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Enron Mail |
I did ....Thanks! Have a great holiday and thanks for your note...We all di=
d the best we could. -----Original Message----- From: =09Migden, Janine =20 Sent:=09Wednesday, November 21, 2001 2:01 PM To:=09Shapiro, Richard Subject:=09FW: Enron Continues to Implode; Will the Dynegy Deal Proceed? Have you seen this? -----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] << File: http://secure.scientech.com/specialpages/Multi_C= lient.asp << =09 [IMAGE]=09[IMAGE]=09 =09[IMAGE] [IMAGE] [IMAGE] [IMAGE][IMAGE] << File: http://www.thestructur= egroup.com << [IMAGE][IMAGE] << File: http://secure.scientech.com/specialp= ages/Strategic_Planning.asp << [IMAGE][IMAGE] << File: http://secure.scient= ech.com/rci/details.asp?ProductID=3D909 << [IMAGE] [IMAGE] [IMAGE] Novem= ber 21, 2001 Enron Continues to Implode; Will the Dynegy Deal Proceed?= By Will McNamara Director, Electric Industry Analysis [News item from = Reuters] Enron Corp. (NYSE: ENE) shares fell sharply in opening trade on No= v. 20 after the humbled energy giant warned it could be forced to pay by ne= xt week $690 million in debt triggered by a credit downgrade last week. The= shares were down $1.16, or 12.8 percent, to just over $7.00 in early morni= ng 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 earl= y morning trading on Nov. 21, Enron shares were priced at $4.85, reportedly= their lowest level in nearly 10 years. Analysis: To paraphrase Shakespea= re, "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 s= entence, at least at this point. Enron has been accused of a lot of things = over the last few weeks, but at this juncture an ongoing Securities and Exc= hange Commission (SEC) investigation has yet to reach any conclusion regard= ing deceptive financial reporting on the part of the Houston trader. Enron = itself has admitted that its financial records from 1997 through the first = half of 2001 "should not be relied upon." Nevertheless, perception is reali= ty and the perception currently in the industry is that Enron is now taking= a fall after getting caught following years of skirting the truth. While n= egative perception continues to cause damage to Enron's stock, perhaps of m= ore 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 ove= r 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 Dy= negy, which still aims to buy Enron but wisely included an exit clause in i= ts purchase contract. The other question is, what happens to Enron if Dyneg= y leaves it standing at the altar? A terminated marriage agreement would su= rely cause further reductions to Enron's already-weak credit standing, and = it is unknown how the company could recover from another blow to its reputa= tion. 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= acquisition of Enron, and Enron's financial problems that precipitated the= proposal, please see my 11/12/01 IssueAlert (available at www.scientech.c= om/rci << File: http://secure.scientech.com/issuealert/article.asp?id=3D987= << ). In the interest of time, let me summarize what is happening at this = moment. Dynegy rode in as Enron's white knight and plopped down a $9-billio= n offer ($10 a share) to buy the company, which at the time represented a s= teal of a price considering that Enron was priced at almost $90 a share lit= tle more than a year ago. To some extent, this seemed like the final chapte= r in the Enron saga. In other words, the company had gone through a tumultu= ous year, hit its "rock bottom" but still planned to live happily ever afte= r as part of Dynegy, Inc., its much-smaller rival. The developments just= this week amount to a screeching brake that may in fact interrupt the nupt= ials between the two companies. For starters, on Monday (Nov. 19), Enron su= bmitted its 10-Q report to the SEC (which was five days late, by the way). = In the report, Enron dropped what have turned out to be several bombshells.= First, Enron disclosed that, due to recent downgrades of its credit rating= by agencies such as Moody's, Standard & Poor's and Fitch, it has to pay of= f or refinance by Nov. 26 debt it owes to 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 i= ncludes holdings in C.E.G. Rio, a Brazilian natural gas-company that Enron = had planned to sell to raise about $250 million in cash. Note that just las= t week, various credit services lowered Enron's senior unsecured debt to on= e notch above junk status and warned that further downgrades may occur, whi= ch apparently prompted the call for the debt payment. Reportedly, if Enron = does not make the $690-million payment by Nov. 27, investors will gain the = right to immediately begin liquidating the asset for an amount equal to the= note payable. Enron is presently scrambling to establish a "mutually accep= table" amendment with lenders to avoid having to issue payment on the debt.= Along with the acknowledgement of the imminent payment of $690 million, En= ron said that any further drop in its credit rating might necessitate furth= er payments of $3.9 billion to other partnerships, the bulk of that figure = going to Osprey Trust and Marlin Water Trust. Also in the new SEC filing= , Enron increased its 3Q 2001 loss by 3 cents a share to 87 cents. Enron or= iginally reported a 3Q loss of $618 million, but has now raised that figure= to $664 million. As a minor bright side, Enron did increase reported earni= ngs for the first nine months of 2001 by a penny to 20 cents a share, attri= buted 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. E= nron also claims that, even still, the numbers contained in the 10-Q report= are not necessarily final as they have not been reviewed by Arthur Anderse= n, the company's external auditor. Thus, further revision of the numbers co= uld 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 C= hase 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 li= nes of credit and net collections. Thus, some investors are reassured by th= e belief that Enron has the cash on hand to make the $690-million payment i= f it is unable to renegotiate terms with lenders. According to the SEC fili= ng, Enron also intends to sell off $8 billion in non-core businesses that a= re performing "below acceptable rates" and would use the proceeds to pay of= f debts, although this money would probably not be immediately available. = Again, however, there is a perception element to this development that sho= uld be noted. Enron has been accused of financing partnerships in the past = in 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 addi= ng too much debt to its own books or diluting the value of its stock. As ha= s been well documented, Enron is already in the midst of an intense SEC inv= estigation 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. As I s= aid, the question of the hour is whether or not Enron's new problems will c= ause Dynegy to reconsider its offer. As usual, the answer all depends on wh= o you ask. Dynegy is remaining mum and referring all questions about Enron'= s financial status to Enron. Investors are rather mixed on the question. So= me say that the facts disclosed in the 10-Q report do not dramatically chan= ge Enron's position from what it was when Dynegy launched its acquisition a= nd that the current drop in Enron's stock is just a knee-jerk response to t= he media hype surrounding the story. Further, those who diminish any potent= ial impact say that Enron is still a liquid company and has money coming in= from various sources. Thus, it should have no trouble making the $690-mill= ion 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 price, an= d the acquisition remains valuable to Dynegy as it will position the combin= ed company as North America's biggest marketer and trader of natural gas an= d electricity. In contrast, other investors point to the fact that since = the purchase agreement was signed, Enron's stock has fallen an additional 3= 2.5 percent, which weakens the original acquisition agreement. In addition,= if Enron follows through with the $690-million payment next week or secure= s additional financing to front this cost, both options alter the company's= financial position from when Dynegy made its original offer, which could b= e construed as a "material adverse change." Another interesting developme= nt indicates that Enron may no longer be the company that Dynegy agreed to = purchase. New reports indicate many energy trading companies are now unwill= ing to sell power or natural gas to Enron for fear about the company's cred= it concerns. Such companies are now particularly reticent to sell power to = Enron for next-day delivery. What this means in practical terms is that oth= er trading companies may be gaining Enron's market share, which could dimin= ish the value in the trading market that had attracted Dynegy to Enron in t= he first place. In addition, Enron's once-stellar energy trading business c= ould now become reduced or collapse altogether. Questions have been raise= d why Dynegy is not doing more at this time to help Enron out of its financ= ial mess. Of course, under the acquisition agreement Dynegy already committ= ed to providing an immediate $1.5-billion asset-backed equity infusion into= Enron to help the company with its current financial woes, which will be f= ollowed by an additional infusion of $2.5 billion into the combined company= by ChevronTexaco, which owns 27 percent of Dynegy. However, some traders a= pparently have wondered why Dynegy has not done anything about Enron's dimi= nishing ability to secure power on the open market. Traders claim that Dyne= gy could step in and buy power from sellers on the behalf of Enron, in a st= rategy known as "sleeving." The fact that Dynegy has not chosen to take thi= s step has been an indication to some observers that it is only willing to = go so far in its pursuit of Enron. In addition, Enron shareholders launch= ed a lawsuit on Nov. 12 in state court in Houston to prevent the merger wit= h Dynegy from happening. The petition reportedly alleges that Enron directo= rs breached their fiduciary duties by agreeing to sell the company at too l= ow a price and without adequate consideration of other alternatives. Enron = said it will defend its decision in court. Moreover, Dynegy was smart to= include an exit clause in the acquisition agreement. The clause reportedly= allows Dynegy to walk away from Enron if any material adverse change occur= s related to the outcome of the SEC investigation, possible litigation agai= nst Enron, balance sheet strengths, and earnings forecasts. Certainly the l= atest developments disclosed in Enron's 10-Q filing with the SEC impact the= company's balance sheet strengths and earnings forecasts, so a case could = be made that Dynegy would have grounds to terminate the acquisition. Clearl= y, this pending deal hinges on the developments that will take place over t= he next few weeks. Dynegy ultimately will have to weigh the pros and cons o= f its acquisition offer for Enron and determine if the once-golden company = still represents a great deal, or if pursuing the purchase would cause more= trouble than it is worth. An archive list of previous IssueAlert articl= es is available at www.scientech.com << File: http://secure.scientech.com/i= ssuealert/ << We encourage our readers to contact us with their comments= . We look forward to hearing from you. Nancy Spring << File: mailto:nspri= ng@scientech.com << Reach thousands of utility analysts and decision make= rs every day. Your company can schedule a sponsorship of IssueAlert by cont= acting Jane Pelz << File: mailto:jpelz@scientech.com << at 505.244.7650. = Advertising opportunities are also available on our Website. Our staff i= s comprised of leading energy experts with diverse backgrounds in utility g= eneration, transmission and distribution, retail markets, new technologies,= I/T, renewable energy, regulatory affairs, community relations and interna= tional issues. Contact consulting@scientech.com << File: http://consulting@= scientech.com << or call Nancy Spring at 505.244.7613. SCIENTECH is pl= eased to provide you with your free, daily IssueAlert. Let us know if we ca= n help you with in-depth analyses or any other SCIENTECH information produc= ts. If you would like to refer colleagues to receive our free, daily Issue= Alert articles, please register directly on our site at secure.scientech.co= m/issuealert << File: http://secure.scientech.com/issuealert/ << . 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