Message-ID: <4549196.1075861718174.JavaMail.evans@thyme> Date: Wed, 21 Nov 2001 10:46:05 -0800 (PST) From: vladi.pimenov@enron.com To: jonathan.mckay@enron.com Subject: FW: DYN($42/sh)/ENE($7/sh) Merger At Risk. - Simmons and Company latest thoughts Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Pimenov, Vladi X-To: Mckay, Jonathan X-cc: X-bcc: X-Folder: \JMCKAY1 (Non-Privileged)\Mckay, Jonathan\Deleted Items X-Origin: Mckay-J X-FileName: JMCKAY1 (Non-Privileged).pst -----Original Message----- From: Pehlivanova, Biliana Sent: Wednesday, November 21, 2001 9:24 AM To: Beylin, Anya; Guzman, Julio; Marolo, Massimo; Pimenov, Vladi Subject: FW: DYN($42/sh)/ENE($7/sh) Merger At Risk. - Simmons and Company latest thoughts -----Original Message----- From: Bhatia, Randy Sent: Wednesday, November 21, 2001 8:55 AM To: Gossett, Jeffrey C.; Keiser, Kam; Jones, Brad; O'Rourke, Ryan; Pehlivanova, Biliana Subject: FW: DYN($42/sh)/ENE($7/sh) Merger At Risk. - Simmons and Company latest thoughts got this from a friend at dynegy. written by someone at Simmons & Co., Inc. To: Sales Trading 11/21/01 07:42 cc: AM Subject: DYN($42/sh)/ENE ($7/sh) Merger At Risk. SUMMARY: We are reducing our estimated probability that the DYN/ENE merger is completed to less than 50%/50% based on our belief that ENE's existing wholesale and retail businesses are having a difficult time maintaining their volumes and margins. We have discussed ENE's need to improve counter party confidence on a number of occasions over the last few weeks, and we believe counter party confidence deteriorated further based on the information included in the 10Q, and the strong negative reaction in the stock and bond markets yesterday. The tone of our discussions with competing traders and marketers (representative of ENE's counter parties--which are critical in maintaining ENE's volumes) is becoming more negative. While ENE is continuing to confirm that volumes are improving since the lows on November 9, our market intelligence is suggesting improment has stalled. In addition and probably related, ENE's liquidity position seems to be continuing to deteriorate despite significant recent capital infusions. We are reducing 4Q01 estimates to reflect lower volume and margin assumptions. What would get us more comfortable? ENE 8K disclosure confirming higher volume and decent margins (ENE has committed to provide 4Q guidance by early-mid December, and/or a change in the tone of the counter parties that would suggest they are increasing trading activities with ENE. OPINION ON THE STOCKS: ENE. No change in our opinion on ENE--the upside potential is simply not worth the downside risk. DYN. DYN is likely to benefit in almost all outcomes. If our concerns about counter party confidence prove to be wrong, the upside associated with the accretion in the transaction would likely be huge. However, we sense DYN is getting frustrated by continued restatement of earnings, unexpected debt triggers and worse than expected liquidity problems. If the transaction falls apart, DYN would have some transaction costs that would negatively impact cash flow in the near-term, but DYN would benefit from gaining market share and hiring some of ENE's talent away longer term. A potential downside case for DYN is that DYN retrades the deal on recent information, but is forced to reduced its flexibility to terminate the transaction through material adverse change considerations, this out come would concern us. We continue to believe DYN is a solid long-term holding for investors. However, we are recommending caution with new money, due to our belief that DYN still has $5/sh to $7/sh of "deal" premium factored into the current stock price which could be at risk if the deal fails. We do not believe DYN has significant accounts receivable exposure to ENE in the event the ENE has further liquidity problems (we believe DYN's trading agreement with ENE limits exposure to maybe $100 to $150 MM). COUNTER PARTY INCENTIVES: ENE identified in its 10Q that transaction volume (especially long-term transactions) have declined since the 3Q. If you are a utility or industrial customer, why enter into a long-term transaction with ENE? Why not go directly to DYN or diversify with other suppliers? If you are a natural gas or power producer, why create the account receivable risk? If you are a counter party, strategically why would you contribute to the continuation of the ENE machine--to the ultimate benefit of strengthening another competitor (DYN)? We believe that ENE is offering attractive financial incentives (premium purchases and/or discounted sales) to entice counter parties to trade with them. However, this would also suggest ENE margins may be getting squeezed. EPS ESTIMATES (new/old/consensus): 4Q01-$0.20/0.35/0.42, FY01-$1.55/1.70/1.78, FY02-$1.50/1.50/1.90 We are reducing expectations for margins in the Wholesale segment from 9cts/mmbtu to 7cts/mmbtu--negatively impacting 4Q EPS by 10cts/sh. In addition, we expect contributions from Enron Energy Services will be lower due to challenges in closing long-term transactions (much of EES's earnings are mark-to-market recognition of the value created in long-term agreeements) impacting our estimate by 5cts/sh. ***************************************************************************************************** This e-mail is based on information obtained from sources which Simmons & Company International believes to be reliable, but Simmons & Company International does not represent or warrant its accuracy. The opinions and estimates contained in this e-mail represent the views of Simmons & Company as of the date of the e-mail, and may be subject to change without prior notice. Simmons & Company International, its partners and/or employees may have positions in the securities discussed. Simmons & Company International may make a market in the securities discussed and may have served as a financial advisor and/or underwriter to companies discussed. Simmons & Company International will not be responsible for the consequence of reliance upon any opinion or statement contained in this e-mail. This e-mail is confidential, and may not be reproduced, in whole or in part, without the prior written permission of Simmons & Company International.