12:24 28Nov2001 RSF-WRAPUP 1-Enron near collapse after Dynegy pulls out

    By C. Bryson Hull
    HOUSTON, Nov 28 (Reuters) - Enron Corp. <ENE.N> hovered on the brink of one of the biggest corporate collapses in U.S. history on Wednesday as its rescue by rival Dynegy Inc. <DYN.N> fell apart.
    Dynegy accused Enron of breaching the representations it made when the takeover agreement was negotiated on Nov. 9, invoking an escape clause that let it pull out of the deal.
    Shares of Enron, recently ranked No. 7 on the Fortune 500 list of the biggest U.S. companies, had already lost most of their value and all three major credit rating agencies had slashed their ratings on Enron's bonds to junk status by the time Dynegy made its announcement.
    The loss of investment-grade credit forces some $3.9 billion in debts to off-balance sheet partnerships to come due immediately, a major problem for a company that has spent most of the $5.5 billion it sought in recent weeks to stay afloat.
    It became increasingly clear, as Dynegy sought to renegotiate the deal, that Enron's complex and often indecipherable financial books were becoming a sticking point, sources close to the negotiations said.
    "While it is regrettable to see a leading industry player in difficulties, this does not reflect a failure of the merchant energy business," Dynegy Chairman and Chief Executive Officer Chuck Watson said in a statement.
    Dynegy said it would exercise its option to buy Enron's Northern Natural Gas Pipeline with the $1.5 billion it and partner ChevronTexaco <CHV.X> put into the deal.
    A bad sign came earlier on Wednesday, as energy traders said operations had stopped at Enron's once highly lucrative online trading system, EnronOnline. The unit accounted for up to 90 percent of Enron's earnings, and was considered the jewel of the trading franchise that Dynegy coveted most in its planned $9.3 billion all-stock takeover.
    Enron, which touted itself as an agile risk manager, found its credit and debt had spiraled out of control as a series of partnerships designed to hide debt off of its balance sheet caused investors to lose faith in recent weeks.
    The partnerships, which included top Enron executives and are the subject of a U.S. Securities and Exchange investigation, provided financing in exchange for guarantees that Enron's stock stay above certain levels and its credit remain investment-grade.
    Enron shares plunged $2.95, or 71.3 percent, to $1.19, before the New York Stock Exchange halted trading ahead of Dynegy's announcement. They have fallen more than 98 percent this year.
    The stock peaked at $90.56 in August 2000, riding high on the cresting wave of the technology boom after Enron took its trading outfit online and promised to bring its business model into the broadband communications arena.
    "They (Enron) entrapped the sophisticates," said Robert Stovall, senior strategist at Prudential Securities, referring to what was once an almost fawning admiration for Enron by institutional investors. "I think this is going to become a classic case."
    Stovall, with nearly 50 years of working on Wall Street, said he could not recall any previous corporate unravelling that matches that of Enron.
    "You would have to go to pre-SEC days for that," he said, referring to the creation of the U.S. Securities and Exchange Commission in the aftermath of the stock-market crash of 1929.