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Deregulation - December, 2001 - Page Three
in ‘tort reform,’ making it harder to sue corporations for the damage they do” - San Jose Mercury News
Energy Industry ShuddersThe New York Times – by A. Berenson, R. OPPEL Jr. – December 19, 2001
The financial crisis afflicting the electricity and natural gas industry deepened yesterday as investors were unnerved by a credit downgrade on Dynegy, a leading power trader.
After markets closed Friday, Moody's Investors Service, a credit agency, lowered its rating on Dynegy's bonds to its lowest investment-grade rung. Hoping to restore Wall Street's confidence, Dynegy said yesterday morning that it would trim spending next year, reduce debt and raise cash by selling new shares. Dynegy said it remained on firm financial footing, but warned that its earnings per share next year would be 10 percent lower than analysts had predicted.
But investors remained concerned about the downgrade. Shares in Dynegy and other energy companies tumbled yesterday, continuing a slide that began last month with the collapse of Enron, once the world's largest power and natural gas trader.
Over the last two years, Dynegy and its peers have raised tens of billions of dollars to build new power plants, tapping investors giddy about high electricity and gas prices. Today, prices for power have plunged, and investors are worried about the possibility of an electricity glut and the heavy debt loads carried by many energy companies.
Wall Street's sudden wariness has led Dynegy and other independent power plant operators to cancel plans for new plants. More cuts from other companies may follow, analysts say, as the industry struggles to shore up its balance sheet.
"This is indicative of an industrywide trend," said Carol Coale, analyst at Prudential Securities in Houston. "For a long time, this industry has been carrying leverage that I have been uncomfortable with."
Already, Wall Street has almost halted the sale of stock by merchant energy companies. Since the end of August, this industry group has only sold about $500 million of equity, compared with almost $7 billion in the first eight months of the year, according to Thomson Financial. Last year, the sector sold about $6 billion in stock.
The long-term impact of the industry's capital squeeze is unclear. Despite widespread investor fears of a power glut, analysts say a few states, including New York, Florida and California, may eventually face a power shortfall if new plants are not constructed. Earlier this year, a severe electricity shortage in California led to occasional blackouts, but those prices collapsed this summer.
Analysts like Jeff Dietert of Simmons & Company in Houston had expected about 150,000 megawatts of power-generating capacity to be added nationwide from this year to 2005. But now he says that total will probably end up closer to 100,000 megawatts.
Most plants not already financed and under construction have been taken off the drawing board, he said. Currently, the nation has close to 800,000 megawatts of capacity. One megawatt is enough to supply about 800 typical homes.
But the immediate crisis the industry faces is financial, not electrical.
Dynegy shares plunged $3.24, or 13 percent, to $21.70, yesterday. The company's stock has lost 21.9 percent of its value over the last week. Shares of Mirant, which owns independent power plants worldwide, fell 15 percent yesterday and have collapsed 40.5 percent over the last week. Other natural gas and electric companies, including the El Paso Corporation and Calpine, also fell.
Dynegy said yesterday that it would sell $375 million in assets next year and reduce its capital spending by an additional $375 million. The company also plans to sell $500 million in stock next summer. Dynegy said that dilution from the stock sale and lower natural gas and oil prices would cause its earnings to be only $2.30 to $2.35 a share next year, compared with a previous estimate of $2.50 to $2.60.
"Dynegy is moving forward with a permanent plan, utilizing our existing business model, that addresses market concerns, increases our capital strength, and reduces our debt," said Chuck Watson, Dynegy's chairman, in a statement announcing the restructuring effort. Dynegy said that ChevronTexaco, its largest shareholder, supports the plan. ChevronTexaco, the second-largest United States oil company, owns 35 percent of Dynegy's stock.
Chris Gidez, a spokesman for ChevronTexaco, said ChevronTexaco does support Dynegy's effort. But he said ChevronTexaco has not decided whether to buy more Dynegy shares in the company's stock offering next year. Last month, ChevronTexaco injected $1.5 billion into Dynegy as part of Dynegy's failed effort to buy Enron.
"We're evaluating it," Mr. Gidez said of the offering.
After Moody's downgrade, analysts said they worried that Dynegy's credit ratings could be cut further, forcing the company to repay its debts early or post hundreds of millions of dollars in collateral to its trading partners.
"There's a risk that they could get downgraded to junk status," said Christopher Ellinghaus, an analyst at the Williams Capital Group in New York, who cut his rating on Dynegy from strong buy to hold yesterday morning. "It would be a pretty material event. The core trading business is very dependent on your credit rating."
Ms. Coale said she was concerned because Dynegy had said that it might have to pay back a portion of its debt immediately if its credit ratings were cut to noninvestment grade, or junk, status. Previously the company had said that it did not face a credit rating trigger, she said.
"Are there ratings triggers or aren't there?" she said.
Meg Nollen, Dynegy's senior vice president for investor relations, said Dynegy had one loan of about $250 million that it might have to pay back immediately if it received a junk rating from two of the three major credit agencies. The company has cash and credit lines of $900 million, more than enough to repay that loan.
Dynegy's stock was also hurt yesterday by an incorrect report from an analyst at J. P. Morgan Chase, Ms. Nollen said. J. P. Morgan has withdrawn the report, she added.
The report mistakenly said that Dynegy's credit rating had fallen "below junk, which would mean we were bankrupt," Ms. Nollen said. "They made a mistake, they discovered it, and they're going to fix it." Anatol Feygin, the J. P. Morgan analyst who covers Dynegy, did not return calls for comment.
Legislation on 401(k)'s In an effort to address another aspect of Enron's collapse, legislation is expected to be introduced in Congress today aimed at reducing how concentrated employees' 401(k) retirement plans can be in any single investment. The legislation is expected to be introduced by Senator Barbara Boxer, Democrat of California, and Senator Jon Corzine, Democrat of New Jersey.
As Enron's shares fell 99 percent this year, its employees' 401(k) plans lost, on average, over half their value — a total of about $1.2 billion — because of the high proportion of Enron stock in the plans.
In the last two years, workers at other large companies who had much of their retirement assets in company stock have also seen their nest eggs shrivel.
Enron Board Not Off HookThe New York Times - Reed Abelson – December 18, 2001
All may not be forgiven. In the clubby world of corporate boardrooms, outside directors are rarely held responsible for what befalls their companies. But as more questions emerge over the board's independence and role in the collapse of Enron, the outsiders who were Enron directors are coming under sharp criticism. And doubts are increasing over whether they will ever be named to other boards.
"The directors of Enron are going to carry this stigma with them," said Patrick McGurn, a vice president at Institutional Shareholder Services, which advises large investors about proxy issues. "Usually the directors get a free ride when things melt down."
What makes the Enron case different, Mr. McGurn said, is how "sudden and final" the company's fall was for its shareholders. "Anger is going to linger from this situation for quite some time," he added.
The board's judgment in allowing partnerships and other entities that helped keep so much debt off Enron's books and off the minds of shareholders has also been questioned. "This board, on the surface of it, is in deep trouble," said Robert E. Mittelstaedt Jr., a business professor at the Wharton School at the University of Pennsylvania.
The variety of potential conflicts, some of which are not disclosed and others merely hinted at in Enron's financial filings, also cast a shadow over the board and its actions in recent months.
Last week, the chief executive of Arthur Andersen, Enron's auditor, testified in Congress that Arthur Andersen had informed the board's audit committee of "possible illegal acts within the company" regarding the accounting over one of the entities in early November. Enron says that it was management that first alerted the auditor to potential problems.
Lawsuits also abound, many aimed at the board, including one that claims some directors engaged in "massive insider trading."
The Amalgamated Bank, a union-owned bank that has become known as a shareholder activist, brought the lawsuit in federal court in Houston this month against some Enron officers and directors. The suit contended that these people made misleading statements about the company and sold about $1 billion worth of stock in the last three years.
Though the suit does not say how much the officers and directors profited from those sales, much of the proceeds represented the sale of stock from options given at low prices, said William S. Lerach, one of the lawyers representing the bank.
Even if the suit fails, it has added to the doubts about the credibility of the Enron board, which was one of the highest paid in the country last year.
"There will always be a question of what this board was doing and thinking," said Thomas L. McLane, vice chairman of the Directorship Search Group, an executive recruiting firm based in Greenwich, Conn. "Their marketability is not very good."
What is already clear is that myriad relationships between directors and the company cast doubt on directors' independence. Consulting agreements are disclosed in the proxy statement. But subtler ties have also drawn attention, like the donations by the company to some of the institutions employing the directors. Much of the focus will be on the board's audit committee because of its responsibility for Enron's accounting and financial reporting. The chairman of that committee, Robert K. Jaedicke, a former accounting professor at Stanford, is one of a handful of directors who go back to Enron's beginning with the 1985 merger of two energy companies, InterNorth and Houston Natural Gas.
Another member of the audit committee, Wendy L. Gramm, a former chairwoman of the Commodity Futures Trading Commission and the wife of Senator Phil Gramm of Texas, says it is a conflict to own stock in Enron. Dr. Gramm has requested that the equity she would receive as pay for serving as a director under the company's 1991 stock plan be put into an account where payment is deferred for some time. This conflict did not prevent Dr. Gramm from selling nearly $300,000 in stock at the end of November 1998, according the lawsuit claiming insider selling. And Dr. Gramm owned stock options in another public company, IBP, in which she served as a director this year, according to IBP's proxy statement. Dr. Gramm and her husband decided in late 1998 that they would not own any common stock, as a way to avoid any appearance of conflict because her husband is a senator, Mark Palmer, an Enron spokesman, said. Dr. Gramm never owned IBP stock but simply cashed out the value of the options, Mr. Palmer said. When she told Enron that she could not own Enron stock, he said, the company decided not to pay her in any equity except in the deferred account.
Some corporate governance experts wonder how someone who cannot own stock in a company can serve on its board.
Other members of Enron's audit committee sold stock in recent years, the lawsuit contending insider trading says. The suit says Mr. Jaedicke, for example, disposed of about $841,000 in stock, about $500,000 this year. Among the other outside directors who sold stock, the lawsuit said, were Norman P. Blake Jr., the chairman and chief executive of Comdisco, who sold $1.7 million in stock about a year ago. Charles A. LeMaistre, one of the original Enron directors and a former president of the University of Texas M.D. Anderson Cancer Center, sold about $842,000 worth of stock in 1999 and earlier this year, according to the lawsuit.
Enron directors certainly were well compensated. They are ranked seventh in total remuneration in 2001 with $380,619 worth of cash and stock, according to a director compensation study by Pearl Meyer & Partners, a New York based compensation consulting firm, which based the rankings on the value of a company's stock on the date of its annual meeting.
Whether the directors engaged in insider trading remains to be proved, of course, but the sales by members of the board raise questions. "As a director, you should never sell stock until you leave a company's board," said Charles M. Elson, the director of the Center for Corporate Governance at the University of Delaware. While selling stock is a director's legal right, the sale sends a bad signal to shareholders, he said.
"There really is no good reason to do it," Mr. Elson added.
Aside from the various consulting contracts and other business relationships disclosed in the proxy statements, there are ties that are not made clear.
Dr. LeMaistre, for example, does not list other directorships. But he became a director of a now-struggling public biotechnology company, International Isotopes, in 1998.
Dr. LeMaistre described the company as "insignificant," according to Mr. Palmer, the Enron spokesman. The company's most recent public filing, dated in early November, lists Dr. LeMaistre as one of the directors, but Dr. LeMaistre says he has resigned from that board.
The proxy does not disclose that Herbert S. Winokur Jr., another of the directors from 1985, serves on the board of the Natco Group, a company that has been public since early 2000. The proxy does disclose some ties to the company, including sales by Natco to Enron subsidiaries. Over the last three years, those sales totaled $1.5 million. The description of Natco as privately held was a mistake, according to Mr. Palmer of Enron.
While directors are not obligated to disclose their board seats in privately held companies, there is no ambiguity over whether to list directorships in companies whose shares are publicly traded in the United States, said George Wilson, vice president of the SEC Institute, which provides training to companies on how to comply with securities laws.
Already facing litigation, the outside directors have hired their own lawyers. Gibbs & Bruns, a Houston firm, is representing them as well as two former outside directors.
While the directors are covered under the company's insurance for directors and executives, the language of the policy may determine whether they continue to be covered under all events. Many insurers, for example, might refuse to pay if there has been fraud or when there have been significant changes in the company's financial condition, such as restatements, suggesting that the initial application was flawed. Some shareholders have argued that Enron's outside directors have not come forward to communicate with investors and demonstrate their independence. The A.F.L.-C.I.O. and the Amalgamated Bank wrote to Enron's board in early November, raising questions about the independence of some board members. "What Enron shows us is that shareholders need individual relationships with outside directors," said William Patterson, the director of the office of investment for the A.F.L.-C.I.O., some of whose affiliated unions owned shares in Enron.
So far, the directors are remaining silent. Mr. Jaedicke referred questions to Enron, and Mr. Blake, Dr. Gramm, Dr. LeMaistre and Mr. Winokaur did not return phone calls last week. They did not comment on the lawsuit accusing them of insider trading and would comment on some of the other issues only through Mr. Palmer, the Enron spokesman.
While some of the omissions in the proxy statement and other relationships may not be significant, they may provide a fuller and not particularly flattering portrait of the board.
"All of this demonstrates a laxity in the corporate culture," Mr. Elson said.
Enron Closes D.C. ShopRoll Call – by John Bresnahan – December 15, 2001
(12/13/01) - Even as at least four Congressional committees have begun laying the groundwork for investigations into the abrupt collapse of energy giant Enron Corp., the Houston-based firm has essentially shut down its lobbying operation in Washington.
Enron boasted a government affairs shop with roughly 25 employees until last week, when the company laid off all except a handful, including Linda Robertson, a former top aide in the Clinton White House, according to informed sources.
A knowledgeable source said the Washington office had languished "for months" while top Enron officials in Houston provided little or no information about what was happening as the company’s finances rapidly spun out of control. Enron filed for bankruptcy Dec. 2.
Enron spent more than $1.7 million its in-house lobbying operation last year plus hundreds of thousands of dollars more on outside firms, such as Bracewell and Patterson, Quinn, Gillespie & Associates and the Alexander Strategy Group, home to Ed Buckham, the former chief of staff for House Majority Whip Tom DeLay (R-Texas).
In addition to Robertson, Enron had recently hired Pat Shortridge, a top aide to House Majority Leader Dick Armey (R-Texas). Shortridge recently returned to Armey's leadership office following the closing of Enron's Washington office.
Enron officials did not return several calls seeking comment.
The Washington layoffs come as a top official from Arthur Andersen, Enron's auditing firm, told the House Financial Services Committee that the company failed to provide "critical information" about its financial condition to his company.
Joseph Berardino, Arthur Andersen's CEO, testified yesterday before the House panel in the first hearing of what is now expected to be a comprehensive Congressional probe of Enron's demise that will involve at least four committees Ń two each in the House and Senate Ń and several federal agencies, including the Justice and Labor departments as well as the Securities and Exchange Commission.
Kenneth Lay, Enron's CEO, and other company officials declined to appear before yesterday's joint hearing of two subcommittees from the Financial Services panel, although Lay has apparently promised to cooperate with future requests.
House Energy and Commerce Chairman Billy Tauzin (R-La.)is seeking an array of documents from Enron and has called on the SEC to provide his committee with reviews and records of Enron's accounting practices and filings since 1997, along with information on its partnerships and personnel.
The Louisiana Republican has also threatened to subpoena Enron's former chief financial officer, Andrew Fastow, unless he speaks to committee investigators by Dec. 21.
The SEC is already planning action against Fastow for ignoring a subpoena to appear before the commission. Tauzin's actions, however, may lead him to clash with Financial Services Chairman Mike Oxley (R-Ohio), who believes his panel should have jurisdiction over the House investigation because the matter involves allegations of possible financial improprieties.
"Enron was essentially a giant [financial-trading] concern, and that falls under the Financial Services Committee," said Oxley, who waged a bitter fight with Tauzin for the gavel of the Energy and Commerce Committee before the opening of the 107th Congress. Oxley was given the reconstituted Financial Services Committee instead, a tribute to his strong fundraising on behalf of his GOPcolleagues.
Ken Johnson, Tauzin's spokesman, downplayed any talk of a turf war over the Enron probe.
"They have a role and we have a role," noted Johnson, pointing to Energy and Commerce's jurisdiction over national energy policy as well as accounting standards. "The only possible conflict would come a long way down the road if somebody introduced legislation."
Tauzin, however, also plans to make a large document request from Arthur Andersen soon, a move that will land him right in the middle of the Enron fight.
The Senate is expected to weigh in on the Enron fiasco soon as well, and the fact that Democrats control that chamber is likely to raise the political stakes for the White House and GOP Congressional leaders.
Sen. Byron Dorgan (D-N.D.), chairman of the Commerce, Science and Transportation subcommittee on consumer affairs, said he will hold the first of several hearings on Enron Tuesday.
And the Governmental Affairs Committee, chaired by Sen. Joe Lieberman (D-Conn.), is expected to begin an investigation of the company early next year, Lieberman confirmed Tuesday.
The Connecticut lawmaker's probe was triggered by a formal request from Sen. Dianne Feinstein (D-Calif.). Senate Democrats see a chance to score political points, and some of the issues they raise "may make the White House squirm," according to a top Senate Democratic aide.
Feinstein, for instance, questioned whether the Bush-led SEC dragged its feet in failing to look into Enron's financial condition. A Dec. 7 letter from Feinstein to Lieberman cited "the reluctance of the Securities and Exchange Commission to investigate Enron's financial records and impending bankruptcy."
Enron officials, including Lay, were close with President Bush and other top Republicans. Lay, a top Bush fundraiser and the No. 1 individual contributor to his White House campaign last year, was considered to be on the short list to head the Department of Energy at one point.
Enron itself donated $2.4 million to political campaigns in the last election cycle, with the overwhelming majority of that going to Republicans.
Several Bush aides, including top political adviser Karl Rove, were criticized earlier in the year for owning hundreds of thousands of dollars in Enron stock. Democratic and media pressure led the aides to sell the stock before Enron's collapse.
Other Bush White House officials, including U.S. Trade Representative Robert Zoellick, Army Secretary Thomas White Jr. and Bush's top economic adviser, Lawrence Lindsey, had worked for the company before joining the administration.
Enron's bankruptcy is also causing pain for lawmakers. At least 15 Members owned stock in the company at some point last year, according to financial disclosure records.
For instance, Senate Minority Whip Don Nickles (R-Okla.) held Enron stock valued between $15,000 and $50,000. "It's one of my great investments," cracked Nickles when asked about it.
Sen. Mike DeWine (R-Ohio)said he wasn't aware that he had even purchased any Enron stock, although he was listed as having sunk between $15,000 and $50,000 into the company, as well.
"No one would believe that, but it's true," said DeWine.
At one point, Rep. Jane Harman (D-Calif.) had as much as $350,000 invested, according to her 2000 financial disclosure report. Harman, like several other lawmakers, declined to comment.
Wendy Gramm, wife of Sen. Phil Gramm (R-Texas) and a former head of the Commodity Futures Trading Commission, served on the board of directors for Enron and held stock options worth between $250,000 and $500,000, according to the Gramms' 2000 financial disclosure report filed in May.
Wendy Gramm was a member of Enron's internal audit committee and has been named personally in at least one lawsuit filed against the company by creditors. Sources said she was likely to be interviewed by House Energy and Commerce investigators about her role in the company's failure.
It is unclear if Mrs. Gramm was able to dispose of her Enron stock before the company's implosion. The Senator himself said he "didn't know anything about it," while his wife, through an Enron spokeswoman, declined to comment.