HOUSTON – Enron Corp., its energy trading empire in ruins, filed for Chapter 11 bankruptcy Sunday and hit rival and one-time suitor Dynegy Inc. with a $10 billion breach of contract lawsuit for pulling out of a last-ditch merger effort.
The filing in federal bankruptcy court in the Southern District of New York sought protection from creditors while Enron, burdened with at least $16 billion in debt, tries to reorganize its finances. Under Chapter 11 of the U.S. bankruptcy code, a company can continue to operate while it and creditors work out a reorganization plan.
The lawsuit accuses Dynegy of wrongfully terminating a $9 billion merger deal last Wednesday. The suit also seeks to stop Dynegy from exercising its option to obtain Enron's Northern Natural Gas Pipeline, the heart of Enron's pipeline system. The units that own Enron's pipelines were not part of the bankruptcy filing, Enron said.
"While uncertainty during the past few weeks has severely impacted the market's confidence in Enron and its trading operations, we are taking the steps announced today to help preserve capital, stabilize our businesses, restore the confidence of our trading counterparties, and enhance our ability to pay our creditors," Enron Chairman and Chief Executive Officer Ken Lay said in a statement.
To help it recapitalize its North American trading business, Enron said it is in negotiations with banks and financial institutions to get credit support. Enron said it would provide traders and back-office support staff, and would trade through its EnronOnline Internet trading platform.
Nonetheless, the expected massive layoffs that are expected to accompany a bankruptcy filing will now become reality. Enron said it would implement "substantial workforce reductions," primarily from among the 7,500 workers employed at its Houston headquarters. It gave no firm numbers, but the cuts are expected to be in the thousands. Enron will also continue its previously planned campaign to sell off non-core and underperforming assets.
Enron is also working with lenders to obtain debtor-in-possession financing to help it maintain its payroll and other operational expenses. Discussions are expected to be done shortly, the company said.
Enron was the top U.S. energy trader with $100 billion in revenues and $1 billion in profits last year, but has unraveled with stunning speed since mid-October when it declared a third-quarter loss and a billion-dollar reduction in shareholder equity linked to questionable off-balance sheet deals.
Its descent into bankruptcy was hastened as partners fled its key energy trading business and was sealed on Wednesday when its credit rating fell to junk status and Dynegy pulled out of a hastily arranged merger announced Nov. 9.
The release made no mention of the more than two dozen shareholder lawsuits that have been filed, accusing Enron of making fraudulent claims about the value of its business and of hiding financial losses.
Its shares closed at 26 cents on the New York Stock Exchange on Friday, having fallen more than 98 percent on the year, and far from a high of $90.56 reached in August 2000.