Enron Bankruptcy: Purchasing Assets from Enron and its Subsidiaries and Affiliates


© 2002 Haynes and Boone, LLP.
Enron announced in court Friday, January 11, that it had selected UBS Warburg’s bid for its wholesale commodity trading business.  Many details concerning the sale remain to be resolved through the bankruptcy court process. Importantly for Haynes and Boone’s energy clients, there are many other Enron assets remaining on the auction block.  Following its bankruptcy filing on December 2, 2001, Enron has announced an intent to sell certain major assets, and to sell between $4 and $8 billion of non-core diversified energy assets.  In addition to the sale of EnronOnline, the major completed and anticipated sales include:

  • Enron’s 65% interest in its Dabhol power plant in India held by Enron Oil & Gas India Ltd.
  • Wessex Water, the regional UK utility owned by Azurix Corp.
  • 160 MW Wind power generating plant in West Texas by Enron Wind to American Electric Power for $175 million closed December, 2001.
  • Sundance power generating plant in Canada by Enron Canada Power Corp. to a partnership between Alta Gas Service and TransCanada Pipelines closed for $135 million December 2001.
  • Portland General Electric power utility in Oregon under contract for $1.8 billion to Northwest Natural Gas Co. announced in October.
  • Enron LNG Power Atlantic to an undisclosed buyer for $266 million.
  • Spanish power plant, Diario Economico 1,200 MW combined-cycle gas plant at Arcos de la Frontera, near southern port Cadiz, Spain.
  • 50% participation in South Korean gas and power joint venture, SK – Enron.
  • Philippine power plants (total 200+ MW) to be sold by Enron Power Corp (Philippines) to Philippine government.

Also, there are numerous Enron sponsored off-balance sheet vehicles that invested in power, water and energy related assets.  Some of these off-balance sheet vehicles issued debt which went into default as a result of Enron’s bankruptcy.  It is likely that these vehicles will seek to sell assets to satisfy the defaulted indebtedness.  Enron noted in court papers, filed on Dec. 21, that offers continue to come in for non-debtor assets, including offers to purchase turbines, power plant projects, emission credits issued by California air districts and oil and gas exploration and development assets.
As of January 14, 2002, Enron and approximately 30 of its subsidiaries had filed for protection under the bankruptcy laws in US as well as England, Canada, Japan and Thailand.  Enron has over 3,500 other subsidiaries and affiliates, including the off-balance sheet vehicles, that have not filed for bankruptcy protection.  Purchasing assets from Enron, or a bankrupt or non-bankrupt affiliate, create several potential benefits and pitfalls for our clients which would not be present in asset acquisitions outside of bankruptcy.
Sale by a debtor entity
Structure of the Transaction.  Section 363 of the Bankruptcy Code allows a debtor to sell assets (outside of the ordinary course of business) only after bankruptcy court approval. A sale under Section 363 involves the following procedural steps:

  • The debtor and purchaser negotiate an acquisition agreement;
  • The debtor sends notice to its creditors of the terms of the proposed sale;
  • A hearing is held in the bankruptcy court to hear objections to the sale, receive other offers and, if there are no successful objections or higher offers, to approve the sale; and
  • The sale is consummated.

It has become common to structure Section 363 sales of significant assets, such as EnronOnline, as competitive bids. Under a competitive bid, the debtor will establish bidding procedures which include the dates on which offers must be received, the structure of the offer, the amount of any deposit, the approved form of purchase agreement, and a procedure for submitting successive rounds of offers.  These procedures are approved by the bankruptcy court, and used to conduct an auction of the assets being sold.
Under Enron’s December 12, 2001 Motion, procedures were prescribed for bidding on 51% of Enron’s wholesale U.S. gas and electric trading platform, including EnronOnline. Enron had proposed to retain 49% as a limited partner with certain put/call options, tag-along and drag-along rights and buy-back rights triggered upon the happening of certain events.  Ultimately, it appears, the winning bid did not exactly follow the parameters set out in Enron’s motion.  A hearing on approving the bid by UBS Warburg is scheduled for Thursday, January 17, 2002.  The sale of EnronOnline was expedited by Enron.  In Enron’s opinion, an expedited sale was necessary to preserve the value of the enterprise which Enron alleged could become worthless if a credit-worthy partner was not found soon to reestablish the trading desk’s financial ability to back up its trades.
In many bankruptcy sales, it has become common to use “stalking horses” in Section 363 auctions.  In these transactions, the debtor conducts preliminary negotiations with a small number of possible purchasers.  The debtor and one of the purchasers enter into a definitive agreement for purchase of the assets.  Enron attempted, but was unable to, lock in a stalking horse bid for its sale of EnronOnline.  A typical agreement will contain bidding procedures for soliciting higher offers, and will contain termination provisions and a break-up fee payable if the assets are subsequently sold to a higher bidder.  This agreement is submitted to the bankruptcy court for approval at a hearing.  If approved, an active bidding process is conducted as contemplated in the court approved agreement.
Benefits of a Purchase in Bankruptcy.  The benefits of acquiring assets in bankruptcy include:

  • Assets purchased in a Section 363 sale are free and clear of any third party interests or claims.  If the asset was pledged to a creditor the sale will be free of any liens on the property provided that the conditions under Section 363 are met including that the creditor consents, the sales price exceeds the value of the liens and under applicable property law the creditor could be compelled to accept money in satisfaction of such interest.
  • A purchaser can purchase assets from the debtor free and clear of related liabilities.  For example, if an asset is subject to a contract which is detrimental to the bankrupt entity, the contract may be rejected and terminated and the asset sold to the purchaser free and clear of any contract obligation that the purchaser does not want to assume.
  • A purchaser can purchase assets (including contract rights) without regard to rights of first refusal, termination rights, consent rights or change of control provisions. However, certain successor liability issues must be addressed on a case by case basis, for example, whether a purchaser will be liable for the assets’ pre-existing environmental liabilities.
  • For certain interests (typically real estate) which are owned jointly by the debtor and third parties as tenants in common, the entire asset may be ordered sold (subject to conditions under Section 363).  Much of Enron’s property related to natural gas and electric power production, transmission and distribution is expressly excluded from this provision (Section 363 (h) (4)).  However, the exclusion under Section 363 (h) (4) would not apply to Enron’s broadband lit and dark fiber assets to the extent that they are owned jointly with others.
  • Bankruptcy tends to be a drawn out, complex process that many potential buyers are unwilling to participate in.  As a result, the competition for assets purchased in bankruptcy may not be as vigorous as in a non-bankruptcy context.
  • Sales in bankruptcy are not driven by market conditions.  Consequently, assets may be sold into depressed markets, or in competition with other assets sales.
  • The decision on an acceptable price for assets frequently will be made using criteria different from non-bankruptcy context.  For example, holders of a debtor’s publicly traded bonds may have purchased their bonds for a fraction of their principal amount.  These bondholders may be willing to take an immediate cash return in an asset sale, rather than wait for a higher offer months in the future.
  • There are a large number of divergent interests in bankruptcy cases.  If the debtor’s effort to sell assets or to reorganize have stalled or failed, it may be possible to convince a creditors committee to support the sale of an asset in situations in which the company’s management does not support the sale. If creditors are allowed to file their own plans calling in asset sales or get a trustee appointed instead, asset sales can be accelerated over the objections of entrenched management.

Detriments of a Bankruptcy Purchase

  • Each sale of a debtor’s assets that is out of the ordinary course of business is subject to review by the bankruptcy court. Sales transactions involving a company’s assets, which normally can be done quickly outside of bankruptcy, are more time consuming because of court review.
  • Bankruptcy court proceedings, especially as large as the Enron bankruptcy, involving many parties with conflicting and diverse interests, can be unpredictable.
  • Management’s business judgment is subject to review by the court subject to input and objection from creditors and potential third party bidders, accordingly, no one should expect to negotiate a “sweet heart/brother-in-law deal” where the assets may be sold for less than market value.  Because the sale is open to scrutiny, there are no “private deals” and the total consideration offered is a matter of public record for review by creditors and competitors alike.
  • The sale of assets or businesses located outside of the U.S. must be done in compliance with local tax, regulatory, creditors’ rights and labor laws and the business customs of the particular foreign jurisdiction. Generally there is no authority for the US bankruptcy court to enforce the order approving the 363 Sale in these foreign countries, and no way to compel foreign creditors and authorities to permit the sale to go forward without full payment of local claims. These problems and costs must be calculated as part of the bid for these foreign assets and the contingencies above noted are usually handled by creating a reserve against the purchase price.

Sale by a non-bankrupt subsidiary or affiliate of the debtor
A sale by a non-bankrupt subsidiary or affiliate of a bankrupt company also involves special considerations. A subsidiary or affiliate of Enron that is not party to the bankruptcy proceeding may sell its assets without court approval.
Enron has said its ability to reorganize successfully is connected to its ability to sell the assets owned by its units that remain outside its bankruptcy case.
Although not required, purchasers from a subsidiary or affiliate of a bankrupt entity may benefit if it receives approval of the transaction by the bankruptcy court, as was requested in the December 21, 2001 filing by Enron in connection with its proposed sales of the Enron Wind and Enron Canada assets.
Preparing and positioning yourself for a purchase in bankruptcy
Identify Assets.  Purchasers generally tee up an asset for sale by approaching the owner of the asset and negotiating a term sheet or contract for the sale of assets.  Generally, a debtor, like Enron, will not be compelled to sell its assets or any particular asset until the court is convinced that the debtor’s directed reorganization efforts are not going to be successful. Once that happens, other creditors can file reorganization plans which can include asset sales or the creditors can seek to appoint a Trustee for the purpose of liquidating the company and its assets.
Flexible Corporate Approvals and Financing Structure.  Although the bankruptcy sale process tends to be drawn out, the actual auction may be fast paced. A potential purchaser at an auction should come with the authority to bid and bind his company.  Bidders without authority or who must make “subject to” bids that must get additional board approval, or approvals by financial sources, may be at a significant disadvantage.
The successful bidder for a bankrupt company’s assets requires not only the successful negotiating skills that are required for any acquisition, but also a well grounded understanding of the dynamic process that governs the transaction in the context of a bankruptcy proceeding.

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