11/23/2001
The New York Times

Business/Financial Desk; Section C
From Sunbeam to Enron, Andersen's Reputation Suffers
By FLOYD NORRIS

THIS has been the worst year ever for Arthur Andersen, the accounting firm that once deserved the title of conscience of the industry. The Securities and Exchange Commission filed civil fraud complaints against the Andersen partner who audited Sunbeam and against the firm itself in the Waste Management case. Now Enron has repudiated the financial statements that were certified by Arthur Andersen, in the process shaving more than half a billion dollars from the company's reported profits in recent years.

AICPA

-- Anonymous, November 28, 2001

Answers

Sunbeam Plans to Reorganize

Chicago: Department 56 files suit against Arthur Andersen

-- Anonymous, November 28, 2001

Enron, the champion of energy deregulation that grew into one of the nation's 10 largest companies, collapsed yesterday, after a rival backed out of a deal to buy it and many big trading partners stopped doing business with it.

Enron, based in Houston, was widely expected to seek bankruptcy protection. With $62 billion in assets as of Sept. 30, it would be the biggest American company ever to go bankrupt, dwarfing the filing by Texaco in 1987. Late in the day, though, Enron's chief financial officer, Jeff McMahon, said that the company was still talking to banks about a restructuring and considering other options.

Talks with its would-be rescuer Dynegy, also of Houston, about salvaging the deal ended in acrimony.

Dynegy, which had agreed on Nov. 9 to buy Enron but had second thoughts as Enron disclosed more financial problems and investors pummeled its stock, accused Enron of misrepresenting the health of its business. Enron, meanwhile, was weighing whether to sue Dynegy for breaching the terms of the deal, a person close to Enron said.

Enron's swift collapse left the prospects of 21,000 employees in doubt and wiped out what was left of the holdings of stock investors, including some big mutual funds, as shares that sold for $90 in August 2000 crashed to close yesterday at 61 cents. It roiled the Treasury market and tarnished the standing of the big New York banks that both advised on the deal and poured their own cash into the company. And it left in tatters the reputation of Enron's chief executive, Kenneth L. Lay, a confidant and campaign backer of President George W. Bush.

The Treasury Department, the Federal Reserve and the Federal Energy Regulatory Commission said they had monitored Enron's impact on the financial and energy markets yesterday; officials who would comment said they saw no dangerous ripple effect.

"The markets are functioning normally," said Peter Bakstansky, a spokesman for the Federal Reserve Bank of New York.

From a pipeline company in the 1980's, Enron grew into the world's largest energy trader, using the Internet to buy and sell natural gas and electric power supplies for utilities and industrial power users and helping them hedge against fluctuations in power prices.

But Enron was undone by shaky accounting, too much borrowed money and an unwillingness to provide information to investors who grew to doubt its financial reports.

Five weeks ago, the company disclosed that, to fuel its growth, it had shifted billions of dollars in debt off its balance sheet and into an array of complex partnerships. The Securities and Exchange Commission began an investigation, and Enron restated five years of earnings, wiping out nearly $600 million in profit.

Enron was teetering close to insolvency before Dynegy, a smaller cross-town rival, agreed to acquire it for $9 billion plus the assumption of $13 billion in debt, with additional financing from ChevronTexaco, a major Dynegy shareholder.

But Enron subsequently disclosed even more debts, and its financial plight continued to worsen. Energy- trading companies reduced dealings with the firm; doubting its creditworthiness, some forced Enron to pay higher prices for natural gas and other products or required it to post large cash deposits to back trades.

For four days, Enron and Dynegy worked to salvage the deal. But yesterday morning, Dynegy pulled out. "We knew when to say no, and this morning, we said no," said Chuck Watson, Dynegy's chairman.

In an interview, Mr. Watson said Enron's energy-trading business had deteriorated. He also cited "surprises" in the quarterly report to the S.E.C. that Enron filed on Nov. 19, including the disclosures that a credit downgrade meant Enron had to pay or refinance a $690 million obligation and that Enron had less cash on hand than Dynegy had expected. "Confidence and credibility, which is what this business is all about, deteriorated after that," he said.

Mr. Watson said he called Mr. Lay yesterday after a meeting of Dynegy's board to call off the deal. By then, S.& P. had downgraded Enron's debt to junk status, accelerating up to $3.9 billion in debt payments.

But last night, Mr. McMahon, Enron's chief financial officer, took strong issue with the notion that Dynegy could have been surprised by Enron's financial report.

"I believe Dynegy was aware of everything that was encapsulated in that," Mr. McMahon said, explaining that Dynegy had been given advance copies of the filing.

The companies even disagreed about whether they had reached agreement on a renegotiated deal that would have cut Dynegy's purchase price and pumped hundreds of millions dollars more into Enron.

"There was never a global settlement that all parties agreed to," Mr. Watson said.

Mr. McMahon had a very different view. "It's fair to say that we thought we had a deal several times," he said, "and the goal posts definitely kept moving on us."

As for Enron's future, Mr. McMahon said: "We are looking at every option under the sun, as you can imagine." Those options include the Chapter 11 filing for bankruptcy reorganization that analysts and competitors widely expected. He said that a Chapter 7 filing in short, the liquidation of the company "is not an option we are pursuing."

An executive close to Enron said it had not yet done the advance work needed to seek protection in bankruptcy court. "It's a last resort, but not a last-minute kind of thing," this executive said. "If you go in and file for Chapter 11 like this without having everything done, it's like walking in a bank lobby and throwing a dozen eggs on the floor."

A bankruptcy filing would give the company some breathing room to deal with creditors' claims, but it would be complicated, and many creditors including stockholders would be likely to come away empty handed. Enron has relatively few hard assets, and those it has including an extensive network of natural gas pipelines are already pledged to lenders.

In any case, by the end of the day Enron was a shadow of the colossus that politicians blamed for California's energy crisis and analysts promoted as an innovator that epitomized the free-market swashbuckling that the Internet could unleash.

Yesterday morning, Enron shut down its Internet-based trading platform, EnronOnline, its screens going blank. Other major energy traders announced that they would trade with Enron only in cash effectively meaning that virtually all trading with the company had stopped, they said.

Late yesterday, Mr. McMahon said that Enron was doing some trading by phone, but he declined to say how much or whether EnronOnline would be reopened today.

Yesterday, shares of Enron, which peaked last summer at $90, fell to 61 cents, down 85 percent for the day; Dynegy shares fell $4.08, or 10 percent, to close at $36.81.

Other big energy traders, like the El Paso Corporation, Reliant Energy, Mirant and Aquila, also fell. But Enron's gradual decline over the last month gave many energy companies time to reduce their exposure to Enron, and many operate rival trading operations that would benefit from its collapse.

Yesterday morning, as news leaked out of Dynegy's plans to cancel the deal and S.& P. announced its downgrade of Enron's credit, prices for natural gas futures traded on the New York Mercantile Exchange soared more than 10 percent. But they quickly reversed, plunging about 15 percent from the highs reached before noon. Traders said volume fell off sharply as word of Enron's problems spread.

Mr. McMahon said Enron was working with J. P. Morgan Chase and Citigroup, its lead banks, to restructure the company's debts. "We are optimistic we can get a restructuring," he said. Earlier in the day, Enron said that it had begun a "temporary suspension of all payments other than those necessary to maintain core operations," but Mr. McMahon declined to comment on what bills Enron was paying.

The two banks had hoped that by helping arrange Enron's rescue they could prove the merits of their strategy of providing both loans and advice in the merger business. Now, not only have the banks lost bragging rights for pulling off a difficult deal, as well as millions in fees, they are also left holding hundreds of millions in loans to Enron, analysts said.

Dynegy may come out better. Under terms of the initial merger deal, the $1.5 billion it injected into Enron earlier in the month gave it preferred stock in Enron's Northern Natural Gas pipeline that can be converted into ownership of the pipeline. Dynegy said yesterday that it would exercise its option to acquire the pipeline. Enron said it was reviewing the "assertion" by Dynegy that it could claim the pipeline.

The person close to Enron said that Dynegy might have been seeking control of the pipeline all along. "You've got to wonder if they ever wanted to go through with this agreement from the get-go," he said of Dynegy. "Certainly, this was a way to take probably the world's largest energy player out of the market."

Mr. Watson said that Enron had never leveled that charge at Dynegy in the course of their talks.

Enron executives believed they had successfully revised the deal with Dynegy on Monday afternoon.

Mr. Lay was in a private plane preparing to fly out of Teterboro Airport in suburban New Jersey. He had just signed new merger documents and was hoping to announce a deal on Tuesday in Houston, executives close to the talks said.

But Mr. Watson, who had just returned from a trip, had become deeply involved in the talks earlier that day and kept raising the ante, one executive close to Enron said. "All the parties were flipping out because Chuck was changing the terms by the hour," this executive said.

As Mr. Lay's plane was taxiing for takeoff, the executives said, a call came in from Mr. Watson asking to change the terms once again. That, they said, was when it became clear that the deal might unravel.

In the end, Enron's uncertain finances and evidence that its customers were fleeing sealed Dynegy's decision. "Sometimes," Mr. Watson said, "a company's best deals are the very ones they did not do."

Yahoo!

-- Anonymous, November 29, 2001