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---------------------- Forwarded by Massimo Marolo/HOU/EES on 11/14/2001 09:32 AM --------------------------- Peggy Mahoney 11/14/2001 07:34 AM To: All EES cc: Subject: Enron articles In case you missed these, below is a sample of articles about the Dynegy/Enron merger written in the last couple of days. Dynegy-Enron Deal potentially "staggering" Platts Oilgram News, 11/13/01 Dynegy Calls SEC's Probe of Enron `Financial Noise' Bloomberg, 11/12/01 Dynegy sees no more nasty surprises from Enron. Rueters, 11/12/01 Dynegy and Enron Shares Get a Boost As Acquisition Plan is Met With Optimism The Wall Street Journal, 11/13/01 Gas Pipeline Is Prominent As Dynegy Seeks Enron The New York Times, 11/13/01 Suitor for Enron Receives Approval From Wall St. The New York Times, 11/13/01 Share boost for Dynegy good news Houston Chronicle, 11/13/01 Dynegy Pres: Enron's Core Business Is Very, Very Strong Dow Jones Newswires, 11/13/01 Dynegy Deal Sets Path Of Resolution For Enron - Analyst Dow Jones Newswires, 11/12/01 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Dynegy-Enron deal potential 'staggering' Energy Insight News for Tuesday, November 13, 2001 If the deal between Enron and Dynegy is successfully executed, it "should yield the most widely recognized, respected and downright credible wholesale/retail energy merchant in the world," said James Yannello and Ronald Barone, analysts with UBS Warburg, in a research note Monday. Troubled energy giant Enron Corp. agreed late Friday to be taken over by smaller rival Dynegy Inc. in a $7.8 billion stock swap, with assumption of at least $12 billion of Enron debt. The deal includes an immediate infusion of $1.5 billion from Dynegy's 26.6% owner ChevronTexaco to shore up Enron's cash-strained trading operations, with another $1 billion of new equity from ChevronTexaco when the merger closes. "We view both the near and long-term upside potential of this deal as staggering," said the UBS Warburg analysts, citing the combination of "Enron's unsurpassed global wholesale network franchise with that of Dynegy's; fully leveraging the two's online capabilities; continuing the aggressive growth of what will likely become Dynegy Energy Services; disposing of all non-core assets; and managing this global powerhouse with Dynegy's above-board culture based on teamwork, strict values and honesty." Even though it remains positive about this merger, UBS Warburg hasn't underestimated the "enormous challenge at hand. In the near-term, Enron must remain highly liquid, investment grade and its employees must remain focused on keeping its core wholesale/retail franchises up and running. ... Also, early indications are that the ratings agencies have blessed the plan." Dynegy will offer 0.2685 of its shares for each Enron share, giving Dynegy holders 64% of the combined company. At Dynegy's closing price Friday of $38.76/share, that equates to $10.41/share for Enron, which has seen its stock plummet from more than $89 a year ago to a recent low of $7 before rebounding on Dynegy bailout rumors. Enron closed at $8.63/share Nov. 9. Dynegy Calls SEC's Probe of Enron `Financial Noise' By Russell Hubbard Houston, Nov. 12 (Bloomberg) -- Dynegy Inc. Chairman Chuck Watson said he's convinced Enron Corp.'s trading operations are sound and described disclosures about affiliated partnerships that helped drive Enron's stock down 67 percent in three weeks as ``financial noise.'' Dynegy agreed Friday to buy Enron for at least $23 billion, including at least $8 billion in stock and $15 billion in assumed debt. Dynegy shares rose as much as 16 percent today. Enron rose as much as 20 percent. In an interview after the merger announcement, Watson and Enron Chairman Kenneth Lay discussed how the Houston-based companies reached agreement less than three weeks after Enron's shares began plunging. ``All the financial noise about the partnerships, maybe it has damaged the Enron brand a bit,'' Watson said. ``But I'll tell you what it hasn't impacted, and that's the high regard that the industry places on'' Enron's trading business, he said. Enron last week restated earnings for four years to include losses from three affiliated partnerships, reducing earnings by $586 million. Six employees, out of Enron's 20,000, may have improperly benefited from the partnerships, Lay said. ``I'm sorry those six people seem to have gone somewhat over the edge in their dealings or transactions, but you can't be absolutely protected from that in any business,'' he said. Lost Effectiveness Lay didn't specify which six people he was referring to. He removed Andrew Fastow, who helped set up and ran many of the affiliated partnerships, as chief financial officer on Oct. 24. An Enron securities filing says Fastow made more than $30 million off two of the partnerships. Fastow ``had lost his effectiveness because of all the press coverage'' on the affiliates, Lay said. Treasurer Ben Glisan and Kristina Mordaunt, a managing director and a corporate counsel for an Enron division, also were fired, Enron said in a corporate filing on Thursday. Former employees Michael Kopper, Kathy Lynn and Anne Yeager were in a position to profit from partnerships, the filing said. ``You trust people, you accept their representations and proposals,'' Lay said. ``Sometimes when you do that, you get surprised and disappointed.'' Both executives said they expect antitrust regulators to approve the merger because the two companies own different types of assets and won't dominate any market. ``There really isn't anything that lays on top of each other,'' Watson said Friday night. ``We're not in the pipeline business and they are. We're in the generation business, and they're really not.'' Dynegy shares rose 6.2 percent on Friday after terms of the Enron purchase leaked to the press. Watson expects the acquisition to add 90 cents to 95 cents a share, or 35 percent, to Dynegy's 2002 earnings. Enron is selling for $10.41 a share, one-fifth the average price over the past 12 months. Enron stock climbed 97 cents, or 11 percent, to $9.60 in late morning trading. Earlier, they touched $10.38. Dynegy rose $4.54, or 12 percent, to $43.30 after touching $45. Cash Crunch The rapid decline of Enron threatened to bankrupt the company and disrupt energy markets. Enron handles an estimated one-quarter of U.S. electricity and natural-gas trades. A falling credit rating made it difficult for the company to raise capital needed to back trades. As part of the purchase, ChevronTexaco Corp., which owns 26 percent of Dynegy, agreed to provide Enron with $2.5 billion. ``What we found when looked under the hood is that the core of Enron was still there and working as well as ever,'' Watson said. ``That business was pristine and had nothing to do with the partnerships.'' Dynegy began taking steps toward the acquisition in late October, when Watson called Lay to offer assistance with Enron's growing financial crisis, the two men said. That led to a Saturday morning meeting in Lay's kitchen. ``He even made me a breakfast roll,'' Watson said. ``He didn't eat it,'' Lay said. Lay said he won't be an active manager in the new company. Watson said Friday that he and Lay hadn't discussed a severance package. As head of Enron, Lay had refocused the Houston operator of U.S. natural-gas pipelines on trading and international expansion, boosting reported revenue 20-fold since 1995 to $100.8 billion last year. He said he doesn't regret the strategy. ``Clearly, Enron has gotten involved in business that hasn't turned out well,'' Lay said, pointing to money-losers Azurix Inc., created to supply water and build related projects around the world, and NewPower Holdings Inc., a seller of electricity to homes and small businesses. ``But you have to keep in mind, too, that 12 years ago we weren't in the wholesale merchant (trading) business. Today that's an incredibly valuable franchise.'' The trading business, which accounts for about 97 percent of Enron's revenue, buys electricity, gas and other commodities from producers and sells them to end users such as utilities and industrial customers. It also advises big business customers on energy use and sells them gas and electricity. Reassessing Steel, Lumber Watson said the new company will keep trading coal, gas, power and petroleum products, and plans to expand by buying assets and using them to develop trading. ``We'll just have to reassess over time whether we stay in'' trading of steel, lumber and other non-energy commodities, he said. Enron wants to shed its 65 percent stake in Dabhol Power Co. in India, which is owed $64 million in overdue bills from a state government agency that has refused to pay the power prices Enron was promised in contracts. ``We have strong legal remedies and we're heading down the path toward arbitration, but we'd still very much like to work out a settlement with the government,'' Lay said. Potential buyers have balked at Enron's $1 billion asking price for Dabhol. Neither man would comment on whether Dynegy plans to cut jobs after the merger, or what will happen to the naming rights to Enron Field. The Major League baseball stadium is home to the Houston Astros, and Enron paid $100 million to have its name on the ballpark. ``The name of the company is now Dynegy,'' Watson said. Dynegy's acquisition requires approval from U.S. securities, antitrust and energy regulators. Watson expects soon to share details of the new Dynegy with regulators from the European Union and U.K., where Enron operates a trading desk and owns a water company and two power plants. ``I don't know if we are required to do so, but we will talk to them anyway,'' Watson said. ``We don't think there are going to be any problems,'' Lay said. Dynegy sees no more nasty surprises from Enron. By Andrew Kelly 11/12/2001 Reuters English News Service HOUSTON, Nov 12 (Reuters) - Dynegy Inc. said on Monday does not foresee any damaging disclosures from Enron Corp., slammed by news of murky off-balance sheet transactions, that could derail its planned takeover of the beleaguered energy trading giant. However, Dynegy said it can drop its $9 billion offer if more bad news emerges, or if pending lawsuits against Enron lead to more than $3.5 billion in costs. Dynegy also expressed confidence the takeover announced on Friday, will win U.S. regulatory approval. "I really have a good deal of confidence, but not an absolute guarantee, that we are going to be fine here," said Dynegy Chief Executive Officer Chuck Watson, when pressed about the possibility of further troubling disclosures by Enron. Watson said Dynegy had run the deal through worst-case scenarios and concluded that it made good business sense. Investors apparently agreed, bidding up Dynegy shares $5.55, or 14.3 percent, to close at $44.31 on the New York Stock Exchange. Enron shares gained 61 cents, to 7.1 percent, to $9.24. The deal valued Enron stock at $10.41. Enron agreed to a Dynegy buyout after it was overwhelmed by a series of problems, including a U.S. regulatory probe into the off-balance sheet dealings, a $1.2 billion cut in shareholder equity and damaging credit rating downgrades. Watson has cause for concern about new disclosures from Enron, which last Thursday said an internal probe showed its earnings had been overstated by some $600 million since 1997. In a conference call with analysts on Monday, Dynegy executives emphasized their confidence in the future of the combined company, including annual projected earnings-per-share growth of 15 percent to 20 percent over the next three years. But they also fielded a barrage of questions about how well Dynegy has insulated itself against further surprises of the kind that had slashed Enron's market value last week to barely one-tenth the almost $80 billion it was valued in August 2000. DYNEGY DOUBTS HUGE LIABILITIES To ensure against unpleasant disclosures, Dynegy wrote so-called material adverse change clauses into the deal, allowing it to walk away from Enron if there is serious deterioration of its businesses or assets. In particular, Dynegy can turn its back on the deal if pending litigation against Enron - including a stack of lawsuits filed by angry investors who have lost a fortune - leads to costs of more than $3.5 billion. Chief Financial Officer Rob Doty said it was highly unlikely that this threshold would be reached, even if a "very substantial" settlement was reached in the stockholder suits. Commerzbank Securities analyst Andre Meade said he was not yet convinced that the stream of bad news from Enron was over. "I think Dynegy is making a big bet that they can successfully clean up the problems that Enron has had," he said. But UBS Warburg analyst Jay Yannello said after hearing management discuss the deal, he was reassured it could address tough questions - a breath of fresh air after Enron's tight-lipped response to investors. Some analysts have said the deal could be thwarted by regulators because of concerns that Dynegy would be too powerful after merging with Enron, currently North America's biggest buyer and seller of both natural gas and electricity. Watson said Dynegy would have to work hard to explain the deal to regulators, led by the Federal Energy Regulatory Commission, but does not doubt it will eventually pass muster. "We really are confident that up and down the line we are going to be able to convince them that this is really in the best interest of the energy industry as well as these two respective companies," he said. GAS PIPELINE OPTION, BREAK-UP FEES Dynegy executives also said there would be no complicated financing arrangements of the kind that triggered Enron's downfall, and that the new Dynegy will be able to keep top Enron executives and traders from defecting to rival firms. Enron officials declined to comment on reports that its banks J.P. Morgan and Citigroup were considering pumping an extra $500 million of capital in to Enron. Oil company ChevronTexaco Inc., a major Dynegy stockholder, has already agreed to inject $1.5 billion into Enron immediately to keep it afloat while the merger is completed, which Dynegy expects to take six to nine months. If Enron backs out of the deal to accept a higher offer, it would have to pay a $350 million breakup fee to Dyegy. And if the deal breaks down for any reason, Dynegy would be allowed to exercise an option to acquire Enron's Northern Natural Gas pipeline subsidiary. Dynegy and Enron Shares Get a Boost As Acquisition Plan is Met With Optimism By John R. Emshwiller 11/13/2001 The Wall Street Journal The shares of Enron Corp. and Dynegy Inc. both rose in heavy trading as investors began trying to digest the possible risks and rewards of Dynegy's plan to acquire Enron in a stock swap with a current value of $10.12 billion. In calls and meetings with analysts yesterday, Dynegy Chairman Chuck Watson and Enron Chairman Kenneth Lay continued talking up the deal that was announced late Friday. "We are confident this is good strategically and financially for Dynegy and Enron," said Mr. Watson, who will serve as chairman and chief executive of the combined entity, to be called Dynegy Inc. While the proposed combination faces months of review by government agencies and gives Dynegy possible opportunities to cancel the deal, investors' initial reaction to the merger announcement was positive. As of 4 p.m. in New York Stock Exchange composite trading, Dynegy shares were at $44.31, up $5.55, or 14%. Also on the Big Board, Enron was at $9.24, up 7.1%, or 61 cents. Both companies were among the most actively traded issues. Under terms of the proposed acquisition, Dynegy would give 0.2685 of its shares for each Enron share. Based on Dynegy's stock price yesterday , this formula values Enron stock at $11.90 each. Enron has about 850 million shares outstanding. Some people raised cautionary notes yesterday. Moody's Investors Service placed Dynegy on review for a possible credit-ratings downgrade. Standard & Poor's made a similar move on Friday. Moody's said that while it saw positive elements to the proposed combination, it also believed "the financial and business risks associated with the transaction could negatively impact Dynegy's credit fundamentals." Prudential Securities analyst Carol Coale, who counts herself a fan of Dynegy, also worries that Enron's enormous problems could be a drag on the combined entity. "I don't want the Dynegy folks to get into something that's not good for the company," she said. As reported, Enron in the past several weeks has seen its stock price and standing in the investment community plummet, largely as the result of large-scale transactions it did with partnerships headed by Enron officers. Those transactions have produced hundreds of millions of dollars of write-offs and restatements in the past month. They are being investigated by the Securities and Exchange Commission and have helped spawn more than a dozen shareholder lawsuits. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. Gas Pipeline Is Prominent As Dynegy Seeks Enron By FLOYD NORRIS 11/13/2001 The New York Times Dynegy has negotiated a great takeover. And it may end up buying Enron, too. As part of its planned acquisition of Enron, Dynegy will get the crown jewel even if the overall deal falls apart. In return for its $1.5 billion investment today, Dynegy has the right to acquire Northern Natural Gas, a pipeline system that is probably worth more. As Dynegy stock soared 14 percent yesterday, Enron's lagged behind, rising just 7 percent. [Page C13.] That widened the spread -- the profit a trader could lock in by buying Enron and selling Dynegy short, assuming the deal goes through -- to 28 percent. The big premium probably reflects more than the fact that this deal will not close for many months. It is at least a possibility that Dynegy will renegotiate the price, or even walk away, as it learns more about Enron's business. Not that Chuck Watson, chairman and chief executive of Dynegy, was threatening to do any such thing. In a talk to analysts yesterday, and in a later interview, he was extraordinarily upbeat about Enron's trading business even as he dismissed many of the company's diversifications as failures whose poor performance might have been obscured by fancy accounting. Full details of the agreement between the companies will not be known until the merger agreement is filed with the Securities and Exchange Commission today or tomorrow. But it appears that if the agreement falls apart for any reason, Dynegy has the right to keep the pipeline without putting up any additional cash. Speaking to analysts yesterday, Rob Doty, chief financial officer at Dynegy, said the company was paying about seven or eight times the cash flow of the pipeline business. Walking away from the deal might cost Dynegy $350 million if it could not cite any material adverse change in Enron's business, as provided in the merger agreement. But one way to look at this deal is that Dynegy is spending $1.85 billion for the pipeline and a right to get the rest of Enron on the agreed terms. Mr. Watson said he was confident that things would not go wrong. ''We have comfort there is not another shoe to drop,'' he said. ''If there is no shoe, this is a phenomenally good transaction.'' In presentations to analysts, Dynegy officials said they expected the company's earnings per share to grow by at least 90 cents a year even before considering cost reductions as the two businesses are merged. That arithmetic was based on assumptions that Enron could deliver at least 75 percent of the $2 a share in pro-forma earnings that Wall Street had been forecasting for next year. Those forecasts had stayed the same even as Enron's business collapsed. The bullish case for the merger is that Enron's real profits were there and that the financial maneuvering did not cover up far deeper problems. Mr. Watson promised that more details would be disclosed about the partnerships that were created by Enron and traded with it, providing a substantial part of the company's profits in 2000. Enron's need to make a deal quickly -- almost any deal -- was emphasized by Standard & Poor's, the bond rating service. In a conference call yesterday, Ron Barone, an analyst with S.& P., said that without the takeover, Enron's rating would have been cut to low BB or high B. Those ratings are not even at the high end of junk, and a company like Enron, which depends on others being willing to treat it as a trusted trading partner, needs an investment grade rating. Its current S.& P. rating is BBB minus, the lowest investment grade rating. That means Enron could not continue as an independent business. And it means that should Dynegy decide to renegotiate, Enron would be in a very poor bargaining position unless it had another bidder. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. Suitor for Enron Receives Approval From Wall St. By ALEX BERENSON 11/13/2001 The New York Times Wall Street found nothing but good news in Dynegy's $9 billion takeover of the Enron Corporation yesterday. Three days after Dynegy, an energy marketing and trading company based in Houston, agreed to take over Enron, its giant crosstown rival, Dynegy executives came to New York to assure investors that the deal would sharply increase their company's profits. They met a receptive audience. Dynegy stock closed yesterday at $44.31, up $5.55, or 14.3 percent. Since last Wednesday, when news of a possible takeover emerged, Dynegy's stock has risen more than one-third. Enron closed at $9.24, up 61 cents, or 7.1 percent. After some initial uncertainty about the takeover, investors appear to have accepted Dynegy's view that the deal will give it a lucrative franchise in trading natural gas and electricity. Enron's stock fell almost 80 percent in the weeks leading up to the deal as Enron said it had overstated its earnings by almost $600 million since 1997 and forced out several top executives. But Chuck Watson, Dynegy's chairman, told investors repeatedly yesterday that Enron's problems were mainly a result of failed expansion efforts. He largely dismissed the concerns of some short-sellers and analysts that Enron might be hiding losses at its core energy trading operations. ''There's nothing wrong with Enron's business,'' Mr. Watson said in an interview at the Waldorf-Astoria Hotel after making a lunchtime presentation to analysts and investors. ''The people in it ought to be really upset that for the last several years, they have produced earnings and cash that have been invested in other businesses that are not making money.'' Enron's immediate problem was a crisis of confidence, which could have caused other companies to stop trading with it, Mr. Watson said. A $1.5 billion cash infusion from Dynegy should restore the confidence of Enron's business partners and keep Enron stable until the takeover is complete, he said. To bolster Enron further, J. P. Morgan Chase and Citigroup may each invest an additional $250 million, executives close to the deal said. The potential investments by J. P. Morgan Chase and Citigroup were reported yesterday in The Wall Street Journal. Mr. Watson said Dynegy would also move quickly to assuage Enron employees who are angry that Kenneth L. Lay, Enron's chairman, and other top executives sold hundreds of millions of dollars in stock in 2000 and this year as Enron's shares plunged. ''Right now, there's some animosity over there,'' he said. Many employees at Enron will get new grants of stock options when the acquisition is completed, he said. The company said it expected the deal to close by the end of the third quarter of next year, after extensive reviews from federal and state energy regulators and the Department of Justice. Mr. Watson predicted that the deal would lift Dynegy's earnings by 90 cents or more a share next year, to more than $3.45 a share. Analysts backed that view yesterday. ''Investments in noncore business distracted the attention of management and also took up capital,'' said Thomas Hamlin, an analyst at Wachovia Securities. Mr. Hamlin said he believed that Dynegy had obtained Enron, which reported more than $100 billion in revenue last year, for a bargain price. ''It's not too often you get to take out the No. 7 Fortune 500 company and double your earnings in the meantime,'' he said. ''My guess is the stock is worth $70 per share.'' The deal could increase Dynegy's earnings by $1 to $2 a share next year, said Christopher Ellinghaus, an analyst at the Williams Capital Group. ''That's a whopper,'' he said. ''It's a very good deal financially, certainly should be a good deal strategically, and provides some immediate balance-sheet backstop for Enron.'' Mr. Lay said in an interview that Enron had been forced to sell itself because of ''the relentlessness of all the articles and the shorts.'' ''We realized that we needed to do something to stabilize the ship,'' he said. ''A good company was being badly tarnished.'' Photo: In Houston, the headquarters building of Dynegy Inc., the energy and marketing trading company, which is in a $9 billion takeover of Enron. (Asociated Press) Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. Share boost for Dynegy good news Saving Enron trading called key handicap By LAURA GOLDBERG and DAVID IVANOVICH November 13, 2001 Houston Chronicle Although investors Monday cheered Dynegy's planned acquisition of Enron Corp., Dynegy must still negotiate a series of potential roadblocks to pull off a successful merger. Among them: ensuring that Enron's core energy-trading business, suffering before the merger announcement, stays healthy. Negative news on that front quickly surfaced Monday as at least two traders said they still plan extremely limited business with Enron. Dynegy must also manage any unexpected disclosures about Enron's financial performance and investment partnerships, convince Enron's traders and other key employees to stick around, and mesh different corporate cultures. Investors were optimistic in Dynegy's abilities as shares in the company traded up $5.55 to close at $44.31 Monday, while shares in Enron ended the day up 61 cents at $9.24. Enron has been under siege since Oct. 16 when it reported a $35 million loss and $1.2 billion reduction in shareholder equity tied to business dealings with investment partnerships run by its then-chief financial officer. Since then, the Securities and Exchange Commission started an investigation of Enron, a slew of shareholder lawsuits were filed and Enron's stock price plummeted. A new shareholder suit filed Monday included Dynegy on its list of defendants. Last week, Enron said it was restating its earnings back to 1997 to include losses related to a number of complex partnerships, including several being investigated by the SEC. It said it was correcting almost $600 million worth of mistakes. Just how close Enron was to a collapse remains unclear. One industry source believes Enron had been pushed "to the brink" and would have been done for if it had been unable to reach agreement with Dynegy last week. But Ron Barone, a credit analyst with Standard & Poor's, doesn't think Enron's condition was so desperate. "We clearly didn't see this as an imminent bankruptcy or imminent default, but it is something that could have eroded over time ... in a fairly short time." Friday, Enron's long-term debt rating was downgraded to one notch above investment-grade status by both Moody's Investors Service and S&P. Enron is the largest natural gas and electricity trader in the nation, accounting for about 25 percent of all transactions. Its collapse would have meant the loss of much liquidity in the trading market, making trades more difficult and prices more volatile, industry experts said. Dynegy announced a deal Friday to buy Enron at a fire-sale price of almost $9 billion in stock, plus the assumption of about $13 billion in debt and $2 billion in preferred stock. The merger is expected to close, barring holdups from regulators, in six to nine months. As part of the agreement, Dynegy stakeholder ChevronTexaco is giving Dynegy $1.5 billion, which is to be infused today to help shore up Enron's liquidity and preserve its trading franchise. Some of Enron's former trading partners are still steering clear of the giant. To facilitate transactions, the various energy trading firms extend credit to one another. Those agreements are contingent upon a partner maintaining an adequate rating. If the credit rating firms had downgraded Enron's debt to junk status, its trading operation would have been devastated, industry officials said. As details of Enron's questionable financial dealings have been revealed, Enron's trading partners have been scrambling to reduce their exposure. Kansas City, Mo.-based Aquila Energy Marketing Corp., for instance, has been ratcheting down its activity with Enron, company spokesman Al Butkus said. By the end of last week, Aquila's exposure to Enron was "insignificant," Butkus said. "And after all that was revealed on Friday and the downgrading of the credit, we are now at an even lower level." Atlanta-based Mirant has likewise reduced its exposure and is only doing a limited amount of business with Enron. Some larger players, however, continue doing deals with the company. "Reliant Energy has consistently been trading with Enron through its difficulties, albeit with a heightened sense of caution," said Shahid Malik, president of Houston-based Reliant Energy's trading operation. Charlotte, N.C.-based Duke Energy's exposure stands at $100 million. "We're continuing the way we have been," said Duke spokesman Terry Francisco. John Olson, an analyst with Sanders Morris Harris in Houston, predicted it would take the traders some time to digest the merger deal. "I think people will increasingly come back to Enron just as soon as the $1.5 billion changes hands," he said. Traders still have incentives to do business with Enron even though it's being sold, as it has a wider variety of products than some of its competitors and its EnronOnline Internet trading operation is regarded as superior. On a conference call with investors and analysts Monday morning, Dynegy and Enron executives fielded a variety of questions about the merger but refused comment on a Wall Street Journal report that J.P. Morgan Chase & Co. and Citigroup are considering a $500 million investment in Enron. Analysts remain worried that new and troubling surprises will emerge about Enron's finances, including those that could call into question whether its core trading business is as advertised. Dynegy executives aren't expecting any such disclosures, but took a conservative approach to calculating merger benefits. "I believe we have adequately bracketed the downside," said Chuck Watson, Dynegy's chairman and chief executive. Even with a worst-case scenario, Dynegy still found a "tremendous amount of economic value" in the merger, said Watson, who will take the same roles after the merger. The deal, Dynegy said, will add 90 cents to 95 cents per share in earnings for current Dynegy shareholders. And that's before cost savings that are expected to run $400 million to $500 million a year. Dynegy detailed two escape clauses in the merger deal. For one, if the amount of legal and shareholder claims Enron must pay out is greater than $3.5 billion, it can be called off. Enron and Dynegy officials also said they will do whatever it takes to keep their key people. But will traders jump ship? "Oh, yeah I'm sure they will," the industry source said. Jeff Dietert, an analyst with Simmons & Co. International in Houston, believes that a number of Enron's marketers and traders will find Dynegy a strong alternative. "I firmly believe that the Enron guys like to play on the winning team and Dynegy is a very, very strong player," he said. That Dynegy was approached by three key Enron executives about a merger showed Dynegy would be getting the full cooperation of Enron's management team, Watson said. Enron employees working for Dynegy will have to get used to a new culture. Teamwork and fraternal are words often used to describe Dynegy, while cutthroat is used for Enron, which also is known for its willingness to take more risk. Watson plans to blend strategies and business elements of each. The new company will include Enron's strong offering of financial products and combine them with Dynegy's base of power plants and other assets, said Steve Bergstrom, Dynegy's president, who will take the same job in the new company. The post-merger Dynegy will also be more involved in "market-making," which Enron is known for. That's the practice of ensuring orderly markets can exist by acting as both the buyer and the seller of a commodity. It's unclear whether Dynegy will continue Enron's foray into other commodities such as paper and metals. Dynegy hopes Enron can complete its planned sale of assets considered outside its core wholesale energy business before the merger closes. Enron already has deals to sell power utility Portland General Electric along with about $900 million in international assets. Billions of dollars in international projects are for sale. But Watson said Dynegy isn't interested in seeing the assets go at bargain-basement prices. "We don't necessarily feel like our back is pinned against the wall in asset dispositions," he said. Dynegy Pres: Enron's Core Business Is Very, Very Strong By Christina Cheddar 11/12/2001 Dow Jones News Service NEW YORK -(Dow Jones)- Dynegy Inc. (DYN) Chairman Chuck Watson said he sees "nothing but upside" ahead from the company's planned acquisition of Enron Corp. (ENE), which was announced late Friday. In addition to being a sound strategic move, the deal "injects confidence into the energy markets," said Watson, founder of the Houston energy trading firm, in a conference call held Monday to discuss the $8.85 billion takeover of Enron. On Friday, Dynegy confirmed the widely speculated deal by announcing it would buy its cross-town rival in a stock swap that values each Enron share at 0.2685 of a Dynegy share. The sale of Enron for only a quarter of its share price a month ago, or just a quarter of its all-time high of $90 a share reached just last year, follows an abrupt turn in Enron's fortunes. Last week, Enron, which is the nation's biggest trader of natural gas and electricity, admitted its financial statements going back to 1997 couldn't be relied upon and would have to be restated. The company made accounting errors in recording transactions from some of its limited partnerships. The company also misstated its level of debt and its shareholder equity over this period. Enron's partnership dealings are being investigated by the Securities and Exchange Commission, and have sparked a number of shareholder lawsuits. Over the past month, new revelations about Enron's web of partnerships and off-balance sheet financing vehicles have been uncovered almost daily. During the conference call, Kenneth Lay, Enron's chairman and chief executive, said it was a "very reflective time" for him. When Lay transformed Enron from a natural gas pipeline company into a dynamic energy trading company that was a darling on Wall Street, this was clearly not what he had in mind. Lay said, "I didn't expect to create the world's next leading energy trading company by merging Enron i nto another company." Enron officials said they were continuing their internal investigations of its accounting practices. "We have disclosed anything and everything we have found so far," Lay said. Enron President and Chief Operating Officer Greg Whalley, who will remain with Dynegy after the merger as an executive vice president, said Enron will host a conference call "later this week" to further discuss recent events at the company. The call will likely be held on Wednesday, he said. In light of the uncertainty surrounding Enron's financial dealings, it is not surprising that quite a number of questions during the conference call focused on the company's liquidity and the potential liabilities Dynegy would assume in the transaction. Dynegy's acquisition agreement allows the company to walk away if Enron's additional legal and financial liabilities exceed $3.5 billion. There also are other "material adverse change," or MAC, provisions, officials said. Upon the closing of the acquisition, Dynegy expects to post reserves to cover the cost of outstanding litigation, said Dynegy's Doty. "We believe we have adequately bracketed the downside," said Dynegy's Watson. "There has to be a substantial, substantial material change in what we already know ... I don't want to minimize the impact. That's why we have MAC outs." According to Dynegy's Bergstrom, the economics of the transaction assumed the potential risk from outstanding lawsuits. "Even in that worst-case there is a substantial amount of economic value here," Watson said. Dynegy expects to continue its due diligence in the months leading up to the deal's close, Bergstrom said. Dynegy's examination of the business so far has turned up "no surprises" in Enron's core energy trading business, Bergstrom said. However, the merger agreement has provisions in case the company's examination does reveal any, Bergstrom said. "We don't expect to find anything material," he said, adding that Enron's core energy business is "very, very strong." Based on its current information, Dynegy expects the acquisition to increase earnings by 35%, or between 90 cents to 95 cents a share, before taking into account expected merger cost savings. As a result, Dynegy now expects its full year pro forma earnings for 2002 to be in the range of $3.40 to $3.50 a share. According to Thomson Financial/First Call, analysts were expecting Dynegy to earn $2.57 a share next year. In 2000, the company earned $1.43 a share before items. Dynegy has estimated cost savings from the acquisition at between $400 million to $500 million. The ratio of stock Enron shareholders will be paid is fixed and there is no collar to limit its range, said a Dynegy spokeswoman. There isn't a walkaway provision, but if the deal is terminated, Dynegy will own rights to Enron's Northern Natural Gas pipeline because of the $1.5 billion cash infusion it will provide to the company immediately. Dynegy able to give Enron the cash infusion immediately because ChevronTexaco Corp. (CVX), which owns slightly more than a fourth of Dynegy, will invest $2.5 billion in Dynegy. The deal has a $350 million "topping fee," a Dynegy spokeswoman said. She explained that if either party decided to terminated the transaction, that party would owe the other the "topping fee" if it were acquired by another party. Dynegy's Bergstrom said he expects the acquisition of Enron will receive the needed regulatory approvals and close within the next six to nine months. In addition to approval by the Securities and Exchange Commission, the deal must be approved by the Federal Energy Regulatory Commission. "We expect FERC to be the pacesetter," Bergstrom said. Until the deal closes, Dynegy expects Enron will have "sufficient interim liquidity," Doty said. "(The cash infusion) should immediately put to rest the liquidity concerns." Based on conversations Dynegy had with the leading credit rating agencies management expects Enron's ratings to remain investment grade, Doty said. Meanwhile, Dynegy's ratings are expected to be affirmed at their current ratings, but be placed on watch for a downgrade until the transaction is completed, he said. According to Doty, Dynegy expects its debt-to-capital ratio will be below 40% after the acquisition closes. Enron said it wouldn't comment on reports published in The Wall Street Journal Monday that said its bankers, J.P. Morgan Chase & Co. (JPM) and Citigroup Inc. (C) are considering making an additional $500 million investment in Enron. Dynegy officials said marketplace speculation that suggested Dynegy was acquiring Enron because it was afraid Enron would default on a liability it owed Dynegy was incorrect. "Dynegy currently owes Enron an immaterial amount, less than $50 million," said Dynegy's Doty. The chief financial officer also pledged to make the combined company's balance sheet more easy to understand than that of Enron. But integrating the two energy trading companies will be more than just combining their balance sheets. According to Enron's Whalley, the integration of Enron's non-core assets trading businesses will be rather simple, but combing the core trading businesses "will not be the easiest thing to do." One prevalent concern is that Enron's trading talent will depart for other jobs, and erode the true value of the business, which is rooted in intellectual capital. The employees have seen their value of compensation, which was partially paid in stock options, erode with the value of Enron's shares. "I believe we will retain the people we already have," Whalley said. "Most traders want to be part of the winning team." However, the officials didn't say whether they were making any specific efforts to retain staff. Still, in the end, callers were most interested in learning more about Enron's past accounting practices and the potential effects it will have on the future Dynegy. Officials from both companies said they couldn't tell yet if there were any additional details that needed to be revealed. Enron's newly appointed chief financial officer, Jeff McMahon, said "Could there be more? Possibly. Do we expect more? No." Mahon replaced Andrew Fastow, who resigned after questions arose related to a partnership he ran while chief financial officer of Enron. Fastow's activities are at the center of the SEC probe of Enron's financial dealings. -By Christina Cheddar, Dow Jones Newswires; 201-938-5166; christina.cheddar@dowjones.com Dynegy Deal Sets Path Of Resolution For Enron - Analyst By Christina Cheddar 11/13/2001 Dow Jones News Service NEW YORK -(Dow Jones)- Dynegy Inc.'s (DYN) proposed acquisition of Enron Corp. (ENE) "creates a clear path for the resolution" of the liquidity and financial issues plaguing Enron, said Ted Izatt, a high-grade debt research analyst at Lehman Brothers Holdings Inc. (LEH). Izatt made the comments during a conference call held Tuesday with bondholders to discuss the proposed acquisition, which was announced late last Friday. Lehman's investment bankers advised Dynegy on the transaction. Enron was advised by J.P. Morgan Chase & Co. (JPM) and Citigroup Inc. (C). On Monday, the marriage of the two Houston energy traders received a warm reception as equity investors bid up shares of both companies. Recently, Enron shares traded at $9.25, up 1 cent, or 0.2%, while Dynegy shares changed hands at $45.00, up 69 cents, up 1.6%. Enron shares had fallen more than 80% in the weeks leading up to the transaction as the company posted more than $1 billion in write-offs of failed investments and was forced to restate its earnings going back to 1997 because it improperly accounted for the results at some of its partnerships. The restatement reduced Enron's profits over the period by 20% and added millions to its debt level. Also, the Securities and Exchange Commission launched an investigation of the financial dealings of Enron's former chief financial officer, Andrew Fastow. The chain of events prompted a series of credit rating downgrades and raised doubts about Enron's liquidity Eventually, the concerns threatened Enron's core energy marketing and trading business because a perception of creditworthiness is vital to the business. Izatt said a combination of $1 billion in newly secured bank lines and the $1.5 billion equity infusion from Dynegy has bolstered Enron's financial position. With this additional cash on hand, the greatest risk to bondholders is whether the deal closes, said Izatt. The analyst added he expects the merger to close because both companies are committed to the deal, and he expects regulators to approve the transaction. "There is a lot of commitment to get the deal done," he said. However, if the transaction doesn't close, Izatt said he believes Dynegy's bondholders are "very well protected" in the transaction. According to Izatt, Dynegy's bonds are at an "attractive level." The spread on the bonds had widened ahead of the announcement of the deal as rumors began to leak into the market, leaving the price of the bond in a weaker position. But Izatt does expect Dynegy will merge with Enron, and the resulting company will emerge as a "much stronger company," he said. For example, the analyst expects Dynegy has the potential to achieve more than $400 million to $500 million in pretax, merger cost savings Dynegy is projecting. Also, Izatt said Dynegy's cash infusion and purchase will help Enron to retain its position in the energy market. "Dynegy is there for real," Izatt said. "They intend to see this through to fruition and energy players will view this and (feel confident enough to trade with Enron.)" Under terms of the acquisition, Dynegy will pay Enron shareholders 0.2685 of a Dynegy share for each Enron share outstanding. The value of the stock swap at the close of the market Monday was $10.12 billion. Dynegy is making an immediate cash investment in Enron with the assistance of ChevronTexaco Corp. (CVX). Later, when the deal closes, ChevronTexaco will make an additional $1 billion investment in the combined company. -By Christina Cheddar, Dow Jones Newswires; 201-938-5166; christina.cheddar@dowjones.com
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