WSJ/Major Business News: Energy Firms Figure Enron's Woes Could Cost Total of $600 Million
November 30, 2001
By ALEXEI BARRIONUEVO and ELLIOTT SPAGAT
Staff Reporters of THE WALL STREET JOURNAL
If Enron Corp. winds up in bankruptcy court, some of the world's biggest energy companies likely will fail to collect a total of more than $600 million that the energy-trading concern owes for hedging, commodities swaps and outstanding physical energy contracts.
Those affected will include other energy-trading companies, smaller oil-and-gas producers and some utilities. The losses aren't expected to cripple any of the companies, though they could dent fourth-quarter financial results.
About $400 million of the claims outstanding are concentrated at five companies. Duke Energy Corp., of Charlotte, N.C., says it is owed about $100 million, Williams Cos., of Tulsa, Okla., said it is owed "less than $100 million" and Reliant Resources Inc., of Houston, put its exposure at about $80 million. Dynegy Inc., the Houston energy company that this week called off its takeover of Enron, has claims totaling $75 million. Mirant Corp., of Atlanta, is owed $50 million to $60 million.
Analysts said the silver lining is that no company so far has reported more massive exposures and that the companies with the biggest potential losses are large and apparently healthy businesses. "For companies this size, at worst, that is not a very material amount," said Kit Konolige, an analyst with New York investment bank Morgan Stanley. "That is good news." Still, analysts caution that it could take months to gauge the full impact.
Still, energy merchants generally reveal little about their trading positions. Without knowing their portfolios and studying their contracts for the buying and selling of commodities, neither analysts nor the public can verify the figures independently, said Paul Patterson, an analyst at Dutch investment bank ABN Amro. "We're not sure from a three-paragraph press release exactly what the companies are disclosing," Mr. Konolige said.
Another point of uncertainty is whether the contracts will become part of any bankruptcy-court proceedings, forcing merchants to duel with such creditors as banks and other lenders for payments. Several analysts said most contracts are written to avoid such proceedings. Thus, for those holding contracts with Enron, calculating the value of each contract at current market conditions will be crucial. "It will likely be long and messy, which will cast a big dark cloud over all of the energy marketers," said Michael Barbis, an analyst at brokerage house Fulcrum Global Partners.
That could mean a more-cautious approach to the so-called merchant-trading industry, which has grown rapidly in recent years as markets for electric power and natural gas have deregulated. Merchant-trading companies play the role of middlemen between energy producers and suppliers, moving and delivering commodities to end-users and managing price risk for customers.
"This industry is as valuable to the economy, and as unlikely to go away, as is investment banking or insurance or even the junk-bond market," wrote New York investment bank Salomon Smith Barney in a note to its clients.
1See full coverage of the rise and fall of Enron
Many energy merchants have "master netting agreements" with Enron that require the merchants to liquidate either all or none of their contracts. This is intended to avoid bickering over which contracts should be honored. Analysts expect many merchants to liquidate and writedown the value of their contacts in order to put the mess behind them.
Mr. Barbis expects most merchants to liquidate all contracts, rather than enter a prolonged fight. "The sooner you resolve this, the better you're received in financial markets," he said. "You want to remove all connection to Enron."
One top executive at a rival energy company said Enron traders worked furiously Wednesday and Thursday to make gas deliveries and try to "wire around" their obligations and match buyers with sellers. "Enron is trying to work to preserve its trading business, to try to live to play another day," the executive said.
The big challenge for energy merchants, analysts say, will be replacing their contracts with Enron, since prices, particularly for natural gas, have changed considerably since the contracts were signed.
Some oil- and gas-exploration concerns are owed money for hedges entered this spring against future prices -- natural-gas prices began sliding in February from records of near $10 a million British thermal units, up from only $5 a million BTUs only a few months before. Many exploration companies took steps to lock in those higher prices.
Because Enron's downward spiral has evolved over several weeks, many companies have had time to unwind hedges with Enron. Anadarko Petroleum Corp. and Apache Corp., both of Houston and two of the biggest independent oil producers, don't have any unsecured claims outstanding with Enron. XTO Energy Inc. of Fort Worth, Texas, is owed about $30 million, the most of any producer, while EOG Resources Inc., of Houston, has claims totaling $18 million for hedges and physical contracts, a company spokeswoman said.
Write to Alexei Barrionuevo at alexei.barrionuevo@wsj.com2 and Elliott Spagat at elliott.spagat@wsj.com3
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