weaknesses Threaten Industry
Executives in the energy industry voiced concern Tuesday at the continuing decline in the value and credit rating of Enron Corp. and questioned how long Chief Executive Kenneth Lay will keep his job.
Enron’s stock slumped to its lowest point in 91/2 years on reports that the Houston-based energy giant is stumping for a cash infusion of $2 billion or more.
The fear among executives across many energy sectors is that Enron’s ability to maintain markets in contracts for electricity and natural gas would collapse under the weight of its falling credit standing and the growing reluctance of other energy companies to do business with it.
Enron is the world’s largest trader of energy contracts, taking in more than $140 billion in revenue in the first nine months of this year from buying and selling electric power and natural gas contracts worth more than $500 billion in aggregate.
Industry sources estimate that Enron is involved in one-third of all energy contracts. If such a market maker could not function because of lack of financing, the ripple effects could be a disaster for energy industries, experts said.
“What we’re seeing is a threat to far more than a single company or even a single industry,” one energy investor said.
Leading energy executives have been approached by institutional investors to consider forming a new management team, sources said Tuesday. Such a team would step in at Enron to work out its difficulties, which stem from transactions and obligations the company evidently made with at least 33 off-balance-sheet partnerships from which Enron managers profited.
Lawyers suing the company say Enron used the affiliated partnerships to hide liabilities from shareholders. Investors also have accused company executives of conflicts of interest because they acted on investments for both the company and the partnerships.
The thinking in energy circles in Houston and elsewhere, sources said, is that Enron Chairman and CEO Lay would have to resign to allow the company to attract fresh financing. Enron was reported Tuesday in the Wall Street Journal to be seeking $2 billion in financing.
Sources in Houston reported that the company was discussing emergency financing with Blackstone Group, a New York-based investment firm. Widespread reports had major oil companies, particularly Royal Dutch/Shell Group, considering a buyout of Enron.
Jeffrey Skilling, who resigned suddenly in August as Enron’s CEO, was reported to be under subpoena to testify in Washington. Enron is under investigation by the Securities and Exchange Commission for possibly failing to properly disclose off-balance-sheet partnerships to shareholders.
Meanwhile, the company’s stock declined $1.50 a share to $9.67 on the New York Stock Exchange, the stock’s lowest closing price since 1992. Less than a year ago, Enron stock sold for $84.88 a share.
Enron’s credit rating has been downgraded by Fitch Inc., Standard & Poor’s and Moody’s Investors Service, with Fitch on Monday taking the company’s credit to BBB-, one level above noninvestment grade.
Fitch analyst Ralph Pellecchia said his agency would drop Enron to junk status if the company made no progress in reducing its debt, if its trading business were to show signs of significant deterioration or if expenses and charges from noncore businesses it is selling should exceed current estimates.
A rating below investment grade would present further obstacles to Enron’s ability to continue making markets in electricity and natural gas supplies. A fall below investment grade also would trigger early repayment of $3.3 billion in bonds that otherwise would not be due until 2002 and 2003.
“There are a lot of things they can do that people might perceive as being positive,” Pellecchia said. “They are trying to show that they have the cash available and the capacity of managing their businesses over time, of getting out of bad businesses and running their business more openly and transparently. Obviously, this is a process.”
Enron’s troubles have cascaded of late. The company reported a $618-million loss in the third quarter and a $1.2-billon reduction in shareholder equity--after two years in which its annual revenue more than trebled.
The company led a trend in energy trading, creating an Internet-based network, EnronOnline, that allowed millions of suppliers and purchasers of electricity, natural gas, oil and coal to trade with one another. Enron made markets in all those commodities, putting up its own capital to buy and sell them.
It is that key role as a clearinghouse that has put Enron in greatest peril because it needs a continuing flow of cash to act as “the buyer for every seller and the seller to every buyer,” said Philip K. Verleger Jr., a Newport Beach energy economist.
“Enron is now trying to reach out to other people to get them to fund this EnronOnline ... but a lot of companies have been moving business out of Enron,” he said.
Ironically, California is in the position to help push Enron deeper into trouble, Verleger said.
That is because Enron is owed millions of dollars by California for electricity sold to the state and its utilities during the power crisis, and Enron, in its role as market maker, probably has a hand in many of the controversial long-term power contracts signed this year by the state. Gov. Gray Davis, other politicians and state regulators have repeatedly accused Enron of overcharging for electricity.
“If Gray Davis were to pull the plug on the state’s electricity deals with Enron or other firms, he quite possibly could put Enron into bankruptcy,” Verleger said. “How quickly things change.”
If Enron were to collapse, he said, much of the company’s trading business could simply migrate to smaller competitors, as happened when junk-bond powerhouse Drexel Burnham Lambert Inc. folded in 1990. But such a collapse could seriously damage the trading of electricity, he said, because Enron pioneered that market and its complex financial instruments.
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Bloomberg News was used in compiling this report.
