Enron Receives $1.5 Billion Emergency Funding
A day after Enron laid off 4,000 employees–nearly 20 per cent of its work force–and filed a lawsuit against its former buyer Dynegy and a Chapter 11 bankruptcy claim, two major banks agreed to rescue Enron from immediate dissolution.
Citibank and J.P Morgan, both heavily invested in Enron with secured and unsecured financing, assembled a short-term rescue package of $1.5 billion to assist the company reorganize its finances and business under Chapter 11 bankruptcy protection.
Under the agreement hammered out over the weekend, J.P Morgan and Citibank would give Enron $250 million immediately. Enron would receive another $250 million installment after the company shows the lenders a “satisfactory business plan.” JP Morgan and Citibank also promised $1 billion to secure debt on its Transwestern Pipeline, an asset not included in Enron’s bankruptcy claim.
A lawyer representing Enron said the company currently has $500 million in cash, but should operate with over $2.5 billion. The company, once boasting the seventh-largest corporate revenue in the U.S., owes nearly $31.2 billion in debt.
In its bankruptcy filing, Enron claimed nearly $50 billion in assets and $30.1 billion in liabilities, easily surpassing Texaco’s $35.9 billion bankruptcy claim in 1987. Enron’s claims filed in the Southern District of New York include its energy trading business and 12 of its subsidiaries, but not its pipelines.
Enron also hit Dynegy with a $10 billion lawsuit, alleging the Houston energy rival violated the terms of the $8.4 buyout offer and hastened the company’s financial free-fall.
The lawsuit is an attempt to prevent Dynegy from seizing its Northern Natural Gas pipeline, Enron’s first major asset when the company formed in 1986.
On Monday, Enron announced 4,000 layoffs from its Houston headquarters and told the remaining 3,500 U.S. employees to “take the day off.” Enron had over 21,000 employees worldwide.
One employee told the Associated Press that Enron offered each laid-off worker a $4,500 severance package–pending the bankruptcy court’s approval for creditor protection. The employee added that she also lost over $70,000 of stock options this month alone from the dramatic plunge in Enron’s shareholder value.
Enron’s $10 billion lawsuit alleges that Dynegy prompted the company’s new junk rating by canceling the rescue offer, thereby breaching the $8.4 billion deal. Enron claimed that Dynegy’s move “sought to put an end to Enron as a competitive force.”
Enron’s downgraded status triggered an immediate pay-back of $3.9 billion in debt.
Dynegy filed a counter-suit Monday, contending it was “within legal rights” to withdraw its purchase offer since Dynegy learned more details of Enron’s extensive financial crises.
Dynegy’s counter-suit asserted it gained ownership of the Northern Natural Gas pipeline by its emergency $1.5 billion cash infusion to Enron before the acquisition collapsed. Dynegy stated it would take control of the gas pipeline on Dec. 12.
Dynegy had terminated the acquisition last week, stating that it needed to protect its own businesses from Enron’s unexpected large debts.
On Nov. 19, Enron disclosed it had embellished its earnings by nearly $600 million, for which the SEC fined the company $690 million.
Though Enron received an extension for the $690 million SEC fine, two days later Enron’s credit rating dropped to junk status—mandating the company pay back debts of $3.9 billion within a week— and the Dynegy rescue deal was canceled.
Congress last week initiated an inquiry into the rapid and unexpected deterioration of the leader of the energy deregulation movement.
Republican House Energy and Commerce Committee Chairman Billy Tauzin announced that hearings into Enron’s financial disintegration would begin early next year.
The fallout from the biggest corporate collapse in history is expected to be massive. Banks alone stand to lose billions of dollars once invested in the country’s largest energy trader.
Enron operated in over 40 countries and owned businesses ranging from trading energy-based commodities over the Internet to running a 25,000-mile pipeline system in the U.S.