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Fitch on Enron: The Coming Creditor Battle Over Enron's Assets.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 30, 2001

With total assets of $62.8 billion at Sept. 30, 2001, Enron would become the biggest bankruptcy in United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area.  history if it files for bankruptcy as expected. Fitch anticipates a lengthy and contentious battle over Enron's assets. Some of the key issues for creditors are:

What is the Enterprise Value?

There are several issues that cloud an enterprise valuation of Enron. First and foremost is the uncertain value remaining in Enron's wholesale trading business. Approximately 75% of Enron's total 2000 Income before interest, minority interests and taxes was generated by the wholesale services segment, which consists primarily of the energy trading business. Based on recent refusals of Enron's energy trading partners to accept the company as a counter-party and exacerbated by implementation of trading restrictions on the company by the New York Mercantile Exchange New York Mercantile Exchange (NYMEX)

The world's largest physical commodity futures exchange.
, Fitch believes significant doubt has been cast upon Enron's ability to continue to operate this business at its previous scale. Further, previous valuations of bankrupt trading businesses have been quite low. Therefore, Fitch believes it would be prudent to assign a very conservative valuation to this segment in a recovery analysis. Secondly, due to the ongoing Securities and Exchange Commission investigation of Enron's accounting, and previous restatements of earnings, there exists uncertainty over the accuracy of historical earnings reports. Finally, Enron's retail energy segment is closely integrated with the company's wholesale operations for energy supply. If the wholesale operations remain shutdown, the future cash flow generation ability of the retail segment may be materially impaired.

How will the value of Enron's assets be allocated in a bankruptcy?

Fitch has conducted a preliminary analysis of recovery prospects for various creditor classes. Enron's pipeline business has historically been a steady source of cash flow generation. A market comparable method of valuation for the transportation segment results in strong recovery prospects for secured creditors at Northern Natural and Transwestern. Fitch estimates there would be roughly $1 billion of residual value Residual value

Usually refers to the value of a lessor's property at the time the lease expires.

residual value

The price at which a fixed asset is expected to be sold at the end of its useful life.
 from the pipelines following the satisfaction of their secured and unsecured claims and Dynegy's claim. As part of the merger agreement with Enron, Dynegy injected $1.5 billion into Enron in exchange for preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders.

Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate.
 in Enron's largest pipeline, Northern Natural Gas, which can be converted into ownership of the pipeline. Dynegy has exercised this option. It is noted that as part of its investment in the preferred stock, Dynegy negotiated the right to block a bankruptcy filing at this subsidiary.

Enron has various other assets other assets

Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately.
 that could be monetized to satisfy unsecured creditor Unsecured Creditor

An individual or institution that lends money without obtaining specified assets as collateral. This poses a higher risk to the creditor because they have nothing to fall back on should the borrower default on the loan. A debenture holder is an unsecured creditor.
 claims. Enron has an agreement to sell its Portland General Electric This article is not to be confused with PG&E, a San Francisco, California-based utility company
Portland General Electric (PGE) (NYSE: POR) is an electrical utility, formerly owned by the Houston-based Enron Corporation (but now independent), that distributes electricity to
 subsidiary for anticipated net proceeds Net Proceeds

The amount received after all costs are deducted from the sale of a piece of property or security.

In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions).
 of about $1.8 billion in cash or cash equivalents in 2002. In addition, Enron has contracted to sell $800 million of merchant assets which is expected to close before year end, subject to execution risks including regulatory and transfer risks. The net proceeds that could be realized from cash on hand, inventories, and various other monetizable assets are difficult to estimate. Moreover, the full extent to which the company's assets have been pledged is uncertain.

The outstanding amount of senior unsecured debt Unsecured debt

Debt that does not identify specific assets that the debtholder is entitled to in case of default.
 is currently estimated to be about $11 billion, excluding possible liabilities arising from trust structures such as Marlin and Osprey osprey (ŏs`prē), common name for a bird of prey related to the hawk and the New World vulture and found near water in most parts of the world. . Additionally, other general unsecured claims in a bankruptcy would include customer deposits, minority interests, project and structured finance make whole obligations, as well as an unknown amount of amount of exposure to is shareholders, employees and others relating to relating to relate prepconcernant

relating to relate prepbez├╝glich +gen, mit Bezug auf +acc 
 the spate of recent litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.

When a person begins a civil lawsuit, the person enters into a process called litigation.
 against Enron. The amount of these other general unsecured claims can not be determined at this time.

Despite the fluidity of the situation, Fitch's preliminary view is that unsecured creditors would realize recoveries in the 20-40% range. This opinion considers the deterioration in the value of the wholesale trading business, the pledge of flagship assets to secured creditors, the uncertain cashflow generation prospects of the retail segment in light of the wholesale business situation, the opaque and uncertain accounting and off balance sheet liability issues, and other unexpected liabilities.

Will Enron be able to continue to operate as a going concern or seek to liquidate assets?

Enron would require a sizable debtor in possession debtor in possession n. in bankruptcy proceedings when a debtor has filed for the right to submit a plan for reorganization or refinancing under Chapter 11, and the debtor is allowed to continue to manage his/her/its business without an appointed trustee, that debtor  facility to fund ongoing operations and induce counter-parties to resume business with Enron. Fitch believes it is uncertain whether Enron has adequate unencumbered or over- collateralized assets to obtain a DIP large enough to enable the resumption of wholesale operations.

What is the situation for secured creditors to Marlin Water Trust II and Osprey Trust?

The ratings of Marlin's $915 million senior secured notes and Osprey's $2.4 billion senior secured notes rely on support of Enron. A liquidation of the underlying assets is the primary source of repayment. A shortfall in liquidation proceeds would become a claim against Enron, which may be subject to subordination to the claims of other creditors in a bankruptcy.
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Publication:Business Wire
Date:Nov 30, 2001
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