by John M. Curtis
(310) 204-8700

Copyright December 12, 2001
All Rights Reserved.

nable to rake in obscene profits from energy deregulation and easy money from the stock market, Enron went broke. Bulldozing 401(k)s and pension funds—and the personal lives of its shareholders—Enron filed for Chapter 11 bankruptcy protection, watching share prices nosedive from a record $84 to a piddling 35 cents a share. Shaking Wall Street to the core, Enron's spectacular collapse reminds unsuspecting investors that the law of gravity applies to all companies—not just high-flying dot-coms. During its heyday, Enron delighted shareholders, making unprecedented profits under California's flawed deregulation scheme. At one point, Enron brokered electricity for a whopping $2,900 per megawatt hour, nearly 100 times its current price. When the state began buying power and nailing down long-term contracts, the electricity market collapsed, dropping prices to $35 per megawatt hour—the wholesale price of lighting 750 homes. Enron's profits exploded during a brief window when the now defunct California Power Exchange bid power prices into the stratosphere. When the power market crashed, Enron's cash flow evaporated along with its credibility.

      Enron now has Congress baffled, trying to figure out how the one-time energy giant hit the skids. "Enron went from the No. 7 company on the Fortune 500 to a penny stock in a stunning three weeks because it apparently lied on its financial statements," said Rep. John D. Dingell (D-Mich.), ranking minority member of the House Energy Committee, promising hearings early next year. Dingell questioned how Enron's big fall escaped Wall Street's attention, putting shareholders and banks behind the eight ball. With billions already lost, Enron's bankruptcy didn't help the struggling stock market hoping for good news. When Dynergy bailed out of its bid to buy Enron, share prices tumbled. "Dynergy believed we could make the merger work," said CEO Jack Watson. "Up to the last hour, Dynergy tried to find a short-term liquidity solution and a long-term liability solution," unable to restructure Enron's $31 billion debt. Arranging a $1.5 billion infusion from Chevron-Texaco, Dynergy couldn't resolve Enron's mammoth cash flow problems.

      Breaking off the merger, Dynergy cited Enron's deteriorating cash position, growing long-term liabilities, and, more to the point, "material misrepresentation of financial records." Backing out of the deal, Dynergy triggered the "material adverse change clause," yet still claimed ownership of Enron's largest asset, the 16,500 foot Northern Gas Pipeline, bought and paid for with Chevron-Texaco's cash. Enron immediately slapped Dynergy with a $10 billion dollar breach of contract suit, claiming "this conduct has torn a hole in Enron's business and caused Enron to suffer billions of dollars in damages." In reality, Enron's problems were caused by its announcement in mid-October that it sustained a $1.2 billion third-quarter loss connected with failed limited partnerships. Hearing that, investors—including large mutual and hedge funds— dumped Enron shares. When the SEC announced an investigation, traders liquidated positions, shrinking Enron's market capitalization and paralyzing its cash flow.

      Completing a one-two punch, Moodys downgraded Enron's bonds to "junk" status, immediately calling in $3.9 billion. Yet, despite this disaster, Enron was busy seeking more credit with J.P. Morgan, Chase & Co. and Citigroup already owed billions. Like the giant hedge fund Long-Term Capital Management, Enron also wants to be bailed out. Financial institutions have little choice other than extending more credit to cash-strapped companies hoping to one-day pay their bills. But financial institutions must reevaluate companies' business models before they throw more cash down a rat hole. Capitol infusions aren't magic bullets for business whose lifespans have run their course. It's one thing to bail out county governments or even savings and loans, but still another to waste more cash on failed businesses. When California finally gained control over its runaway power market, companies like Enron could no longer expect astronomical profits. Despite controlling only 4% or 1,400 megawatts, they still made plenty of dough.

      With the bottom falling out of the power market, Enron won't see its cash-cow return anytime soon. Enron's creditors can't expect a sudden reversal of fortunes. Extending more credit probably won't satisfy Enron's current appetite for cash, created by the brief feeding frenzy in the deregulated power industry. Without massive profits, returning to past earnings won't be easy. Even if the stock market heats up, without hefty earnings Enron won't convince skeptical investors to jump on the bandwagon. Enron faces an uphill credibility crisis, leaving Wall Street leery of going out on a limb again. "[No] amount of financial statements, number crunching or tire kicking could have predicted this debacle," said bond analysis Carol Levenson, suggesting that Enron won't get too many analysts to jump back on board. Given the current energy market and baring a spectacular turn around in share prices, Enron would burn through its cash, just as it did with Texaco-Chevron's $1.5 billion. Faced with an avalanche of litigation, Enron faces an uncertain future, even with an improved stock market. No matter how much quick cash creditors kick in, long-term capital prospects look dim.

      Enron's spectacular fall from grace should remind all investors that even the most respected institutions can go under quickly. As Rep. Dingell points out, "This problem is not limited to Enron. There are likely other ticking time bombs out there with smoke-and-mirror earnings," alerting investors to real risks connected with the stock market. Enron's meltdown repeats the same panic seen in other downturns, when companies can no longer count on market capitalization and speculative bubbles. Two major factors led to Enron's collapse: The end of the '90s bull market and the short-lived boom in the deregulated power industry. Since neither should return anytime soon, Enron's business model must be carefully scrutinized before creditors open up the coffers. "We're still transacting business as well as we can and seeking alternatives," said Enron spokesman Eric Thode, blowing more smoke that Enron's electronic trading operation remains open for business, though not admitting at what levels. As the cliché goes, past performance is no guarantee of future results.

About the Author

John M. Curtis is editor of OnlineColumnist.com and columnist for the Los Angeles Daily Journal. He's director of a Los Angeles think tank specializing in political consulting and strategic public relations. He's author of Dodging The Bullet and Operation Charisma.

©1999-2012 Discobolos Consulting Services, Inc.
(310) 204-8300
All Rights Reserved.