Congress Probing Failure of Enron

HOUSTON —  Congressional panels launched investigations Thursday into the virtual collapse of Enron Corp., even as the beleaguered energy trading giant fought to avoid filing for bankruptcy protection.

A bankruptcy filing by Enron, which could come as early as today, would produce a list of creditors reading like a who’s who of banking and energy. It could become one of the most contentious and tumultuous bankruptcy meltdowns in history, sending ripples across the economy.

Other energy companies rushed to assure shareholders that their Enron debts would not hurt earnings. Among the major creditors would be the company’s Houston rival Dynegy Inc., which Wednesday pulled the plug on its proposed $9-billion purchase of Enron. Moody’s Investors Service on Thursday put Dynegy’s debt under review for possible downgrade because of its potential exposure to lawsuits from the aborted merger.

The Enron debacle will be the focus of House and Senate committee hearings.

“Enron went from the No. 7 company on the Fortune 500 to a penny stock in a stunning three weeks because it apparently lied on its financial statements,” said Rep. John D. Dingell (D-Mich.), ranking minority member of the House Energy Committee, which may hold hearings as early as next month.

How, Dingell asked, could Enron’s problems have escaped the notice of regulators, accountants, company directors and Wall Street analysts and institutional investors?

“This problem is not limited to Enron,” he said. “There are likely other ticking time bombs out there with smoke-and-mirror earnings.”

The Senate Energy Committee will hold hearings on energy trading in January, a spokesman said.

Analysts said the chief blame lies with Enron and those paid to examine its books.

“[No] amount of financial statement analysis, number crunching or tire kicking could have predicted this debacle,” bond analyst Carol Levenson said, arguing that investors were kept in the dark about side deals under which an Enron downgrade would trigger immediate payment of $3.9 billion of debt.

“Presumably, the rating agency analysts were privy to all the nonpublic information about these arrangements, which makes their judgment all the more questionable,” said Levenson, an analyst for Gimme Credit, a New York bond-research firm.

A day after leaving Enron at the altar, Dynegy Chief Executive Chuck Watson expressed regret for the turn of events but said Enron’s debts and rapidly deteriorating business were too much to bear.

At a news conference Thursday, Watson said it was “unfortunate for Enron employees, for the city of Houston and to some extent for the industry” that the merger attempt failed because of “events that were beyond our control.’

Among the things that scuttled the merger, he said, was Enron’s unexpected cash crunch after a downgrade of its credit rating earlier this month forced the accelerated payment of $600 million in Enron debt.

“Dynegy believed we could make the merger work,” Watson said. “Up to the last hour, Dynegy tried to find a short-term liquidity solution and a long-term liability solution” for Enron’s problems but ultimately failed.

The liability issue was a reference to class-action lawsuits against Enron executives and fiduciary representatives filed on behalf of shareholders--including about 20,000 Enron retirees and employees--who are holding nearly worthless Enron shares.

The company’s spiral into penny-stock status continued Thursday, its shares plunging 25 cents, or 41%, to close at 36 cents on the New York Stock Exchange.

Enron’s stock traded at nearly $85 a share late last year and sold for about $33 a share in mid-October before the first of a series of financial disclosures that killed investor confidence and caused an all-but-fatal cash crunch.

The company’s slide toward ruin began Oct. 16, when it announced a surprise third-quarter loss and restated its worth because of failed investments in water and telecommunications and losses from the termination of controversial off-balance-sheet partnerships. Analysts said such partnerships apparently enabled Enron to pull debt off its balance sheet and artificially inflate its reported profit.

A Securities and Exchange Commission investigation into the partnerships and a downward revision of four years of earnings because of losses sent investors and energy traders fleeing. Enron, starved for cash, sought rescue through the takeover by Dynegy, a company a quarter its size.

Enron struggled to continue in business Thursday even as it was shunned by former trading partners. Officials of the New York Mercantile Exchange warned traders not to accept any orders from Enron, according to Platts, a private energy news service.

EnronOnline, the electronic trading operation that once accounted for 60% of Enron’s trading business, reopened Thursday after being closed for a day. Only 65 types of energy and metals contracts were offered, compared with 1,600 on a typical day before the cash crisis, spokesman Eric Thode said. Thode declined to discuss volumes of business conducted except to say it was “below average.”

“We’re still transacting business as well as we can and seeking alternatives,” Thode said.

Enron’s European operations filed for creditor protection Thursday after its parent cut off funding.

The fallout from Enron’s melt-down is widespread, although most companies said it will not hurt their earnings.

In California, Edison International and PG&E; Corp., owners of the state’s two largest electric utilities, said they are owed little by Enron but declined to give figures. Sempra Energy, parent of Southern California Gas and San Diego Gas & Electric, said it is owed less than $15 million.

“It’s not material to our earnings,” spokesman Doug Kline said, adding that Sempra’s trading arm has picked up business that Enron has dropped. “For us, it’s been a positive from a business perspective. We’re attracting increased business volumes, and we believe that business is sustainable.”

The state Department of Water Resources, which buys power for the state’s three big investor-owned utilities, is owed no money by Enron, spokesman Oscar Hidalgo said. But the department might have to recalculate how much money it needs to buy power for the utilities if Enron drops several industrial customers it recently signed up for direct power deliveries, he said.

Now that the Enron deal has fallen through, Dynegy made it clear Thursday that it expects to collect on its loan security--and soon. Watson said Dynegy has every intention of taking possession in mid-December of Enron’s Northern Natural Gas pipeline subsidiary, a valuable 16,500-mile network stretching from West Texas to the Great Lakes.

When the merger deal was announced, Dynegy and its 26% owner, ChevronTexaco Corp., advanced Enron $1.5 billion in cash to meet its cash needs. That loan was secured by 100% of the preferred shares in the gas pipeline entity.

He said Dynegy believes its claim to the pipeline supersedes all others, even in the event Enron files for bankruptcy protection, an action that usually triggers a freezing of all assets so the court can sort out competing claims of creditors.

*

Kraul reported from Houston, Rivera Brooks from Los Angeles and Mulligan from New York.