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Congress Probing Failure of Enron

Energy: Committees will hold hearings as the once-mighty firm tries to avoid bankruptcy.

November 30, 2001|CHRIS KRAUL and NANCY RIVERA BROOKS and THOMAS S. MULLIGAN | TIMES STAFF WRITERS

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.

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