Dynegy founder and former chief executive officer Chuck Watson and his chief operating officer — Steve Bergstrom — will receive a combined $32 million in severance payments under a settlement of their severance claims with the company. Mr. Watson will receive approximately $22 million plus interest and legal fees, which is about a quarter less than what he originally demanded from the company. Mr. Bergstrom will receive $10.4 million plus interest and legal fees, which is the full amount that he demanded.
Mr. Watson had been a sterling Houston business success story for the past 15 years until that shine was somewhat dulled by his involvement of Dynegy in a last ditch effort to keep Enron out of bankruptcy in 2001. For years, Mr. Watson led Dynegy successfully as it mirrored many of Enron’s business moves, particularly its involvement in online energy trading.
As Enron spiraled toward bankruptcy in late 2001, Mr. Watson had Dynegy set to take over Enron, but the deal broke down when Dynegy discovered the extent of Enron’s contingent liabilities in connection with its off-balance sheet partnerships. Enron’s subsequent demise almost caused Dynegy to collapse as well, as traders and investors shunned the company over fears that it would become the next Enron. Dynegy’s troubles – a regulatory probe, a share price collapse, a credit downgrade and disappearing trading partners – bore a striking resemblance to the start of Enron’s downfall. However, Dynegy is better capitalized than Enron, as Chevron owns over a quarter of the company’s stock.
Still reeling from the impact of Enron’s demise into insolvency, the Dynegy board pressured Mr. Watson to resign in May, 2002. Mr. Bergstrom inherited the president’s position until he left the company in October 2002 when Dynegy decided to exit the energy trading business for which Mr. Bergstrom had been primarily responsible. The energy trading industry had largely melted down by that time in the wake or Enron’s collapse.
Both Mr. Watson and Mr. Bergstrom objected to the severance packages that Dynegy had offered them upon their resignations from the company and, in early 2003, both demanded arbitration of the disputes. The settlements announced today are the culmination of those proceedings.
As a footnote, the sad case of Jamie Olis involved a deal at Dynegy.

Popular Austin-based delicatessen franchiser Schlotzky’s, Inc. filed a chapter 11 reorganization case (case no. 04-54504) today in San Antonio.
The case was assigned to U.S. Bankruptcy Judge Leif Clark, who is an able and experienced bankruptcy jurist. A team from Haynes & Boone, LLP — led by Dallas-based partner Robert Albergotti — is representing Schlotzky’s in the chapter 11 case. Judge Clark has set a hearing for 10:30 a.m. tomorrow in San Antonio to hear a slew of “first day” motions that Haynes & Boone filed on behalf of Schlotzky’s today.
The company has more than 500 outlets in 36 states and six countries. Upon filing, Schlotzsky’s issued a public statement saying that operations at its shops would continue normally during the reorganization, but it’s a safe bet that more than a few of those shops will close during the reorganization. Schlotzky’s owns 21 “company” shops and franchisees own the balance of the stores.
Schlotzsky’s has been reeling for some time in the intensely competitive deli business that Subway and Quizno’s dominates. Schlotzsky’s recently cut 20 percent of its corporate staff and closed 15 company-owned shops in July. The company reported a net loss of $11.7 million in 2003 in comparison to a loss of about $200,000 in 2002, and lost another $671,000 in the first quarter of 2004.

Following this earlier post regarding United Airlines‘ decision to default on its obligations to its employees’ pension plans to attract capital to fund its chapter 11 reorganization plan, this NY Times article reports on some experts’ concern that the Federal Pension Guaranty Corporation that insures company pensions is facing a string of possible airline industry bankruptcies and pension defaults that could lead to another multibillion-dollar taxpayer bailout similar to the S&L bailout of the 1980’s.
This raises a rather interesting phenomenom. If United is not able to obtain a federal subsidy of its poor business practices in this way, then it will nevertheless obtain a federal subsidy through foisting a large part of its obligation to pay unrealistically large pension benefits on the federal government. Although not particularly creative, you have to admire United’s persistence.
As as Warren Buffett pointed out several years ago, if one tabulates all of the airline industry’s finances since the day the Wright Brothers in 1903, one would discover that, cumulatively, there has not been a single penny of profit? Mr. Buffett suggested famously that, in hindsight, shooting down the Wright Brothers on that beach would have been a reasonable financial, if not moral, move.
United has abot $13 billion in pension obligations that is secured by only $7 billion in assets. Inasmuch as the private capital that would fund United’s reorganization plan will almost certainly require that United terminate its pension plans in connection with that plan, United’s pension liabilities and related collateral will be assumed and administered by the Federal Pension Guaranty Corp. Absent a government bailout, United’s retirees will probably receive around a 50% dividend on their claims against United’s pension plans.
Although I have empathy for United retirees who thought that they were going to receive more in retirement than they will, there simply is no productive business purpose to be facilitated by the government contributing anything to United’s underfunded pensions.

Royal Dutch/Shell Group, the world’s third-biggest public oil company, reached preliminary settlements with U.S. and British authorities to pay penalties of about $150 million for overstating its energy reserves. Earlier posts are here about the Shell overstatement controversy.
Shell announced the hefty settlements after months of negotiations with regulators. Shell ousted top executives, turned over millions of pages of documents and shared with the regulators the findings of an internal Shell investigation of the company’s overstatements of oil and natural-gas reserves. Shell essentially bet that cooperating with regulators would shorten the regulatory investigations and soften the blow from U.S. authorities, and the bet played out well.
Shell has agreed to pay a $120 million penalty to the Securities and Exchange Commission, which is one of the biggest penalties levied by the SEC on a foreign company in recent years. The agreement settles SEC findings that Shell violated the antifraud, reporting, record-keeping and internal-control procedures of U.S. securities laws and related SEC rules. Shell also said it agreed to pay £17 million ($30.9 million) to Britain’s Financial Services Authority, which had already found that Shell had violated British market-abuse regulations. As is usual in such settlements, Shell did not admit or deny the conclusions.
Although the announcements are clearly progress, Shell is not out of the woods just yet. The SEC must formally approve its settlement, and it can still bring civil charges against individuals involved in the fiasco. Moreover, the U.S. Justice Department is continuing its own investigation into the overstatement of reserves. Finally, Shell and its executives still could face costly civil settlements.

Rich Karlgaard is the publisher of Forbes magazine. In this Wall Street Journal ($) column, Mr. Karlgaard examines what has gone wrong at Microsoft and what Bill Gates is doing to try and fix it:

Today Microsoft is struggling to figure out what attracts and motivates the most talented employees within capitalism’s free-agent system. The company had no such problem figuring that out in the 1980s and ’90s. Microsoft CEO Steve Ballmer liked to call the old motivational carrot “The Deal.” That arrangement worked like this: Come and work for Microsoft. Make do with a so-so salary but partake lavishly of options. Sure, you might be forced to grind away on 80-hour weeks for six or seven years. But you’ll change the world and get rich — wildly rich.
Microsoft’s stock has been flat since 1999. The Deal is broken. Not only that, but most of today’s change-the-world projects in computing live outside of Microsoft. These include open-source software, search engines, Web services, Flash video, WiFi, iPods, etc. For reasons of pay and excitement, Microsoft is losing its grip on a new generation of IQ.

Then, Mr. Karlgaard notes that the fortunes of companies in the technology world can changes just as fast as the technologies that they sell:

Digital Equipment Corporation reached its peak market value in 1988 but four years later sold to Compaq for a tenth the price. IBM was a titan throughout the 1980s yet nearly went bankrupt in 1992, before Lou Gerstner stepped in. At both IBM and DEC, the stellar 1980s financial results were lagging indicators of future vitality. The leading indicator was the flow of talent. By the late 1980s, even as DEC and IBM were at the peak of their financial powers, they already had lost the war for young IQ. The bright and bold were flocking to the new personal computer industry.
It’s hard to believe, but Microsoft, in 2004, has become a company run by gray hairs. Mr. Gates and Mr. Ballmer will turn 50 in the next 20 months. Older yet, with snowy white hair, is Jim Allchin, who directs the future of the company’s crown jewel, the Windows operating system . . .

In this context, Mr. Karlgaard suggests that the true purpose of Microsoft’s recent stock buyback program and dividend announcement is actually to reinvigorate “the Deal:”

My guess is that outside investors were not Microsoft’s primary audience for last week’s announcement of a one-time $32 billion dividend payment, a $30 billion stock buyback, and a doubling of the annual dividend payment. No, this move was done to rally employee shareholders and future employee shareholders. Microsoft needs a way to attract and keep future Bill Gateses and Steve Ballmers. It needs to revive The Deal.
A year ago, Microsoft announced it had removed the heart of The Deal — stock options — in favor of restricted grants. An army of Microsoftologists parsed the move for deeper meaning. One analysis had it that Microsoft was merely acknowledging what Mr. Gates’s good friend Mr. Buffett had asserted — that the early 2000s would produce lousy returns in the stock market. If that turned out to be true, stock options would only disappoint employees, lead to bad morale at Microsoft and make it harder to recruit.
In retrospect, maybe Microsoft should have been more optimistic about the stock market. It might have joined Intel, Cisco and others in the battle to keep stock options. But Microsoft didn’t do that, and since there are no longer options for employees, only share reward — paying a higher dividend — is available as an incentive for high-IQ employees.
It’s not The Deal, but it’s a start.

Former heavyweight champion boxer Mike Tyson is currently a debtor-in-possession in a chapter 11 bankruptcy case. This NY Times article outlines Tyson’s plan of reorganization, which is based on the income stream that Mr. Tyson supposedly will generate from fighting an unusually aggressive schedule on pay-for-view television:

The reorganization assumes that Tyson (50-4) will fight five times through November 2005 (with dispensation to stretch the fights out over two more years, when he’ll be 41), an extraordinary amount of work for a boxer who has not fought in 17 months and has not beaten a great opponent since Ronald Reagan was in his second term.
The reorganization requires that after keeping $2 million from each fight, Tyson must pay into a reorganization trust fund 50 percent of the after-tax proceeds from his bouts, or $19 million, to pay his taxes and his former wife Monica Turner.
Tyson’s first payment to the trust fund, $890,000, . . . is due next month. He must then pay the fund $4.9 million in each of the quarters ending Jan. 31 and April 30, 2005, followed by a payment of $3.7 million in the quarter ending October 31, 2005, and $4.6 million in the quarter ending January 31, 2006.
The plan does not state what will happen if he does not make the payments.

I can answer that one: Liquidation, which is where Tyson should probably be anyway.
It also turns out that Mr. Tyson has settled matters with his former promoter, Don King:

The best news for his finances is the $14 million that will come from the recent settlement of the $100 million federal lawsuit he filed in 1998 that alleged financial fraud against Don King, his former promoter.
King will pay Tyson $8 million soon after the reorganization plan goes into effect, $3 million plus interest in January 2005 and $3 million plus interest in January 2006.
For all the money that Tyson charged that King had siphoned off, he will get none of it; all of it will go for debts.

Meanwhile, those pesky chapter 11 operating reports provide some interesting information on Mr. Tyson’s current life:

According to the monthly financial reports Tyson files with the bankruptcy court, his personal earnings in February, $26.54, were overwhelmed by $67,960 in personal expenses. In March, his income improved to $15,127, while his expenses fell to $25,389. And in April, his income soared to $125,055 and his expenses rose again, to $62,589.

Mike Tyson is not a particularly good fighter anymore. Nevertheless, just as many people watch NASCAR events to see the crashes, many folks will tune into a Tyson fight in order to see the inevitable meltdown of Tyson in living color. About when you think the fight game has gone as low as it can go, people leeching off of Tyson push it even lower. Only in America.

United Airlines announced today it would not contribute to employee pension plans while it remains in Chapter 11. This is the first in a number of bold moves that Chicago-based United must take in order to save the struggling airline billions in cash and make it more attractive to the private investors it needs to emerge from bankruptcy protection now that its request for federal subsidies has been rejected.
The action came a week after United skipped a $72.4 million pension payment that it owed to three of its four pension plans, and only a month or so before United faces baking hundreds of millions more in pension payments in September and October. Until that missed payment, United had met all of its pension obligations since filing for bankruptcy in December 2002.
Although difficult, United should go ahead and simply terminate the plans. The plans have enough assets to keep paying benefits to retirees in the short term, but none of the four plans has enough to assure that employees will receive future benefits they have already earned. If the airline abandons the plans, billions of dollars in liabilities for those future benefits will fall on the Pension Benefit Guaranty Corporation, a government-sponsored agency whose finances have already been heavily tapped by the collapse of pension plans at other bankrupt companies in the airline, steel and other industries.
As one would expect, leaders of United’s unions reacted with outrage over United’s decision but, as usual, offered no alternative to the probable liquidation that United faces if it kept making the pension payments. Greg Davidowitch, president of the flight attendants’ union local at United, demanded the following explanation: “Current management should explain to us why the flight attendants should continue to support their restructuring, if this is the best they could do.”
I can answer that one: “So that United can stay in business and provide you and the other flight attendants a job.”
In all likelihood, United’s action was probably a condition of the renewal of its bankruptcy financing (called “DIP financing”), which United advised its Chicago bankruptcy court yesterday that it had arranged. Private lenders and investors will not be willing to invest in United unless the pension obligation was either terminated or dramatically modified. United currently owes its pension plans an estimated $4.1 billion over the next five years.
United is big and many financial institutions have an interest in seeing that it continue as a going concern. However, United is in dire financial trouble, and at substantial risk of liquidation. Even with this latest move, it is not at all certain that United can — or should — make it.

A group of four of the largest private-equity funds teamed up to win the hotly-contested auction for Texas Genco Holdings Inc., a merchant generating company spun off from CenterPoint Energy Inc., in a deal valued at $3.65 billion. CenterPoint stands to realize $2.9 billion in cash when the deal is closed, likely in the first quarter of 2005. The deal is subject to regulatory approval.
The buyers include Blackstone Group, Hellman & Friedman LLC, Kohlberg Kravis Roberts & Co. LLC and Texas Pacific Group, which have been separately shopping the depressed energy sector.
Among the losing bidders was a group of hedge funds advised by Lazard Freres & Co., which reflects the growing influence of such funds in captial markets. Hedge funds generally invest in stocks, bonds and other financial assets because it is easier to trade in and out of such investments. However, as hedge funds accumulate big pools of capital, they are starting to lend to companies and make longer-term investments in certain companies.
The CenterPoint auction has been widely watched in the power industry because it includes more than 14,000 megawatts of Texas generating plants, which will likely be the largest sale of power assets by a U.S. company this year. The sale comes amid a debate over whether CenterPoint can charge customers to recover so-called stranded costs in plant investments. Under regulatory rate rules, CenterPoint is currently arguing to state regulators that the generating plants it is selling are actually worth much less than what the winning bidders have agreed to pay. If it succeeds in its argument, then CenterPoint would be able to charge its Houston area utility customers higher rates.

Houston-based Continental Airlines annonced that it posted a net loss of $17 million for the second quarter, citing weak domestic fare prices, high fuel costs and expenses associated with retiring aircraft.
Continental, which is the No. 5 U.S. carrier, reported net income for the year-earlier period of $79 million, or $1.10 a share, which was primarily due to war-related government subsidies. The latest quarter’s loss included a charge of $19 million for the retirement of leased MD-80 jets. Excluding that charge, Continental would have eked out a profit of $2 million during the quarter. Continental’s total revenue improved 13%, to $2.51 billion from $2.22 billion a year earlier, as passenger revenue improved 15.1% to $2.3 billion. The company’s consolidated load factor increased to 77.6% from 75.9%.
Continental has generally competed well against the rising tide of low-cost carriers as the company’s chapter 22 (i.e., two prior chapter 11 cases) case tends to focus management on lean operations. Nevetheless, management reported that the company will have to cut costs beyond its original projection of $900 million annually to offset lower than expected ticket prices and high fuel costs.
A day earlier, Delta Air Lines reported a higher-than-expected loss of $1.96 billion for the second quarter, with weak fares undercutting a surge in passengers that pushed traffic to its highest level since the summer of 2000. Delta is the prime prospect to be the next American carrier to land in chapter 11.

James F. Parker, Dallas-based Southwest Airlines’ CEO, unexpectedly resigned yesterday after just three years. The publicly stated reason for the resignation was the ubiquitous “personal reasons,” such as the “draining” nature of the job. Airline CEO’s are becoming as disposable as football coaches. Mr. Parker becomes the sixth major airline CEO to step down since the 9/11 attacks.
However, the resignation coincidentally came just hours after Southwest reported that its second-quarter earnings had fallen 54%, although that dip was attributable mainly to labor-related charges in the current quarter and a onetime gain a year earlier. Nevertheless, as with the entire airline industry, Southwest has been troubled by labor troubles, higher operating costs and terrorism concerns since the 9/11 attacks. Moreover, although it pioneered the no-frills, low-cost approach, Southwest faces increased competition from new low-cost upstarts who have chased its business and kept fares under pressure.
Mr. Parker’s undoing probably was due to the acrimonious labor contract talks with the flight attendants union that the CEO complained became “personal” and “off track.” They were were settled only with the involvement of an outside mediator and the company’s hard-charging co-founder and chairman, Herbert D. Kelleher, whom Mr. Parker had to bring in as lead negotiator in the labor negotiations.
Mr. Parker had been seen as a transitional CEO, who definitely had a tough act to follow in Mr. Kelleher. The charismatic Mr. Kelleher had worked hard to build personal rapport with employees and won popularity on Wall Street with his pioneering low-cost approach. The two men were longtime associates who began working together 30 years ago at a San Antonio law firm and Mr. Parker was for years known as Southwest’s coordinator of big projects such as leading Southwest’s successful opposition to a high-speed rail project in Texas. But Mr. Parker had also been largely in the background while Mr. Kelleher became the company’s public face.
Chief Financial Officer Gary Kelly, who is 49, was named to replace Mr. Parker as CEO. Mr. Kelly was responsible for negotiating protective price hedges against higher fuel prices that saved Southwest hundreds of millions of dollars as other carriers suffered higher fuel costs.
The scuttlebutt within the industry is that the Southwest board and Mr. Kelleher had become frustrated by the tenor of labor relations at the airline over the past few years. If true, it’s understandable that Mr. Kelleher would have a hard time comprehending why it took two years of negotiations to settle an agreement that he and the union were able to settle in two months once Mr. Kellerher got involved.