Merger News Articles A full list of news articles will be distributed on Monday, but here is some of the initial coverage.


Business/Financial Desk; Section A
Rival to Buy Enron, Top Energy Trader, After Financial Fall
By ALEX BERENSON and ANDREW ROSS SORKIN

11/10/2001
The New York Times 
Page 1, Column 2
c. 2001 New York Times Company 

With its stock plunging and its finances in doubt, the world's largest energy trader, the Enron Corporation, agreed to be acquired yesterday by the rival Dynegy Inc. for about $9 billion in stock and the assumption of $13 billion in debt. 

The deal is an extraordinary turnabout for Enron, a Houston-based company that had been a driving force behind electricity deregulation nationwide.

Its chairman, Kenneth L. Lay, a big contributor to the Republican Party, provided political influence, while its former chief executive, Jeffrey K. Skilling, helped create markets for the trading of electricity and natural gas. But last winter, when California's effort to deregulate the electricity market led to soaring power prices and rolling blackouts, Enron was the subject of much criticism and political anger. 

Recent disclosures of discrepancies in Enron's financial statements and an investigation by the Securities and Exchange Commission caused the shares to plunge this week to their lowest level in a decade. As other companies became wary of doing business with it, Enron -- also facing a potential cash squeeze -- apparently had little choice but to find a buyer, and a deal was hastily cobbled together this week. 

For critics who had complained about Enron's market power and its dominance, the combination poses additional concerns. Dynegy's acquisition of Enron will be reviewed by state and federal agencies, led by the Justice Department and the Federal Energy Regulatory Commission. Analysts said today that they expected scrutiny of the combined companies' holdings in California, where Dynegy owns power-generating plants and Enron accounts for much of the trading of natural gas -- fuel for the state's electric power plants. 

Buying Enron at a deep discount -- it has lost $60 billion in market value this year -- could make Dynegy the dominant trader of electricity and natural gas. But the agreement carries big risks as well. Along with Enron's gas pipelines and high-technology trading floor, Dynegy will take on Enron's substantial debt and a web of complex transactions that Enron has spun over the last decade. 

In addition to the $13 billion in debt that Enron carries on its books, it has guaranteed at least $4 billion in off-balance sheet loans, and the hidden debt could total as much as $10 billion, said Carol Coale, a stock analyst with Prudential Securities. 

Charles L. Watson, Dynegy's chairman and chief executive, said yesterday that Dynegy could sort through Enron's tangled finances. ''We know the company well,'' Mr. Watson said. ''It's not like we just started fresh. I'm confident that it's as solid as we thought it was.'' 

The new company will combine Enron's 25,000-mile natural gas pipeline system with the large number of power plants that Dynegy owns worldwide, as well as Illinois Power, a Dynegy subsidiary that serves 650,000 customers in Illinois. But its most important asset will be its trading desk. It will be the largest energy trader in the nation, trading more than twice as much power and natural gas as its closest competitors. 

Mr. Watson said the company did not expect to sell significant properties and that the deal should pass regulatory scrutiny. ''There's really not a lot of overlap in assets,'' he said. 

Mr. Watson and Steve Bergstrom, Dynegy's president, will hold those positions in the new company, which will be called Dynegy and remain in Houston. Mr. Lay, who created Enron in the mid-1980's, will not have any role in the combined company's daily operations. He has been asked to join its board but has not provided an answer. ''The last three weeks haven't been a lot of fun,'' he said. 

In a statement announcing the agreement yesterday afternoon, Mr. Watson said he was confident that the merger would produce a strong new company. ''Enron is the ideal strategic partner for Dynegy,'' Mr. Watson said. ''We will keep a strong balance sheet and straightforward financial structure as key priorities.'' 

To shore up Enron's finances, Dynegy will immediately put $1.5 billion into Enron through ChevronTexaco, the giant oil company, which already owns 27 percent of Dynegy. Another billion dollars will be injected once the deal is completed. 

Investors appeared comfortable yesterday that Dynegy could make the deal work. After falling $3, to $33, on Wednesday, when the companies first said they were in discussions, Dynegy rose $5.76 on Thursday and yesterday to close the week at $38.76. 

''On paper, it works,'' Ms. Coale of Prudential said. ''The combined company would be the leading trader, the market leader in most of their businesses.'' Ms. Coale, who has a sell rating on Enron and a buy rating on Dynegy, said she planned to keep her buy rating on Dynegy. 

As it works to have the deal approved, Dynegy will have to persuade Enron's traders to stay with the combined company. The pain of the stock's 90 percent plunge this year will not be equally shared. Some Enron employees have held onto their shares and seen their retirement accounts eviscerated. Meanwhile, Mr. Lay, Mr. Skilling and other former and current executives sold hundreds of millions of dollars in Enron stock in 2000 and this year. 

The companies also have very different corporate cultures. Dynegy emphasizes teamwork, while Enron is more competitive, said Ehud Ronn, director of the Center for Energy Finance Education and Research at the University of Texas. Even before the merger was announced, Enron had lost some of its employees to other energy trading companies, Mr. Ronn said. 

Some investors and analysts say that the problems with Enron's finances may extend beyond the partnerships that have been the subject of Wall Street's scrutiny the last month. James Chanos, a short-seller who has been one of Enron's most vocal critics, said there was increasing evidence that Enron's energy trading operations were not as profitable as the company had said. ''There appears to be a culture at Enron of aggressively booking profits and deferring or obscuring losses,'' Mr. Chanos said. 

On Thursday, Enron said in a filing with the S.E.C that it had overstated its earnings by almost $600 million over the last five years. Mr. Chanos said more restatements were possible, noting that the filing disclosed partnerships had been used to hedge almost $1 billion in losses in 2000 and this year. So far, the losses from those partnerships remain off Enron's financial statements, Mr. Chanos said. 

Enron's stock had been under pressure for most of this year, as the company ran up large losses with failed efforts to expand outside its core trading operation. In August, Mr. Skilling resigned as chief executive, and Mr. Lay resumed control of daily operations. 

Still, the company appeared financially sound until last month, when it disclosed that its shareholders' equity, a measure of the company's value, dropped by $1.2 billion because of deals disclosed only hazily in its financial statements. The announcement unnerved investors, who wondered whether Enron had found ways to inflate its profits and move debt off its balance sheet, and led the S.E.C. to begin an investigation. 

Mr. Lay tried to reassure investors that Enron's finances were in order and that its businesses remained strong. But the last three weeks have brought a series of damaging revelations about partnerships that Enron formed with some of its top executives, including its former chief financial officer, Andrew S. Fastow. 

With questions mounting, the major credit-rating agencies began to downgrade Enron's debt, putting additional pressure on the company. If Enron's debt rating falls below investment grade, it would be forced to repay $3.3 billion in loans that it had guaranteed. 

To strengthen its balance sheet and bolster its stock, Enron turned to big investors like Warren E. Buffett in search of billions of dollars of financing. When the financing did not quickly appear, its stock fell further. 

By this week, some major energy traders were refusing to extend credit to Enron, worrying that the company would be unable to make good on its contracts. The Mirant Corporation, an Atlanta-based power plant owner and electricity trader, sharply curtailed its trading with Enron this week. ''We're trading with them on a very limited basis,'' said James Peters, a Mirant spokesman. ''It's not business as usual.'' 

On Wednesday, Enron's stock fell as low as $7 a share, its lowest level in more than a decade. That day, news of the Enron and Dynegy talks leaked out. 

By late Wednesday, the boards of the two companies had tentatively agreed to a deal. But Dynegy refused to go ahead until it learned whether Enron's credit rating would remain investment grade and was comfortable with the effect of the deal on its own rating. The deal moved forward yesterday after Dynegy was assured Enron's debt was not in danger of being lowered to junk status soon after the deal was announced, according to company officials. 

Dynegy and Enron had provided Standard & Poor's and Moody's Investors Service, the main credit agencies, with statements showing them what a combined company might look like and asked the ratings agencies for an expedited review of the transaction, Mr. Watson said. 

Under the deal, Enron shareholders will receive 0.2685 share of Dynegy stock for each Enron share, or $9.80 based on Dynegy's closing price on Thursday. Enron's stock gained 22 cents yesterday, to $8.63. 

''I never thought our stock price would be at this level,'' Mr. Lay said yesterday. 

Enron's shareholders will own only 36 percent of the combined company, and Dynegy will name at least 11 members of the company's 14-member board. 

If the deal falls apart, Enron or Dynegy will have to pay a breakup fee of $350 million. 

To protect Dynegy's and ChevronTexaco's cash infusion, the money will go to an Enron unit that owns the Northern Natural Gas Pipeline. If the merger is not completed, Dynegy will have the right to buy the unit. 

An army of bankers and lawyers advised the companies. Lehman Brothers Inc. acted as financial adviser and Baker Botts and Akin, Gump, Strauss, Hauer & Feld acted as counsel for Dynegy. J. P. Morgan & Company and Salomon Smith Barney acted as financial advisers for Enron, and Vinson & Elkins and Weil Gotshal & Manges acted as the company's counsel. Pillsbury Winthrop served as counsel to ChevronTexaco.

Chart: ''A Marriage of Strength and Weakness'' A merger of Enron and Dynegy would bring together two of the country's biggest energy companies -- and save Enron from potential collapse. Graph tracks the weekly closes of Enron shares from 1999 through 2001. Top North American gas marketers SALES, OF BILLION CUBIC FEET PER DAY* Enron: 24.6 Reliant: 13.2 Duke Energy: 12.8 BP: 12.3 Mirant: 11.8 Dynegy: 10.9 Top North American power marketers SALES, OF MILLION MEGAWATT HOURS* Enron: 212.5 American Electric Power: 134.5 Duke Energy: 118.1 Reliant Resources: 86.1 PG&E National Energy Group: 73.2 Dynegy: 70.1 *Figures are for the 2nd quarter of 2001. (Sources: Bloomberg Financial Markets; Simmons & Co.; Natural Gas Week)(pg. C2)

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Dynegy, Enron Merger Deal Worth Almost $25 Billion
Melita Marie Garza

11/10/2001
KRTBN Knight-Ridder Tribune Business News: Chicago Tribune - Illinois 
Copyright (C) 2001 KRTBN Knight Ridder Tribune Business News; Source: World Reporter (TM) 

Enron Corp., the nation's biggest power trader, was taken over by its smaller, more conservative rival, Dynegy Inc. in a merger deal valued at nearly $25 billion, company officials announced Friday. 

The combined company will be called Dynegy Inc. and will be headed by Chuck Watson, Dynegy's chairman and chief executive. If it wins regulatory and shareholder approval, the deal would propel Dynegy, the sixth-largest U.S. power trader, to the No. 1 position, with more than 30 percent of the market.

The Houston-based competitors are new-breed energy companies, formed to capitalize on wholesale power marketing and trading, with Dynegy emphasizing its own power generation capabilities. 

Enron, meanwhile, has been laid low in recent weeks by soured transactions with energy partnerships run by one of its former executives and by a series of revelations about questionable accounting practices. Enron this week was forced to restate its earnings over the past five years -- revising them downward by 20 percent, or $586 million -- and has seen its stock price plunge more than 80 percent in the past three weeks. 

Both Enron and Dynegy have extensive business dealings in Illinois, one of the first states to begin deregulating its electric power industry; among other things, Dynegy owns Illinois Power, a Downstate utility. 

The new Dynegy would become one of the largest companies in the world, with revenues exceeding $200 billion and assets of roughly $90 billion, company officials said. By comparison, ExxonMobil, the nation's largest company, reported revenues of $232.7 billion in 2000. 

"We needed to do something to strengthen our balance sheet and get the investor community focused on the core energy business," said Kenneth Lay, Enron's chairman and chief executive. "We looked at several alternatives; this was in the best interests of our employees and shareholders." 

Lay said he would not have a role in running the new company, but was considering a request to serve on the newly combined board. 

Watson, Dynegy's chairman, said the merger compact included escape clauses for Dynegy. "But, I wouldn't be standing here if I expected to see that (used). I really believe the value degradation in Enron had nothing to do with their core business. We looked under the hood, it is just as strong as we thought it was." 

Still, Watson acknowledged the possibility that more problems may surface at Enron. "I don't think anybody can absolutely unequivocally say there's nothing (more) there," he said. 

Dynegy's stock price closed higher Friday, rising $2.26, or 6.2 percent, to $38.76. Enron's stock was down 33 cents, or 3.7 percent, at $8.63 a share. 

Together, the companies have natural gas sales of about 40 billion cubic feet per day through the third quarter of 2001 and power sales exceeding 500 million megawatt hours through the third quarter of 2001. In addition, the new Dynegy's delivery network will include more than 22,000 megawatts of generating capacity and 25,000 miles of interstate pipelines. In Enron, Dynegy is taking on a company saddled with a heavy debt load and a credit rating that has been downgraded to near junk bond status and is under the cloud of a Securities and Exchange Commission investigation. 

Under the stock for stock swap portion of the deal, valued at $8.846 billion, Dynegy is paying about $10.41 a share for the 850 million outstanding Enron shares. Dynegy would pay .2685 shares of its stock for each share of Enron. 

In addition, Dynegy agreed to provide $1.5 billion infusion in cash to help stabilize its much larger competitor and assume an estimated $15 billion in debt. 

Just Thursday Enron reported that its debt was an estimated $12.9 billion pending completion of financial statements dated Sept. 30. A day later the company's accounting of its debt jumped $2 billion. 

Dynegy's current shareholders, including Chevron Texaco Corp., will end up owning 64 percent of the new company. Chevron Texaco said it would invest an additional $2.5 billion in Dynegy. 

Enron's stockholders will own about 36 percent of the combined company's stock at closing, which is anticipated for the third quarter of 2002. 

In Illinois, in addition to Illinois Power, Dynegy owns a Chicago area electricity peaker plant and is a partner with Nicor Inc., in Nicor Energy, an unregulated natural gas utility in the Chicago area. 

Enron's subsidiary, Enron Energy Services, has a high-profile contract to provide 60 percent of Chicago city government's electricity. It also has contracts to provide electricity to Quaker Oats Co. and the University of Chicago, among others. 

In addition to Watson, other top Dynegy management will remain in place in the new company. Steve Bergstrom, president of Dynegy Inc., and Rob Doty, chief financial officer of Dynegy Inc., will retain those positions in the combined company. Enron's current president and chief operating officer, Greg Whalley, will become an executive vice president of the new Dynegy. The board of directors of the combined company will be comprised of 14 members. Dynegy's 11 designees will include three from ChevronTexaco. Enron will have the right to designate a minimum of three board members.

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Business/Financial Desk; Section C
Regulators Struggle With a Marketplace Created by Enron
By JEFF GERTH with RICHARD A. OPPEL Jr.

11/10/2001
The New York Times 
Page 1, Column 2
c. 2001 New York Times Company 

WASHINGTON, Nov. 9 -- For years, the Enron Corporation used its political muscle to build the markets in which it thrived, pushing relentlessly on Capitol Hill and in bureaucratic backwaters to deregulate the nation's natural gas and electricity businesses. 

Its achievement, as one Enron executive said today, in creating a ''regulatory black hole'' fit nicely with what he called the company's ''core management philosophy, which was to be the first mover into a market and to make money in the initial chaos and lack of transparency.''

Now, Wall Street's dissatisfaction with Enron's secretive ways has delivered the company into the arms of its much smaller Houston rival, Dynegy Inc., in a deal worth about $9 billion in stock and the assumption of $13 billion in debt. The combination of the two companies, energy experts and lawmakers said today, poses a novel set of challenges for regulators still struggling to grasp the complexities of the marketplace that Enron invented. 

''We're in a supersonic-speed era of electronic trading with a horse-and-buggy-era regulatory system to protect consumers,'' said Representative Edward J. Markey, a Massachusetts Democrat who has devised legislation to close the regulatory gap. 

Dynegy's acquisition of Enron is expected to be reviewed by numerous state and federal agencies, led by the Justice Department, the Federal Trade Commission and the Federal Energy Regulatory Commission. 

Analysts said today that sharp scrutiny would be given to the combined companies' holdings in California, where Dynegy owns generating plants and Enron controls a large part of the market for trading natural gas -- the fuel for a big share of the state's electric power plants. 

''Dynegy would now have a greater ability to take the dominant position in gas and raise the price of electricity,'' said Frank Wolak, a professor of economics at Stanford University. 

Mr. Wolak, a consultant to the Justice Department on a 1999 antitrust case that led to limits on another merger of electricity and natural gas companies in Southern California, said he was skeptical that regulators were up to the task of reviewing today's deal. 

The transaction ''is something the Department of Justice needs to look at, and they are going to have a hard time looking at,'' Mr. Wolak said. ''And it's beyond the ability of the F.E.R.C. to look at.'' 

Pat Wood -- named chairman of the federal energy commission earlier this year with the backing of Kenneth L. Lay, the chairman of Enron -- acknowledged in an interview today that the agency had ''a long way to go'' in matching the sophistication of the companies it regulates. 

But he said that the commission had made great strides in grappling with the new risk management techniques pioneered by Enron, Dynegy and other energy companies. It is hiring more experts, he said, adopting more restrictive rules on how much ''market power'' one party can control and requiring more disclosure of certain energy transactions. 

In an interview this evening, Charles L. Watson, the chairman of Dynegy, said he did not believe that regulators reviewing the deal with Enron would require the sale of any assets. ''We haven't really identified any pitfalls that require any sort of asset divestiture,'' he said. ''There's not really any overlap.'' 

A senior executive at one of Enron's largest energy-trading rivals disagreed. ''I don't think this deal gets through unscathed,'' he said today. ''I'm sure the Justice Department and the F.T.C. will look closely at the pretty substantial concentration of market power these companies will have in the energy-trading area.'' 

Enron is mainly a trader of natural gas and electricity -- indeed, the biggest player in both those markets -- and it also owns a network of gas pipelines. Dynegy processes and sells natural gas and generates and sells electricity. Each company owns a local electric utility, too: Dynegy owns Illinois Power in Decatur, Ill., while Enron owns Portland General Electric in Portland, Ore., but last month announced plans to sell it to another Oregon utility. 

For a decade, as it transformed itself from a gas pipeline operator into the nation's biggest energy trader, Enron enjoyed unalloyed lobbying success in Washington and the enthusiastic backing of Wall Street. 

In the early months of the Bush administration, Mr. Lay -- whose company was one of the biggest financial backers of George W. Bush's presidential campaign -- played a prominent, and some said unusual, role in helping the White House pick nominees to the federal energy commission. Enron executives met with Vice President Dick Cheney, whose energy task force backed many of the deregulatory initiatives pushed by Mr. Lay. 

Now, ''the company has become a pariah,'' an Enron executive said today. ''The Bush administration doesn't want to have anything to do with us.'' 

The problems began with the energy crisis in California, where Enron's outspoken defense of deregulation, even more than its electricity trading activities, made the company a favorite whipping boy of politicians and consumer advocates. In the financial markets, meanwhile, Enron's confusing disclosures, tolerated when its stock was soaring, drew disdain as the calming of the energy storms in California and other parts of the country beat the shares down, starting last spring. 

''Enron fell victim to their own inconsistencies on transparency,'' Mr. Wolak said. As California officials sought to understand why energy prices had soared out of control, he said, Enron's ''view was that we want everybody's data, but if you want ours, get a subpoena.'' 

Energy executives and regulators said that sort of arrogance had long marked Enron's attitude about government oversight. 

Electricity sales had for decades been the job of local utility companies, operating as monopolies and selling power at regulated rates within their service areas. A few entrepreneurs, led by Mr. Lay, conceived a different model in which power could be sold by generators or middlemen to big corporate users or utilities in faraway regions, at whatever price the market would bear. 

In the early 1990's, Congress -- under heavy lobbying by Enron -- passed legislation that began to open up electricity sales to marketers. Before long, Enron became one of the first companies to receive government approval to sell electricity at market rates. The market for interstate sales of natural gas had been freed up a few years earlier, and critics complained that traders like Enron were gleaning their profits by stoking volatility in gas prices. 

In the mid-1990's, independent gas producers backed legislation in Congress to allow the creation of a co-operative marketing organization, which, they hoped, would have helped stabilize prices. 

Raymond Plank, the chairman of the Apache Corporation, a gas producer based in Houston, said that the big gas marketing and trading companies, including Enron, successfully lobbied to kill the plan, leaving prices as volatile as ever. 

''It was a great concept,'' Mr. Plank said. ''We could have headed off the problems we have today.'' 

Enron's final lobbying success came last year. With a strong push from the company's lobbyists, Congress passed futures trading legislation that exempted Internet energy trading platforms like EnronOnline, the industry leader, from oversight by the Commodity Futures Trading Commission. Enron takes the other side of trades on its exchange. In traditional markets like the New York Mercantile Exchange, which remain subject to oversight, the exchange acts as a middleman between buyers and sellers. 

Under Mr. Watson, Dynegy has been less of a pathbreaker than Enron, and though California politicians denounced it, too, as a profiteer during the energy crisis, most analysts say it has been less aggressive than Enron in both its business practices and its lobbying. 

Indeed, the rival energy-trading executive today predicted ''a huge culture clash'' as the Houston neighbors merge. ''Blood will flow in Houston over the integration of the trading operation,'' he said. 

But regulators may find Dynegy easier to deal with. 

Earlier this year, the federal energy commission asked for comments on whether it should tighten scrutiny of dealings between natural gas pipelines and energy-trading shops owned by the same company. 

Enron wondered what all the bother was. ''Would stricter rules prevent real affiliate abuse that current rules do not,'' it wrote in a regulatory filing, ''or would they instead merely restrict the activities of some of the more successful participants in the marketplace?'' 

Dynegy, by contrast, painted a grim picture and invited regulators to crack down. ''Abuses abound,'' it said, ''because of financial windfalls, difficulty of detection, lengthy investigations and increased complexity of the market.''

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Report on Business: Canadian
Dynegy to buy troubled rival Enron
Reuter News Agency

11/10/2001
The Globe and Mail 
Metro
B4
"All material Copyright (c) Bell Globemedia Publishing Inc. and its licensors. All rights reserved." 

NEW YORK -- Energy provider Dynegy Inc. agreed yesterday to acquire fast-sinking rival Enron Corp. for $9.5-billion (U.S.), signalling the demise of a company that just months ago was one of Wall Street's highest fliers. 

Terms of the transaction call for Dynegy to swap 0.2685 shares of its own stock for each Enron share, the companies said. That would value Houston-based Enron at $10.41 a share, including convertible stock, a premium of 21 per cent over yesterday's closing price of $8.63.

ChevronTexaco Corp., which owns a 27-per-cent stake in Dynegy, has agreed to infuse $1.5-billion immediately into Enron to support it until the deal closes. "With its market-making capabilities, earnings power and proven strategic approach to wholesale markets, Enron is the ideal strategic partner," said Dynegy chairman and chief executive officer Chuck Watson. 

Enron, the United States' largest energy trader, has been struggling to overcome a plummeting stock price and credit rating in the past month following disclosures of deals being investigated by the U.S. Securities and Exchange Commission for possible conflict of interest.

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Financial Desk
The Nation Smaller Rival to Acquire Teetering Enron Power: Energy giant that pressed for deregulation in California is on the brink of collapse.
NANCY RIVERA BROOKS; THOMAS S. MULLIGAN; NANCY VOGEL
TIMES STAFF WRITERS

11/10/2001
Los Angeles Times 
Home Edition
A-1
Copyright 2001 / The Times Mirror Company 

Enron Corp., the once-highflying energy giant whose aggressive efforts to profit from California's energy deregulation made it a target of consumer and political backlash, on Friday agreed to be saved from possible financial collapse through a proposed acquisition by rival Dynegy Inc. 

The roughly $7.7-billion deal is a stunning plot twist for Houston-based Enron, which was vilified in California as it was being glorified on Wall Street. In only the last month, a series of disturbing financial revelations pushed to the edge of ruin this once-powerful company, whose top executives had lectured California on its energy foibles and who influenced the direction of national energy policy.

Enron muscled its way to the top of the energy heap using aggressive and, in the end, financially suspect strategies that proved its undoing. 

Now, the company that late last year had a market value of $63 billion is worth one-tenth that and has agreed to be swallowed by a cross-town competitor one-quarter its size. Enron's proud and influential chairman and chief executive, Kenneth L. Lay, who became a focus of bitter attacks by California politicians and regulators, would lose his job, as would many others at Enron. 

Even the name would disappear. The combined company would be called Dynegy Inc. if the deal receives all the necessary regulatory and shareholder approvals. 

California officials took no joy in Enron's fate Friday, though there was perhaps some sense of retribution from its many critics in the state. 

"This is basically a rogue corporation," said Sen. Steve Peace (D-El Cajon), an outspoken critic of Enron for years who dealt with the company as he chaired the committee that hammered out the legislative portion of California's landmark electricity deregulation plan in 1996. "It has from the beginning been a rogue corporation which answered in its mind to a higher law--a fundamental belief that there are laws of economics that supersede the law of the land." 

A Failed Experiment 

Steve Maviglio, spokesman for Gov. Gray Davis, said that although Enron was never a major force in California's doomed electricity market, it was outspoken in support of deregulation. 

"In a sense, their experiment was much like California's experiment--a failure," he said. 

Said Harvey Rosenfield, president of the Foundation for Taxpayer and Consumer Rights in Santa Monica: "Nothing could better illustrate the disaster of deregulation than the fact that one of its biggest proponents, which reaped the reward of deregulation, is suffering the consequences." 

Enron is the world's largest energy trader, handling one of four energy deals in the United States through its online trading operation, EnronOnline. Since it reported a surprising third-quarter loss on Oct. 16, partly tied to shadowy investment vehicles, Enron has endured a huge loss of investor confidence, which brought on a massive cash crunch and some shrinkage of its trading business. 

Under the deal announced Friday, Dynegy, invited in two weeks ago after Enron fell short in its efforts to line up new financing, would immediately help Enron by pouring $1.5 billion in cash into the company. The money would be provided by ChevronTexaco Corp., the San Francisco oil company that owns nearly 27% of Dynegy. 

Enron shareholders would get 0.2685 Dynegy share for each Enron share, which values the company at about $7.7 billion based on Friday's stock close. Dynegy shares surged $2.26 to close at $38.76 per share on the New York Stock Exchange; Enron added 22 cents to close at $8.63 per share, still off 89% year to date. 

If the deal closes in six to nine months, as the parties expect, Dynegy and ChevronTexaco would invest $1 billion additionally in the combined company. 

"This is just a financial bonanza really for both companies," said Charles L. Watson, Dynegy chairman and chief executive, who will head the combined company. Watson said the merger would immediately add to Dynegy's earnings. 

Even so, the repercussions of Enron's fall from grace could be far-reaching. Coming on the heels of California's energy crisis, Enron's troubles may slow the country's march toward energy deregulation, which Lay and Enron championed for years as a potential boon to consumers and the economy in general. 

But the deal announced Friday will prevent an even worse outcome, energy experts said: the threatened collapse of Enron, which would clog up for a time the business of buying and selling electricity, natural gas and oil. That could interfere with delivery of energy around the country, they said. 

"This is an encouraging development for the energy industry," said Stephen Baum, chairman of Sempra Energy, the San Diego-based parent of Southern California Gas and San Diego Gas & Electric. "The Enron-Dynegy combination will create a credit-worthy counter-party which will help preserve order in the marketplace. It also will reinforce confidence in the energy trading business going forward." 

But some in the industry are less pleased. 

Raymond Plank, chairman of Apache Corp., a Houston-based natural gas exploration and development firm, said he is considering a motion to the Federal Trade Commission against the proposed merger. 

"There are issues of concentration in a combination of the largest energy trader, Enron, and the fifth-largest, Dynegy," Plank said. "California should be particularly concerned because Dynegy owns power plants there and Enron has pipelines and other interests." 

Troubles Mount as Stock Plunges 

The swagger that was Enron is long gone. Consider: 

* Enron's brash chief executive, Jeffrey K. Skilling, touted only months ago as one of the young stars of American business, abruptly resigned in August, citing personal reasons. Enron's stock already had fallen from its high of nearly $90 per share as investments in water and telecommunications turned sour, a fact that contributed to Skilling's departure. 

* The Securities and Exchange Commission has launched an investigation of Enron's controversial dealings with a number of limited partnerships, some organized and run by Enron managers, including Enron Chief Financial Officer Andrew S. Fastow, who was ousted last month. 

* In an extraordinary confession Thursday, Enron announced that it had overstated profit by $586 million, or 20%, during the last five years. The earlier financial statements reported to Wall Street and the investing public, Enron said, "should not be relied upon." 

* The company also fired its treasurer and a corporate lawyer, both of whom it said were investors in one of the limited partnerships. Yet some analysts questioned whether, even in its admission of accounting trickery, Enron wasn't still holding something back. 

* Credit-rating agencies, which already have downgraded Enron's bonds to barely above "junk" status, continue to pore over Enron's books. Analysts have said a further downgrade to the level of junk, or below investment grade, could precipitate a crisis akin to a run on a bank and threaten Enron's survival while the merger is pending. 

With its stock crumbling and trading partners leery about its ability to pay its debts, Enron was forced to walk hat in hand down Houston's Energy Alley to negotiate a saving takeover by Dynegy, the rival once jokingly dismissed as "Enron Lite." 

In the trading markets where Enron still holds a leading but increasingly vulnerable position, other players already are stepping up to grab a bigger share of the business. Even if Enron's trading operation survives more or less intact, under the wing of a Dynegy or some other company, experts said it may never regain its former level of dominance. 

"Enron has been a very innovative shop, willing to spend considerably to establish new markets," said analyst Andre Meade of Commerzbank Securities in New York. "If that culture is not kept, everyone loses." 

Skilling and mentor Lay had worked for a decade to create both a new kind of company and a new set of markets for it to play. 

In large part, they succeeded. Enron transformed itself from a traditional gas pipeline company into a high-tech global trader of everything from electricity to pollution credits to aluminum. The company's overarching strategy was to pare its physical assets to the minimum to get the maximum profit bang from its intellectual capital: the ranks of MBAs and PhDs that filled its Houston trading floor. 

Rather than maintain its own expensive gas fields and power plants--which it relegated to stodgy utilities and oil companies--Enron would handle everything by contract, relying on a network of suppliers to obtain, store and deliver the goods while the company focused on squeezing out the best price. 

Dynegy, in contrast, has invested in such energy assets, including three power plants in Southern California. It uses those assets to back its trading operation, which is much smaller than Enron's. 

Enron pulled off a migration from the "dirty" extreme of the oil patch, the asset-intensive domain of drillers and explorers, to the "clean" end, where all the deals are done on a computer screen. It also was a migration from lower profit margins and lower risk to high margins and high risk. 

Shannon B. Burchett, chief executive of Risk Limited Corp., an energy-oriented strategic-management consultancy in Dallas, compared Enron to the investment bank Salomon Bros., where he used to work in the former PhiBro commodities unit. 

Enron, Burchett said, embodies "a Wall Street culture that happens to be in Houston." 

Wall Street certainly "got it," or thought it did. 

Accounting Rules Pushed to the Limit 

At Enron's zenith last year, when its stock peaked near $90 a share and it was pushing into esoteric markets for weather derivatives and fiber-optic bandwidth, Enron seemed to be a one-company wave of the future. 

Enron's aggressiveness, brainpower and willingness to back radical new ideas with serious capital helped it acquire an aura that in some ways was its undoing, analysts said. 

Investors accorded Enron's stock a price-to-earnings valuation that was consistently higher than those of its peers, reflecting the view that its cutting-edge business model could consistently deliver faster-growing profit than its competitors. 

To keep profits arcing ever upward to justify the outsize valuation, Enron began pushing the accounting rules as hard as it pushed competitors in the trading arena. It acknowledged as much in its statement Thursday, conceding that the operations of three of the limited partnerships should have been consolidated with Enron's own financial statements instead of being held separate. 

By raising capital and running deals through the limited partnerships, Enron could keep large amounts of debt and certain volatile assets off its own balance sheet, while simultaneously booking profit from the partnerships' transactions, analyst Meade said. 

Deals Backed by Costly Guarantees 

One risky aspect of some of Enron's deals through the partnerships was what Meade called a "double-trigger guarantee," under which Enron would pledge a cash payout if either its bond rating fell below investment grade or its stock declined below a certain price. 

The guarantees must have seemed a cheap way to sweeten a deal when Enron's stock was flying high, but they came back to haunt the company later, when it had to pay cash to make good on its obligations, Meade said. 

Other energy-trading companies use similar devices, but Enron carried it to an extreme and disclosed too little detail to make the process understandable to investors, he said. 

Enron's magic, like that of the Internet-stock phenomenon, had never been easy to understand in the first place. The company had a reputation among analysts for providing scanty financial detail and hard-to-grasp explanations of some of its dealings. 

But as long as the reported profit kept climbing, Enron kept getting the benefit of the doubt. 

M. Carol Coale, a respected Houston-based analyst for Prudential Securities, ruefully recalled a time last winter when she told Enron she could find "no positive catalyst for the stock" and was considering downgrading her investment opinion. 

Skilling telephoned Coale and asked her to hold off, promising her that there was unspecified good news on the horizon that would justify her faith. 

"I believed him," Coale said last week in an interview in Houston. She held her rating steady at that time but has since downgraded Enron to an outright "sell." 

Instead of Skilling's promised good news, questions mounted during the spring, and Enron's stock continued a steady decline. Coale and other analysts were troubled that a large proportion of Enron's earnings seemed to come not from its core trading operations but from unusual transactions involving the company's own stock or that of affiliates. 

In California, Enron played a key role as chief cheerleader for electricity deregulation and a key energy middleman in the state. As wholesale electricity prices soared and the state plunged into its energy crisis late last year, Enron and other out-of-state electricity generators and traders became favorite targets of California politicians and regulators, who said the companies were manipulating the market and charging too much for power. 

But significantly, California was not a directly successful territory for Enron. 

Markets in water did not develop as Enron subsidiary Azurix envisioned. And Enron's plans for selling electricity to retail customers were deferred even as deregulation took effect in 1998 because the state's deregulation formulas didn't allow room for retail competition. 

Lay complained about California frequently and met with the governor to try to influence the state's moves to repair its energy problems. In an interview in his Houston office in January--overlooking Enron's new headquarters building, which is still under construction as the company's name disappears--Lay said he and other Enron executives had objected to the way California regulation was set up. 

"We objected more vehemently than anyone. We opposed the concept of the pool," he said, referring to the now-defunct California Power Exchange, in which most of the state's power was bought and sold in an hourly market. "What competitive market in the world has a pool? We don't buy our groceries through a centralized PX." 

Enron also backed away from building a small power plant in California last year when the state imposed price caps. 

One of the loudest complaints by Davis and other California officials was that generators of electricity were playing "games" to get higher prices. 

They criticized Enron severely, too, even though it was not a major generator, because the level of its worldwide trading operations--buying and selling contracts worth billions of dollars in electric power every day--gave Enron immense sway over pricing and supplies of electricity. They also believe that Enron and Lay helped play a part in the reluctance of federal regulators for several months to place restraints on the California marketplace. 

CEO's Future Role Uncertain 

"Millions of people in California businesses lost money because this rogue company succeeded in controlling the government of the United States," said state Sen. Peace, one of the architects of the state's deregulation plan. 

"Ken Lay was a mystic," Peace said. "Whatever he said had to make sense because he was Ken Lay. It was hero worship. 

"Many of the people working as economists at the Federal Energy Regulatory Commission worshiped Ken Lay. As a consequence, the things Enron promoted and pushed for were never challenged, intellectually and otherwise." 

Lay, who has been asked to sit on the board of the combined company, said Friday that he had not yet decided whether to accept. 

He described his time building Enron as "a very long ride. It's been a very good ride for the most part. 

"I have to say the last few weeks have not been very much fun," he said. 

* 

Rivera Brooks reported from Los Angeles and Mulligan from Houston and New York. Times staff writer James Flanigan in Los Angeles contributed to this report. 

* 

RELATED STORY 

Fallen CEO: Enron's Lay is a brilliant man defeated by arrogance, associates say. A22 

RELATED STORY 

Energy crisis: Power firms have seen their fortunes dim in recent months. Sunday Business C1

PHOTO: Dynegy Chairman and Chief Executive Charles L. Watson, right, announces the merger, with Enron Chairman Kenneth L. Lay.; ; PHOTOGRAPHER: Associated Press; PHOTO: "This is just a financial bonanza really for both companies," says Charles L. Watson, Dynegy chairman and chief executive.; ; PHOTOGRAPHER: Associated Press

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Dynegy to buy Enron
Associated Press

11/10/2001
Deseret News 
D07
Copyright (c) 2001 Deseret News Publishing Co. 

HOUSTON -- Energy marketer Dynegy Inc. announced Friday that it will buy its much larger rival, the once mighty but now troubled Enron Corp., for $8 billion in stock. Dynegy also will assume a hefty $15 billion in Enron debt. 

The announcement came after Enron's stock price plummeted about 80 percent over the past three weeks because of concerns that the company wasn't revealing serious financial problems to shareholders.

Under the deal, ChevronTexaco Corp., which owns more than a quarter of Dynegy, would quickly provide about $1.5 billion. ChevronTexaco also would contribute an additional $1 billion upon completion of the deal, the companies said. 

"With its market-making capabilities, earnings power and proven strategic approach to wholesale markets, Enron is the ideal strategic partner for Dynegy," Dynegy chairman and chief executive officer Chuck Watson said in announcing the purchase. 

Watson made it clear that he would not tolerate the sort of financial practices that prompted explosive disclosures by Enron this week -- including an admission that more than half a billion dollars in debt had been kept off the company's books. 

"As a combined company, we will focus on leveraging our core skill sets and, as always, we will keep a strong balance sheet and straightforward financial structure as key priorities," Watson said. 

Enron is the country's top buyer and seller of natural gas, and the No. 1 wholesale power marketer. The company operates a 25,000-mile gas pipeline system, and also markets and trades metals, paper, coal, chemicals and fiber-optic bandwidth. 

Dynegy controls nearly 15,000 megawatts of power generating capacity through investments in power projects, and sells the energy in wholesale markets and through utilities. 

At a news conference, Watson said company officials who negotiated the deal came away convinced that Enron was worth buying despite its recent troubles. 

"We looked under the hood . . . it's just as strong as it ever was," Watson said. 

Under the terms of the deal, Enron shareholders will receive .2685 Dynegy share for each share of Enron common stock, valuing each Enron share at $10.41. Enron has about 775 million common shares, said spokeswoman Karen Denne. 

That represents a 21 percent premium above Enron's closing price of $8.63 Friday on the New York Stock Exchange -- but still just a fraction of their 52-week high of $84.87. Dynegy's shares climbed $2.26, or 6 percent, to close at $38.76 on the NYSE. 

In after hours trading on the NYSE, Enron shares shot up 15.6 percent, or $1.35, to $9.98. Dynegy shares were unchanged. 

Dynegy's stockholders will own approximately 64 percent of the new company, with Enron's stockholders holding the remainder. 

The boards of both companies have unanimously approved the transaction, which is expected to close next summer. The deal is expected to save the combined company between $400 million and $500 million annually because of continued elimination of "non-core" Enron holdings and lower operating costs. 

Watson will remain as chairman and chief executive of the combined company, which will retain the Dynegy Inc. name. Steve Bergstrom will remain as president of Dynegy. 

Enron chairman and chief executive Kenneth L. Lay will no longer have a role in day-to-day management of the company, but has been offered a seat on the combined company's board and will help shepherd the merger through. 

"I am personally committed to working with Chuck Watson, Steve Bergstrom and their colleagues in the months ahead to accomplish the merger and to build a solid foundation for future value creation," Lay said. 

Dynegy said that Greg Whalley, the current president and chief operating officer of Enron, will become an executive vice president of the new Dynegy. He said the merger sets the best course for Enron. 

"Few of the options we considered for our core business going forward provided us with the earning potential and immediate synergies that a merger with Dynegy could deliver," Whalley said. "Together with Enron's recently announced bank commitments, this cash infusion gives Enron immediate liquidity, which we believe will enable the company to maintain its investment grade credit rating." 

The merger was announced a day after Enron acknowledged it overstated earnings by about 20 percent over the past four years and kept large amounts of debt off its balance sheets through business partnerships now under investigation by the Securities and Exchange Commission. 

Analysts said the merger rescues Enron, but leaves Dynegy in uncharted territory -- with the outcome of the SEC investigation completely unknown. "There is still a shroud hanging over Enron that now moves over to Dynegy," said Carol Coale, an analyst with Prudential Securities.

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Business
Dynegy, Enron OK $25 billion deal ; New company would rank among largest
Melita Marie Garza, Tribune staff reporter

11/10/2001
Chicago Tribune 
North Final ; N
1
(Copyright 2001 by the Chicago Tribune) 

Enron Corp., the nation's biggest power trader, was taken over by its smaller, more conservative rival, Dynegy Inc., in a merger deal valued at nearly $25 billion, company officials announced Friday. 

The combined company would retain the Dynegy name and would be headed by Chuck Watson, Dynegy's chairman and chief executive. If it wins regulatory and shareholder approval, the deal would propel Dynegy, the sixth-largest U.S. power trader, to the No. 1 position, with more than 30 percent of the market.

The Houston-based rivals are new-breed energy companies, formed to capitalize on wholesale power marketing and trading, with Dynegy emphasizing its own power generation capabilities. 

Enron, meanwhile, has been laid low in recent weeks by soured transactions with energy partnerships run by one of its former executives and by a series of revelations about questionable accounting practices. Enron this week was forced to restate its earnings over the past five years--revising them downward by 20 percent, or $586 million --and has seen its stock price plunge more than 80 percent in the past three weeks. 

Both Enron and Dynegy have extensive business dealings in Illinois, one of the first states to begin deregulating its electric power industry; among other things, Dynegy owns Illinois Power, a downstate utility. 

The new Dynegy would be one of the largest companies in the world, with revenues exceeding $200 billion and assets of roughly $90 billion, company officials said. By comparison, ExxonMobil Corp., the nation's largest company, reported revenues of $232.7 billion in 2000. 

"We needed to do something to strengthen our balance sheet and get the investor community focused on the core energy business," said Kenneth Lay, Enron's chairman and CEO. "We looked at several alternatives; this was in the best interests of our employees and shareholders." 

Lay said he would not have a role in running the new company but was considering a request to serve on the newly combined board. 

Watson said the merger agreement included escape clauses for Dynegy, "but I wouldn't be standing here if I expected to see that [used]. I really believe the value degradation in Enron had nothing to do with their core business. We looked under the hood; it is just as strong as we thought it was." 

Still, Watson acknowledged the possibility that more problems may surface at Enron. "I don't think anybody can absolutely unequivocally say there's nothing [more] there," he said. 

Dynegy's stock price closed higher Friday, rising $2.26, or 6.2 percent, to $38.76. Enron's stock was up 22 cents, or 2.6 percent, at $8.63 a share. 

Through the third quarter of 2001, the companies together have natural gas sales of about 40 billion cubic feet per day and power sales exceeding 500 million megawatt hours. In addition, the new Dynegy's delivery network would include more than 22,000 megawatts of generating capacity and 25,000 miles of interstate pipelines. 

In Enron, Dynegy is taking on a company saddled with a heavy debt load, a credit rating that has been downgraded to near junk bond status and which is under the cloud of a Securities and Exchange Commission investigation. 

Big premium 

Under the stock-for-stock-swap portion of the deal, valued at $8.846 billion, Dynegy is paying the equivalent of $10.41 a share for the 850 million outstanding Enron shares, a 24 percent premium. Dynegy would pay .2685 shares of its stock for each share of Enron. 

In addition, Dynegy agreed to provide a $1.5 billion cash infusion to help stabilize its larger competitor and to assume an estimated $15 billion in debt. 

On Thursday Enron reported that its debt was an estimated $12.9 billion pending completion of financial statements dated Sept. 30. A day later the company's accounting of its debt jumped $2 billion. 

Dynegy's current shareholders, including Chevron Texaco Corp., will end up owning 64 percent of the new company. Chevron Texaco said it would invest an additional $2.5 billion in Dynegy. 

Enron's stockholders would own about 36 percent of the combined company's stock at closing, which is anticipated in the third quarter of 2002. 

Chicago-area operations 

In Illinois, in addition to Illinois Power, Dynegy owns a Chicago- area electricity peaker plant and is a partner with Nicor Inc. in Nicor Energy, an unregulated natural gas utility in the Chicago market. 

Enron's subsidiary, Enron Energy Services, has a high-profile contract to provide 60 percent of Chicago's city government's electricity. It also has contracts to provide power to Quaker Oats Co. and the University of Chicago, among others. 

In addition to Watson, other top Dynegy management would remain in place in the new company. President Steve Bergstrom and Rob Doty, chief financial officer, would retain those positions in the combined company. Enron's president and chief operating officer, Greg Whalley, would become an executive vice president. 

The board of directors of the combined company would have 14 members. Dynegy's 11 designees would include three from ChevronTexaco. Enron would have the right to designate a minimum of three board members.

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Financial
Enron Accepts $8 Billion Buyout Offer From Dynegy; Energy Giant Was Forced to Negotiating Table After Disclosing That It Had Overstated Earnings
Peter Behr
Washington Post Staff Writer

11/10/2001
The Washington Post 
FINAL
E01
Copyright 2001, The Washington Post Co. All Rights Reserved 

Embattled Enron Corp. yesterday accepted a buyout offer valued at about $8 billion from crosstown rival Dynegy Inc. If the deal is completed, it would end Houston-based Enron's reign as the leader in the huge energy trading markets that set the prices of power and natural gas in the nation. 

Its cash dwindling and its credit rating hammered, Enron was forced to the negotiating table after its recent disclosures that its obligations to a complex web of partnerships involving company officials had caused the trading powerhouse to overstate its earnings and obscure its total debt obligations. Four top Enron officials have resigned or been replaced since July and, once Dynegy takes control, Enron's chairman and chief executive, Kenneth Lay, will also leave the company. Lay said yesterday that he had not decided whether to accept Dynegy's offer to serve on the combined company's board.

"It's been a good ride for a long time," Lay said in a conference call last night. "The last three weeks haven't been a whole lot of fun." 

The final deal was announced after the close of stock trading. Enron's shares -- which had fallen from $33 to $8 after the disclosures -- ended the day slightly higher, at $8.63. Dynegy's stock closed at $38.76, up $2.26. 

Dynegy offered all stock for the Enron shares, so the total value of the deal will fluctuate with Dynegy's stock price. Dynegy also said it would assume about $13 billion in Enron debt, bringing the total value of the transaction to around $21 billion. 

Dynegy's rescue of Enron will begin with an immediate cash infusion of $1.5 billion, which will be supplied by ChevronTexaco Corp., a major Dynegy stockholder. ChevronTexaco will invest another $1 billion in Dynegy after the acquisition has passed regulatory review and is completed, which executives said they expect will take six to nine months as Enron tries to unscramble the complex partnerships that are now under investigation by the Securities and Exchange Commission. 

The takeover agreement gives Dynegy an escape clause permitting it to cancel the purchase if Enron winds up with heavy regulatory fines or legal judgments from shareholder suits tied to its handling of the partnerships. 

Chuck Watson, Dynegy's chairman and chief executive, said in the conference call that a close scrutiny over the past two weeks of Enron's financial condition convinced him that the company's trading and pipeline businesses were solid. "We looked under the hood, and guess what? It looked just as strong as we thought it was." Watson said he did not think more damaging disclosures were forthcoming from Enron. 

Until the partnership mess, Enron was the nation's dominant energy trader, and it had front-door political connections to the White House. Lay, its longtime chairman, raised more then $100,000 for the presidential election campaign of his friend George W. Bush. Enron rode the growth of energy trading markets beginning in the mid-1990s, as first natural gas, and then electric power sales were deregulated at the wholesale level. Its revenues leaped from $9.2 billion in 1995 to $100.8 billion last year. 

During those heady times, the Houston company could choose which questions to answer about its dealings with related partnerships and its Byzantine bookkeeping. 

"It was always very difficult to get information," said Louis B. Gagliardi, an analyst with John S. Herold Inc. "They would always rebuff you." 

Until this fall, the muscular company seemed too big to stumble, said investment manager David Coxe, with Harris Insight Equity Fund in Chicago. 

Coxe bought 78,000 shares of Enron at $40 a share in August, after wrestling with the decision for months, he said. Then Jeffrey Skilling, Enron's chief executive and strategic mastermind, unexpectedly resigned. The stock, which had been as high as $90 in August 2000, pitched downward. 

"Enron seemed so indispensable to the nation's energy markets that I thought it inconceivable it could implode," Coxe said. "That's how I got sucked in." 

Enron's fall is "classic hubris," Coxe said: a Greek tragedy striking someone who chose to defy the gods -- "in this case, the rules of the system." 

Among the rules that Enron now acknowledges it didn't follow were the accounting standards that applied to the complex partnerships it created. The purpose of the partnerships, Enron said, was to reduce the risks of investments in Internet transmission systems and to sell power plants and other assets it no longer wanted. 

The accounting errors were described in a 20-page SEC filing Enron made Thursday. The errors resulted in a $1.2 billion reduction in the value of shareholders' equity. The company also said it had overstated its earnings by $586 million since 1997. 

Enron created partnerships that would buy major assets -- such as a power plant -- that Enron wanted to sell, or in other cases, assets such as fiber-optic cable networks that Enron intended to run but did not want to have on its balance sheet. 

The partnerships had outside investors, but the general partner of two of them was Enron's own chief financial officer, Andrew Fastow. He earned $30 million in fees from managing two of the largest partnerships, according to the SEC document. 

Enron added to the capital of these partnerships by pledging its stock, or securities convertible into stock. Some of those stock transactions should have been counted as loans, resulting in the $1.2 billion drop in shareholder equity, Enron now says. 

Investors are asking why Enron's auditor, Arthur Andersen LLP, did not insist that these transactions be handled that way in the first place. Enron's SEC filing mentions but does not explain some "proposed audit adjustments" over the past four years that were overruled. 

Even though, as Enron now acknowledges, it created an information barrier, masking critical information and violating standard accounting rules, many financial analysts who were recommending the stock to investors were not pushing hard enough to punch through that barrier, some analysts acknowledge. 

"It was so complicated that everybody was afraid to raise their hands and say, 'I don't understand it,' " Gagliardi said. 

The questions are now coming, from a new committee reporting to Enron's board that will investigate how the company's financial reporting was handled; from the SEC; and, eventually, from teams of lawyers representing aggrieved shareholders. 

Lay indicated yesterday he had not been aware until recently that Enron employees other than Fastow had profited from the partnership activity. Enron directors had approved Fastow's management of the partnerships, but Fastow quit the partnerships in July and was then replaced as chief financial officer. 

Enron this week fired Treasurer Ben Glisan and Kristina Mourdant, an Enron division lawyer, who it said had invested in partnerships that were tied to one of the major partnerships headed by Fastow. The Enron report to the SEC describes a central role in these transactions played by Michael J. Kopper, an associate of Fastow who left Enron in July to take over Fastow's financial interests in the partnership, the company said. 

Enron will hold a conference call next week to discuss what it has uncovered about outside partnership investments.

http://www.washingtonpost.com

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Financial Desk
The Nation NEWS ANALYSIS A Visionary Fallen From Grace
JAMES FLANIGAN
TIMES STAFF WRITER

11/10/2001
Los Angeles Times 
Home Edition
A-22
Copyright 2001 / The Times Mirror Company 

A year ago, Enron Corp. Chairman Kenneth L. Lay was on top of the energy world. As a leading fund-raiser, contributor and energy advisor to the Bush administration, he played a key role in shaping the new president's energy policy. As head of the world's largest energy trading company, he had an enormous influence on the price of energy in California and across the nation. Enron's highflying stock helped him cash out $123 million in stock options last year alone. 

On Friday, with Enron being saved from financial collapse by agreeing to be acquired by rival Dynegy Inc., Lay's career and reputation are in shambles. Under the merger, he will be stripped of a management job. His integrity is tattered, with Enron's controversial financial dealings under federal investigation. Enron investors and employees are chagrined and outraged because the company's stock lost 80% of its value in recent weeks.

The rapid rise and fall of Lay, 58, is a story of how a brilliant man with innovative ideas and a grand scheme to transform the world's energy markets was overcome with arrogance, associates and critics say. Under Lay, Enron stretched the limits of the law and took risks that nearly caused its financial collapse, they say. That in turn could have resulted in a widespread disruption in energy supplies. 

"Enron's behavior casts doubt on the integrity of our financial markets. It is a very serious matter," said Edward R. Muller, an energy investor and former president of Edison International's Mission Energy subsidiary. 

"Nobody denies he's smart, but it's a question of integrity," said Raymond Plank, chief executive of Apache Corp. and an associate of Lay's in Houston's vibrant oil and gas industry. 

Lay and longtime partner Jeffrey K. Skilling, who served briefly as Enron's chief executive before resigning abruptly in August, rose to prominence in the last decade through the use of innovative financial techniques designed to exploit a reduction in government regulation of energy. 

Lay transformed world energy industries through his vision of new, market-driven ways to finance natural gas and electricity production and transmission. 

The financial markets that Lay and his Enron associates created had an enormous effect on California's disastrous experiment in electricity deregulation. Critics say his influence was excessive and misguided. 

"Ken Lay was a mystic," said state Sen. Steve Peace (D-El Cajon), an outspoken critic of Enron. "Whatever he said had to make sense because he was Ken Lay. It was hero worship. Many of the people working as economists at the Federal Energy Regulatory Commission worshiped Ken Lay. As a consequence, the things Enron promoted and pushed for were never challenged, intellectually and otherwise." 

Lay, who has a doctorate in economics, had modest beginnings as the son of a poor country preacher who did farm labor on the side to raise money for his children's education. In the Navy in the late 1960s, Lay was assigned to the Defense Department because of his economic acumen. "He allocated Pentagon dollars more efficiently in purchasing for the military," said Mark Palmer, chief spokesman for Enron. 

Lay worked for Exxon and other energy firms in the 1970s, amid soaring oil prices, gasoline shortages and still-regulated natural gas. He headed Houston Natural Gas, a predecessor firm of Enron, in the 1980s as falling prices for oil and natural gas presented grave problems for Houston's energy industries. 

When the federal government allowed pipelines to carry the gas of any producer, Lay turned Enron into a foremost firm in the new, deregulated industry. Still, Enron almost went bankrupt in the late 1980s, with natural gas in oversupply and prices falling. 

It was then that Skilling, a McKinsey & Co. consultant, suggested to Lay that the firm trade long-term contracts for gas, promising to deliver the commodity to customers at fixed prices, buying and selling contracts of varying maturities "the way mortgage companies deal with mortgages," in Skilling's words. 

The innovation started Enron's rapid growth and rise to prominence as the embodiment of a new kind of energy company. In the 1990s, the federal government called for deregulation of electricity. 

Lay saw opportunities. He and Skilling created a market for contracts in electricity in 1994, and by 1996 Enron was the world's leading firm doing such business. 

Lay's central idea was that, by creating a market of millions of buyers and sellers constantly taking positions, power supplies could be allocated efficiently and prices lowered. Lay liked to lecture, in an avuncular way, about the new economics of energy trading. 

"Technology is changing, and there's a lot more value in flexibility and optionality. Just about in every industry, you can make them a lot more efficient when you have more optionality," Lay said in an interview in January in his Houston offices overlooking the sparkling new Enron headquarters building, which still is under construction. 

As Enron's business profile grew, so did Lay's political influence. He served as an energy advisor to both Bush administrations and headed Texas fund-raising for George W. Bush's presidential campaign. Lay raised $100,000 for the Bush-Cheney campaign, and with his wife, Linda, Lay contributed another $100,000 to help finance the inaugural gala this year. 

As the administration prepared its energy plan, Lay gained national stature as a preacher of market economics applied to electricity. 

"There's no way you can centralize a command-control environment and make the best decisions to have an efficient, low-cost, reliable electricity industry," Lay said. 

His sermon was intended for California, which suffered sharply higher prices for electricity last winter, to the point that private utilities fell into or near bankruptcy and the state budget incurred a cost of $12 billion, which Sacramento now is trying to recover through the sale of revenue bonds. 

Because Enron, trading billions of dollars a day in power contracts worldwide, had an immense effect on electricity prices, Lay's preaching grated on state officials. Driven to intemperance, state Atty. Gen. Bill Lockyer said in May that he'd like to "escort" Lay to a prison cell. 

But more than economic philosophy was behind Lay's goading of California. The state's debacle gave energy deregulation a bad name and chilled deregulation moves by many other states. 

That in turn reduced growth prospects for Enron. The promise of continued growth in deregulation had helped make Enron a Wall Street darling. Its stock price, at one point nearly $90 a share versus less than $10 now, pushed up the value of Enron stock options, held by almost all employees but owned in great amounts by Lay, Skilling and other company officers. 

Lay cashed in last year, converting options for a gain of $123 million, while Skilling gained $62 million by converting his options. As they cashed in, Enron was encountering other problems. Attempts to set up trading markets in water and broadband Internet transmission were floundering. A major power plant venture in India was in grave economic and political trouble. 

But in the last month, Enron revealed that it had reduced the firm's equity value by more than $1 billion due to write-offs in a hitherto hidden partnership. 

Revelations then cascaded. The firm had 33 such partnerships, which had billions of dollars in debt for which Enron was liable. Lay and Skilling piled up debt in hidden partnerships, analysts explain, because the firm needed huge amounts of debt to support its greatly expanding levels of trading in electricity, natural gas and other commodities. 

But the firm could not support such debt and still retain its credit rating, growth rate and high stock price. After weeks of gamely protesting that the business was sound and that he personally took offense at investment analysts' suggestions of impropriety, Lay fell silent. 

* 

Times staff writer Nancy Vogel in Sacramento contributed to this report.

PHOTO: With the takeover of his once-soaring firm, Enron chief Kenneth Lay's career is in tatters.; ; PHOTOGRAPHER: Reuters

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Business
Struggling Enron agrees to takeover by smaller rival Dynegy One-time energy giant and Southern Co. often scrapped over access to markets
MATTHEW C. QUINN
STAFF

11/10/2001
The Atlanta Journal - Constitution 
Home
F.1
(Copyright, The Atlanta Journal and Constitution - 2001) 

Energy giant Enron Corp. capitulated to a mounting financial crisis Friday and agreed to be taken over by a smaller competitor. But Atlanta-based Southern Co. was not gloating at the misfortunes of its vanquished rival. 

It wasn't easy.

For years, the two companies were locked in a struggle over access to electricity markets. Enron pushed for competition and deregulation, while Southern resisted to protect its dominance in the fast-growing Southeast. 

Sometimes the battle got nasty. 

"If Thomas Alva Edison came back from the dead and called Southern Co. to get some electricity, he'd find that nothing has changed," Jeffrey Skilling, then Enron's president, said in November 1997. "These guys are living in an industry that was created 100 years ago, and they want to keep it that way." 

Fast forward four years. 

Southern Co. has split itself in two, retaining its regulated Southeastern utility business and spinning off its own unregulated power generation and energy trading arm, Mirant Corp. Southern reported net income of $1 billion for the first nine months of this year, and Mirant's profits were $538 million. Southern's shares are up 19 percent this year. Mirant's have declined 7 percent. 

Enron, on the other hand, lost 90 percent of its stock market value this year alone and this past week restated earnings for the past 4 1/2 years, reducing profit by more than $500 million. 

Skilling was named chief executive in February but abruptly resigned after six months. This week he was subpoenaed to testify in a Securities and Exchange Commission probe of the Texas company's questionable relationships with outside partnerships. 

Houston-based Dynegy Corp., a crosstown rival, said late Friday it will buy Enron --- once valued at $69 billion --- for $7.8 billion in stock. 

Enron will be wrapped into a "new Dynegy" managed by top Dynegy executives. That suggested even the name Enron --- synonymous with innovation in recent years in the utility industry --- will go by the wayside. 

Southern spokesman Todd Terrell declined to comment earlier in the day on Enron's problems. 

A.W. "Bill' Dahlberg, who retired as Southern's chief executive in April and is now Mirant's board chairman, said he regretted Enron's troubles. 

"They were a rival and got credit for doing a lot of innovative things in our industry," Dahlberg said. "You always like to win the competition because you do well, not because somebody else does badly." 

Enron was a pioneer in the wholesale trading of electricity and natural gas, and has been widely imitated, from Mirant's sprawling energy trading floor at Perimeter Center to an energy management subsidiary launched this year by AGL Resources, parent of Atlanta Gas Light Co. 

As the largest U.S. energy trading firm, Enron's tentacles run deep. It was active at the Public Service Commission in 1998 when rules for Georgia's natural gas deregulation were written, only to opt out of becoming a gas marketer itself. But New Power Co., which is 45 percent owned by Enron, became Georgia's newest marketer this year. 

A Dynegy-Enron combination will create a $200 billion-a-year enterprise that will dwarf Mirant in both the electricity and natural gas sectors. 

Dynegy and Mirant are considered more stable than was Enron because they rely more on their own power plants for electricity and less on trading for power produced by others. And Dynegy is no stranger to Georgia. It is a minority partner with AGL Resources in Georgia Natural Gas Services, the state's No. 1 gas marketer. 

But the partners have been at odds for months. 

AGL sued Dynegy in July, alleging it "earned millions of dollars at the expense" of the marketing company that it supplies with natural gas. 

Dynegy's counterclaim accused AGL, among other things, of scheming to shift the partnership's gas supply deal to AGL's own subsidiary, Houston-based Sequent Energy Management. 

Dynegy in May started up a 500 megawatt natural gas-fired power plant in Heard County despite opposition from nearby residents. Dynegy is also a major buyer of electricity produced at Southern Co.'s new power plant in Jackson County. 

"They're a big customer, a partner and a competitor --- all of those things," said Southern's Terrell.

Graphic POWER POWERHOUSE A merger of Enron Corp. and Dynegy Corp. would create an energy powerhouse. Atlanta-based Mirant Corp. would be far behind, based on second-quarter figures. Top 20 North American Gas Marketers, 2nd quarter 2001 Company........................ Billions of cubic feet a day 1...Enron...................... 24.6 2...Reliant.................... 13.2 3...Duke Energy................ 12.8 4...BP..........................12.3 5...Mirant......................11.8 6...Dynegy......................10.9 7...Aquila Energy.............. 10.3 8...Sempra......................10.1 9...El Paso......................9.2 10. American Electric Power......8.5 ........................ Top 10 North American Power Marketers, 2nd quarter 2001 Company........................Millions of megawatt hours 1...Enron......................212.5 2...American Electric Power....134.5 3...Duke Energy................118.1 4...Reliant Resources.......... 86.1 5...PG&E National Energy Grp... 73.2 6...Dynegy......................70.1 7...Mirant......................69.7 8...Aquila......................66.3 9. Williams.................... 63.4 10. Exelon Power Team.......... 52.5 Source: Natural Gas Week

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BUSINESS
Dynegy to Acquire Troubled Enron / Energy giants in $7.8B stock deal
COMBINED NEWS SERVICES

11/10/2001
Newsday 
ALL EDITIONS
A16
(Copyright Newsday Inc., 2001) 

Houston - Energy marketer Dynegy Inc. announced Friday it will buy much larger rival Enron Corp. for $7.8 billion in stock. 

The announcement came after Enron's stock plummeted about 80 percent in the past three weeks over concerns that the company wasn't revealing serious financial problems to shareholders.

"Dynegy is taking out a competitor, acquiring some attractive assets, and they're doing it at an incredible price," said Joseph Correnti, an analyst at Wayne Hummer Investments. 

The two Houston-based companies began negotiations a week ago as it became apparent Enron needed cash to stay in business. Dynegy, which is 26-percent owned by ChevronTexaco Corp., agreed to the deal after Moody's Investors Service maintained an investment-grade rating on Enron, eliminating a stumbling block in negotiations. 

The combined company will have annual revenue of more than $200 billion, ranking it as one of the nation's 10 largest. It will have more than 22,000 megawatts of electric generating capacity and 25,000 miles of natural gas pipeline. 

On Thursday, Enron acknowledged it overstated earnings by about 20 percent over the past four years and kept large amounts of debt off its balance sheet through business partnerships now under investigation by the Securities and Exchange Commission. Enron said financial statements from 1997 through the first half of 2001 "should not be relied upon." 

Revised statements reduced Enron's profits for those years by $586 million and increased its debt by $628 million. 

During its recent turmoil, Enron fired chief financial officer Andrew Fastow, who ran some of the partnerships under investigation by the SEC. 

Dynegy chief executive Charles Watson will head the combined company. 

The terms of the deal value each Enron share at $10.41, based on Friday's closing stock prices. That represents a 21-percent premium above Enron's closing price of $8.63. Dynegy's shares closed at $38.76, up 6 percent. 

It was not immediately clear what role Enron chairman and chief executive Kenneth L. Lay would have in the new company. 

While Watson has led a diversified company that put as much emphasis on building power plants as on energy trading, Lay focused on the wholesale trading of natural gas and electricity. He had expanded Enron in the 1980s from a natural gas pipeline into the most formidable competitor in the business of energy trading, which was created by deregulation of energy markets in the United States and Europe.

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Dynegy announces $8 billion deal to buy larger rival Enron
By JUAN A. LOZANO
Associated Press Writer

11/09/2001
Associated Press Newswires 
Copyright 2001. The Associated Press. All Rights Reserved. 

HOUSTON (AP) - Energy marketer Dynegy Inc. announced Friday that it will buy its much larger rival, the once mighty but now troubled Enron Corp., for $8 billion in stock. Dynegy also will assume a hefty $15 billion in Enron debt. 

The announcement came after Enron's stock price plummeted about 80 percent over the past three weeks because of concerns that the company wasn't revealing serious financial problems to shareholders.

Under the deal, ChevronTexaco Corp., which owns more than a quarter of Dynegy, would quickly provide about $1.5 billion. ChevronTexaco also would contribute an additional $1 billion upon completion of the deal, the companies said. 

"With its market-making capabilities, earnings power and proven strategic approach to wholesale markets, Enron is the ideal strategic partner for Dynegy," Dynegy chairman and chief executive officer Chuck Watson said in announcing the purchase. 

Watson made it clear that he would not tolerate the sort of financial practices that prompted explosive disclosures by Enron this week - including an admission that more than half a billion dollars in debt had been kept off the company's books. 

"As a combined company, we will focus on leveraging our core skill sets and, as always, we will keep a strong balance sheet and straightforward financial structure as key priorities," Watson said. 

Enron is the country's top buyer and seller of natural gas, and the No. 1 wholesale power marketer. The company operates a 25,000-mile gas pipeline system, and also markets and trades metals, paper, coal, chemicals, and fiber-optic bandwidth. 

Dynegy controls nearly 15,000 megawatts of power generating capacity through investments in power projects, and sells the energy in wholesale markets and through utilities. 

At a news conference, Watson said company officials who negotiated the deal came away convinced that Enron was worth buying despite its recent troubles. 

"We looked under the hood and, guess what, it's just as strong as we thought it was," Watson said. 

Under the terms of the deal, Enron shareholders will receive .2685 Dynegy share for each share of Enron common stock, valuing each Enron share at $10.41. Enron has about 775 million common shares, said spokeswoman Karen Denne. 

That represents a 21 percent premium above Enron's closing price of $8.63 Friday on the New York Stock Exchange - but still just a fraction of their 52-week high of $84.87. Dynegy's shares climbed $2.26, or 6 percent, to close at $38.76 on the NYSE. 

In after hours trading on the NYSE, Enron shares shot up 15.6 percent, or $1.35, to $9.98. Dynegy shares were unchanged. 

Dynegy's stockholders will own approximately 64 percent of the new company, with Enron's stockholders holding the remainder. 

The boards of both companies have unanimously approved the transaction, which is expected to close next summer. The deal is expected to save the combined company between $400 and $500 million annually because of continued elimination of "non-core" Enron holdings and lower operating costs. Watson said it was too soon to say if the deal would result in job cuts. Enron has about 20,000 employees, while Dynegy's work force is about 6,000. 

Watson will remain as chairman and chief executive of the combined company, which will retain the Dynegy Inc. name. Dynegy's Steve Bergstrom will continue as president. 

Enron chairman and chief executive Kenneth L. Lay will no longer have a role in day-to-day management of the company, but has been offered a seat on the combined company's board and will help shepherd the merger through. 

Dynegy said that Greg Whalley, the current president and chief operating officer of Enron, will become an executive vice president of the new Dynegy. He said the merger sets the best course for Enron. 

"Few of the options we considered for our core business going forward provided us with the earning potential and immediate synergies that a merger with Dynegy could deliver," Whalley said. "Together with Enron's recently announced bank commitments, this cash infusion gives Enron immediate liquidity, which we believe will enable the company to maintain its investment grade credit rating." 

The merger was announced a day after Enron acknowledged it overstated earnings by about 20 percent over the past four years and kept large amounts of debt off its balance sheets through business partnerships now under investigation by the Securities and Exchange Commission. 

Analysts said the merger rescues Enron, but leaves Dynegy in uncharted territory - with the outcome of the SEC investigation completely unknown. "There is still a shroud hanging over Enron that now moves over to Dynegy," said Carol Coale, an analyst with Prudential Securities. 

Early Friday, Moody's Investors Service downgraded Enron's debt ratings to one level above junk bond status and said the company's long-term debt ratings remain under review for further downgrade. 

In an SEC filing, Enron said financial statements from 1997 through the first half of 2001 "should not be relied upon" and that outside businesses run by Enron officials during that period should have been included in the company's earnings reports. 

The revised statements reduced Enron's profits for those years by $586 million, from $2.89 billion to $2.31 billion. The revisions also increased the company's debt each of the four years, reaching $10.86 billion - $628 million more than previously reported - by the end of 2000. 

Keeping the debt off its balance sheets likely ensured Enron could maintain a strong credit rating to support expansion of its core businesses - wholesale trading of natural gas and electricity. 

But the company's stock price started dropping 10 months ago when its high-speed Internet unit foundered and Enron had trouble collecting money from power customers in India. 

The stock price began to free fall after Enron announced a $618 million third quarter loss, and news of the SEC investigation surfaced. 

Enron responded by firing its chief financial officer and scrambled to get cash and increase credit lines in an attempt to regain investor confidence, but investors dumped Enron shares and sent its stock plummeting. 

The ousted chief financial officer, Andrew Fastow, ran some of the partnerships under investigation by the SEC. 

Jeff Skilling, Enron's former chief executive who left in August, has been called to testify before the SEC, although it's unclear when. 

--- 

On the Net: 

http://www.enron.com 

http://www.dynegy.com

AP Graphic DYNEGY ENRON

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Copyright ï¿½ 2000 Dow Jones & Company, Inc. All Rights Reserved.  





