Original Source

Friday November 9, 2001 6:23 PM ET


Enron, Dynegy Race to Complete Merger

By Jeff Franks

HOUSTON (Reuters) - Enron Corp. (NYSE: ENE - news), hit by erosion in its critical energy-trading operations, raced on Friday to complete talks on an $8 billion merger with Dynegy Inc. (NYSE: DYN - news) in a desperate bid to salvage its fast-crumbling energy empire.

Enron's rapid fall from grace picked up speed on Friday when Moody's Investors Service cut its long-term credit rating to just a notch above the junk level that would make it prohibitively costly for the company to raise much-needed cash.

At the same time, Enron's woes, which began in earnest last month with disclosures about questionable business deals, caused wary energy traders to shy away from dealing with the company, which is the nation's largest natural gas and electricity trader.

Its trading activity had stayed at normal levels through most of the crisis, but on Friday there were signs of weakness and cautious words from traders, who said they were worried about Enron's ability to pay. Some said they were entering only short-term deals with the Houston-based firm.

"I've been watching the Enron board all morning and it hardly lit up at all," said one trader in the U.S. Northeast. The board lights up each time a transaction is made for delivery to a particular point.

"Our people are definitely looking at our dealings with Enron after the downgrade ... We need to make sure our bills will be paid," one Texas-based spot trader said.

Some 90 percent of Enron's revenues, which totaled nearly $140 billion in the first three quarters of 2001, come from trading energy. The company also trades a host of other commodities and has natural gas pipelines.

Rating agency Moody's said it cut Enron's senior unsecured debt rating to "Baa3," its lowest investment grade. Competitor Fitch cut the debt to an equivalent level on Monday.

Moody's said a "substantial loss of investor confidence" had reduced Enron's financial flexibility. It said the company had drawn down bank credit lines, faced looming debt payments and may have increased margin requirements from nervous trading partners.

Whether Enron could maintain even the lowest investment grade status was questionable, Moody's said.

With pressure building for it to do something before running out of cash, Enron entered into talks with Dynegy, (DYN.N), a much smaller utility holding company, to sell the company at what analysts have described as a fire-sale price. Just a year ago, Enron's market value was around $80 billion.

The two were said to be nearing a deal in which Dynegy would give Enron shareholders 0.27 of a share for each Enron share, the Wall Street Journal reported in its online edition.

Dynegy stakeholder and major oil producer ChevronTexaco Corp. (NYSE: CVX - news) also would chip in $1.5 billion immediately and another $1 billion at closing, people close to the matter have said.

They also said Dynegy wants to know before proceeding if an Enron acquisition would cause its own debt to be downgraded.

The two companies confirmed the talks on Thursday and said they would not comment further until they were done.

Enron's stock, which has fallen from a year-high of $84, closed up 22 cents to $8.63 in Friday trade. Dynegy shares closed up $2.26 to $38.76 after trading as high as $40.50 earlier.

Enron, once exalted by Wall Street as a money-making paragon of the new economy, has come apart at the seams following disclosures of off-balance-sheet deals now under investigation by the U.S. Securities and Exchange Commission ( news - web sites) for possible conflicts of interest.

The deals contributed to a $1 billion third-quarter charge and $1.2 billion reduction in shareholders' equity that angered Wall Street and prompted calls for an explanation.

On Thursday, Enron restated its earnings and debt levels for the past four years as it put some of the murky transactions back on its financial statement.

It trimmed earnings by $591 million, or 22 percent, from 1997 to 2000, and increased its debt by $628 million, or 6 percent, in a bookkeeping revision aimed at calming the firestorm that has engulfed the company in recent weeks.

The company, in a filing with the SEC, also pointed the finger at some of those involved in the deals.

It said former Chief Financial Officer Andrew Fastow, who abruptly left the company last month, had made $30 million managing limited partnerships that conducted outside transactions with Enron.

Also, it disclosed that two executives -- Managing Director and Treasurer Ben Glisan and Enron division general counsel Kristina Mordaunt -- were both believed to have stakes in the Fastow-led partnerships and had been fired.

They were the latest in a growing line of executives to leave Enron in recent months. In August, Chief Executive Jeff Skilling resigned after just six months on the job, citing personal reasons.