-----Original Message-----
From: Onukogu, Ernest [mailto:Ernest.Onukogu@dowjones.com]
Sent: Friday, November 09, 2001 11:59 AM
To: undisclosed-recipients
Subject: POWER POINTS: Does Dynegy Know What It's Getting Into?




> POWER POINTS: Does Dynegy Know What It's Getting Into?
>    By Mark Golden 
>    A Dow Jones Newswires Column 
>  
>   NEW YORK (Dow Jones)--If I were an executive with Dynegy Inc. (DYN), I
> would
> want to know who was buying up my stock Thursday and Friday, encouraging
> me that
> Enron is a steal at $9.50 a share. 
>   After all, the market's initial reaction to the Dynegy/Enron Corp. (ENE)
> talks
> was negative. Dynegy's share price fell 9% to $33 on the Wednesday, the
> day that
> Dynegy was negotiating a possible acquisition of Enron were disclosed by
> CNBC.
> But Dynegy's stock rebounded sharply Thursday to recover that loss and
> then
> some, and it's up another $3 to near $40 Friday. 
>   Is this a case of average investors approving Dynegy's "steal" of
> formerly
> formidable Enron? Or were Wall Street banks, holding a lot of Enron debt,
> trying
> to encourage Dynegy to do a deal? About 75% of the 12 million Dynegy
> shares
> bought Thursday were purchased in a few hundred large blocks. 
>   Some usually talkative Wall Street bank sources refuse to say a word
> about
> Enron or Dynegy, even off the record. Wall Street may be biting its
> collective
> lip in the hopes that Dynegy signs the contracts to buy Enron and brings
> in a
> critical injection of cash. That cash would come from ChevronTexaco Corp.
> (CVX),
> which owns about a quarter of Dynegy. According to the Wall Street
> Journal, the
> terms of the deal call for ChevronTexaco to inject $1.5 billion
> immediately and
> another $1 billion into the combined companies if the deal goes through. 
>   Wall Street holds billions in Enron debt, which Dynegy is fully aware
> of. But
> Dynegy might be getting more than it's bargaining for, particularly
> regarding
> Enron's numerous obligations to deliver its own shares in the future at
> minimum
> values. 
>  
>      SEC Probe Complicates Deals Based On Stock 
>  
>   Any company that acquires Enron may have to make good on those
> commitments to
> issue stock pegged to values much higher than $9.50 a share, or perhaps to
> make
> up the difference in cash. 
>   In a publicly disclosed example, an Enron off-balance-sheet financial
> affiliate - Whitewing Associates - owns 250,000 shares of Enron
> convertible
> preferred stock, which are good upon conversion in January 2003 for 50
> million
> shares of Enron common stock at a guaranteed minimum value of $48.55 a
> share. 
>   Enron's stock is currently trading below $9 a share. According to the
> terms of
> Whitewing's convertible preferred holding, Enron would have to deliver far
> more
> shares at current prices - 1,080 - for each of the 250,000 convertibles. 
>   But Enron can't issue new stock now because it's under investigation by
> the
> U.S. Securities and Exchange Commission, so it would be obliged to come up
> with
> the $40-per-share difference in cash. Since Enron owns 50% of Whitewing,
> it
> could tear up most of the convertibles, but not all of them. A rough
> estimate is
> that Enron - or Dynegy - would still owe the dozens of mutual funds that
> invested in Whitewing around $500 million cash. 
>   Dynegy is surely familiar with that deal, but highly leveraged Enron has
> similar share-settled arrangements floating around that haven't been so
> fully
> disclosed. The lesser-known deals are similarly troublesome due to the
> combination of Enron's stock-price crash and its inability to issue lots
> of new
> stock to make up the difference. 
>   Another Enron-related partnership, the Marlin Water Trust II, is part of
> Enron's disastrous venture into water companies through its Azurix
> affiliate and
> the later refinancing of huge losses related to the water investments.
> Enron has
> marked down the value of its direct holdings in Azurix, but not the assets
> of
> Marlin, even though Marlin's primary asset is supposed to be its half of
> Azurix.
>   Prominent Enron short-seller Richard Grubman of Highfields Capital
> Management
> has asked Enron why Marlin's assets are still valued at $1 billion, when
> 50% of
> Azurix would seem to be a worth a fraction of that amount. Enron has
> declined to
> answer Grubman's question fully. 
>  
>      Is Wall Street Short? 
>  
>   Fitch credit rating agency said this July that Marlin's debt is
> ultimately
> supported by "an equity commitment from Enron in the form of mandatorily
> convertible preferred stock." Neither the number of shares nor the
> guaranteed
> minimum value for those shares has been disclosed. If Enron can't deliver
> those
> shares, it is obliged to make up the difference in cash, Fitch said. 
>   "In the event that the issuance of the preferred stock yields less than
> the
> amount required to redeem the senior notes, Enron is required to deliver
> additional shares," Fitch said. "If Enron cannot or does not deliver on
> this
> obligation, then the amount of the deficiency becomes a payment obligation
> of
> Enron, representing a general unsecured claim." 
>   In another partnership, disclosed in Enron's 2000 annual report but not
> named,
> Enron invested "the right to receive up to 18 million shares of
> outstanding
> Enron common stock in March 2003 (subject to certain conditions)." 
>   Do those conditions include a share value much higher than $9.50? Did
> Enron
> prudently purchase puts on its own stock from Wall Street to cover some of
> its
> positions? As part of that same deal, Enron paid $123 million to purchase
> unspecified options on 21.7 million shares of its common stock. 
>   Because these deals are done through private placements of debt, Enron
> doesn't
> have to answer questions, and it has declined to do so. Dynegy also
> refused to
> answer questions on the issue. 
>   One Wall Street equity derivatives trading manager indicated that all
> the
> banks have found themselves "unexpectedly short in-the-money puts" on
> Enron.
> Unexpectedly, perhaps, not just because Enron stock has fallen so far, but
> because the SEC investigation prevents Enron from issuing additional
> shares. 
>   Wall Street has been sweating for weeks, and millions don't make Wall
> Street
> sweat. Billions do, and the concern has to do with liabilities beyond
> Enron's
> fully disclosed traditional debt. The banks have told Enron they don't
> expect to
> get clobbered on a technicality that wouldn't have arisen without the SEC
> investigation Enron brought on itself, a person at a bank involved in the
> talks
> said. Enron agreed in principle, but the negotiations to make Wall Street
> whole
> were put on hold for the Dynegy talks. 
>   If Dynegy buys Enron, it may be stepping into the middle of those
> arrangements, letting Wall Street off the hook. 
>   Dynegy competitor El Paso Corp. (EPG) and ChevronTexaco rival Royal
> Dutch/Shell (RD) reportedly took a look at acquiring Enron last week and
> passed.
> Is Dynegy smarter than El Paso? Is Chevron smarter than Shell? 
>   True Dynegy believers better hope so. 
>   -By Mark Golden, Dow Jones Newswires; 201-938-4604;
> mark.golden@dowjones.com 
>  
>   (END) Dow Jones Newswires 09-11-01
>   1948GMT(AP-DJ-11-09-01 1948GMT)
>