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Trying to Restore Confidence in Enron to Salvage a Merger

November 28, 2001 

By RICHARD A. OPPEL Jr. and ANDREW ROSS SORKIN


 

The Enron Corporation (news/quote) and Dynegy Inc.
(news/quote) worked yesterday to find ways to bolster
confidence in Enron's weakened energy- trading business as
the companies' negotiators continued talks on revising the
terms of their merger, executives close to the talks said. 

The renegotiated deal would cut the value of the
acquisition by half, they said, to roughly $4 billion.
Dynegy, they said, was also prepared to invest at least an
additional $250 million in Enron, on top of the $1.5
billion cash infusion from Dynegy's biggest investor,
ChevronTexaco, included in the initial deal announced Nov.
9. But Dynegy wants the new cash backed by hard assets, and
the companies were trying to identify and value enough
Enron holdings not already mortgaged to other creditors,
the executives said. 

Before a series of financial disclosures sent Enron's stock
into collapse and the company into the arms of Dynegy, its
Houston rival, Enron's natural gas and electricity trading
floors did more business than the two largest competitors
combined. They also accounted for the majority of Enron's
profits by far. 

But traders and Wall Street analysts said the business had
steadily deteriorated amid questions about the depths of
Enron's financial straits. Many traders have curtailed
dealings with Enron, and the executives close to the talks
said Dynegy officials scouring Enron's books were having
difficulty this week figuring out how much cash the trading
operation was generating. 

The executives close to the talks said that the
renegotiated terms for Dynegy's acquisition of Enron would
lower the price to about 0.13 Dynegy share for each share
of Enron, cutting by half the value of the deal announced
Nov. 9, when Dynegy offered 0.2685 share. If a deal is
struck at 0.13 Dynegy share, at yesterday's closing prices,
Dynegy would be paying about $5.32 an Enron share, a 29.4
percent premium over Enron's diminished stock price. The
premium was 20.6 percent over Enron's closing price on the
day that the deal was announced. 

Both companies are seeking promises from Enron's bank
lenders to extend debt repayment dates until after the
merger closes. And they are also discussing adding
provisions that could limit Dynegy's ability to back out of
the combination. 

The two companies are also working to arrange a cash
infusion of $500 million from J. P. Morgan Chase
(news/quote) and Citigroup (news/quote) that would provide
Enron with desperately needed new cash. 

But there is growing concern that the cash infusion from
the banks will not calm investors' fears or reassure energy
traders, leading Dynegy to seek an additional $500 million
in cash for Enron. Late yesterday, the two companies were
hung up over whether Enron, which has already used many of
its most prized assets as collateral for loans, has enough
assets left to serve as collateral for the additional
money, according to executives close to the talks. 

A number of Enron assets were being examined, including
some that have already been used to obtain other loans, the
executives said. The assets include: Transwestern Pipeline,
a major natural gas pipeline that links the gas-producing
basins of Texas and the Southwest with California; Enron's
stake in other gas- pipeline assets; its 9.8 percent stake,
worth about $400 million, in EOG Resources (news/quote), a
former subsidiary that is now an independent publicly
traded oil and gas company; and its indirect stake in
Hanover Compressor, which manufactures equipment used to
increase the pressure of natural gas and facilitate its
flow on interstate pipelines. 

Yesterday, investors anxiously awaited a report by Moody's
Investors Service, which like other major credit-rating
firms, currently ranks Enron's debt at the lowest
investment-grade level. If Enron were to lose its
investment-grade status, it could be forced to repay or
refinance up to $3.9 billion in debt, while other traders
would probably further curtail business. But by late
yesterday, Moody's (news/quote) decided not to issue a
statement after receiving assurances from Enron and Dynegy
officials that a renegotiated deal would be announced soon,
the executives said. A Moody's spokesman declined comment. 

Executives close to the talks said that they hoped that
new cash from Dynegy would reassure both Wall Street and
the energy-trading markets that Enron's trading floor would
survive and remain a valuable asset. 

But analysts and investors are having difficulty figuring
how much value the trading operation has already lost, and
how much the business has been reduced because of credit
concerns. 

"I believe Dynegy is probably seeing that deterioration in
the core business and wants to renegotiate the purchase
price as a result," said Andre Meade, head of United States
utilities research for Commerzbank Securities in New York.
"I don't think anyone can estimate the earning power of
Enron over the next three to four quarters, and I'm not
sure Enron has a good estimate." 

Mr. Meade said he did not believe that Dynegy's earlier
estimate that the acquisition would add 90 cents a share to
its earnings was "reliable today, given how sharply the
business seems to have deteriorated." By Mr. Meade's
calculations, if Enron's trading volumes were to fall 50
percent next year - even if normal volume growth levels
returned in 2003 - that would wipe out nearly all the value
in the stock. 

Karen Denne, an Enron spokeswoman, said the company had
experienced a decline in energy trading volume and in the
number of traders doing business with it, but both
stabilized yesterday. She declined to elaborate or quantify
the decline. 

She also said that Enron's trading operation remained
profitable, though she could not quantify it, and she also
said she did not know whether the company was working on a
possible bankruptcy filing or other contingency plans
should its business and liquidity worsen. "We're moving
forward with the merger," she said. 

Dynegy officials did not return telephone calls yesterday.


Shares of Enron rose yesterday on news of a possible
revised acquisition agreement. They closed at $4.11, up 2.5
percent, or 10 cents. Shares of Dynegy closed at $40.89, up
4.2 percent, or $1.64. 

Though yesterday's gains halted a four-day slide in Enron
shares, the stock is down 95 percent this year after
disclosures of major losses as well as significant
accounting errors that led Enron to admit it overstated
profits during the last five years by nearly $600 million. 

Now, difficulties within Enron's trading operation are
exacerbating the company's overall liquidity problems in
three ways, according to some analysts and rival
energy-trading executives. 

First, other traders are requiring Enron to put up greater
margin on its trades. On top of that, in some cases Enron's
traders are being forced to pay more to buy natural gas
than traders at other companies. This credit premium in
some transactions has ranged from 3 cents to 6 cents for
every million British thermal units of gas Enron buys,
these people say. 

Additionally, many traders, like the Mirant Corporation
(news/quote), have either scaled back or stopped doing
business with Enron, hurting its trading revenue. 

Mr. Meade of Commerzbank said "end-use customers and
trading counterparties appear to be shifting their business
to competitors as a result of Enron's credit concerns and
are reluctant to increase their exposures to Enron." 

http://www.nytimes.com/2001/11/28/business/28PLAC.html?ex=1007937624&ei=1&en=efdefb2d568fae37



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