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Enron Corp. filed for bankruptcy protection Sunday and also hit its estranged merger partner, Dynegy Inc., with a breach-of-contract lawsuit seeking at least $10 billion for backing out of the $9 billion deal. The embattled Houston energy trading concern is also seeking to have a court declare that its rival, Dynegy, is not entitled to exercise an option to acquire an Enron unit that indirectly owns Northern Natural Gas pipeline. Dynegy spokesman John Sousa insisted that his company believes it had the right to walk away from the deal. “We have not had an opportunity to review the litigation,” Sousa said. “However, we continue to be confident in our position as it relates to exercising the material adverse change position in the merger agreement. We believe we were within our legal rights to exercise the position, and it would have been a breach of our fiduciary responsibility not to do so.” But Enron, in its lawsuit said, Dynegy agreed to the merger “with full knowledge of Enron’s well-publicized financial crisis and after conducting two weeks of extensive due diligence. Dynegy knew that Enron was in a precarious financial condition, was on the verge of being dropped to a non-investment grade credit rating, and was in no small measure dependent on the successful completion of the merger for its very survival.” In addition, Enron contended, Dynegy’s ability to terminate the merger agreement was “severely” limited. Enron’s legal action, filed in federal bankruptcy court in the Southern District of New York, is the latest chapter in the problems plaguing the energy trading giant. It has seen its stock price plunge in recent weeks in response to questionable financial dealings that have come to light and to the resulting collapse of the Dynegy deal. The parent entity, Enron Corp., and several of its units are seeking bankruptcy protection. Kenneth Lay, Enron’s chairman and chief executive officer said in a statement that the bankruptcy would “enhance our ability to pay our creditors.” Enron also said in its statement that it will cut its work force substantially, with most of the job losses to occur at its home base in Houston, where it employs 7,500 people. Enron listed its total assets at nearly $24.8 billion. And it said its total debts were $13.15 billion. However, that figure did not reflect other off-balance-sheet and contingent obligations, the company said in a footnote in the filing. Peter A. Chapman, an editor at Bankruptcy Creditors’ Services, a newsletter published in Trenton, N.J., called the Enron action one of the largest bankruptcy filings in U.S. history. “If it were a sovereign nation, it would be the 30th-largest country, a little bit bigger than Malaysia, a little bit smaller than Egypt,” Chapman said, pointing to Enron’s $200 billion in revenues. “At the minimum, this company is in bankruptcy for two years,” Chapman predicted. “It’s so big. The average company spends 17 months in bankruptcy. Most who are prepared can do it in six months.” But there is the mountain of litigation, he noted, pointing to the alleged misconduct of corporate officers and directors in connection with off-balance-sheet partnerships. Even Enron’s auditor, Arthur Andersen, is a potential legal target. Last week, Enron was scrambling to put together a record, multibillion-dollar debtor-in-possession loan, which pitted its existing lenders against the company and rival financial institutions that want to participate in the DIP. A key sticking point in the DIP talks was what role, if any, new lenders — specifically GE Capital Corp. — would have, and what kind of security Enron can offer lenders. Enron has tapped the Blackstone Group’s Steve Zelin to assemble what at nearly $3 billion is believed to be the biggest DIP package ever. Early indications are that Zelin is finding no shortage of potential lenders, including Enron’s relationship banks, Citigroup Inc. and J.P. Morgan Chase & Co. Sources familiar with the talks said that Enron executives were pushing for new lenders in the DIP syndicate to dilute the power of its existing bank group. Enron’s current banks are believed to have made additional cash advances in recent weeks to keep the company solvent, expecting it would close its $9 billion merger with Dynegy. But Dynegy pulled out of the deal Wednesday. And the uncertainty about the amount of those advances — which may not be determined for weeks — is complicating talks over the DIP financing. Bankers, lawyers, accountants and executives have to assess not only what real and unencumbered assets Enron has to secure new loans, but also what debt the company truly has. “People are just beginning to find out there are more borrowings that don’t fit the definition of loans,” said William A. Brandt, a consultant with Development Specialists Inc. in Miami. “It could be bridge funding, payroll — anything that was part of a relationship between Citigroup, Chase and Enron.” Fitch, the ratings agency, predicted Friday that unsecured creditors would see 20 to 40 cents on the dollar in bankruptcy. Spokesmen for Enron, J.P. Morgan, GE Capital and Citigroup declined comment. Enron’s bankruptcy counsel is Weil, Gotshal & Manges, led by partner Martin Bienenstock. J.P. Morgan Chase has retained Donald Bernstein at Davis Polk & Wardwell. Shearman & Sterling is counsel for Citibank. Jockeying for position in the DIP syndicate is common in reorganizations. DIP loans are considered very safe because they are the first to be paid off in a liquidation, and they can produce lucrative returns if the debtor turns around. However the debtor fares, the lenders earn a bonanza of fees and interest. But pre-bankruptcy lenders often want to keep out new lenders at the DIP stage, because their interests can conflict with prior lenders’, who want to protect their earlier stakes. “It’s an unwritten rule for the banks,” said Anthony Clemente, a bank loan fund manager for Invesco. “The reason is that it makes the process run smoother because everyone has a similar interest.” But Enron wants to bring in new lenders, according to a source familiar with the talks. Not all of Enron’s banks are eager to stay on board. Many are bailing out. On Friday ABN Amro NV, Canadian Imperial Bank of Commerce, National Australia Bank Ltd. and Abbey National joined an ever-growing list of banks that were writing off or claiming exposure to Enron. Those banks’ exposures varied from a less than $10 million to $200 million. Enron’s banks are on the hook for as much as $7 billion, and the company has $11 billion in unsecured debt, according to a Fitch report. While the lenders maneuvered for position, Houston energy merchant Dynegy reiterated its claim to Enron’s Northern Natural Gas Co. subsidiary, asserting that it must OK any bankruptcy filing by the pipeline unit. In exchange for pumping $1.5 billion of cash into the ailing Enron, Dynegy acquired an option to buy the pipeline in the event the merger fell through. When Dynegy backed out of the merger, it said it would exercise the option. When the smoke clears, Chapman said, “this will make for an interesting history lesson.” — Additional reporting by Terry Brennan Copyright (c)2001 TDD, LLC. All rights reserved.

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