One year after declaring bankruptcy, Enron remains months away from completing its reorganization, while continuing to burn cash at a record rate on fees for lawyers and professionals.
Instead of the slimmed-down profitable company promised by its now-sacked leadership, Enron is still sorting through its debris.
At best, the company will manage to sell to its own creditors a new business built around some hard energy assets, keeping a fragment of the old Enron aglow, and get what it can for the rest.
At worst, it will sell everything at distressed prices in a soft market, use its remaining cash on lawyers during the process and leave creditors with billions of dollars in worthless claims.
Twelve months after filing in the early hours of Dec. 2, a Sunday, bankruptcy experts say Enron’s biggest achievement is simply staying alive this long. Many Chapter 11 companies fail to reorganize within the first year, and none was burdened with the taint that haunts Enron.
What was once arguably the company’s second-biggest achievement in bankruptcy, keeping the commodity trading business together, has since lost much of its luster.
In January, company officials and their bankruptcy lawyers hailed the sale of the commodity trading business, which once generated 90 percent of Enron’s reported income, to credit-worthy UBS Warburg as an unqualified success.
To keep the trading operation together, Enron gave tens of millions of dollars in bonuses to its traders, and most of them transferred to UBS. At the sale hearing in bankruptcy court, Enron’s financial advisers said the deal, which promised Enron no cash up front but a cut of future profits, could generate up to $2.74 billion for creditors.
UBS Warburg Energy has since undergone two rounds of substantial job cuts and is abandoning its Houston office. Next February, when Enron was supposed to get its first royalty check, it will get nothing, and it might never be paid a dime if the foundering trading business fails to revive.
Though Enron’s core energy businesses, such as pipelines and power plants, are still operating and generating some cash, the company has kept itself in the black with a steady stream of asset sales. Proceeds from selling assets outside Enron’s core businesses have brought in about $1.7 billion since the bankruptcy filing.
The company has badly needed the money. In the past year, Enron has excelled in only one area spending money on lawyers and other bankruptcy professionals trying to unscramble the eggs.
The company estimates it will spend $315 million on professionals in its first 13 months of bankruptcy, obliterating the $200 million record set in the early 1990s by the bankruptcy of the Saudi Arabian Bank of Credit and Commerce International BCCI in Luxembourg.
Enron, now spending about $30 million a month on such fees, is likely to spend at least $500 million in total and at least as much on administrative costs to keep its core business running while in bankruptcy.
LOWER FEES FOR WORLDCOM
Even though WorldCom’s bankruptcy in July supplanted Enron as the largest ever, its fees don’t approach Enron’s.
The primary firm representing both companies in bankruptcy is New York’s Weil Gotshal & Manges. Early on, its monthly billings to Enron were running more than $6 million a month. In comparable stages of the WorldCom case, the firm billed $1.5 million to $2 million a month.
“This case is many multiples in size and complexity than any other case, ever,” said Enron’s lead bankruptcy lawyer, Martin Bienenstock, of Weil Gotshal.
“There’s no question (that) from the first moment when we didn’t even know the assets and liabilities of each debtor, throughout the first year, there were more unknowns and more questions to solve than ever before.”
Others following the case, including bankruptcy professors and government officials, agree that WorldCom is far simpler than Enron, as addition and subtraction are to calculus.
Prosecutors say several WorldCom executives participated in a huge accounting fraud to hide costs and inflate profits by more than $9 billion over about four years.
In Enron’s case, prosecutors say executives not only used special purpose entities to hide debt, but personally enriched themselves, and the company cast a very broad net in drawing up its partnerships.
“Up until Enron, the only frauds that I had seen in bankruptcy were simple, almost so brazen you had to ask how people could have thought they would get away with it,” Bienenstock said.
“The biggest difference with Enron was the use of special purpose entities to get debt off the balance sheet and to buy assets from Enron to show profit. It was a system that was devised by reputable people in many different professions. You had lawyers, accountants and investment bankers coming up with systems that pushed the envelope so far, you had honest people believing it was OK.”
In addition to sorting out Enron’s thousands of such transactions and stumbling through the muck of Enron’s muddled finances, Enron’s bankruptcy lawyers have recovered $25 million from Dynegy for the failed merger, forced the company to turn over another $63 million it was holding back and filed several other lawsuits to recover company assets.
Also, within the past month, the lawyers privately presented a preliminary plan of reorganization to the creditors committee in the bankruptcy.
Typically, a company’s bankruptcy fees range from 2 to 10 percent of a company’s assets, said Robert Lawless, a professor at the University of Nevada,
Las Vegas School of Law.
“You can’t look at the fees absolutely. It’s a question of scale,” he said.
When it filed for bankruptcy Dec. 2, 2001, Enron listed $49.8 billion in assets. The true value is between $10 billion and $20 billion, Bienenstock said.
Although even the lowest figure puts Enron at or below the 10 percent threshold, it’s still far too much money for the tastes of David Bennett and other lawyers who represent creditors of Enron North America, the subsidiary of Enron that held the company’s commodity trading operation.
Bennett looks at Enron and sees a steady liquidating of assets, overspending in an effort to reorganize and taking too much time to do it.
“Spending money in the hopes that a phoenix will rise from the ashes, when it’s not going to happen, doesn’t make much sense,” he said.
He, like others, says the company should have entered into a full-fledged liquidation shortly after filing for bankruptcy, saving hundreds of millions of dollars in expenses.
Three officials associated with the bankruptcy are in perhaps the best position to comment on the expenditure of fees in the case and their necessity U.S. Trustee Carolyn Schwartz, fee committee chairman Joseph Patchen and creditors committee lead lawyer Luc Despins. All of them declined to be interviewed for this story.
Patchen’s committee has been reviewing the hundreds of fee applications in the bankruptcy and has released reports in advance of a Dec. 12 hearing suggesting law firms reduce their billings by a few percentage points for inaccurate record-keeping and other discrepancies.
Nothing in the reports appears to question the reasonableness of the total amount being spent on fees.
Enron and its bankruptcy lawyers insist the company’s costs would have been similar if it had gone into an outright liquidation, rather than pursuing reorganization.
Having sold a number of assets and in the midst of selling energy contracts negotiated pre-bankruptcy, Enron has begun an auction of a dozen of its premiere holdings, including pipelines and power utilities.
This approach is a relatively novel one by Stephen Cooper, Enron’s new chief executive and a restructuring specialist. It is essentially a liquidation that keeps Enron’s officers and lawyers in charge of the business.
Final bids are expected on these 12 assets by mid-December. A decision on whether to sell them individually or bundle them together as a new company that would send revenues to creditors is expected by late January.
A source familiar with the auction said the assets based in North America, including pipelines and the Portland General electric utility, are likely to sell at market value.
Assets in South America, such as Elektro, are commanding far less interest because of financial instability and other uncertainties, the source said.
SOUTH AMERICAN BUNDLING
As a result, a small company based around the South American interests may be sold to creditors because they have no other choice but to buy it, the source said. They would receive cash for the other assets.
(Enron shareholders, incidentally, have long since been forsaken. The lowest class of creditors, they will receive no money in the bankruptcy.)
Once the sale is completed, much of the bankruptcy case work remains. Creditors of several dozen Enron entities are battling over the question of billions of dollars in loans the subsidiaries made to one another.
Sorting out those transactions may prove impossible. The creditors committee may also seek to consolidate all creditors into one group, regardless of the solvency of the various subsidiaries.
Bienenstock said Enron will seek to compromise on both points, but won’t let the process go on forever.
“To get to the point where there’s a compromise that everyone likes is a difficult process,” he said. “The company’s notion is that we’re going to try because we’d like to have a settlement rather than a litigation. But you could spend years negotiating compromise.”
Cooper said in mid-October that he expects it to take about another year to approve a plan of reorganization. That assessment remains reasonable, company officials say.
Reorganizing the company in less than two years would fall short of the original boast of getting it done within a year, and the shadow that survives would not be called Enron.
Pulling it off at all would still be a feat, experts say. On average, public companies that file for Chapter 11 bankruptcy take 17 months before emerging from hibernation.
There is nothing average about Enron.