Drowning in Red Ink, Enron Nears Fading to Black

As befitting a company that forsook the plodding world of energy production for a high-flying life of the spread, trading, retailing and — it turns out — creative-accounting its way to Wall Street glory, the decline and fall of Enron has been a clatter of dominoes. The $1.2 billion hit from a shady partnership venture gone bad. The SEC investigation into how Enron hid massive amounts of debt off its books where Wall Street couldn't see it. The frantic talks with banks, creditors, and a suitor/savior, fellow Houston giant and erstwhile competitor Dynegy.

All framed by a spectacular slide in Enron's stock price from over $80 in January to $30 in October to less than $4 at Wednesday’s opening bell — and punctuated only hours later with the one-two punch that looks to have finished Enron off. That would be the downgrade Wednesday morning of Enron’s corporate debt to "junk" status — a bit of paperwork that instantly adds something like $10 billion in debt to Enron’s towering stack of bills — and the abrupt termination by Dynegy of the planned rescue.

[an error occurred while processing this directive] The move surprised Wall Street, which even after the debt downgrade was whispering that the deal — after some very heavy renegotiations, of course — was as good as done, and Dynegy CEO Chuck Watson wouldn't get specific with reporters afterwards about why he killed it. Some reports indicate a fear — or a discovery — of more skeletons lurking in Enron's apparently spacious creative-accounting closet. But it seems more likely that Enron had simply ceased to be worth the trouble. Why buy a corpse when you’ve already pulled the boots off — and it’s starting to rot?

Dynegy got into the Enron deal for three reasons. The first — that Enron stock was dirt cheap — went sour when Enron's stock continued to slide even faster than Dynegy's, but the renegotiations looked likely to rectify that. The other two were about structure — Dynegy wanted to take over as the energy-trading honcho by folding its own trading operation into Enron's powerhouse, and it wanted to beef up its real energy-production assets by acquiring Enron subsidiary Northern Natural Gas, a pipeline network that runs from the upper Midwest down to Texas.

But three weeks later, Enron's trading operation is a shell of its former self, having been steadily deserted by leery clients as each day brought further doubt how long Enron itself was going to be a viable company. And the pipeline? As part of the original merger deal, Dynegy handed Enron $1.5 billion in badly needed capital — in exchange for preferred stock in Northern Natural Gas. And now that the merger is terminated, guess what? Dynegy has the right to buy the rest of the pipeline’s stock.

"Sometimes a company's best deals are the ones they didn't do," Watson said Wednesday — especially if you’ve already gotten what you wanted. Once Enron's credit rating went "junk" Wednesday — essentially condemning Enron to a takeover or bankruptcy — Dynegy didn't see anything left to buy that it couldn't get cheaper at the gone-out-of-business sale, including the thousands of Enron traders and other employees for whom the commute to the Houston office is already a daily routine.

And life will go on. The NNG pipeline will simply change hands, and probably get more attention from Dynegy than Enron ever gave it. Other energy retailers, starting with Dynegy, will happily fill in the trading space — that's what markets do. And Enron, once No. 7 on the FORTUNE 500, will file for bankruptcy, sell off its assets, and very likely disappear, having found (like derivatives-slinger Long-Term Capital Investment of yesteryear) that in the high-wire life of trading for profits, too much leverage, too-clever accounting and a few bad breaks can be a lethal combination.