One-time financial and energy giant Enron Corp. filed for Chapter 11 bankruptcy protection Sunday and sued former suitor Dynegy Inc. for $10 billion for alleged breach of contract for terminating a last-minute merger. As expected, Enron’s lawsuit also asks the court to declare Dynegy is not entitled to exercise its option to acquire an Enron subsidiary that indirectly owns the Northern Natural Gas Pipeline.

One-time financial and energy giant Enron Corp. filed for Chapter 11 bankruptcy protection Sunday and sued former suitor Dynegy Inc. for $10bn for breach of contract for terminating a last-minute merger. The lawsuit, filed in the Southern District of New York, seeks to reorganize Enron, which has billions of dollars in debt. Some observers had feared the company could be forced to liquidate under Chapter 7.

As expected, Enron’s lawsuit also asks the court to declare Dynegy is not entitled to exercise its option to acquire an Enron subsidiary that indirectly owns the Northern Natural Gas Pipeline.

Dynegy Chairman and CEO Chuck Watson said the company intended to exercise its option obtained under the $9bn merger agreement and last week warned Enron not to put the pipeline company into bankruptcy. Dynegy backed out of the deal after credit ratings agency downgraded Enron to below an investment grade ranking.

Dynegy said Monday that Enron’s lawsuit was “frivolous and disingenuous”. Watson said, “We want to be perfectly clear on this point: Enron’s lawsuit against Dynegy has no merit whatsoever in law or in fact, and is one more example of Enron’s failure to take responsibility for its demise”.

To preserve cash, Enron said it would implement “substantial” work force reductions, but did not specify numbers in a Sunday statement. But it said the layoffs would primarily affect the company’s Houston operations, where it is headquartered and employs about 7,500 people. The company has already dismissed 1100 staff from its London office.

The bankruptcy protection filing affects 14 affiliated entities, including Enron Corp., Enron North America Corp., Enron Energy Services, Enron Transportation Services, Enron Broadband Services, and Enron Metals & Trade.

The filing doesn’t affect Northern Natural Gas Pipeline, Transwestern Pipeline, Florida Gas Transportation, Portland General Electric Co., EOTT, and various international entities, the company said.

Enron Chairman Ken Lay said the past few weeks’ uncertainty has “severely” hurt market confidence in the company, but the steps taken Sunday will help preserve capital, stabilize the business, restore the confidence of counterparties, and improve the company’s ability to pay creditors.

Enron said it is continuing discussions to raise money and recapitalize the company under a new ownership structure. It has proposed providing traders and back office services to the new entity, which would conduct counterparty transactions through EnronOnline, Enron’s existing trading platform.

The deal would require the court’s approval, but Enron President Greg Whalley said the company will make an effort to keep employees key to the future success of the company’s wholesale energy trading business. “We understand that it may take time for counterparties to resume normal trading levels with this entity, but we are confident that this business can be put back on solid footing,” he said.

Up until six months ago, Enron was the top US gas and power trader with $1.3bn in profits in 2000 and $100bn in revenue. But in a stunning reversal of fortune, the company reported a third quarter loss and a $1bn reduction in shareholder equity that was linked to questionable off-balance sheet deals. Investors fled the stock, which closed below $1/share, after trading near a high of $90/share.

Other energy market players have been issuing statements to reassure investors of their position in relation to Enron. Utilicorp said Monday that its exposure was “limited” and Mirant last week said its current pre-tax exposure to Enron was approximately $50-60m adding that it was “confident that the energy marketing sector is mature enough to function without Enron”.

One-time financial and energy giant Enron Corp. filed for Chapter 11 bankruptcy protection Sunday and sued former suitor Dynegy Inc. for $10 billion for alleged breach of contract.