Nearly two years after filing for bankruptcy protection, scandal-tarred Enron is still struggling to salvage something for its thousands of creditors. A proposed reorganization plan, filed on July 11 and expected to be amended soon, will hardly be the final word on the company's future. Already, some creditors are questioning the plan's fairness, and new challenges are sure to arise.
One thing is clear: Not much is left of the disgraced energy trader, no matter how you slice it. Under the plan, which is supported by an unsecured creditors' committee, Enron would create at least two spin-offs: CrossCountry Energy, a holding company for Enron's pipeline interests, and Prisma Energy International, comprising energy assets in some 14 countries. Equity in these outfits and possibly in Enron-owned utility Portland General Electric, plus cash from other asset sales, would give unsecured creditors between 5% and 75% of their claims, Enron estimates. Most would receive less than 20 cents on the dollar.
When Enron filed for Chapter 11 in December, 2001, it estimated that it had about $63 billion worth of assets, with some $25 billion later written off. Now that has been shrunk to an estimated $12 billion in realizable value, 70% of it in cash. But to calculate creditors' recovery rates, Enron is figuring on only $67 billion in claims -- even though more than $300 billion worth have been filed. That means creditors ultimately may see far less than the estimated recovery percentages.
LESS THAN STELLAR. One possible mitigating factor in all these losses: Enron has yet to file any claims against the banks, law firms, and others blamed for helping in some of the financial chicanery that ultimately hastened its collapse. Such filings could yield more money for creditors.
Some creditors figure Enron couldn't get fair prices for its best assets, including the pipelines, so it chose not to sell at the bottom of the market. Agrees one energy-industry rival: "Prices are not stellar right now," with some pipelines selling at about 7.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA), vs. 8.5 or 9 times a few years ago. Another force working against Enron, he notes, is that its Transwestern pipeline company now faces tough competition from West Texas to California.
If CrossCountry is spun off, creditors will get a company with about $1.8 billion in assets and cash flow of some $140 million a year, figures energy analyst John Olson of Sanders Morris Harris. CrossCountry's estimated $550 million in debt is "reasonable for the industry," he adds.
UNSOLD "TURKEYS." With Prisma, on the other hand, "there's not much 'there' there," Olson says. International holdings would include power plants and pipelines in such countries as South Korea, Brazil, and Venezuela. Portland-based energy consultant Robert McCullough, who's working for some creditors, says Enron tried to sell many of these "turkeys" for five years before the bankruptcy. Says McCullough: "With all due respect, if you can't sell them for five years, their value is zero."
Some creditors say they're waiting for more details on Enron's valuation of the spin-off companies before making their decisions about the plan. Enron is hoping to win court approval of its restructuring by early next year.
At least one faction, however, is already calling for the appointment of an examiner to investigate the plan's fairness. Baupost Group and Racepoint Partners, two Boston-based investment outfits holding some $1.6 billion in Enron debt, argue that negotiations on the plan unfairly excluded a representative bargaining solely for the interests of Enron Corp. creditors. As a result, they contend, Enron North America creditors may have gotten a better deal than they deserve.
"It was a lopsided negotiation," says attorney Isaac M. Pachulski of Stutman, Treister & Glatt. In court documents, the debtholders warn that without the appointment of an examiner, there's "virtually certain to be costly and protracted litigation" over the plan's fairness.
COSTLIER JUICE? Another source of controversy is Portland General Electric, the Oregon utility Enron bought in 1996. Daniel W. Meek, a public-interest attorney, is representing groups that are pushing for public acquisition of the utility through "eminent domain" proceedings. That comes after the city of Portland and Enron failed to reach a deal on a sale earlier this year.
Meek fears that Enron intends to use federal bankruptcy law to help Portland General escape state regulation of its energy rates. A deal with a new buyer, he contends, could be structured so the assets fall only under federal regulation, resulting in some $2 billion worth of higher costs for Oregon ratepayers. Such a sale could come only after a reorganization plan is approved by the bankruptcy court. Until then, "Enron has no incentive to sell," Meek says.
Enron spokesman John Ambler says there hasn't been any foot-dragging on a sale. The company has been entertaining bids for the utility since last August and expects to resolve the issue "within the next couple of months." Enron has "never actively pursued" an approach that would remove Portland General from the oversight of state regulators, he adds. If the utility isn't sold, its stock could be distributed to creditors, and its regulatory status would be unaffected.
"EXPENSIVE PROCESS." Whatever the final details of the reorganization plan, unhappy creditors still have one big incentive to put this case to rest: mounting legal fees stemming from the bankruptcy, which are expected to top $500 million by yearend. "We have to get to an end here. This is a very expensive process," says David Bennett, a Dallas-based attorney representing some energy company creditors.
But he notes that approval of the plan "is not a fait accompli" and the winding down of the former high-flier is likely to be a "years-long process." With Enron these days, nothing is ever easy. By Wendy Zellner in Dallas