Enron Failure’s Ripple Effects

The likely bankruptcy of Enron Corp. could lead to a host of troubling consequences, including higher wholesale prices for electricity and natural gas and financial distress for banks and other firms as well as major bondholders and other investors, analysts said Wednesday.

However, energy trading markets were calm as Enron competitors picked up the slack while looking for opportunities to build or expand their own trading operations and acquire Enron assets.

The concerns and maneuvering came as Dynegy Inc. on Wednesday canceled its proposed acquisition of Enron, once the world’s largest energy trading company, after Enron’s debts were downgraded to non-investment “junk” status, making a bankruptcy filing highly likely.

“Banks are starting to worry about a financial meltdown from an Enron collapse,” said Peter Fusaro, president of Global Change, a risk management consultancy in New York.

Enron’s debts, which had been partly hidden in off-balance-sheet partnerships, could total $5 billion more than the company’s assets, experts in New York and Houston estimated.

Citigroup and J.P. Morgan Chase, major commercial bankers to Enron, will face losses if Enron files for bankruptcy, analysts said. Shares of Citigroup and Morgan declined more than 5% on Wednesday. Other experts warned that investment banking firms such as Goldman Sachs and Morgan Stanley that had been part of Enron’s sophisticated trading network also could run into problems.

As Enron, which rose rapidly in recent years to almost $200 billion in annual revenue, neared bankruptcy, shareholders faced being wiped out and investors in about $9billion in Enron bonds may get only cents on the dollar, analysts said.

Enron’s employees, 15,000 of whom hold Enron stock in their 401(k) retirement plans, stood to be among the biggest losers in the company’s collapse. Many probably also will lose their jobs.

Major lawsuits against Enron claiming lack of loyalty and prudence in dealing with its employees are among scores of lawsuits now confronting the company and Arthur Andersen, the accounting firm that approved Enron’s financial statements. Enron is under investigation by the Securities and Exchange Commission for its handling of disclosure of the partnerships and subsidiaries.

And yet as Enron’s crisis approached a possible bankruptcy filing, a brisk optimism prevailed among energy traders. Enron competitors were as enthusiastic about opportunities to buy parts of Enron as they were fearful of the consequences of the big trader’s collapse.

Stephen Baum, chief executive of Sempra Energy, the San Diego-based utility holding company, said EnronOnline, the Houston company’s highly successful Internet-based trading operation, would be acquired by other companies and carry on energy trading in the future.

Sempra itself would be interested in discussing formation of such a new online trading firm, Baum said, “although its name would not be Enron Online.”

Baum added that Sempra could be interested in acquiring several Enron assets, in the U.S. and abroad.

Energy markets were calm Wednesday. Kevin Fox, manager of commodities and trading for Aquila Energy, a Kansas City, Mo.-based energy trader, described markets as “surprisingly orderly.”

Enron’s troubles have been building for well over a month, Fox explained, and so the halt of Enron Online came as no surprise. Fox saw no difficulty in his firm and other trading companies fulfilling Enron’s contracts should the energy company cease to operate.

Still, others saw disrupted markets and price volatility. Fears about the aftermath of Enron’s collapse centered on long-term commitments the firm has made in recent years to handle all the energy needs of giant entities such as the University of California system or to supply 10 years of natural gas at a fixed price range to an electricity generating station.

Problems could arise because long-term contracts typically become encrusted with related transactions that hedge against price movements over time or the interest cost of financing. Such complexity could make it difficult for other firms to pick up Enron’s long-term contracts.

If Enron in bankruptcy “can’t cover its obligations, maybe other wholesalers can’t either,” said Gordon Allott, vice president at KW International, a trading and risk management firm in San Francisco.

“And then you have customers going out into the spot market, which could drive prices higher. That’s the big bogey monster out there,” Allott said.

However, any effect on consumers from such disruptions could be slight. Gerald Keenan, head of the energy practice at PriceWaterhouseCoopers, noted that Enron’s collapse would not “affect the basic supply and demand for electricity and natural gas,” the true determinant of prices.

One major factor reducing the effect of an Enron collapse on markets and energy supplies is the growth in recent years of energy trading into a broad industry, with more than $300 billion in annual activity in contracts for electricity and the natural gas and oil fuels that produce it.

The Intercontinental Exchange, a consortium of six trading firms, handles more energy trades today than did Enron.

If Sempra and other companies acquire and operate EnronOnline, the industry will have two major groups to rely on. The need for energy trading has been growing out of deregulation and change in the electric utility industry.

“Trading absorbs risks of fuel-price movements and the like that used to be passed on to retail customers in the form of adjustments to monthly bills,” Fox explained.

The breadth and expertise of this new industry, as well as the months of Enron’s decline that gave competitors and markets time to adjust, could promise a relatively stable aftermath of Enron’s downfall.

However, the post-Enron future is likely to see closer regulation of energy contract trading to increase disclosure of terms and risks.

But Enron and its top executives, along with the Arthur Andersen accounting firm, face months and possibly years of lawsuits from shareholders who suffered losses as Enron’s stock lost more than $60 billion of market value in a single year.

And lawsuits by Enron employees, challenging the firm’s treatment of 401(k) accounts, will go forward even if Enron is in bankruptcy, said attorney Lynn Sarko of Keller Rohrback, a Seattle law firm that is bringing one of the suits on behalf of employees.

“There is still liability faced by fiduciaries, officials who were administrators of the savings plan and by the companies that insured it,” Sarko said.

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Flanigan reported from Los Angeles and Kraul from Houston. Times staff writer Jerry Hirsch contributed to this report.