Dynegy Seems To Have Options In Enron Deal
The Wall Street Journal, 11/26/01
Volatility Fell Slightly in Light Holiday Trading As Enron Calls, Lilly Puts Attracted Interest
The Wall Street Journal, 11/26/01
The Other Instant Powerhouse in Energy Trading
BusinessWeek, 11/26/01
ALL EYES ON THE ENRON PRIZE If the deal holds, Dynegy will walk away with some juicy assets
BusinessWeek, 11/26/01
CONFUSED ABOUT EARNINGS? You're not alone. Here's what companies should do--and what investors need to know
BusinessWeek, 11/26/01
END THE NUMBERS GAME
BusinessWeek, 11/26/01
FREE AND CLEAR OF ENRON'S WOES
BusinessWeek, 11/26/01
COMPANIES & FINANCE INTERNATIONAL - Enron still optimistic of averting financial meltdown.
Financial Times, 11/26/01
Schwab Chief's Main Theme: Diversification
The Wall Street Journal, 11/26/01
Enron Pursuing a Cash Infusion Energy: Company is seeking as much as $1billion as it tries to shore up its endangered acquisition by Dynegy.
Los Angeles Times, 11/26/01

Dynegy Optimistic That Enron Merger Will Succeed - FT
Dow Jones International News, 11/26/01

Dynegy Purchase Prompts Antitrust Concerns, L.A. Times Says
Bloomberg, 11/26/01

Enron hopes for infusion of capital: Seeks US$500M as talks of Dynegy merger continue
National Post, 11/26/01

India's Aditya Birla Not Eyeing Enron's Stake In Dabhol
Dow Jones International News, 11/26/01

The Enron scandal
Business Standard, 11/26/01

India's Mehta Comments on Birla Group Offer to Buy Enron Stake
Bloomberg, 11/26/01

Dynegy Seems To Have Options In Enron Deal
By Rebecca Smith and Robin Sidel
Staff Reporters of The Wall Street Journal

11/26/2001
The Wall Street Journal
A3
(Copyright (c) 2001, Dow Jones & Company, Inc.)

With the stock market telling Dynegy Inc. that energy trader Enron Corp. isn't worth even half what Dynegy has offered to pay, analysts and investors are paying close attention to the circumstances under which Dynegy could bargain a lower price or even walk away from the merger deal.
Earlier this month, Houston-based Dynegy offered to buy its far larger cross-town rival in an all-stock deal that currently values Enron shares at $10.85 apiece, or a total of about $9.2 billion. But in the wake of post-agreement disclosures by Enron that its future earnings are likely to be substantially less than expected, the company's stock has been hammered. In 1 p.m. trading on the New York Stock Exchange on Friday, Enron shares fell 30 cents to $4.71. The stock is down 94% so far this year and far short of the per-share takeover price. Dynegy shares rose 64 cents to $40.40.
Although Dynegy and Enron both say they are going ahead with the deal under the terms negotiated, Dynegy does appear to have other options. The agreement with Enron contains a broad "material adverse change" clause as well as some specific trigger points that could be invoked.
Dynegy officials performed "due diligence" throughout the holiday weekend, seeking to learn more about the intimate workings of Enron, which has suffered a series of damaging blows. Since mid-October, Enron has disclosed that some of its officers participated in personally enriching deals that moved assets off Enron's balance sheet, for a time, to several private partnerships. Those deals are now the subject of a Securities and Exchange Commission investigation. Past treatment of some of those deals has been termed an "accounting error" by Enron and it twice has rejiggered its earnings since Oct. 16. At one point, Enron restated downwards nearly five years of earnings.
An Enron spokeswoman said the company was proceeding in the belief that the deal would be completed as agreed. Dynegy spokesman John Sousa said the two sides are forging ahead although he acknowledged that the walk-away provisions "are broad, by design, to ensure adequate protection for Dynegy shareholders." Shareholders of both firms must still vote on the merger agreement.
Clauses related to a "material adverse change," also known as a "material adverse effect," have been the focus of much attention among merger professionals this year, due, in part, to the stock market's fluctuations and the economic slowdown that have caused some buyers to reconsider planned acquisitions.
But such clauses rarely are invoked by a buyer or seller because they are considered extremely difficult to prove. Both parties typically are reluctant to lay out specific terms for canceling a deal, much the way a bride and groom often balk at negotiating a prenuptial agreement since it appears to envisage a breakup of the marriage even before it begins.
Furthermore, a key court case earlier this year affirmed widespread views that a buyer can't easily walk away from a merger. In that case, meat-processing concern Tyson Foods Inc. sought to cancel a planned acquisition of meat-packer IBP Inc. due to a drop in IBP's earnings and a write-down of an IBP subsidiary. But a Delaware judge refused to let Tyson cancel the pact, saying Tyson had been aware of the cyclical nature of IBP's business and the accounting issue.
In a lengthy June 18 opinion, Delaware Chancery Court Vice Chancellor Leo E. Strine Jr. wrote that " . . . the important thing is whether the company has suffered a Material Adverse Effect in its business or results of operations that is consequential to the company's earnings power over a commercially reasonable period, which one would think would be measured in years rather than months."
That interpretation has created ripples in the deal-making community, prompting some transactions to include more details about circumstances under which deals can be terminated. Since the Sept. 11 attacks, for example, a handful of merger agreements have specified that future terrorist activity would qualify as a "material adverse change," or MAC.
A key issue for any firm alleging there has been a material adverse change is "whether the new facts go to the guts of the strategic opportunity or is it just a hiccup," says Meredith Brown, co-chairman of the mergers and acquisitions group at law firm Debevoise & Plimpton in New York. He adds that a court "may be skeptical" if Dynegy claimed that Enron's post-merger agreement disclosures were a surprise.
The Enron-Dynegy merger agreement includes several triggers permitting either side to seek termination. Enron can quit the deal if it receives a substantially better offer, although it is prohibited from soliciting one. In such a case, it could be required to pay a $350 million "topper fee" to Dynegy and its co-investor, ChevronTexaco Inc.
Dynegy can alter the deal if Enron faces "pending or threatened" litigation liabilities that are "reasonably likely" to cost Enron $2 billion. If those liabilities hit $3.5 billion "an Enron material event will be deemed to have occurred," presumably allowing Dynegy to call the whole thing off. In some situations, Dynegy would be liable for a $350 million fee, as well.
Karen Denne, the Enron spokeswoman, said her firm doesn't believe that losses arising from the normal course of business would qualify as a material event. The liability must result from litigation. Currently, the company faces more than a dozen shareholder suits alleging breach of fiduciary duty by officers and directors, issuing false and misleading reports and other offenses.
Deal makers who aren't involved in the combination say the steep drop in Enron's stock price since the merger agreement was signed wouldn't by itself give Dynegy the ability to cancel the pact or force Enron to renegotiate its terms. Instead, they say, Dynegy would likely have to prove that Enron's worsening financial condition was an unanticipated event, which could be difficult in light of the company's highly publicized problems and Dynegy's frequent statement that it clearly understands Enron's businesses. Still, there is another standard clause in the merger document that would allow Dynegy to terminate the deal if "any representation or warranty of Enron shall have become untrue."
Other energy companies have abandoned deals following a widening gap in stock prices that changed an acquisition premium. Western Resources Inc. of Topeka, Kansas last week sued Public Service Co. of New Mexico seeking hundreds of millions of dollars in damages after it failed to buy Western's utilities. The lawsuit accused Public Service of breaching its "duty of good faith and fair dealing" and said the New Mexico company tried to "sabotage" the deal as the two companies' stock prices diverged. Public Service denies the accusations.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Options Report
Volatility Fell Slightly in Light Holiday Trading As Enron Calls, Lilly Puts Attracted Interest
By Cheryl Winokur Munk
Dow Jones Newswires

11/26/2001
The Wall Street Journal
B8
(Copyright (c) 2001, Dow Jones & Company, Inc.)

NEW YORK -- The options market dozed, as many participants stayed home to recover from too much turkey and football.
The Chicago Board Options Exchange's market volatility index, or VIX, which measures certain Standard & Poor's 100 Index option prices to gauge investor sentiment, remained in a tight range during the abbreviated trading session the day after Thanksgiving. It fell 0.53 to 24.79.
VIX typically ranges between 20 and 30. A rise indicates traders and money managers are becoming anxious about the stock market; a fall shows investor optimism.
Volatility has been dropping from post-Sept. 11 levels in recent weeks amid victories over the Taliban in Afghanistan and interest-rate cuts by the Federal Reserve and other central banks. VIX ranged between 30 and 40 for several weeks following the attacks.
Volatility is likely to remain low, said Mika Toikka, head of options strategy at Credit Suisse First Boston. "Typically, going into the Thanksgiving and December holidays, we tend to experience a seasonal drift lower in implied volatility. We would expect the same this year, especially in markets outside the U.S. where volatility is still lingering at high levels," Mr. Toikka wrote in a recent research note.
The CBOE's Nasdaq Volatility index, or VXN, a sentiment barometer for the technology sector, fell 1.86 to 50.82 while the American Stock Exchange's Nasdaq volatility index, or QQV, dropped 1.03 to 42.74.
Elsewhere in the options market:
Calls in Enron Corp., the embattled Houston energy and trading company, continued to trade briskly, with one investor buying 10,000 January 5 calls and simultaneously selling 12,250 January 10 calls.
More than 14,800 of the January 5 contracts traded, compared with open interest of 3,640, as shares fell 33 cents, or 6.6%, to $4.68. These calls cost $1.40 on the American Stock Exchange where most of the volume was traded.
More than 15,000 of the January 10 contracts traded, compared with open interest of 30,674. These out-of-the-money calls cost 30 cents on the Amex.
Eli Lilly & Co.'s December 80 out-of-the-money puts also were popular Friday, as shares fell 91 cents, or 1.1%, to $82.42. Morgan Stanley cut its rating on the company to neutral from outperform, saying the stock has become too expensive even with Food and Drug Administration approval of its potential blockbuster drug Xigris, which treats septic infections. More than 3,000 of these puts traded, compared with open interest of 6,427. They cost $1.25 on the CBOE, which saw much of the volume.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

The Corporation: Acquisitions
The Other Instant Powerhouse in Energy Trading
By Louise Lee in San Mateo, Calif.

11/26/2001
BusinessWeek
96
(Copyright 2001 McGraw-Hill, Inc.)

It's not easy being No. 4. Despite a $35 billion merger completed in October, ChevronTexaco Corp. is still not one of the oil superpowers. Nor, at more than $90 billion a year in revenues, is it a scrappy little guy. So Chairman David J. O'Reilly has been searching for a strategy beyond just drilling for more oil and gas.
Now, he may have something: a big stake in the No. 1 energy-trading company. Chevron Corp. has owned 26% of Dynegy Inc. since 1996, and with Dynegy's planned acquisition of Enron Corp., the top energy trader, ChevronTexaco is making the oil industry's most aggressive push yet into this fast-growing business. It plans to eventually pump $2.5 billion into the combined Dynegy and Enron to maintain its 26% stake, and it might raise that share. So, while ChevronTexaco's much bigger rivals run small in-house trading operations, energy trading may soon account for more than 10% of ChevronTexaco's earnings. ``Chevron is now positioned to be a leader in the business,'' says analyst Arjun Murti at Goldman, Sachs & Co.
The deal would certainly dovetail with ChevronTexaco's strategy of becoming a more integrated energy company, with a hand in everything from pumping oil at the wellhead to trading natural-gas futures. By acquiring Texaco, Chevron picked up, for instance, a big refining-and-marketing business --which should balance out the bad times in oil and gas production, says Eugene Nowak, an analyst at ABN Amro. ``When crude-oil prices are down, they'll have margin improvements on refining and marketing,'' he says. O'Reilly and other ChevronTexaco executives declined to comment.
Until now, Dynegy wasn't a big deal for Chevron. Chevron purchased the stake for $700 million when Dynegy was still called NGC Corp., and it filled three of the 14 board seats--positions it will keep. Since then, Chevron has sold nearly all its domestic natural-gas production to Dynegy. The stake has been a good investment: it is now worth $3 billion, ChevronTexaco says.
Sitting on $2.9 billion in cash as of the end of the second quarter, ChevronTexaco can well afford the Dynegy deal, analysts say. And they expect O'Reilly to use some of that to make more buys; the most likely target is a natural-gas company. Maybe it's not so bad being No. 4.

Illustration: Chart: CHEVRON'S GROWING CASH HOARD
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

The Corporation: Acquisitions
ALL EYES ON THE ENRON PRIZE If the deal holds, Dynegy will walk away with some juicy assets
By Stephanie Anderson Forest, with Wendy Zellner in Dallas, and Peter Coy and Emily Thornton in New York

11/26/2001
BusinessWeek
94
(Copyright 2001 McGraw-Hill, Inc.)

As Houston-based Enron Corp. imploded amid a dizzying scandal over its finances, few would have blamed Dynegy Inc. CEO Charles L. Watson if he had sat back and gloated. After all, Watson had watched as his bigger, brasher crosstown rival sniffed at Dynegy's more cautious strategy, all the while garnering most of the credit for reshaping the energy-trading business.
Instead, Watson picked up the phone on Oct. 24 and called Enron Chairman, CEO, and longtime acquaintance Kenneth L. Lay to ask how he could help. Lay didn't respond immediately, but as Enron's stock continued to plunge and the company faced a cash squeeze, it became clear what the only realistic answer could be: Bail us out.
So two days later, Lay invited Watson to his River Oaks home near downtown Houston for breakfast to discuss a deal. Over muffins and ``a bad cup of coffee'' the next day, Watson recalls, they sketched the outlines, and by 10 p.m. that night, the investment bankers were called in. On Nov. 9, Dynegy announced that it would pay about $10 billion, plus the assumption of $13 billion in debt, to buy Enron, which is nearly four times its size. The key to the deal was Dynegy's immediate $1.5 billion infusion of cash to shore up Enron's balance sheet and save its credit rating. The money came from Dynegy's 26% owner, ChevronTexaco Corp.
Without that help, Enron--the seventh-largest U.S. company, based on its $100 billion in sales last year--may well have faced bankruptcy. Watson says that he never would have imagined such an outcome in his wildest dreams. ``I don't think anybody foresaw the problems [at Enron],'' he says. ``It's been incredible to watch.''
Watson, 51, has to make good on what may well be his riskiest investment yet. If he can pull it off, the new Dynegy will have revenues of more than $200 billion and $90 billion in assets, including more than 22,000 megawatts of power-generating capacity and 25,000 miles of pipeline. It would control an estimated 20% to 25% of the energy-trading market, up from about 6% now.
That would be sweet vindication for Watson's strategy. Dynegy backs trading operations with hard assets such as power plants, which allows the company to guarantee a supply of electricity to a buyer. In contrast, Enron has worked furiously to shed power plants and oil- and gas-generating fields, believing it could earn higher returns using its trading and technology expertise to tap assets owned by others in markets including steel, pulp, and paper. IRRESISTIBLE BARGAIN. As Enron's stock slid below $9 from its August, 2000, high of $90, it became a bargain that Watson couldn't pass up. It would have taken years for Dynegy to build up a market-making operation to match Enron's. Its risk-management systems are top-of-the-line. Enron's commercial-services unit, which manages power supplies for corporate customers such as Wendy's International Inc., is three or four years ahead of Dynegy's, says Steve Bergstrom, president of Dynegy. Watson says he still plans to get rid of the $8 billion worth of assets Lay had earmarked for sale, including the Portland (Ore.) General Electric plant and oil and gas assets in India. For the $1.5 billion, though, if the deal falls through Dynegy will have the right to Enron's prized Northern Natural Gas pipeline, worth an estimated $2.25 billion. And Dynegy can walk away if Enron's legal liabilities exceed $3.5 billion.
Watson firmly believes that Enron suffered from a crisis of confidence, not a meltdown of its core business. Indeed, Enron's wholesale-trading operation earned $2.3 billion last year. Says Watson: ``We know the business. We looked under the hood, and guess what? It's just as strong as we thought it was.''
But the trading profits were obscured in recent weeks by Enron's accounting tricks. The biggest danger for Watson is that there are other time bombs ticking away. Already, the company has slashed its reported earnings since 1997 by $591 million, or 20% of its total, to account for controversial partnerships involving Enron officials. The Securities & Exchange Commission is still investigating. ``We believe it will take more than just a couple of weeks and a long-term relationship [between Watson and Lay] to do all the necessary due diligence,'' says analyst Carol Coale of Prudential Securities Inc. Dynegy's Bergstrom counters: ``We're pretty certain that most everything of material consideration has been disclosed.'' If not? The massive earnings boost provides ``a high margin of error,'' he says. A WANNABE. Of course, regulators may object to the concentration of trading operations. And Watson will have to mesh two very different cultures. Enron is known for its intense, even cutthroat entrepreneurial spirit. Dynegy's operations are more conservative; some compare it to a fraternity. Dynegy's decision to issue new stock options to some Enron employees may soothe battered egos. It should help, too, that Lay decided not to take the $60 million golden parachute he could have received in a buyout. As it is, Lay will not have a management job with the new company.
Dynegy often seemed to be an Enron wannabe, following it into online trading and commercial services. Still, Dynegy's 361% stock gains last year eclipsed Enron's 87% rise, and it rankled some that Lay's execs got more credit. ``Chuck Watson may not have been in the spotlight, but he has always been at the forefront of this business,'' says Bruce M. Withers, who sold his Trident NGL Inc. to Dynegy in 1995. Watson will get more attention next year--he's a 15% owner of the new Houston Texans pro football team. But with his bold takeover of Enron, Watson has ensured that he's off the sidelines for good.

Photograph: DYNEGY'S WATSON He says Enron's core business is strong. But others worry that more accounting tricks will turn up PHOTOGRAPH BY NAJLAH FEANNY/CORBIS SABA Illustration: Chart: POWERING UP AT DYNEGY CHART BY LAUREL DAUNIS-ALLEN/BW
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Cover Story
CONFUSED ABOUT EARNINGS? You're not alone. Here's what companies should do--and what investors need to know
By Nanette Byrnes and David Henry
With Mike McNamee in Washington

11/26/2001
BusinessWeek
76
(Copyright 2001 McGraw-Hill, Inc.)

In an age when giant earnings write-offs have become commonplace, it's hard to shock Wall Street. But on Nov. 8, Enron Corp. managed to do it. After years of high-octane growth that had seen earnings surge by up to 24% a year, the Houston-based energy company acknowledged that results for the past three years were actually overstated by more than a half-billion dollars. It was confirmation of investors' worst fears. Three weeks earlier, Enron had announced a big drop in shareholders' equity, sparking fears that its hideously complex financial statements were distorting its true performance. Management pointed to a number of factors, including a dubious decision to exclude the results of three partnerships from its financial statements and a billion-dollar error several years earlier that had inflated the company's net worth.
Enron may be an extreme example of a company whose performance fell far short of the glowing picture painted by management in its earnings releases, but it is hardly alone. This year, Corporate America is expected to charge off a record $125 billion, much of it for assets, investments, and inventory that aren't worth as much as management thought (chart, page 79). Even if companies don't go back and restate earnings, as Enron is doing, those charges cast doubt on the record-breaking earnings growth of the late '90s.
Not since the 1930s has the quality of corporate earnings been such an issue--and so difficult for investors to determine. There's more at stake than the fortunes of those who bought shares based on misleading numbers. If even the most sophisticated financial minds can't figure out what a company actually earns, that has implications far beyond Enron. U.S. financial markets have a reputation for integrity that took decades to build. It has made the U.S. the gold standard for financial reporting and the preeminent place to invest. It has also ensured ready access to capital for U.S. corporations. That a company such as Enron, a member of the Standard & Poor's 500-stock index and one of the largest companies on the New York Stock Exchange, could fall so far so fast shows how badly that gold standard has been tarnished. ``The profession of auditing and accounting is, in fact, in crisis,'' says Paul A. Volcker, former chairman of the Federal Reserve and now one of the leaders of the International Accounting Standards Board.
Sometimes, as in the case of Enron, fuzzy numbers result from questionable decisions in figuring net earnings. More often, though, the earnings chaos results from a disturbing trend among companies to calculate profits in their own idiosyncratic ways--and an increasing willingness among investors and analysts to accept those nonstandard tallies, which appear under a variety of names, from ``pro forma'' to ``core.'' (Enron offers its own such version. Before investors untangled the importance of Enron's first announcement, its stock rose briefly because it told investors that its ``recurring net income'' had met expectations.) The resulting murk makes it difficult to answer the most basic question in investing: What did my company earn?
Why calculate a second set of earnings in the first place? Because the numbers reached by applying generally accepted accounting principles (GAAP) are woefully inadequate when it comes to giving investors a good sense of a company's prospects. Many institutional investors, most Wall Street analysts, and even many accountants say GAAP is irrelevant. ``I don't know anyone who uses GAAP net income anymore for anything,'' says Lehman Brothers Inc. accounting expert Robert Willens. The problem is that GAAP includes a lot of noncash charges and one-time expenses. While investors need to be aware of those charges, they also need a number that pertains solely to the performance of ongoing operations.
That's what operating earnings are supposed to do. But because they're calculated in an ad hoc manner, with each company free to use its own rules, comparisons between companies have become meaningless. ``No investor--certainly not any ordinary investor--can read these in a way that's useful,'' says Harvey L. Pitt, chairman of the Securities & Exchange Commission. The SEC is examining whether new rules are needed to clarify financial reports and perhaps restrict use of pro formas.
What's badly needed is a set of rules for calculating operating earnings and a requirement to make clear how they relate to net income. In the end, investors need two numbers--a standardized operating number and an audited net-income number--and a clear explanation of how to get from one to the other. ``OUT OF HAND.'' A widespread consensus is building to do just that. In early November, S&P proposed a set of rules for companies to follow when tallying operating earnings. Only the week before, the Financial Accounting Standards Board, the rulemakers for GAAP, had announced that they, too, would be taking up this issue. Volcker says the International Accounting Standards Board is also seeking a uniform definition of operating earnings.
``Over the past two or three years, the use of creative earnings measures has grown and grown and grown to the point where it has really gotten out of hand,'' says David M. Blitzer, S&P's chief investment strategist. ``Earnings are one of the key measures that anybody looks at when they're trying to evaluate a company. If people want to use an operating-earnings measure, we better all know what we're looking at.''
Without those standards in place, the gap between earnings according to generally accepted accounting principles and earnings according to Wall Street is only going to grow wider and more confusing. Look at the variance in earnings per share calculated for the S&P 500 for the third quarter: It's $10.78 according to Wall Street analysts as tallied by Thomson Financial/First Call, $9.17 according to S&P, and $6.37 according to numbers reported to the SEC under GAAP. (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies.)
The lack of a standard measure can be costly to those who choose wrong. Use First Call's earnings for the past four quarters and you get a relatively modest price-earnings ratio of 23 for the S&P 500. But run the numbers using GAAP earnings, and suddenly the market has a far steeper p-e of 38.
How did we get into this mess? Investors and analysts have been calculating operating earnings for years, and for years, reasonable people could more or less agree on how to do it. Then came the dot-com bubble, along with increased pressure from Wall Street for companies to meet their quarterly earnings forecasts. Suddenly, companies that hadn't turned a profit by any conventional measure started offering ever more inventive earnings variants. These customized pro forma calculations excluded a grab bag of expenses and allowed upstart companies to show a profit. ``TOWER OF BABEL.'' Pro forma formulas vary wildly from company to company and even from quarter to quarter within the same company, casting doubt on their validity. And these days, the gulf between net earnings and pro forma earnings is wider than ever. S&P's tallies fall between the two: S&P's numbers are more systematic than pro forma, but they aren't followed widely enough to be a standard. ``Investors are facing a Tower of Babel,'' says Robert K. Elliott, former chief of the American Institute of Certified Public Accountants (AICPA) and a retired KPMG partner. ``It's not standardized, and the numbers are not audited.''
That makes it tough to evaluate a company's performance. In the quarter ended on Sept. 30, Nortel Networks Corp. offered shareholders at least three earnings numbers to choose from. By conservative GAAP accounting, the telecommunications giant lost $1.08 a share. The company also provided two possible pro forma options: a 68 cents loss that excluded ``special charges,'' including some acquisition costs and restructuring charges, and a still better 27 cents loss that further excluded $1.9 billion of ``incremental charges,'' such as writing down inventories and increasing provisions for receivables. Wall Street chose the rosiest one.
Confusing? You bet. Companies defend their pro forma calculations by pointing out that they're merely filling a void: Investors are clamoring for a measure that gives them better insight into their company's future. The goal is to get to the core of the business and try to measure the outlook for those operations. ``There are good reasons why there is an emphasis on operating earnings,'' says Volcker. ``It is an effort to provide some continuity and some reflection of the underlying progress of the company.'' Besides, as companies like to point out, they still have to report GAAP earnings, and investors are free to ignore everything else.
There's no starker lesson in the shortcomings of GAAP than the $50 billion asset write-downs by JDS Uniphase Corp., the biggest charge of the year. Near the height of the telecom bull market in July, 2000, the San Jose (Calif.) maker of fiber optics topped off a buying spree by acquiring competitor SDL Inc. for $41 billion in stock. When the deal closed in February, its assets ballooned from $25 billion to $65 billion. But by then, shares of JDS and other fiber-optics makers were collapsing. To bring its acquisitions into line with their new value, the company took charges of $50 billion. Despite the fact that the bulk of its losses stemmed from stock transactions and involved no cash paid, GAAP required that the charges be taken out of net income. So according to GAAP, JDS lost $56 billion in the fiscal year ending in June--a staggering figure for a company whose revenues over the past five years added up to only $5 billion.
Analysts and the company argue that besides not involving cash, the charge-off was all about the past, a right-sizing of values that had gotten out of hand. To analyze the company's prospects, they excluded the $50 billion charge. ``The accounting is not designed to make things look better but to describe what happened,'' says JDS Uniphase Chief Financial Officer Anthony R. Muller, ``and we'll live with the consequences, whatever they are.'' Analysts make a similar defense. ``My goal is to figure out what the business is going to produce so that we can value the company,'' says Lehman Brothers analyst Arnab Chanda. GLACIAL PACE. Are JDS's pro forma numbers realistic--a fair gauge of JDS's ongoing operations? Right now, it's hard for investors to judge. And that's the kind of ambiguity S&P and others would like to eliminate. In November, S&P circulated a memo on how to standardize operating earnings. Under the proposal, operating earnings would include the costs of purchases, research and development, restructuring costs (including severance), write-downs from ongoing operations, and the cost to the company of stock options. It would exclude merger-and-acquisition expenses, impairment of goodwill, litigation settlements, and the gain or loss on the sale of an asset.
When S&P applied roughly that formula to JDS Uniphase, it split the difference between Wall Street and GAAP. Because of differences in what each group included in their earnings calculations, the results were chaotic. Using GAAP, the company lost $9.39 a share. S&P figures it lost $3.19, while the company put the loss at 36 cents. Meanwhile, Wall Street says it made 2 cents.
The S&P standard may make sense, but it raises the question: Where is the Financial Accounting Standards Board, the group in charge of GAAP? Chairman Edmund L. Jenkins says FASB will be addressing the problems. Still, investors shouldn't expect any improvement soon. The pace of change at FASB tends to be glacial. It typically takes four years to complete a new standard. In 1996, for example, the board realized that standards on restructuring charges had some big loopholes and it resolved to put the issue on its agenda. In June, 2000, the board finally issued a draft of a new standard, asked for comments, and held a public hearing. In October, 2001, the board said it still wasn't ready to put a fix in place. Now, the recession has set off another wave of restructuring charges, and the FASB still doesn't have new rules.
The slow pace means the standard-setters sometimes fail to react to sudden changes in the market. The most recent failure followed the terrorist attacks on September 11. An FASB task force, unable to come up with a set of rules for separating September 11 costs from general expenses, instead told companies that the disaster could not be treated as an extraordinary item. So GAAP earnings include costs stemming from the disaster as part of a company's general performance. Many companies have nevertheless broken those costs out in their unaudited press releases.
Many more are likely to do so in the fourth quarter. Indeed, 2001 is shaping up to be one for the record books. A poor economy and the devastating aftereffects of September 11 have resulted in a slew of unusual charges that are unlikely to recur and that no one could have foreseen. But there's a growing concern that the earnings fog is providing managers with cover to hide missteps of the past within that vast category of supposedly one-time charges. The temptation will be to take as big a charge as possible now, while investors are braced for bad news. Not only can managers sweep away yesterday's errors, but tomorrow's earnings will look even better.
The basic question comes down to what constitutes a special expense--a charge so unusual that to include it in the earnings calculation would be to distort the truth about a company's performance. Usually, big charges fall into a few categories, including charges for laying off workers and restructuring a company, charges for assets that have lost value since they were purchased, charges for investments that have lost value, and charges for inventory that has become obsolete. In a recent study, Harvard Business School professor Mark T. Bradshaw found that companies are increasingly calling these charges unusual. That gives them a rationale for excluding them from their pro forma calculations.
Lots of critics disagree, saying such charges are often an inevitable part of the business cycle and should be reflected in a company's earnings history. They certainly should not be ignored by investors. ``Charges are real shareholder wealth that's been lost,'' argues David W. Tice, manager of the Prudent Bear Fund, a mutual fund with a pessimistic bent that's up 17% so far this year. ``It's money they spent on something no longer worth what it was, a correction of past earnings, or a reserve for costs moving forward. Whatever the reason, it's a real cost to the company, and that hurts shareholders.'' Without standards, excessive write-offs from operating earnings can obscure actual performance. Without any rules, companies calculate operating earnings inconsistently in order to put their companies in the best possible light. Dell Computer Corp. is a good example of this ``heads I win, tails you lose'' school of accounting. For years, Dell benefited from gains in its venture-capital investments and was happy to include those gains in its reported earnings, where they appeared as a separate line on the income statement. But this year, when those gains turned to losses, the computer maker issued pro forma numbers that excluded that $260 million drag. Dell spokesman Michael Maher says the company's press releases and SEC filings break out investment income and give GAAP numbers as well as pro forma. ``In our view, the numbers are reported clearly,'' says Maher. ``It's all out there for the consuming public.'' PAST PUFFERY. Many experts believe special charges are a sign that past performance was exaggerated. What should investors make of a company such as Gateway Inc.? Two restructuring charges in the first and third quarters, minus a small extraordinary gain, totaled $1.12 billion, or about $100 million more than the company made in 1998, 1999, and 2000 combined. Which is the truer picture of its performance and potential? The write-offs or the earnings? Write-offs for customer financing are another example. When Nortel increased its reserves for credit extended to customers by $767 million in September, it effectively admitted it had booked sales in the past to companies that couldn't pay--in effect overstating its performance in those earlier periods. In addition, Nortel says booking sales and accounting for credit are unrelated issues. Tech companies blame the sharp downturn in their industry for the big write-offs. And these aren't isolated examples. Peter L. Bernstein, publisher of newsletter Economics & Portfolio Strategy, found that from 1989 to 1993, 20% of earnings vanished into write-offs.
Big charge-offs can also distort future performance. Critics contend that excess reserves are often used as a sort of ``cookie jar'' from which earnings can be taken in future quarters to meet Wall Street's expectations. Or charges taken this year, for example, which is apt to be a lousy one for most companies anyway, might include costs that would otherwise have been taken in future periods. Prepaying those costs gives a big boost to later earnings. Rules for figuring operating earnings would help, but this is an area that will always involve a certain amount of judgment--and therefore invite a certain amount of abuse. ``People are going to write off everything they can in the next two quarters because they're having a bad year anyway,'' says Robert G. Atkins, a Mercer Management consultant.
Part of the lure of big special charges is that investors tend to shrug them off, believing that with the bad news out in the open, the company is poised for a brighter future. Since Gateway detailed its third-quarter charge of $571 million on Oct. 18, Wall Street has bid the stock up 48%, compared with a 6% runup for the S&P 500.
Often, though, investors should take exactly the opposite message. If, for example, part of a restructuring involves slashing employee training, information-technology spending, or research and development, the cuts could depress future performance, says Baruch Lev, a professor of accounting at the Stern School of Business at New York University. ``Are these really one-time events?'' he asks. ``Or is this the beginning of an avalanche?'' Indeed, Morgan Stanley Dean Witter & Co. strategist Steve Galbraith has found that in the year following a big charge-off to earnings companies have underperformed the stock market by 20 percentage points. ``LA LA LAND.'' Investors are apt to be faced with more huge write-offs next year, even if the economy doesn't continue to worsen. Why? The transition to a new GAAP rule that changes the way companies account for goodwill--a balance-sheet asset that reflects the amount paid for an acquisition over the net value of the tangible assets. Under the new rule, companies will have to assess their properties periodically and decrease their worth on the balance sheet if their value falls. An informal survey by Financial Executives International of its member controllers and financial officers found that at least a third expect to take more charges.
But figuring out the proper value of those assets is no easy task. Unless there is a comparable company or factory with an established market price, valuing them involves a lot of guesswork for which there are no firm rules. ``What this is really coming down to is corporations and their auditors coming up with their own tests for impairment,'' says the Stern School's Professor Paul R. Brown. ``It's La La Land.''
While the tidal wave of special charges is providing cover for earnings games, it could also be an impetus for change--especially in the wake of the dot-com fiasco. Indeed, there are some signs of a backlash. The real estate investment trust industry was a pioneer of engineered earnings, with its ``funds from operations,'' or FFO. But now some REITs have begun to revert to plain old GAAP earnings. Hamid R. Moghadam, CEO of San Francisco-based AMB Property Corp., shifted back to GAAP in 1999. ``The reason I don't like FFO is very simple,'' says Moghadam. ``One company's numbers look better than another one's even if they had identical fundamental results.''
There are other steps FASB could take to improve financial reporting and restore GAAP's status. Trevor S. Harris, an accounting expert at Morgan Stanley, says it could force companies to make clear distinctions between income from operations and income from financial transactions. Lehman's Willens says companies should provide more information on cash expenses and how they bear on earnings. An easy step would be to require companies to file their press releases with the SEC.
At the least, says Lev, companies must clearly explain how their pro forma numbers relate to the GAAP numbers. Otherwise, he says, investors ``see numbers floating there, and where did they come from?'' In today's environment of unregulated pro forma calculations and supersize write-offs, no question is more important to investors.

High-Gloss Glossary
Companies are using a variety of accounting practices to put the best spin on
their results. Here's what those terms mean:
DEFINING EARNINGS:
NET INCOME
The bottom line, according to generally accepted accounting principles (GAAP).
Sometimes called ``reported earnings,'' these are the numbers the Securities &
Exchange Commission accepts in its filings.
OPERATING EARNINGS
An adjustment of net income that excludes certain costs deemed to be unrelated
to the ongoing business. Although it sounds deceptively like a GAAP figure
called ``operating income'' (revenue minus the costs of doing business), it is
not an audited figure.
CORE EARNINGS
Another term for operating earnings. Neither core nor operating earnings are
calculated according to set rules. They can include or exclude anything the
preparer wishes.
PRO FORMA EARNINGS
The 1990s term for operating earnings. Popularized by dot-coms, it sometimes
excludes such basic costs as marketing and interest.
EBITDA
Earnings before interest, taxes, depreciation, and amortization. The
granddaddy of pro forma, it was initially highlighted by industries that
carried high debt loads, such as cable TV, but has since come to be widely
quoted.
ADJUSTED EARNINGS
A new term for pro forma.
DEFINING COSTS:
SPECIAL CHARGES
A general term for anything a company wants to highlight as unusual and
therefore to be excluded from future earnings projections.
ASSET IMPAIRMENTS
Charges taken to bring something a company paid a high price for down to its
current market value. Many companies are now taking these charges on internal
venture-capital funds that bought Internet and other high-tech stocks at
inflated prices.
GOODWILL IMPAIRMENTS
The same idea as asset impairments except they're used to write down the
premium a company paid over the fair market value of the net tangible assets
acquired. These charges will explode in the first quarter of 2002 because of a
change in mergers-and-acquisitions accounting that eliminates goodwill
amortization and requires holdings to be carried at no more than fair values.
RESTRUCTURING RESERVES
An accrued expense (not usually cash) to cover future costs of closing down a
portion of a business, a plant, or of firings. These are projected costs and
if overstated can later become a boost to earnings as they are reversed.
WRITE-DOWN
Lowering the value of an asset, such as a plant or stock investment. It is
often excused as a bookkeeping exercise, but there may have been a real cost
long ago that now proves ill spent, or there may have been associated cash
costs, such as investment-banking fees.
Illustration: Chart: THE BIG BATH CHART BY ERIC HOFFMANN/BW
Illustration: Chart: EARNINGS CHAOS CHART BY ERIC HOFFMANN/BW
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Editorials
END THE NUMBERS GAME

11/26/2001
BusinessWeek
130
(Copyright 2001 McGraw-Hill, Inc.)

What did the company earn? That's the most basic question an investor can ever ask. The equity culture that has generated so much growth over the years depends on a clear answer, but getting one has become impossible. Enron Corp. just announced that its earnings for the past three years were overstated by half a billion dollars. How did one of the biggest companies on the New York Stock Exchange manage to inflate its earnings by 20% without auditors, analysts, ratings agencies, and the business press (BusinessWeek included) discovering it? In part, blame the breakdown of standardized accounting rules and the anarchy that runs rampant in the financial statements of Corporate America. The U.S. needs a new set of accounting rules that gives a clear picture of financial performance. Without integrity in financial reporting, the U.S. cannot hope to remain the preeminent place to invest in the global marketplace (page 76).
The dot-com bubble was the first indication that there was something seriously wrong with accounting standards. Companies without much of a business model customized their quarterly statements to exclude a grab bag of expenses in order to put a positive financial spin on their operations. Wall Street conspired in this and encouraged big companies to join in. Soon, the method of calculating earnings began to vary from company to company and even from quarter to quarter within a company. It is now chaos.
A stricter adherence to accounting rules won't solve the entire problem. GAAP, the generally accepted accounting principles, allow all kinds of one-time expenses and noncash charges. This obscures the performance of ongoing operations. No one can fathom what are true operating earnings because there are no guidelines as to what constitutes an extraordinary expense. The result is total confusion. Take earnings per share for the Standard & Poor's 500-stock index for the second quarter. Under Thomson Financial/First Call standards, it is $11.82. But it's $9.02 according to S&P and $4.83 under GAAP. How can investors make intelligent decisions?
The Financial Accounting Standards Board clearly is failing to do its job. It has promised to write a set of rules that calculates operating earnings and relates them to net earnings, but it hasn't delivered. The rating agency Standard & Poor's (owned by The McGraw-Hill Companies, as is BusinessWeek) is doing a better job. It recently drew up a definition of ``operating earnings'' that includes restructuring costs (including severance), writedowns from ongoing operations, and the cost of stock options. It excludes merger and acquisition expenses, litigation settlements, impairment of goodwill, and gains or losses on asset sales. This is a beginning that FASB should build on. The accounting anarchy has to end.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Up Front: AFTERLIVES
FREE AND CLEAR OF ENRON'S WOES
Edited by Sheridan Prasso
By Stephanie Anderson Forest

11/26/2001
BusinessWeek
16
(Copyright 2001 McGraw-Hill, Inc.)

Back in Enron's heyday, one of its rising stars was Rebecca Mark. Nicknamed ``Mark the Shark'' because of her ferocious ambition, she made her name in the early '90s building the energy giant's international operations, including the now-troubled Dabhol power plant in India. Once rumored to be a successor to Enron CEO Ken Lay, she resigned from Enron in August, 2000, after two years of heading Enron's ailing water company spin-off, Azurix.
These days, as Enron struggles to stay afloat, Mark-Jusbasche (who hyphenated her name with that of her husband of two years) is watching the action from the sidelines. And she'd like to keep it that way. ``I'm very surprised and saddened by [what has happened at Enron], and I wish them all the best,'' she says. Beyond that, Mark-Jusbasche, 47, is not much interested in talking about Enron, which is being acquired by a small rival after a spectacular Wall Street flameout. Mark left Enron with millions of dollars worth of Enron shares, although she says she has sold them since.
Mark-Jusbasche spends most of her time serving on advisory boards, both at Yale and Harvard business schools, as well as the school where her 16-year-old twin sons from a previous marriage are sophomores.
In her spare time, she seeks out opportunities for investing. Currently, Mark-Jusbasche is considering alternative-energy and water-technology companies. A farm girl from Missouri, she has one investment focus that's especially dear to her heart: looking into expanding her cattle ranches. She now owns 15 acres in New Mexico. ``I'm doing things that are fun, interesting, and important to me--family and community,'' she says. Sure beats being anywhere near Enron.

Photograph: MARK: Now just a bystander PHOTOGRAPH BY BRETT COOMER/AP/WIDE WORLD
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

COMPANIES & FINANCE INTERNATIONAL - Enron still optimistic of averting financial meltdown.
By ANDREW HILL and SHEILA MCNULTY.

11/26/2001
Financial Times
(c) 2001 Financial Times Limited . All Rights Reserved

Enron said yesterday it was still expecting outside investors to inject $500m to $1bn into the group, as talks continued to avoid a financial meltdown at the energy trading group.
Dynegy, whose rescue bid for its Houston rival is crucial to Enron's survival, spent last week's Thanksgiving holiday and the weekend reviewing Enron's operations and finances.
Dynegy said it remained "optimistic for the potential of the merger to be completed, and in the time-frame we originally announced - six to nine months".
Enron's fate depends on a delicate, unofficial pact between its lenders, Dynegy, and credit ratings agencies, which have resisted downgrading the group's debt while the deal is pending.
If the pact stays in place, at least $500m is likely to be invested in Enron by JP Morgan Chase and Citigroup, Enron's key lenders and advisers. A further $500m is being sought from private equity firms.
But if Dynegy pulls out of the deal, the cash infusion could be put in jeopardy and the ratings agencies could downgrade the debt to junk, triggering debt repayments across a network of partnerships and off-balance-sheet vehicles linked to Enron.
Enron confirmed yesterday that it was still seeking additional liquidity from new equity investors, but would not discuss their identities.
Enron's crisis of confidence became more acute last week when the shares fell from $9 to $4.74 following a regulatory filing that revealed the extent of the group's debt burden.
Completion of a $1bn secured credit line from JPM Chase and Citigroup, and the postponement of a $690m notes repayment due tomorrow were not sufficient to prop up the share price. The bonds also fell to levels consistent with a potential bankruptcy filing.
The slide in the share price has encouraged speculation that Dynegy is preparing to renegotiate its all-stock bid, now worth $9.3bn, compared with Enron's market value of $3.5bn.
But people close to Enron say renegotiation of the deal would not in itself have any impact on the energy group's finances. Latest news, www.ft.com/enron.
(c) Copyright Financial Times Ltd. All rights reserved.
http://www.ft.com.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Schwab Chief's Main Theme: Diversification
By Lynnette Khalfani
Dow Jones Newswires

11/26/2001
The Wall Street Journal
(Copyright (c) 2001, Dow Jones & Company, Inc.)

NEW YORK -- More than two months after the Sept. 11 terrorist attacks, many investors remain edgy. But the stock market, after an initial selloff, has shown remarkable resilience.
Few observers expect stock-market volatility to subside soon. Still, experts say that now, more than ever, is the time for skittish investors to keep their wits about them.
In a recent interview, Charles R. Schwab, chairman and co-chief executive of Charles Schwab & Co., the San Francisco-based online and discount brokerage firm, gave his views on what investors should be doing -- and what mistakes they should avoid.
Here are some excerpts from the interview:
In the wake of the Sept. 11 attacks, how much more risk, if any, do you think is in the financial markets? Or do you think it's just that people's perceptions about risk have changed?
I've been investing since 1959, and I have to say that, year after year, the risk hasn't changed. The risk is always there. There's risk in investing in stocks, bonds and even U.S. Treasuries because of interest-rate [fluctuations]. There's risk in real estate, too.
So the question is: How do you handle it? The best way is to diversify. Over a long period of time, people who diversify their investments do pretty darned well. When they don't . . . sometimes it's fatal. If the only stock an investor owned was Enron . . . or Cisco at 70, that was pretty fatal.
What do you say to people who say they're too scared to invest right now? That because of the threat of terrorism, the anthrax scares, the war in Afghanistan, the recession, and so forth, there's just too much uncertainty in the markets?
I remember back during the Cuban missile crisis, we all feared the worst. We were all building bomb shelters. It was a scary time. This terrorist thing is no different. It's awful -- particularly for our children. But this country is so wealthy, in terms of its resources, intellectual capital and the strength of our government.
There is no more uncertainty today than in times past. For example, we've had many recessions. It's not fun, especially when you begin reading about all these layoffs. In fact, I think the unemployment rate [now at 5.4%] pretty easily might get to 6.5% before it gets better. And it probably won't get better until March or April. Also, the stock market will go up, hopefully before the economy goes up.
There's $2 trillion sitting in money-market accounts. That's a huge resource and buying power that's definitely available for new investments.
What do you think is the biggest mistake investors have made over the past two or so months?
They let their emotions take over. With the fear that people had, they didn't use their rational thinking. They used their emotional thinking. [After Sept. 11], they sold at the low, and fear was the driver.
Just a year and a half ago, the driving emotion was greed. You're not going to avoid this stuff. So the issue is how you manage through these cycles of fear and greed. Even when I'm fearful of something, I say to myself: "This is still the time to invest."
My biggest worry right now is that people will give up and say, "I just don't want to be in the stock market at all." And it's just the time that people should be hanging on and keeping a diversified portfolio.
Some other mistakes: A lot of people hang on to the stock that was the poster child of the last cycle. Or people say, "I'll get back in [the market] when I see the economy turn around." Well, by the time they see that, it's too late. They will have missed the whole ride back up.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Business; Financial Desk
Enron Pursuing a Cash Infusion Energy: Company is seeking as much as $1billion as it tries to shore up its endangered acquisition by Dynegy.
From Bloomberg News

11/26/2001
Los Angeles Times
Home Edition
C-2
Copyright 2001 / The Times Mirror Company

HOUSTON -- Enron Corp. said talks are continuing with potential investors for an infusion of as much as $1 billion as the biggest energy trader tries to avoid a collapse of its planned purchase by Dynegy Inc.
An investment would ease concern that Enron's weakened finances may prompt Dynegy to pull out of or renegotiate the terms of the transaction, which is valued at $23 billion in stock and assumed debt.
Enron is seeking an additional $500 million to $1 billion in cash but wouldn't divulge details. "We are not going to discuss the particulars of who we are talking to," Enron spokeswoman Karen Denne said Sunday.
Shares of the Houston company fell by 48% in the last three trading sessions on the New York Stock Exchange. At Friday's closing price of $4.71, the stock sells for less than half the $10.85 that Dynegy is slated to pay in the acquisition. That's a sign investors are skeptical the transaction will go through as planned.
Enron is likely to have approached Kohlberg, Kravis Roberts & Co., Blackstone Group and Carlyle Group for a private equity investment, said industry analyst David Snow of PrivateEquityCentral.Net.
The firms have declined to comment.
In a conference call Nov. 14, Enron Chief Financial Officer Jeffrey McMahon said the company is in talks with several private investors and expects to receive $500 million to $1 billion from those sources.
On Wednesday, Enron got a three-week reprieve from lenders on a $690-million note due this week, gaining more time to restructure its finances. Dynegy Chief Executive Chuck Watson said he was "encouraged" by the commitment to extend the note payment as well as the closing of a $450-million credit facility. He said Dynegy remained committed to the purchase.
Enron already received $1.5 billion in cash Nov. 13 from ChevronTexaco Inc. as part of the Dynegy buyout agreement. In return, Dynegy received preferred stock and other rights in an Enron unit that owns the Northern Natural Gas Co. pipeline. Under the deal's terms, if Dynegy and Enron fail to merge, Dynegy can acquire the pipeline company.
But Barron's reported over the weekend that Dynegy's right to the pipeline might be challenged by J.P. Morgan Chase & Co. and Salomon Smith Barney Inc., which accepted the asset as collateral for $1billion in loans to Enron.
Dynegy spokesman John Sousa declined to comment on Enron's attempts to secure financing or whether more cash for Enron is a condition of keeping the merger alive.
Enron's dealings with affiliated partnerships have led to a federal investigation of the company, which restated its earnings and saw its credit ratings cut.
The company said in a Securities and Exchange filing a week ago that it has less than $2 billion in cash and credit lines left.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Dynegy Optimistic That Enron Merger Will Succeed - FT

11/26/2001
Dow Jones International News
(Copyright (c) 2001, Dow Jones & Company, Inc.)

LONDON -(Dow Jones)- Dynegy Inc. (DYN) remains optimistic, after further review of Enron Corp.'s (ENE) finances last week, that it will be able to buy the company, the Financial Times reported Monday.
Dynegy said that it, "remained optimistic for the potential of the merger to be completed, and in the time frame we originally announced - six to nine months," the FT reported.
Critical investment in Enron by J.P. Morgan Chase and Citigroup will proceed only if an unofficial pact between Enron, Dynegy, and Enron's lenders and credit rating agencies remains intact, the report said. Investment from these two is likely to total between $500 million and $1 billion, while Enron continues to look for a further $500 million from private equity firms.
The deal suffered a setback last week, when a regulatory filing revealed a greater debt burden than some investors had realized. Enron's share price fell following the report, to $4.74 from $9.00.
A $1 billion secured credit line from J.P. Morgan Chase and an extension of a $690 million repayment due Tuesday weren't enough to keep the share price from falling. This led to speculation that Dynegy was considering renegotiating its all-stock bid, now at $9.3 billion, compared with Enron's market value of $3.5 billion, said the report.
Renegotiating the deal wouldn't have any impact on Enron's finances, unnamed sources told the FT.
But if Dynegy pulled out of the deal altogether, there might be no cash infusion from J.P. Morgan chase and Citigroup. Credit ratings agencies could then downgrade Enron's debt to junk, forcing partners to repay debts, the report said.
-By Sarah Spikes, Dow Jones Newswires; +44-(0)20-7842-9345; sarah.spikes@dowjones.com

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Dynegy Purchase Prompts Antitrust Concerns, L.A. Times Says
2001-11-26 07:36 (New York)

     Washington, Nov. 26 (Bloomberg) -- California Attorney
General Bill Lockyer is examining Dynegy Inc.'s proposed
acquisition of rival energy seller Enron Corp. for possible
antitrust violations, the Los Angeles Times reported.

     The California Independent System Operator, which manages the
state's electric grid, has asked federal regulators to ban Dynegy
and other major power sellers, including Mirant, and AES Corp.'s
Williams Cos., from selling electricity at market prices in the
state, the Times said.

     Throughout the state's power crisis, Governor Gray Davis and
other officials accused Dynegy, Enron and other power companies of
withholding electricity and manipulating the cost of wholesale
power to gouge consumers, the Times said.

     Enron is negotiating with bankers to restructure $9.15
billion in debt.

     ``I would hope that the people who look at the antitrust
implications would consider this one carefully,'' California State
Senator Steve Peace, a Democrat, told the Times. ``If anything,
Dynegy would be in an even stronger position to be able to
manipulate markets than it was before.''

Financial Post: News
Enron hopes for infusion of capital: Seeks US$500M as talks of Dynegy merger continue
Andrew Hill and Sheila McNulty
Financial Times

11/26/2001
National Post
National
FP3
(c) National Post 2001. All Rights Reserved.

Enron Corp. said yesterday it was still expecting outside investors to inject US$500-million to US$1-billion into the group, as talks continued to avoid a financial meltdown at the energy trading group.
Dynegy Inc., whose rescue bid for its Houston-based rival is crucial to Enron's survival, spent last week's U.S. Thanksgiving holiday and the weekend reviewing Enron's operations and finances.
Dynegy said it remained "optimistic for the potential of the merger to be completed, and in the time-frame we originally announced -- six to nine months."
Enron's fate depends on a delicate, unofficial pact between its lenders, Dynegy, and credit ratings agencies, which have resisted downgrading the group's debt while the deal is pending.
If the pact stays in place, at least US$500-million is likely to be invested in Enron by JP Morgan Chase and Citigroup, Enron's key lenders and advisers. A further US$500-million is being sought from private equity firms.
But if Dynegy pulls out of the deal, the cash infusion could be put in jeopardy and the ratings agencies could downgrade the debt to junk, triggering debt repayments across a network of partnerships and off-balance-sheet vehicles linked to Enron.
Enron confirmed yesterday it was still seeking additional liquidity from new equity investors, but would not discuss their identities.
Enron's crisis of confidence became more acute last week when the shares fell to US$4.74 from US$9 after a regulator filing that revealed the extent of the group's debt burden.
Completion of a US$1-billion secured credit line from JPM Chase and Citigroup, and the postponement of a US$690-million notes repayment due tomorrow, were not sufficient to prop up the share price. The bonds also fell to levels consistent with a potential bankruptcy filing.
The slide in the share price has encouraged speculation Dynegy is preparing to renegotiate its all-stock bid, now worth US$9.3-billion, compared with Enron's market value of US$3.5-billion.
But people close to Enron say renegotiation of the deal would not in itself have any impact on the energy group's finances.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

India's Aditya Birla Not Eyeing Enron's Stake In Dabhol

11/26/2001
Dow Jones International News
(Copyright (c) 2001, Dow Jones & Company, Inc.)

NEW DELHI -(Dow Jones)- India's Aditya Birla Group on Monday denied local media reports that said it is considering acquiring U.S. energy company Enron Corp.'s (ENE) stake in Dabhol Power Co.
"I have checked with our directors and can tell you that the Aditya Birla Group has shown no expression of interest in Dabhol," said group spokeswoman Pragnya Ram.
The Economic Times and Financial Express reported the group is exploring the possibility of submitting an expression of interest with Indian financial institutions to buy Enron's stake in Dabhol.
Dabhol is a 2,184-megawatt power plant located in Maharashtra state.
Enron holds a controlling 65% stake in Dabhol. Costing $2.9 billion, the power project is the single largest foreign investment in India to date.
Aditya Birla Group is a leading Indian conglomerate whose interests include textiles and cement. Its two joint ventures with Britain's Powergen PLC (PWG) to produce more than 1,000 MW of electricity in two Indian states haven't made much progress since their announcement in the mid-1990s.

-By Himendra Kumar; Dow Jones Newswires; 91-11-461-9426; himendra.kumar@dowjones.com

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

The Enron scandal
A V Rajwade

11/26/2001
Business Standard
10
Copyright (c) Business Standard

Enron has always been recognised by other companies as best practice in risk management. It put in systems to manage risks on a real-time basis and had very strong management." James Lam, founder of eRisk, a consulting firm.
As an occasional teacher and more regularly a student of the subject of management of price risks, I have been an admirer of Enron's elaborate disclosure of its risk management practices. And yet, in a cascade of events over a period of just three weeks from mid-October, it lost two-thirds of its share value, became the subject of a US Securities Exchange Commission (SEC) investigation, and was taken over by a rival a third in size. (Latest reports create some doubt about whether this will go through.) What went wrong?
No, the events had nothing to do with Dabhol. Indeed, if, for us in India, Enron will always be associated with the controversial power project, elsewhere it is likely become a case study for students of accounting, finance and general management. (On second thoughts, even its Indian adventures would make an excellent case study!)
But first, a recount of what happened. After announcing on October 16, without much explanation or transparency, that it has taken a charge of $ 1.2 billion against equity, Enron's share price started tumbling. Apparently, the charge was the result of some financial transactions, and the SEC launched an investigation. The chief financial officer (CFO), who was directly involved with the transactions, the company's treasurer and a couple of other senior officials were sacked.
Perhaps most damagingly, Enron revised its accounts from 1997 onwards, reducing profits by about $ 600 million and increasing debt by a somewhat similar amount. As a result, Enron's credit rating was downgraded.
It seems the root problem was not in its basic business of power and gas trading, but in its investment activities controlled by the CFO. These comprised private equity, and Enron's share in each of the investee companies was kept artificially below 50 per cent to avoid consolidation of accounts. To this end, outside investors were brought in and assured of equity in Enron itself, should the value of the investee company(ies) fall below agreed threshold(s).
All this was done to keep the losses in investments off-balance sheet, and mitigate their impact on reported profits. Many other US corporations including J P Morgan Chase, which had large private equity investments, have suffered on this score (see World Money October 15). Enron wanted to avoid this and, last year, paid its since-dismissed CFO $ 30 million for his creative accounting genius.
Incidentally, those enamoured of US GAAP and its alleged superiority over the rest of the world should note that all these gimmicks were blessed by the company's auditors one of the Big Five firms, which was paid $ 25 million as audit fees and $ 27 million for other services by Enron last year.
The restatement of the accounts from 1997 onwards became necessary as the Enron management/board and the auditors were forced, on review, to admit that at least some of the transactions should have been on, rather than off, balance sheet. Details of all the transactions in question are yet to come out, but what has come out is bad enough.
But this apart, a billion dollar hit for a company of the size ($ 300 billion) or cash flow ($ 3 billion) of Enron is, by itself, hardly a death warrant. But it turned out to be just that for Enron.
Perhaps because it was too arrogant? Perhaps also because its accounts lacked transparency and their opaqueness ensured that investors' confidence was always somewhat fragile?
But there are two other points worth noting: the professionalism of equity analysts and whether the event restores somewhat the balance between trading and producing. As for the first, the professional analysts were surely aware of the opaqueness of the accounts,but few questioned the management aggressively on the subject. Perhaps the stock was too glamorous and typified the spirit of the times trading assets was what the "masters of the universe" did, not the boring old business of producing oil or power or cars. The Enron management itself was proud of the way it operated in its principal activity of trading in power and gas, with Skilling, the former CEO, claming that "we are on the side of angels. We are taking on the entrenched monopolies. We are bringing the benefits of choice and free markets to the world." (The quotation is from an interview in BusinessWeek, prior to Skilling's inglorious exit from Enron a couple of weeks before the bubble burst).
For the analysts, there was also safety in numbers. Skilling claimed that "Enron's operations are built around the integration of modern financial technologies and physical technologies", bringing derivatives theory to trading in power and gas! Obviously, the fate of Long Term Capital Management has not led to more sober management of trading risks.
Surely the role of "markets" should be to reduce the distance, and cost, between producer and consumer? One does feel that there is something perverse in a society that values, in terms of compensation, the trader (don't forget this is just a euphemism for the speculator) over the producer whether in the bond, currency or power and gas markets. The markets and, indeed, greed obviously have a role to play, but surely the pendulum needs to swing a little bit to the left?

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

India's Mehta Comments on Birla Group Offer to Buy Enron Stake
2001-11-26 03:42 (New York)

     Mumbai, Nov. 26 (Bloomberg) -- Jaywantiben Mehta, India's
union minister of state for power, comments on reports of Aditya
Birla Group, which owns Grasim Industry Ltd., the nation's third-
biggest cement maker, bidding for Enron's stake in Dabhol Power
Co.

     Enron wants to sell its 65 percent stake in Dabhol Power,
India's biggest foreign investment, at cost. The project is mired
in a tariff dispute over $64 million in bills that haven't been
paid by the Maharashtra State Electricity Board, its only
customer, for eight months.

     ``One more bidder will increase competition, which is
welcome.

     ``Any step in the national interest is good.

     ``Cheap energy is always in the national interest since we
want to increase electricity generation and sell it at a
reasonable price.

     ``I can't comment on the time-frame of buying out the Enron
stake until the legal wrangles are solved. Once that's cleared,
then we will try and clear the proposal quickly.''

--Gautam Chakravorthy in the Mumbai newsroom (91-22) 233-9027


Angie, would you go into Unify on July 31st and change the pathed volume to
Clinton from 430 to 651 please - this should make the total volume = 13,551.
Change the supply from Phillips to balance out the transaction.

	From:  Donnie Myers @ ENRON                           08/22/2000 01:43 PM

To: Chris Germany/HOU/ECT@ECT
cc:
Subject: Peoples deal with Clinton

Chris,

 I just finished talking with you about a deal that we sold to Clinton Energy
Management (Deal #320094).  The volume that we have in our system has a
volume of  13,330 MMBtu and it should be 13,551 MMBtu @ 4.56 (We only need to
change the volume).  Could you please change this as soon as possible so that
I can get a corrected invoice to them?  Let me know if you have any
questions.  Thanks...


I am currently planning on being out of town this week from Wednesday morning through Sunday.  We will be at Lake LBJ, at 830/598-8923.  We will also be in San Antonio on Thursday and Friday, at various times.  I can be reached in San Antonio at the Kingmans (brother-in-law), at 210/826-7311.  My cell phone is 713/503-4456.  Note, both the Blackberry device and the cell phone do not work at the Lake - horribly convenient.  Thanks.  Lance.

W. Lance Schuler
Enron North America Corp.
1400 Smith Street
Houston, Texas  77002
Phone: 713/853-5419
Fax:  281/664-4890
Email:  lance.schuler-legal@enron.com


All is officially crap here - I have worked 10 weeks straight no week-ends, all night and still its horrible.  Hope its better for you over there.

We have buyers - it's just gettting more and more horrible to be in the building - well actually in Houston come to that.

 -----Original Message-----
From: 	Romano, Marcello
Sent:	Thursday, December 06, 2001 3:46 AM
To:	Kitchen, Louise
Subject:	RE: Hello

Hello Mrs woman of many words,

Enron Europe is in administration but the administrators have a huge talent for destroying value very quickly.
EBS is in liquidation.

I'm becoming an angel -
 << File: IMGP0016.JPG >>
Nikki doing a Louise -
 << File: IMGP0093.JPG >>
Alison doing what she always does -
 << File: IMGP0096.JPG >>
Good reasons to be back in Europe -
 << File: IMGP0042.JPG >>
Any pictures of the mini Swift?

You need to plan a huge vacation...

M

 -----Original Message-----
From: 	Kitchen, Louise
Sent:	05 December 2001 19:16
To:	Romano, Marcello
Subject:	RE: Hello

You're still there then.  Is Enron Europe in administration or liquidation?

 -----Original Message-----
From: 	Romano, Marcello
Sent:	Wednesday, December 05, 2001 1:04 PM
To:	Kitchen, Louise
Subject:	Hello

Hello Sweeeeetie,

I am on the phone to Nikki who is sunning herself at home oops I mean looking for a job and cooking for mum - she gives you a big hullo!!!

I hope you are bearing up well and look forward to having a 1996 newton with you in London.

M


__________________

I have discussed with Doug Gilbert-Smith the transmission contingent language
e-mailed to you on 4-27-01 and am communicating the revised text below for
insertion into those written confirmations of EPMI's purchases in ERCOT being
supplied across a DC tie, when designated by the ERCOT traders to require
this insert .  This text is only for those specific transactions which the
ERCOT traders indicate.

"Transmission Contingent: DC Tie.  If Seller is unable to secure the
transmission required for this Transaction on a DC tie line across the ERCOT
system border ("DC tie"),  or transmission on such DC tie is curtailed in a
manner affecting Seller's delivery hereunder, then Seller at its election
shall not be required to deliver the affected portion of the Energy and, in
the event of that election by Seller, neither party shall be liable to the
other hereunder for failure to deliver/receive such Energy.  No other
transmission contingency is designated by the parties to pertain to this
Transaction."


COLUMBIA GAS TRANSMISSION CORPORATION
                        NOTICE TO ALL INTERESTED PARTIES
                                NOVEMBER 27, 2001

Notice ID: 3295
5 - NO RESPONSE REQUIRED

SUBJECT:  TCO CAPACITY UPDATE EFFECTIVE FOR WEDNESDAY, NOVEMBER 28, 2001

             THERE ARE NO CHANGES FROM PREVIOUS DAY

Effective Wednesday, November 28, 2001, capacities will be as follows:

Excess MDWQ              Available +
ISS Withdrawals          Available
SIT Withdrawals          Available
Imbalance Drawdowns      Available

Excess MDIQ              NOT Available +
ISS Injections           NOT Available
SIT Injections           NOT Available
Imbalance Paybacks       NOT Available

PAL Lends/Unparks        Available
PAL Parks/Loan Paybacks  NOT Available

+ Call Gas Control 24 hours in advance at (304) 357-2606 to request approval.

Non-firm receipt capacity will be as follows:

TENNESSEE:

Brinker (B12)            20,000
Broad Run (B9)          450,000
Cambridge (B10)               0
Dungannon (B11)          20,000
Highland (B17)                0
Milford (B18)            20,000
North Greenwood (B22)         0
Unionville (B15)         50,000

TEXAS EASTERN:

Delmont (C16)            10,000
Eagle (C22)              20,000
Hooker (C9)              20,000
Pennsburg (C23)          20,000
Windridge (C12)          20,000

NATIONAL FUEL:

Independence (M1)             0
Ellwood City (L1)        15,000

TRANSCO:

Downingtown (E3)          2,500
Emporia I (E13)          60,000
Rockville (E2)           60,000
Dranesville (E1)         50,000

CNR PIPELINE:

Wiser (827280)                0

DELTA:

Delta Natural Gas (819288)    0

ALGONQUIN:

Ramapo (R1)              25,000

ANR:

Paulding/Cecil           30,000
(F1, A2)

LEBANON AGGREGATE       100,000
(A4, F2, C4, D3)

TOLEDO AGGREGATE        100,000
(A3, F4, 734462)

COLUMBIA GULF:
(801)

TCO-Leach               700,000

Internal point non-firm capacity will be as follows:

Lanham                        0

Delivery capacity (non-firm) will be as follows:

TRANSCO:

Martins Creek            10,000
  (MLI E5)
Young Woman's Creek      10,000
  (MLI E9)

ALGONQUIN:

Hanover                       0
  (MLI R2)

EQUITRANS:

Fallen Timber            31,000
  (MLI K1)

Waynesburg-Rhinehart     20,000
  (MLI K2)

OPT-30 will be available in all market areas.
OPT-60 will be available in all market areas.

Market Area delivery capacity (non-firm) will be as follows:

Operating Area 1
     Market Area 33       No Restrictions
     Market Area 34       No Restrictions

Operating Area 2
     Market Area 20       No Restrictions

Operating Area 3
     Market Area 15       No Restrictions
     Market Area 16       No Restrictions
     Market Area 17       No Restrictions
     Market Area 18       No Restrictions
     Market Area 19       No Restrictions

Operating Area 4
     Market Area 21       No Restrictions
     Market Area 22       No Restrictions
     Market Area 23       No Restrictions
     Market Area 24       No Restrictions
     Market Area 25       No Restrictions
     Market Area 29       No Restrictions

Operating Area 5
     Market Area 02       No Restrictions
     Market Area 07       No Restrictions

Operating Area 6
     Market Area 10       No Restrictions
     Market Area 11       No Restrictions
     Market Area 12       No Restrictions
     Market Area 13       No Restrictions
     Market Area 14       No Restrictions

Operating Area 7
     Market Area 01       No Restrictions
     Market Area 03       No Restrictions
     Market Area 04       No Restrictions
     Market Area 05       No Restrictions
     Market Area 06       No Restrictions
     Market Area 08       No Restrictions
     Market Area 09       No Restrictions

Operating Area 8
     Market Area 26       No Restrictions
     Market Area 27       No Restrictions
     Market Area 32       No Restrictions
     Market Area 35       No Restrictions
     Market Area 36       No restrictions for southern part of Market Area 36.
                          Primary receipts/deliveries only for gas delivered
                          in the northern portion of Market Area 36.
     Market Area 38       No Restrictions
     Market Area 39       No Restrictions
     Market Area 40       No Restrictions

NOTE:  GAS DELIVERED IN THE NORTHERN PORTION OF MARKET AREA 38 OR THE NORTHERN
PORTION OF MARKET AREA 36 MUST BE RECEIVED FROM TENNESSEE GAS PIPELINE AT
HIGHLAND.

Operating Area 10
     Market Area 28       No Restrictions
     Market Area 30       No Restrictions
     Market Area 31       No Restrictions

If you have any questions, please contact your Account
Representative.


Just so we are all on the same page, this is the most recent draft of the ESA
breakout contract in my files.

Thanks,

Kay
---------------------- Forwarded by Kay Mann/Corp/Enron on 12/05/2000 01:48
PM ---------------------------

"Thompson, Peter J." <peterthompson@akllp.com> on 11/30/2000 02:30:37 PM
To: "Kay Mann (E-mail)" <kay.mann@enron.com>
cc: "Pipitone, Paul" <paulpipitone@akllp.com>, "Cobb, Chris"
<chriscobb@akllp.com>

Subject: Attached Files

Attached please find a clean draft of the Enron South America Turbine
Agreement, as well as a blackline showing changes made to the from
document agreed to by GE.

The only additional information that we need to insert into the
agreement is the Agreement Number in Section 6.7.1.

I will send the exhibits in a few moments.
 <<ESA Break-out Agreement Draft of 11/30/00.DOC>>  <<Comparison of
Enron South America Turbine Agreement.DOC>>
 - 00.DOC
 - Comparison of Enron South America Turbine Agreement.DOC


Jan. 5, 2001, 12:48AM
Houston Chronicle
Contracts to ease blow of rise in fuel prices helping airlines
Hedging your jets
By LAURA GOLDBERG
Copyright 2001 Houston Chronicle
Faced with higher gasoline prices in the past year, consumers lamented the
bite that rising oil prices were taking from their wallets.
Other than driving less or buying cars that use less gas, there wasn't much
they could do.
Airlines, which consume billions of gallons of jet fuel a year, also felt the
sting as prices fluctuated.
But airlines, unlike drivers, can use financial tools to ease the pain of
volatile fuel prices.
As airlines begin rolling out their fourth-quarter earnings reports in the
next few weeks, those that "hedged" on fuel are likely to show better profits
than those that didn't.
Not only was that the case last year, but it will continue to be the case if
jet-fuel and oil prices remain high.
Gary Kelly, chief financial officer at low-fare Southwest Airlines in Dallas,
says hedging is "insurance against a catastrophic rise in fuel prices that
would put us at unacceptable earnings levels."
Hedges aren't agreements to buy fuel. They are financial contracts pegged to
the prices of oil and oil products, such as heating oil and jet fuel.
If airlines buy the contracts at the right prices, they can collect cash to
compensate them when jet fuel goes up.
Successful hedging didn't stop airlines from raising ticket prices last year
to help cover rising fuel costs. But, airlines say, the increases might have
been higher without hedging.
When the industry's fuel bill for 2000 is tallied, it is expected to be $13
billion -- 50 percent higher than the previous year's $8.5 billion, according
to a recent report from airline stock analysts at Merrill Lynch. At the same
time, the airlines used only 4 percent more fuel.
If the industry hadn't hedged, fuel expenses would have been $2 billion to $3
billion higher, the analysts wrote. AMR Corp., the parent of Fort Worth-based
American Airlines, the No. 2 domestic carrier, is expected to save $550
million alone because of its hedging, they noted.
Airlines don't like wild spikes in fuel prices because they make it difficult
to plan and they jeopardize profits.
A consumer would face the same dilemma if one month's apartment rent was
$600, the next it jumped to $1,200 and the next it fell to $800.
That's similar to what airlines faced the past year as the benchmark price of
jet fuel, which is made from crude oil, fluctuated widely on the spot market.
It was above 88 cents a gallon in March, dipped below 66 cents in April, rose
to almost $1.10 in September and was just over 78 cents the last week in
December.
Airlines hedge to help smooth out such ups and downs.
Greg Hartford, vice president for fuel at Houston-based Continental Airlines,
looks to hedging "to take volatility out of the market, not to second-guess
it."
There are a variety of hedging tools. Some, just like car or home insurance,
require upfront premiums.
Hedging can be done through futures exchanges, such as the New York
Mercantile Exchange, or through institutions, including banks, investment
houses and energy traders such as Houston-based Enron Corp.
Hedging is about managing risk, said Bill Berkeland, manager of trading for
Enron North America, an Enron Corp. subsidiary. Techniques to cope with fuel
price risks have been around probably 20 years, he said, but airlines didn't
adopt them until the last decade.
Airline hedging has gained more attention recently because of jet-fuel price
spikes, he said. Some carriers will be able to take victory laps for being
smart enough to hedge, he added, while others will simply blame fuel prices
for their earnings problems.
Hedges are bought for specific amounts of product and time: 2 million barrels
a month for the next three months, for example. They can be pegged to the
prices of crude oil, heating oil or jet fuel.
Continental generally sticks to three basic types of hedges -- swaps, caps
and collars. Hartford outlined the way each works:
? Swap: A swap is one of the simplest types. It essentially locks in the cost
of energy at a specific price for a certain time. No upfront payments are
required.
For example, an airline takes out a swap for 1 million barrels of crude oil
at $25 a barrel for February. If the price averages $28 during February, the
airline is paid $3 million -- the difference between $28 and $25 a barrel for
the million barrels.
But if the cost averages $22 a barrel, the airline must pay $3 million.
? Cap: With caps, airlines purchase "call options" that protect them when
prices rise but don't penalize them if prices drop. Caps, however, require
upfront premium costs, which are based on a variety of factors.
For example, an airline buys a crude-oil cap at $25 a barrel for 1 million
barrels for February. If at month's end, oil averaged $28 a barrel, the
airline collects $3 million.
If it averaged $22, the airline gains nothing but loses nothing. Its cost:
the upfront price-per-gallon premium.
? Collar: A collar is more complex. It involves buying two different tools
that create a price range -- essentially a minimum and maximum. The airline
benefits if fuel goes above the range's high end but pays if it goes below
the minimum. It can be set up so no premium is paid.
Intuitively, it would seem to make sense for airlines to hedge on jet fuel.
But the market for trading jet fuel isn't as liquid, or as strong, as the one
for crude oil.
So airlines look for something that correlates to jet-fuel prices. Heating
oil is often best, followed by crude oil.
There are trade-offs. Premiums for jet-fuel hedges are more expensive than
those for heating oil. In turn, heating-oil hedges are more expensive than
crude. But using crude oil as a hedge may not smooth volatility as much
because of fluctuations in the relationship between crude and jet fuel.
In the first part of 1999, when crude oil traded for around $12 a barrel,
Atlanta-based Delta Air Lines started buying hedging contracts pegged to
heating oil as far as 36 months out, said Joe Kolshak, director of investor
relations at the third-largest U.S. airline.
Delta's strategy has served it well. For the quarter that ended Sept. 30,
hedging, including premium costs, saved the Atlanta-based carrier from paying
an extra $160 million in fuel costs, he said. Even with that gain, Delta
still paid 37 percent more for fuel over the same period than the year
before.
For the Sept. 30 quarter and the four preceding it, Delta had net hedging
gains of $600 million.
Hedging gains also helped balance sheets at other airlines, including No. 5
Continental and No. 7 Southwest.
Southwest's Kelly said the airline's hedging last year met its goal of
protecting against catastrophic fuel-price rises. In the third quarter,
operating profits rose $43.1 million because of hedging.
During the same quarter, Continental gained $27 million from hedging. For
1999, it was $105 million.
Hedging isn't without risk. Airlines can predict the wrong way and lose
millions. And when prices are already sky-high, certain hedging contracts
won't be attractive because they, too, are pegged to higher prices.
"Hedging is not a panacea, and it's not the golden elixir that people might
consider it to be," Continental's Hartford said.


---------------------- Forwarded by Benjamin Rogers/HOU/ECT on 09/26/2000
11:19 AM ---------------------------

	Enron North America Corp.

	From:  Dean Russell                           09/26/2000 11:14 AM

To: Benjamin Rogers/HOU/ECT@ECT
cc: David Parquet/SF/ECT@ECT
Subject: PG&E Questions

David Parquet asked me to forward these answers to you:
Question:
Is the major maintenance reserve estimate based on a negotiated Long Term
Services Agreement (LTSA)?  If so, will it be in place and transfer with
PEF?
Answer:  We have not negotiated an LTSA with anyone at this time, and we do
not expect to have one in place to transfer with PEF.  The maintenance
reserve is our estimate based on industry data and information from GE.

Question: Are spare parts for the first major overhaul included anywhere in
the
capital cost estimate or are they assumed to be purchased through the
maintenance reserve estimate (i.e. the LTSA) charge?

Answer:  The maintenance reserve is intended to include parts and labor for
the overhaul.