The still unfolding story of Enron’s demise is one which headline writers dream of. “The Prince and the Pauper”, “David and Goliath” or “How the mighty fall”, were a few that came to mind. But let’s not get too clever. I always say: play the game you know best; have a game plan; and most importantly let the rest of the team know what it is.
Enron would have done well to adopt the same philosophy. It is not to say creative thinking should not be encouraged, but Enron often stretched the credible limits of creativity. So much so, that many observers often had little idea of what the game plan (or even the game) was.
Enron has never been the most transparent of companies and at the same time is no stranger to controversy. Not a good mix. Whether unfairly or otherwise, the company has faced accusations in India and California. Then there was the surprise resignation in August of Jeffrey Skilling as chief executive officer after just six months.
But try talking to Enron about any of this. Over the years, I have never managed to develop a liaison, dangerous or otherwise, with the company. It was perhaps this generally guarded, some say arrogant, approach which made the market react in the way it did to an unexpected equity charge announced on October 16. Management announced that the company had incurred a $1.0 billion charge and $1.2 billion reduction of shareholders equity as a result of some off-balance sheet dealings – dealings which have since led to an informal investigation by the Securities and Exchange Commission.
In true Enron style, the company was only prepared to put a list of “frequently asked questions” on its website in response to analysts enquiries following the controversial announcement. But what followed the announcement was quite incredible and perhaps would not have had the same result for the ‘average’ company. But this was Enron – the innovator; the company which could turn integrated businesses into markets; the king of managing risks – not your ‘average’ company. Its share price fell by 70 per cent due to investors concerns about the transactions.
Meanwhile, credit agencies downgraded its stock to just one grade above “junk” status – a move which allowed ‘Goliath’ to be both slain and saved by ‘David’. Enron’s neighbour and much smaller rival, Dynegy Inc., seized the opportunity to takeover Enron for just $9 billion in stock. How the mighty fall. Just last year the company was worth nearly $80 billion. “It’s an unbelievable ending to an unbelievable story,” said Fulcrum Global Partners analyst Michael Barbis. “The company that created the industry is gone – it’s all Dynegy now.”
Described as a merger, the new company will keep the Dynegy name. It will have annual revenues of more than $200 billion and assets worth $90 billion, including more than 22 000 MW of generating capacity and 40 000 km of natural gas pipelines. It will be North America’s biggest marketer and trader of natural gas and electricity, positions previously held by Enron.
Unlike Enron, the new company will play the game it knows best. Under the new direction, Enron is to be stripped of many of its peripheral trading businesses and its non-core global assets. Enron’s woes were not helped by a downturn in its telecoms business. Enron had set up one of perhaps a dozen “bandwidth exchanges” in the belief that surplus network capacity would become a tradable commodity (see PEi, July/August 1999, page 114). Also, Dynegy will take an asset-backed approach. Enron’s lack of assets created liquidity problems which had a negative impact on its trading operations.
The merger still requires approval by regulators and both sets of shareholders but is expected to close by the end of the third quarter of 2002. Chuck Watson, Dynegy’s chief executive officer, said he did not expect the merger to run into serious regulatory obstacles. “Regulatory agencies realize that a speedy resolution is important to keep stability in the US energy market,” said one UBS Warburg analyst.
If the merger is not completed, Dynegy will have the right to acquire 100 per cent of the equity in Enron’s Northern Natural Gas subsidiary, thus providing Dynegy with the full value of its investment.
And what would happen to Enron? I called Enron to find out what might happen if the deal was not approved, and guess what? I am still waiting for them to call back. Even at the end some things never change; they’ll keep the gameplan to themselves.
Junior Isles, Managing Editor