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Enron Mail |
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ech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09 <http://secure.s= cientech.com/images/spacer.gif<=09 <http://secure.scientech.com/_IA_TEST/C= orner_TR.jpg<=09 =09 <http://secure.scientech.com/rci/wsimages/ia_banner02.gif<=09=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.sciente= ch.com/specialpages/Multi_Client.asp< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scient= ech.com/images/spacer.gif<=09 =09 <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg< <http://secure.scientech.com/_IA_TEST/Corner_TL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_TR.jpg<=09 =09 <http://secure.scientech.com/images/spacer.gif<; <http://www.thestructu= regroup.com< <http://secure.scientech.com/images/spacer.gif<; <http://secure.scientech.= com/specialpages/Strategic_Planning.asp< <http://secure.scientech.com/ima= ges/spacer.gif< <http://secure.scientech.com/rci/details.asp?ProductID=3D90= 9< <http://secure.scientech.com/images/spacer.gif<;=09 <http://secure.scientech.com/_IA_TEST/Corner_BL.jpg<=09=09 <http://secur= e.scientech.com/_IA_TEST/Corner_BR.jpg<=09 November 21, 2001=20 Enron Continues to Implode;=20 Will the Dynegy Deal Proceed? By Will McNamara Director, Electric Industry Analysis [News item from Reuters] Enron Corp. (NYSE: ENE) shares fell sharply in ope= ning trade on Nov. 20 after the humbled energy giant warned it could be for= ced to pay by next week $690 million in debt triggered by a credit downgrad= e last week. The shares were down $1.16, or 12.8 percent, to just over $7.0= 0 in early morning trade on the New York Stock Exchange. The stock was the = biggest loser by percentage change and the second-most active stock on the = NYSE. As of early morning trading on Nov. 21, Enron shares were priced at $= 4.85, reportedly their lowest level in nearly 10 years.=20 Analysis: To paraphrase Shakespeare, "Oh, what a tangled web they weave whe= n first they attempt to?" Wait, I better stop. When speaking about Enron, I= am not prepared to finish that sentence, at least at this point. Enron has= been accused of a lot of things over the last few weeks, but at this junct= ure an ongoing Securities and Exchange Commission (SEC) investigation has y= et to reach any conclusion regarding deceptive financial reporting on the p= art of the Houston trader. Enron itself has admitted that its financial rec= ords from 1997 through the first half of 2001 "should not be relied upon." = Nevertheless, perception is reality and the perception currently in the ind= ustry is that Enron is now taking a fall after getting caught following yea= rs of skirting the truth. While negative perception continues to cause dama= ge to Enron's stock, perhaps of more current interest are the developments = that are more grounded in reality. We know Enron has just lowered its third= -quarter earnings, faces a stiff payment of $690 million (due within a week= , in fact) and has cast doubt over its 4Q earnings potential. The question = of the hour is whether these new financial hits will represent a "material = adverse change" in the eyes of Dynegy, which still aims to buy Enron but wi= sely included an exit clause in its purchase contract. The other question i= s, what happens to Enron if Dynegy leaves it standing at the altar? A termi= nated marriage agreement would surely cause further reductions to Enron's a= lready-weak credit standing, and it is unknown how the company could recove= r from another blow to its reputation.=20 As has been the case since the first of October, the ongoing "fall of Enron= " story is changing by the day. For background on Dynegy's proposed acquisi= tion of Enron, and Enron's financial problems that precipitated the proposa= l, please see my 11/12/01 IssueAlert (available at www.scientech.com/rci <h= ttp://secure.scientech.com/issuealert/article.asp?id=3D987<). In the intere= st of time, let me summarize what is happening at this moment. Dynegy rode = in as Enron's white knight and plopped down a $9-billion offer ($10 a share= ) to buy the company, which at the time represented a steal of a price cons= idering that Enron was priced at almost $90 a share little more than a year= ago. To some extent, this seemed like the final chapter in the Enron saga.= In other words, the company had gone through a tumultuous year, hit its "r= ock bottom" but still planned to live happily ever after as part of Dynegy,= Inc., its much-smaller rival.=20 The developments just this week amount to a screeching brake that may in fa= ct interrupt the nuptials between the two companies. For starters, on Monda= y (Nov. 19), Enron submitted its 10-Q report to the SEC (which was five day= s late, by the way). In the report, Enron dropped what have turned out to b= e several bombshells. First, Enron disclosed that, due to recent downgrades= of its credit rating by agencies such as Moody's, Standard & Poor's and Fi= tch, it has to pay off or refinance by Nov. 26 debt it owes to a third part= y with which it has a partnership, or face nearly $4 billion in additional = payments. Enron also has the option of finding new collateral to guarantee = the debt. Enron would not disclose who owns the note, but we know that the = limited partnership includes holdings in C.E.G. Rio, a Brazilian natural ga= s-company that Enron had planned to sell to raise about $250 million in cas= h. Note that just last week, various credit services lowered Enron's senior= unsecured debt to one notch above junk status and warned that further down= grades may occur, which apparently prompted the call for the debt payment. = Reportedly, if Enron does not make the $690-million payment by Nov. 27, inv= estors will gain the right to immediately begin liquidating the asset for a= n amount equal to the note payable. Enron is presently scrambling to establ= ish a "mutually acceptable" amendment with lenders to avoid having to issue= payment on the debt. Along with the acknowledgement of the imminent paymen= t of $690 million, Enron said that any further drop in its credit rating mi= ght necessitate further payments of $3.9 billion to other partnerships, the= bulk of that figure going to Osprey Trust and Marlin Water Trust.=20 Also in the new SEC filing, Enron increased its 3Q 2001 loss by 3 cents a s= hare to 87 cents. Enron originally reported a 3Q loss of $618 million, but = has now raised that figure to $664 million. As a minor bright side, Enron d= id increase reported earnings for the first nine months of 2001 by a penny = to 20 cents a share, attributed to adjustments made after the quarter's end= . However, looking forward, Enron warned that continuing credit worries and= a decline in the value of some of its assets could take a further toll on = fourth-quarter earnings. Enron also claims that, even still, the numbers co= ntained in the 10-Q report are not necessarily final as they have not been = reviewed by Arthur Andersen, the company's external auditor. Thus, further = revision of the numbers could take place.=20 Interestingly, there does not seem to be a big question about whether or no= t Enron can pay the $690-million debt obligation. Enron apparently has secu= red an additional $2 billion in loans from J.P. Morgan Chase and Citigroup = in the last week. In fact, within the current SEC filing, Enron says that i= s has $1.2 billion of domestic cash consisting of the lines of credit and n= et collections. Thus, some investors are reassured by the belief that Enron= has the cash on hand to make the $690-million payment if it is unable to r= enegotiate terms with lenders. According to the SEC filing, Enron also inte= nds to sell off $8 billion in non-core businesses that are performing "belo= w acceptable rates" and would use the proceeds to pay off debts, although t= his money would probably not be immediately available.=20 Again, however, there is a perception element to this development that shou= ld be noted. Enron has been accused of financing partnerships in the past i= n such a way as to keep them off the company's balance sheets. Apparently, = this non-disclosure was done so that Enron could grow quickly without addin= g too much debt to its own books or diluting the value of its stock. As has= been well documented, Enron is already in the midst of an intense SEC inve= stigation regarding potential conflict-of-issues involving its former CFO. = News about other financial deals that may not have been fully disclosed is = clearly making investors even more nervous about Enron's stock.=20 As I said, the question of the hour is whether or not Enron's new problems = will cause Dynegy to reconsider its offer. As usual, the answer all depends= on who you ask. Dynegy is remaining mum and referring all questions about = Enron's financial status to Enron. Investors are rather mixed on the questi= on. Some say that the facts disclosed in the 10-Q report do not dramaticall= y change Enron's position from what it was when Dynegy launched its acquisi= tion and that the current drop in Enron's stock is just a knee-jerk respons= e to the media hype surrounding the story. Further, those who diminish any = potential impact say that Enron is still a liquid company and has money com= ing in from various sources. Thus, it should have no trouble making the $69= 0-million payment. From a broad perspective, so one theory goes, Dynegy is = still getting a great deal in Enron due to its staggering drop in stock pri= ce, and the acquisition remains valuable to Dynegy as it will position the = combined company as North America's biggest marketer and trader of natural = gas and electricity.=20 In contrast, other investors point to the fact that since the purchase agre= ement was signed, Enron's stock has fallen an additional 32.5 percent, whic= h weakens the original acquisition agreement. In addition, if Enron follows= through with the $690-million payment next week or secures additional fina= ncing to front this cost, both options alter the company's financial positi= on from when Dynegy made its original offer, which could be construed as a = "material adverse change."=20 Another interesting development indicates that Enron may no longer be the c= ompany that Dynegy agreed to purchase. New reports indicate many energy tra= ding companies are now unwilling to sell power or natural gas to Enron for = fear about the company's credit concerns. Such companies are now particular= ly reticent to sell power to Enron for next-day delivery. What this means i= n practical terms is that other trading companies may be gaining Enron's ma= rket share, which could diminish the value in the trading market that had a= ttracted Dynegy to Enron in the first place. In addition, Enron's once-stel= lar energy trading business could now become reduced or collapse altogether= .=20 Questions have been raised why Dynegy is not doing more at this time to hel= p Enron out of its financial mess. Of course, under the acquisition agreeme= nt Dynegy already committed to providing an immediate $1.5-billion asset-ba= cked equity infusion into Enron to help the company with its current financ= ial woes, which will be followed by an additional infusion of $2.5 billion = into the combined company by ChevronTexaco, which owns 27 percent of Dynegy= . However, some traders apparently have wondered why Dynegy has not done an= ything about Enron's diminishing ability to secure power on the open market= . Traders claim that Dynegy could step in and buy power from sellers on the= behalf of Enron, in a strategy known as "sleeving." The fact that Dynegy h= as not chosen to take this step has been an indication to some observers th= at it is only willing to go so far in its pursuit of Enron.=20 In addition, Enron shareholders launched a lawsuit on Nov. 12 in state cour= t in Houston to prevent the merger with Dynegy from happening. The petition= reportedly alleges that Enron directors breached their fiduciary duties by= agreeing to sell the company at too low a price and without adequate consi= deration of other alternatives. Enron said it will defend its decision in c= ourt.=20 Moreover, Dynegy was smart to include an exit clause in the acquisition agr= eement. The clause reportedly allows Dynegy to walk away from Enron if any = material adverse change occurs related to the outcome of the SEC investigat= ion, possible litigation against Enron, balance sheet strengths, and earnin= gs forecasts. Certainly the latest developments disclosed in Enron's 10-Q f= iling with the SEC impact the company's balance sheet strengths and earning= s forecasts, so a case could be made that Dynegy would have grounds to term= inate the acquisition. Clearly, this pending deal hinges on the development= s that will take place over the next few weeks. Dynegy ultimately will have= to weigh the pros and cons of its acquisition offer for Enron and determin= e if the once-golden company still represents a great deal, or if pursuing = the purchase would cause more trouble than it is worth.=20 An archive list of previous IssueAlert articles is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 _____ =20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<at 505.244.7650. Advertising opportunities are also= available on our Website.=20 _____ =20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission and distribution, retail markets, new te= chnologies, I/T, renewable energy, regulatory affairs, community relations = and international issues. Contact consulting@scientech.com <http://consulti= ng@scientech.com< or call Nancy Spring at 505.244.7613.=20 _____ =20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. 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SCIENTECH'= s sole purpose in publishing its IssueAlert articles is to offer an indepen= dent perspective regarding the key events occurring in the energy industry,= based on its long-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=3D11/21/2001<;
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