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Enron and Kmart Go Bankrupt PRESENTED BY: Jang-Woong An Melissa Cole Todd Haberly Filing Chapter 11 - Reorganization.

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Presentation on theme: "Enron and Kmart Go Bankrupt PRESENTED BY: Jang-Woong An Melissa Cole Todd Haberly Filing Chapter 11 - Reorganization."— Presentation transcript:

1 Enron and Kmart Go Bankrupt PRESENTED BY: Jang-Woong An Melissa Cole Todd Haberly Filing Chapter 11 - Reorganization

2 AGENDA Bankruptcy Filing Options The Process of Chapter 11 Information about Enron Enron’s alternatives to filing bankruptcy Factors that lead Enron to file Bankruptcy Why Enron chose Chapter 11 Post-Bankruptcy Timeline Enron’s Proposed Reorganization Process Factors that lead Kmart to file Bankruptcy Why Kmart chose Chapter 11 Goals and where Kmart and Enron are in the Reorganization Process

3 Bankruptcy Filing Options

4 The Process of Chapter 11 Step 1: A petition is filed in bankruptcy court, either by the debtor - the company in financial difficulty - or in rare cases, by a creditor or group of creditors of the debtor. Step 2: After filing, the debtor is referred to as the debtor in possession because the debtor keeps the business and its assets and continues to run it. Step 3: In vary rare cases of fraud, dishonesty, incompetence or gross mismanagement, the bankruptcy court may appoint a trustee to run the business. Step 4: The debtor in possession (or the trustee) must file: –A list of creditors –A schedule of assets and liabilities, current income and expenditures –A statement of the debtor’s financial affairs

5 Chapter 11 Process Cont. Step 5: One hundred and twenty (120) days after the filing of the petition, the debtor in possession must file a plan for the reorganization of the business. An appointed trustee may also file a plan, and the creditors have the right to file a plan under certain circumstances. Step 6: Creditors in each specified “class” of creditors - shareholders, secured creditors, unsecured creditors - have the right to approve the plan. Each respective class has certain voting rights depending on the number and nature of the classes and the overall vote of creditors. If the creditors approve the plan, it must also be confirmed by the bankruptcy court. Step 7: If the plan has been carried out successfully, the debtor is discharged from debts that arose before the confirmation of the plan and the business may continue to operate.

6 Enron (A Brief Summary) Fundamental Issue around Enron: Multiple Conflicts of Interest among relevant parties Executives Personal gains (through compensation & increased stock price) vs. Fiduciary duties (to shareholders, creditors, employees and the Corp.) Board of Directors Personal gains (through compensation & increased stock price) vs. Fiduciary duties (overseeing the management conducts) Andersen Auditing vs. Non-audit services Regulators (Federal Government & Congress) Fundraising vs. Regulation

7 Enron (Summary Cont.) Outcomes of Conflicts Executives benefited from inflated profits and the partnerships while banning employees’ stock sales. The board revised the code of ethics to allow the executives’ direct involvement to the questionable partnerships. Andersen supported the establishment of partnership while ignoring the foreseeable problem. The personal relationship with the regulators led Enron to become the seventh largest U.S. corporation. The SEC allowed Andersen to provide auditing and consulting services to a single client. Enron’s Filing for bankruptcy on December 2

8 Enron’s Alternatives to Filing Bankruptcy Merger with Dynegy ($7.8 billion takeover deal) Terminated on November 28 due to Enron’s misrepresentation of financial condition and the dropped value of Enron’s core energy trading business Options after Dynegy’s termination Chapter 7 Bankruptcy (the least likely and least desirable option) Chapter 11 Bankruptcy Securing more financing from creditors, the closing of previously announced asset sales and additional asset sales (unavailable due to Enron’s downgraded credit rating)

9 Factors that lead Enron to file Bankruptcy Uncovered fact (inflated profits & hidden debts) Losing credibility and the difficulty to access cash and credit hurt Enron’s energy trading business that is responsible for 90% of its income Threatening lawsuits against Enron The failure of $7.8 billion the merger deal with Dynegy Inability to reshape investors’ confidence

10 Why Enron chose to File Chapter 11 Bankruptcy Seeking legal protection from creditors’ claim against its assets Avoiding the wholesale of the entire company Opportunity to continue in business while liquidating non-profit assets Seeking court approval to use the portion of $1.5 billion debtor-in-possession

11 Post - Bankruptcy Timeline December 2 - Enron files for Chapter 11 protection in New York December 4 - Enron sells Enron Direct to Centrica for $137 million December 5 - Enron sells certain Canadian power assets to TransCanada and AltaGas for $140.1 million December 7 - Creditors file change of venue motions from New York to Houston December 10 - Post-petition lender JP Morgan sues Enron for a return of trade receivables that backed credit facilities for Sequoia

12 Timeline Cont. December 18 - The judge, Arthur Gonzalez, dismissed the unsecured creditor Wiser Oil’s demand for documentation December 20 - The judge excuses Enron’s two utilities from their natural gas service contracts until a venue is decided December 28 - The court approved Enron to sell $310 million in assets from subsidiaries Enron Wind Development Corp. and Enron Canada January 3 - The court approved Enron to terminate 600 to 700 power supply contracts

13 Timeline Cont. January 4 - Enron agrees to sell its Northern Natural Gas pipeline to Dynegy January 7 - The judge hears the change of venue arguments January 11 - UBS Warburg wins Enron’s wholesale energy trading business January 15 - UBS Warburg announces to pay royalties instead of cash for the deal

14 Timeline Cont. January 16 - Creditors are expected to seek the recovery of assets under the Fraudulent Conveyance Law that gives the court an opportunity to scrutinize pre-bankruptcy transactions that may have been designed to drain assets out of company January 17 - Enron fired Andersen as its auditor January 18 - The court approved the UBS deal January 23 - Kenneth Lay resigned as Enron’s chairman and CEO

15 Timeline Cont. January 30 - Stephen Cooper was appointed as Enron’s new CEO and the chief restructuring officer and Sempra Energy buys Enron Metals for $145 million February 12 - Enron announces the plan of reducing its board members from 14 to 8 February 20 - Enron agreed to sell its Wind assets to GE May 3 - The CEO announced its proposal to emerge from bankruptcy

16 Enron’s Proposed Reorganization Process A new form of the company, the OpCo Energy Co., will have about 16,000 miles of natural gas pipeline assets and 6,700 megawatt capacity of power operations stretching from the United States to South America With $10.8 billion in assets and 12,000 employees, the new company will generate about $3 billion in revenue and about $350 million profits in the first year The new company will operate out from the bankruptcy proceeding to maximize creditors’ recovery and later it will be either sold, merged or run on its own Creditors will be entitled to the assets in any cases (sales, merger or run on its own)

17 Factors that lead Kmart to file Bankruptcy Below planned earnings from recent holiday season Unsuccessful marketing initiatives Intense competition in discount retail industry Overall Economy down Enron’s collapse - raised insurance premiums and hurt bond market Decline in consumer and supplier confidence

18 Why Kmart chose Chapter 11 Bankruptcy Terminate leases of approx. 350 stores that were previously closed or being rented by other tenants. Could result in annual savings of $250 million. Save $350 million through staff reductions, office consolidations, and other actions. “Shed extra weight” and once again able to compete Shield itself from creditors while reorganization plan is developed

19 Kmart’s Goals and their position in the Reorganization Process Says it will reorganize on a “fast-track” basis and emerge from Chapter 11 in 2003 As of now, all 2,114 Kmart stores remain open Plan to invest in key merchandising and marketing initiatives Want to emerge from bankruptcy as a stronger, more dynamic, more profitable enterprise with a well-defined position in the discount retail sector

20 Enron’s Goals and their position in the Reorganization Process Even though future does not look bright, a “slimmed down” Enron that could create value for the creditors is planned Enron has outlined a proposal to create a new power and pipeline company with operations stretching from United States to South America New company will go by the name OpCo Energy Co. The reorganization process allows Enron to shed money- losing assets and shape up a new company that could be sold, merged or run on its own Creditors would pocket most of the proceeds from a sale or merger or own stock in an ongoing business

21 Thank You Questions?

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