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Enron Files Chapter 11, Sues Ex-Suitor Dynegy
Bloodied but defiant, fallen energy giant Enron Corp. on Sunday filed both a long-awaited Chapter 11 bankruptcy petition--the largest ever--and a $10-billion lawsuit against would-be merger partner Dynegy Inc. for abandoning it at the altar last week.
Enron said it was in talks with potential outside investors, or "white knights," to rescue the company and promised to present an interim financing plan this morning in U.S. Bankruptcy Court in New York that would allow it to keep operating.
California experts said the bankruptcy filing could cause short-term disruption of the state's electricity markets. Closer to home, Enron warned that it would soon announce significant layoffs, mainly among its 7,000 employees in Houston, its headquarters.
The filing sets up what could be one of the most complicated and controversial bankruptcy proceedings ever, given the swirl of litigation and federal and congressional investigations surrounding Enron's murky finances.
Enron at its peak grew to be the world's largest energy trader and the seventh-largest public company in the U.S. It has wielded political clout in Washington and California, pushing a vision of deregulated markets for electricity and other energy commodities.
The bankruptcy filing was widely expected after Dynegy, an energy trading company also based in Houston, announced Wednesday that it was pulling out of a $9-billion acquisition the two companies announced Nov. 9.
In its filing Enron claimed about $50 billion in assets; the previous record bankruptcy filing was by Texaco Inc. in 1987, with $36 billion in assets. Enron listed $31 billion in liabilities but did not include debts from a series of controversial partnerships at the heart of the company's sudden decline.
The list of Enron creditors includes several banks on the hook for billions of dollars in loans. Enron also owes about $49 million to the California Power Exchange, $2.4 million to the California Independent System Operator and $1.4 million to the electric and gas utilities operated by San Diego-based Sempra Energy.
In breaking off the merger, Dynegy cited Enron's deteriorating cash position, its mounting long-term liabilities and unspecified misrepresentations of its true financial condition. Dynegy said a "material adverse change" clause in the deal entitled it to walk away.
Several class-action lawsuits have been filed on behalf of Enron shareholders, employees and retirees who have seen their investments evaporate with the collapse of Enron stock.
But Enron claimed in its suit against Dynegy, also filed in New York, that its onetime suitor had no right to terminate the deal, which it claims was nothing more than a pretext for destroying a rival and gaining access to its valued assets.
In a statement, Dynegy spokesman John Sousa said his company had not had an opportunity to review the litigation but that "we continue to be confident in our position as it relates to exercising the material adverse change provision of the merger agreement."
Combined with the lawsuit, the bankruptcy filing augured a long and bitter high-stakes legal battle between the downtown Houston rivals that could drain the resources of both companies.
"Will it last a while? Sure. If there is no white knight, this could take literally years to be resolved," said Nancy Rapoport, dean of the University of Houston Law Center.
The battle could be fiercest over Enron's crown jewel, the 16,500- mile Northern Natural Gas pipeline network. In exchange for advancing $1.5 billion in cash to Enron after the merger agreement was announced, Dynegy received all the preferred shares of the pipeline network as security. The day after it called off the merger, Dynegy said it expected to take possession of the pipeline in mid-December.
In addition to the damages, Enron has asked the Bankruptcy Court to prohibit Dynegy from taking over the pipeline network.
"This conduct has torn a hole in Enron's business and caused Enron to suffer billions of dollars in damages," the lawsuit reads.
An energy executive pointed to Dynegy and its chief executive, Charles L. Watson, as an example of the "dangers of getting entangled with Enron."
"Watson has put $1.5 billion of ChevronTexaco's money into Enron and doesn't have a pipeline to show for it, or any idea of how the $1.5 billion could be repaid," said the executive, who asked not to be named. ChevronTexaco, the giant oil firm, owns 26% of Dynegy.
Enron said it was in talks with potential outside "counter-parties" to provide the company with credit and to help form a new ownership structure formed around its valued wholesale energy trading business.
"We will review what businesses we want to be in and not want to be in," Enron Chief Financial Officer Jeff McMahon said in an interview Sunday. "That evaluation is certainly ongoing and could result in a significantly different company."
Rapoport said a critical factor in Enron's ability to persuade the court to let it reorganize is whether and how soon it presents a "debtor in possession" loan package from outside lenders and investors. Such a package would make a judge confident in allowing the reorganization to proceed.
Conversely, a judge could force the company to liquidate if Enron is unable to persuade the court that its core, continuing business has not been irreparably crippled, observers said.
California officials expressed concern Sunday that Enron's bankruptcy filing could disrupt the state's fragile energy peace, saying they are uncertain that Enron can fulfill its obligations in the California marketplace.
Enron, in its role as energy peddler to industry and other big users, including several University of California campuses, supplies customers consuming as much as 1,400 megawatts of electricity in the state, or 4% of current consumption levels, said S. David Freeman, an energy advisor to Gov. Gray Davis and head of a new state agency charged with building power plants and transmission lines.
Enron owns no power plants in California, instead buying electricity under contract and through trading operations. If Enron were unable to serve those customers, the state might be unable to handle the sudden surge in demand at a time many power plants are idled for maintenance and because of operating problems, Freeman said.
"We currently have enough to serve those customers, but if it's a cold week, I don't know," said Freeman, executive director of the California Consumer Power and Conservation Financing Authority. That worry was echoed by Davis spokesman Steve Maviglio.
Enron's plight has been greeted in the state with some satisfaction; the company became a target of attacks from politicians, regulators and consumer activists for its aggressive business tactics and its relentless push for energy deregulation.
Maviglio found a lesson in Enron's fall: that volatile markets alone should not supply such a crucial commodity as electricity.
"This is further justification for the state safety net to be there so that businesses and homes can continue to receive power as they should," he said. "It's wild and woolly in the electricity market and promises to continue to be so."
The Enron blowup has been compared with two earlier financial fiascoes: the Orange County bankruptcy and the collapse of the giant hedge fund Long-Term Capital Management. One key difference is that Enron's trading strategy never went sour the way that Orange County's and Long-Term Capital's did.
Instead, Enron's collapse in its final stages was a crisis of confidence among shareholders, lenders and customers that ultimately fled the company as in a run on a bank. Trading partners whom Enron owed cash or commodities began to fear that Enron would be unable to deliver, so they started pulling money back and refusing to extend credit for new trades.
What spooked the stock market and the trading community was Enron's surprise mid-October announcement that it had sustained a major loss in its third quarter and had reduced shareholder equity by $1.2 billion to reflect losses related to limited partnerships set up and run by then-company executives.
The Securities and Exchange Commission quickly announced an investigation, and Enron ousted the executive most closely associated with the partnerships.
When Dynegy agreed Nov. 9 to take over its much larger rival, it believed that the $1.5 billion being injected into Enron by ChevronTexaco plus a new $1-billion Enron credit line would be enough capital to tide Enron over until the deal could be consummated. But the "run" by Enron's trading partners was well underway by then, and Enron tore through most of the money in less than a month.
Adding to the pressure were Enron's tumbling stock price and the threat that its bonds would be downgraded to "junk" status by the major credit-rating agencies.
When the downgrades came Wednesday, they triggered provisions in some earlier agreements that made $3.9 billion instantly come due when Enron had nowhere near that much cash.
Chris Kraul reported from Houston, Rivera Brooks from Los Angeles, Thomas Mulligan from New York. Times staff writer James Flanigan in Los Angeles contributed to this report.