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Enron Mail |
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-----Original Message----- From: =09Energy Industry Issues Newsletter <ISSUEALERTHTML@LISTSERV.SCIENTE= CH.COM<@ENRON On Behalf Of IssueAlert@SCIENTECH.COM Sent:=09Wednesday, November 21, 2001 11:12 AM To:=09ISSUEALERTHTML@LISTSERV.SCIENTECH.COM Subject:=09Enron Continues to Implode; Will the Dynegy Deal Proceed? =09=09[IMAGE]=09 [IMAGE]=09 [IMAGE] [IMAGE] [IMAGE] [IMAGE] [IMAGE] [IMAGE] =09=09 [IMAGE]=09[IMAGE] =09 [IMAGE]=09[IMAGE]=09 =09[IMAGE] [IMAGE] [IMAGE] [IMAGE][IMAGE] [IMAGE][IMAGE] [IMAGE][IMAGE] = [IMAGE] [IMAGE] [IMAGE] November 21, 2001 Enron Continues to Implode= ; Will the Dynegy Deal Proceed? By Will McNamara Director, Electric Indus= try Analysis [News item from Reuters] Enron Corp. (NYSE: ENE) shares fel= l sharply in opening trade on Nov. 20 after the humbled energy giant warned= it could be forced to pay by next week $690 million in debt triggered by a= credit downgrade last week. The shares were down $1.16, or 12.8 percent, t= o just over $7.00 in early morning trade on the New York Stock Exchange. Th= e stock was the biggest loser by percentage change and the second-most acti= ve 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. A= nalysis: To paraphrase Shakespeare, "Oh, what a tangled web they weave when= 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 junctu= re an ongoing Securities and Exchange Commission (SEC) investigation has ye= t to reach any conclusion regarding deceptive financial reporting on the pa= rt of the Houston trader. Enron itself has admitted that its financial reco= rds from 1997 through the first half of 2001 "should not be relied upon." N= evertheless, perception is reality and the perception currently in the indu= stry is that Enron is now taking a fall after getting caught following year= s of skirting the truth. While negative perception continues to cause damag= e to Enron's stock, perhaps of more current interest are the developments t= hat 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 o= f the hour is whether these new financial hits will represent a "material a= dverse change" in the eyes of Dynegy, which still aims to buy Enron but wis= ely included an exit clause in its purchase contract. The other question is= , what happens to Enron if Dynegy leaves it standing at the altar? A termin= ated marriage agreement would surely cause further reductions to Enron's al= ready-weak credit standing, and it is unknown how the company could recover= from another blow to its reputation. As has been the case since the firs= t of October, the ongoing "fall of Enron" story is changing by the day. For= background on Dynegy's proposed acquisition of Enron, and Enron's financia= l problems that precipitated the proposal, please see my 11/12/01 IssueAler= t (available at www.scientech.com/rci ). In the interest of time, let me s= ummarize 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 considering that Enron w= as 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 "rock bottom" but stil= l planned to live happily ever after as part of Dynegy, Inc., its much-smal= ler rival. The developments just this week amount to a screeching brake = that may in fact interrupt the nuptials between the two companies. For star= ters, on Monday (Nov. 19), Enron submitted its 10-Q report to the SEC (whic= h was five days late, by the way). In the report, Enron dropped what have t= urned out to be several bombshells. First, Enron disclosed that, due to rec= ent downgrades of its credit rating by agencies such as Moody's, Standard &= Poor's and Fitch, it has to pay off or refinance by Nov. 26 debt it owes t= o a third party 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 Brazil= ian natural gas-company that Enron had planned to sell to raise about $250 = million in cash. Note that just last week, various credit services lowered = Enron's senior unsecured debt to one notch above junk status and warned tha= t further downgrades may occur, which apparently prompted the call for the = debt payment. Reportedly, if Enron does not make the $690-million payment b= y Nov. 27, investors will gain the right to immediately begin liquidating t= he asset for an amount equal to the note payable. Enron is presently scramb= ling to establish a "mutually acceptable" amendment with lenders to avoid h= aving to issue payment on the debt. Along with the acknowledgement of the i= mminent payment of $690 million, Enron said that any further drop in its cr= edit rating might necessitate further payments of $3.9 billion to other par= tnerships, the bulk of that figure going to Osprey Trust and Marlin Water T= rust. Also in the new SEC filing, Enron increased its 3Q 2001 loss by 3 = cents a share to 87 cents. Enron originally reported a 3Q loss of $618 mill= ion, but has now raised that figure to $664 million. As a minor bright side= , Enron did increase reported earnings for the first nine months of 2001 by= a penny to 20 cents a share, attributed to adjustments made after the quar= ter's end. However, looking forward, Enron warned that continuing credit wo= rries 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 n= umbers contained 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. Interestingly, there = does not seem to be a big question about whether or not Enron can pay the $= 690-million debt obligation. Enron apparently has secured 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 is has $1.2 billion of= domestic cash consisting of the lines of credit and net 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 renegotiate terms with= lenders. According to the SEC filing, Enron also intends to sell off $8 bi= llion in non-core businesses that are performing "below acceptable rates" a= nd would use the proceeds to pay off debts, although this money would proba= bly not be immediately available. Again, however, there is a perception e= lement to this development that should be noted. Enron has been accused of = financing partnerships in the past in such a way as to keep them off the co= mpany's balance sheets. Apparently, this non-disclosure was done so that En= ron could grow quickly without adding too much debt to its own books or dil= uting the value of its stock. As has been well documented, Enron is already= in the midst of an intense SEC investigation regarding potential conflict-= of-issues involving its former CFO. News about other financial deals that m= ay not have been fully disclosed is clearly making investors even more nerv= ous about Enron's stock. 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 r= eferring all questions about Enron's financial status to Enron. Investors a= re rather mixed on the question. Some say that the facts disclosed in the 1= 0-Q report do not dramatically change Enron's position from what it was whe= n Dynegy launched its acquisition and that the current drop in Enron's stoc= k is just a knee-jerk response to the media hype surrounding the story. Fur= ther, those who diminish any potential impact say that Enron is still a liq= uid company and has money coming in from various sources. Thus, it should h= ave no trouble making the $690-million payment. From a broad perspective, s= o one theory goes, Dynegy is still getting a great deal in Enron due to its= staggering drop in stock price, and the acquisition remains valuable to Dy= negy as it will position the combined company as North America's biggest ma= rketer and trader of natural gas and electricity. In contrast, other inve= stors point to the fact that since the purchase agreement was signed, Enron= 's stock has fallen an additional 32.5 percent, which weakens the original = acquisition agreement. In addition, if Enron follows through with the $690-= million payment next week or secures additional financing to front this cos= t, both options alter the company's financial position from when Dynegy mad= e its original offer, which could be construed as a "material adverse chang= e." Another interesting development indicates that Enron may no longer be= the company that Dynegy agreed to purchase. New reports indicate many ener= gy trading companies are now unwilling to sell power or natural gas to Enro= n for fear about the company's credit concerns. Such companies are now part= icularly reticent to sell power to Enron for next-day delivery. What this m= eans in practical terms is that other trading companies may be gaining Enro= n's market share, which could diminish the value in the trading market that= had attracted Dynegy to Enron in the first place. In addition, Enron's onc= e-stellar energy trading business could now become reduced or collapse alto= gether. Questions have been raised why Dynegy is not doing more at this t= ime to help Enron out of its financial mess. Of course, under the acquisiti= on agreement Dynegy already committed to providing an immediate $1.5-billio= n asset-backed equity infusion into Enron to help the company with its curr= ent financial 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 n= ot done anything about Enron's diminishing ability to secure power on the o= pen market. Traders claim that Dynegy could step in and buy power from sell= ers on the behalf of Enron, in a strategy known as "sleeving." The fact tha= t Dynegy has not chosen to take this step has been an indication to some ob= servers that it is only willing to go so far in its pursuit of Enron. In = addition, Enron shareholders launched a lawsuit on Nov. 12 in state court i= n Houston to prevent the merger with Dynegy from happening. The petition re= portedly alleges that Enron directors breached their fiduciary duties by ag= reeing to sell the company at too low a price and without adequate consider= ation of other alternatives. Enron said it will defend its decision in cour= t. Moreover, Dynegy was smart to include an exit clause in the acquisiti= on agreement. The clause reportedly allows Dynegy to walk away from Enron i= f any material adverse change occurs related to the outcome of the SEC inve= stigation, possible litigation against Enron, balance sheet strengths, and = earnings forecasts. Certainly the latest developments disclosed in Enron's = 10-Q filing with the SEC impact the company's balance sheet strengths and e= arnings forecasts, so a case could be made that Dynegy would have grounds t= o terminate the acquisition. Clearly, this pending deal hinges on the devel= opments that will take place over the next few weeks. Dynegy ultimately wil= l have to weigh the pros and cons of its acquisition offer for Enron and de= termine if the once-golden company still represents a great deal, or if pur= suing the purchase would cause more trouble than it is worth. An archive= list of previous IssueAlert articles is available at www.scientech.com = We encourage our readers to contact us with their comments. We look forwar= d to hearing from you. Nancy Spring Reach thousands of utility analysts = and decision makers every day. Your company can schedule a sponsorship of I= ssueAlert by contacting Jane Pelz at 505.244.7650. Advertising opportunit= ies are also available on our Website. Our staff is comprised of leading= energy experts with diverse backgrounds in utility generation, transmissio= n and distribution, retail markets, new technologies, I/T, renewable energy= , regulatory affairs, community relations and international issues. Contact= consulting@scientech.com or call Nancy Spring at 505.244.7613. SCIENT= ECH is pleased to provide you with your free, daily IssueAlert. Let us know= if we can help you with in-depth analyses or any other SCIENTECH informati= on products. If you would like to refer colleagues to receive our free, da= ily IssueAlert articles, please register directly on our site at secure.sci= entech.com/issuealert . If you no longer wish to receive this daily e-mai= l, and you are currently a registered subscriber to IssueAlert via SCIENTEC= H's website, please visit http://secure.scientech.com/account/ to unsubsc= ribe. Otherwise, please send an e-mail to IssueAlert , with "Delete IA Su= bscription" in the subject line. SCIENTECH's IssueAlert(SM) articles are= compiled based on the independent analysis of SCIENTECH consultants. The o= pinions expressed in SCIENTECH's IssueAlerts are not intended to predict fi= nancial performance of companies discussed, or to be the basis for investm= ent decisions of any kind. SCIENTECH's sole purpose in publishing its Issue= Alert articles is to offer an independent perspective regarding the key eve= nts occurring in the energy industry, based on its long-standing reputatio= n as an expert on energy issues. Copyright 2001. SCIENTECH, Inc. All ri= ghts reserved.=09 [IMAGE]
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