Message-ID: <5217766.1075860984893.JavaMail.evans@thyme> Date: Wed, 28 Nov 2001 00:53:44 -0800 (PST) From: jimboman@ix.netcom.com To: michelle.lokay@enron.com Subject: NYTimes.com Article: Trying to Restore Confidence in Enron to Salvage a Merger Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: jimboman@ix.netcom.com X-To: Lokay, Michelle X-cc: X-bcc: X-Folder: \Michelle_Lokay_Mar2002\Lokay, Michelle\Personal X-Origin: Lokay-M X-FileName: mlokay (Non-Privileged).pst This article from NYTimes.com has been sent to you by jimboman@ix.netcom.com. I thought you might want to read this. -Jim jimboman@ix.netcom.com 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 HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact Alyson Racer at alyson@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2001 The New York Times Company