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Charles
Watson, Chairman and Chief
Executive of Dynegy and the
man who, along with the Dynegy
board, almost acquired Enron
last November when that company
was teetering on the brink
of collapse, says he is confident
that Enron's bankruptcy is
a "passing phase" that
will not impact the profitability
and robustness of the energy
industry. Admitting that
the city of Houston has been
impacted in the short-run
with thousands of layoffs,
Watson said that in the long
term Enron's demise won't
reflect on the city or the
industry.
In
a speech to the Petroleum Club of Houston,
Watson blamed Enron's spiral into bankruptcy
on what he called its self-inflicted choice
of bad investments and questionable accounting
practices. "Enron's bankruptcy had nothing
to do with energy," he told a full ballroom
in the Petroleum Club, "but with the non-energy
aspect of their business." Watson had
noted earlier that the non-energy commodities
trading and the company's joint ventures were
the big problems leading to Enron's demise.
He said that the company was determined to
grow in those commodity markets, even beyond
the limits of its balance sheet.
Enron's
downfall has perhaps affected Watson
and his company more than any
other competitor in the industry. The
two firms are right across from each
other in downtown Houston. Many employees
have worked for both companies. But for
several years, while Enron consolidated
its position as the sexy energy company
that rose to be the "jewel in the
crown" of the energy capital, Dynegy
had to content itself with living under
the hometown leader's shadow. The cultures
of both companies were also vastly different:
Enron employees perceived themselves
to be the best and the brightest, breeding
arrogance even among the lower ranks
of managers, while even the top ranks
at Dynegy‹including Watson‹came
across as low-key and modest.
Jeff
Skilling epitomized the hubris of Enron
at its peak. "We're on
the side of angels," he said. "People
want open, competitive markets. It's
the American way." While Enron revamped
its image from a stodgy energy company
to model itself like a Wall Street bank‹claiming
to earn 80 percent of its profits from
trading and only 20 percent from energy‹Dynegy
was still the good old fashioned energy
company where those ratios were reversed.
But Dynegy was nonetheless a strong,
stable company. Last year the value of
its stock jumped 218 percent, making
it the second best performer in the S&P
500.
So when Enron's troubles started with
the abrupt resignation of Skilling in
August 2001, and slid into a state of
credit downgrade and bankruptcy in October
because of accounting errors and hidden
partnerships, it was forced to reach
out to its competitor, Dynegy, to rescue
it from bankruptcy.
By rescuing Enron, Watson would become
a hero overnight and become the leader
of the potentially hottest new company
in Houston.
So, in early November, Watson decided
to acquire Enron. The company, which
had once been valued at $70 billion,
would be Watson's for just $9 billion
in Dynegy stock. He says he was sure
then that Enron was still a great buy
with an excellent track record. Its revenue
had grown 57 percent in the third quarter
to $47 billion. With the acquisition,
Dynegy would suddenly expand sixfold
into a $200 billion-a-year giant with
$90 billion in assets. The newly combined
companies would handle as much as one
quarter of US energy trading market,
turning the otherwise low profile Dynegy
into a marquee company.
However,
two weeks later, on Nov. 19, when Enron
filed quarterly financials,
the merger was off. Watson pulled out
of his own dream deal after learning
of a string of financial misrepresentations
Enron had made. He was both furious and
disappointed. Enron had $1 billion less
in cash on hand than it was supposed
to have. Recent credit downgrades to
a notch just above junk had put Enron
on the hook to repay $690 million to
a partnership in just a week‹something
Enron had never warned Dynegy about.
Enron's market capitalization had continued
to plunge, falling to an all-time, unthinkable
low of less than $270 million. The company
clearly was headed for Chapter 11 or
even liquidation, and Watson bailed out
of the deal on Nov. 28.
In hindsight,
there is no doubt now that Watson saved
Dynegy at the last
minute from committing a huge mistake
that could have perhaps led to its own
demise. But this is not surprising because
Watson has always been a cautious player.
Unlike the high-risk strategy adopted
by Enron boss Ken Lay, Watson slowly
built his company over the years to make
it a leading processor of natural gas
and one of the top three transporters
on every interstate pipeline in North
America. Dynegy's power plants generate
19,000 megawatts of electricity, enough
to supply a city of eight million. The
company is a top trader in natural gas,
power, coal, emission credits and weather
derivatives. Watson, who took over Dynegy
in 1985 with a $600 investment and a
10-percent stake for himself, built it
into a firm with a market value of $10
billion. With 5 percent of its stock,
now he's worth half a billion. And he
is still one of the big dealmakers of
the energy industry‹which may need
his confidence as it presses forward.
"We should not allow this one incident
to change how corporate America works," Watson
said. "Corporate America is not
a bad word and financing and deal making
are not bad words. People need to understand
that."
Watson has made nine acquisitions since
1995, which has kept Dynegy growing at
the rate of a solid 45 percent a year.
Even on the day Watson pulled out of
the Enron deal, he signed a $600 million
purchase of BG Storage. Looking to the
future, Watson says he strongly believes
in deregulation as the mantra for energy
markets.
"Deregulation of energy markets
should move forward as proposed all over
the country. It is the most significant
reason that prevented the energy trading
markets from coming to a standstill after
the Enron collapse. The self-proclaimed
number one market player in energy, gas
and power left those markets overnight
and yet there was no disruption in demand
and supply and no price inflation occurred," said
Watson at the Petroleum Club. "That's
what deregulation, open markets and competition
is all about‹offering customers
choices to move around, which they did."
"The other significant thing to
note about the Enron collapse was that
it occurred during the peak season of
the energy business in the United States," he
continued. "It is incredible that
they could go under during the bid week
and not a single customer was affected.
Everyone still got gas or power."
"Its a big black eye on this city.
It put 7,000 very good employees on the
street, but Houston is a very resilient
city. It has gone through turmoil at
several points in the last three decades
and always bounced back. I am confident
that it will do so again." The chief
executive added: "Long term, I don't
foresee any impact [on Houston] as the
energy capital of the world. No one company
can take this city down."
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