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catching up -- derivatives ...
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Enron's Growing
Financial Crisis Raises Doubts About Merger Deal
November 21, 2001
By RICHARD A. OPPEL Jr.
Shares of Enron (news/quote)
plunged 23 percent yesterday
as expectations grew in the stock and bond
markets that
Dynegy (news/quote) would either back out of its deal
to
rescue the company or seek to renegotiate terms of their
merger.
Wall Street analysts said top officials of both companies
had not
known until the last few days that a recent
downgrading of Enron's credit
meant that it would face a
$690 million loan payment next week unless it
could come up
with collateral. Enron's disclosure of the obligation
late
on Monday - along with new numbers about the extent of its
cash
squeeze - raised fresh doubts among investors about
Enron's financial
controls and credibility, they said.
Other trading companies, worried
about being paid as
Enron's financial picture has darkened, continued
yesterday
to limit their exposure to the company, which has been
the
nation's biggest energy trader. Analysts also expressed
concern about
the rate at which Enron appeared to be
burning through cash.
Yesterday evening, Karen Denne, a spokeswoman for Enron,
which is
based in Houston, said the company had obtained
"verbal indications" from
lenders that they would extend
the time Enron had to repay the $690 million
debt. Details
of the extension - including how long it would last -
were
still being worked out, she said. The payment had been due
next
Tuesday.
An executive close to the talks said that bankers could
"see
a light at the end of the tunnel" for Enron, in the
form of the deal with
Dynegy, and so had an incentive to
roll over the loan.
Dynegy, also
based in Houston, declined to comment about
details of Enron's disclosures,
which came in a delayed
report by the company - a so-called 10Q filing with
the
Securities and Exchange Commission - of its third-quarter
results.
Just a week ago, Dynegy's chief executive, Chuck Watson,
reassured
investors that Enron's business was strong and
that a $1.5 billion cash
infusion by ChevronTexaco,
Dynegy's biggest investor, would calm the market's
jitters.
Dynegy was less impassioned yesterday. A spokesman,
John
Sousa, said that "to the best of my knowledge, there have
been no
changes" in the merger plans.
He added, "We are in due diligence, and
the 10Q is an
important part of due diligence," he said. Due
diligence
refers to a company's thorough review of the financial
and
commercial soundness of a pending deal.
The merger deal,
announced on Nov. 9, allows Dynegy to back
out of the transaction should
there be a "material adverse
change" in circumstances.
Enron shares
fell $2.07, to $6.99, in trading yesterday;
Dynegy shares fell 4.4 percent,
or $1.90, to $41.70.
Those stock prices suggest widespread investor
skepticism
that the deal will go through under the current terms,
which
call for each Enron share to be exchanged for 0.2685
share of Dynegy. At
yesterday's prices, Dynegy would be
paying a 60 percent premium for Enron.
A year ago, Enron's stock market valuation topped $60
billion, and
the company was considered the smartest and
most fearsome company in the
electricity and natural gas
industries. Its chief executive, Kenneth L. Lay,
was a key
backer and confidante of President George W. Bush; its name
was
hoisted above Houston's new baseball stadium, Enron
Field.
But
Enron's shares have slid 92 percent from their peak,
dropping its valuation
to $5.2 billion, with a series of
unwelcome disclosures in the last month -
including the
admission that it has overstated profits by almost
$600
million since 1997.
Now, some analysts and executives at rival
energy trading
companies say Enron faces collapse if the merger
with
Dynegy, a much smaller company, falls apart.
"If Enron is out
there standing on its own, I don't think
that's sustainable," said a senior
executive of one of
Enron's largest energy-trading competitors.
Besides Dynegy's continued commitment to the merger,
analysts and
industry executives said the most crucial
issue for Enron was restoring the
confidence of investors
and trading partners in its financial health.
The restatement of earnings two weeks ago and other
disclosures about
complex dealings with partnerships, some
of them run by Enron's former chief
financial officer, had
prompted the major credit-rating agencies to rate
Enron's
bond's at the lowest investment-grade level.
"If the rating
agencies take them below investment grade,
they can't do business anymore,"
the rival executive said
yesterday. "That's become almost conventional
wisdom."
Another downgrade could force Enron to pay or refinance up
to
$3.9 billion in debt, and it could prompt other energy
traders to halt
dealings with the company entirely.
In fact, Standard & Poor's, one
of the major credit-rating
agencies, gave Enron something of a vote of
confidence
yesterday. While it will continue to review the company for
a
potential downgrade, S.& P. said, it expects Enron's
near-term financial
health "to be sufficient to carry the
company through the completion of its
proposed merger with
Dynegy."
S.& P. noted that Enron was
continuing to negotiate with
major banks and other institutions for an
infusion of $500
million or more in new equity and that Enron
executives
still believed that the company would complete the sale of
$800
million in assets by the end of the year, raising
badly needed cash.
Major energy trading companies continued to limit their
exposure to
Enron and carefully watch the company's
financial condition. Officials at the
El Paso Corporation
(news/quote) and Reliant Energy (news/quote), two
large
energy traders in Houston, said yesterday that they
continued to do
business with Enron.
But others have pulled back. Mirant (news/quote), a
large
electricity generator and trader in Atlanta, is "trading on
a very
limited basis, and we don't expect to broaden that
until Enron's credit
situation improves," a spokesman said.
Executives at two other
companies that rank among the
nation's largest traders but who spoke on
condition their
companies not be identified, also said they had scaled
back
trading. One of those companies was selling natural gas
and
electricity to Enron only in cases in which the sales
helped balance
its account with Enron, an executive said.
"We're trying to do business
that offsets our risk," the
executive said.
Ms. Denne, the Enron
spokeswoman, said the company's
"transaction volume remains within the normal
range,"
adding that there was "no recognizable change" yesterday in
the
number of companies willing to trade with Enron.
"No one significant has
dropped off," she said.
Analysts
said Enron's disclosures late on
Monday indicated that the
company was using up cash more rapidly than had
previously
been thought. Most of the $5.5 billion that the company
has
taken in through equity infusions and borrowings the last
month has
already been depleted.
"The cash burn is greater than anticipated," said
Carol
Coale, an analyst with Prudential Securities in Houston.
"They are
in obvious need of cash." She estimated that by
next summer, Enron could be
$2 billion short of the cash it
would need to meet its obligations.
Ms. Coale noted that the $690 million obligation whose
disclosure
shook the markets yesterday was set off by a
credit downgrade on Nov. 12 -
two days before a conference
call with investors. When she asked an Enron
official
yesterday why the matter was not disclosed in the call, Ms.
Coale
said, she was told, "We weren't aware of that
contingency at the time of that
call."
Donato J. Eassey, an analyst in Houston with Merrill
Lynch
(news/quote), said in a report that Dynegy, too, was
unaware of the
obligation. He calculated that Enron had
exhausted about $5 billion in cash
the last 50 days.
Ms. Denne, the Enron spokeswoman, said that the
company had
paid off $1.9 billion in short-term i.o.u.'s, used more
than
$1 billion to post deposits with its trading partners
and spent $800 million
to $1 billion to pay off or
refinance other loans.
The company has
about $1.2 billion in cash, she said, not
including $450 million from a new
line of credit that
closed this week and a separate credit line with
$103
million remaining.
Jitters about Enron's future extended to the
debt market,
where prices for the company's bonds fell sharply
yesterday.
Enron's short- term bonds fell 5 points, to
about 80 cents for each dollar of
face value, according to
traders in distressed securities. Its longer-term
debt,
maturing in 2004 or later, dropped 10 points, to around 60
cents on
the dollar. Enron's bank debt has not traded
recently, these traders said.
http://www.nytimes.com/2001/11/21/business/21ENRO.html?ex=1007365381&ei=1&en=95ec2936e363ae2f
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