Please see today's issue of Gas Daily for a story titled, "As Woes Mount, Dynegy Stands by Enron Deal", and this week's issue of Inside FERC for a story titled "Pipeline Officials Lay Out Principles of Effective Safety Program". Due to copyright laws, we cannot copy and send these to you.

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

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

The Other Instant Powerhouse in Energy Trading
By Louise Lee in San Mateo, Calif.
11/26/2001
BusinessWeek

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

Circling the Wagons Around Enron
Risks Too Great To Let Trader Just Die
By ANDREW ROSS SORKIN and RIVA D. ATLAS
11/22/2001
The New York Times

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

END THE NUMBERS GAME
11/26/2001
BusinessWeek

COMPANIES & FINANCE INTERNATIONAL - Enron still optimistic of averting financial meltdown.
By ANDREW HILL and SHEILA MCNULTY.
11/26/2001
Financial Times

Schwab Chief's Main Theme: Diversification
By Lynnette Khalfani
Dow Jones Newswires
11/26/2001
The Wall Street Journal

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

Dynegy Optimistic That Enron Merger Will Succeed - FT
11/26/2001
Dow Jones International News

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

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

Deal still on as Enron shares drop 6%
Houston Chronicle - 11/24/01

Analysis: Travails of the Enron Corporation
11/24/2001
NPR: Weekend Edition - Saturday

Dynegy's Right to Enron Pipeline May Be Disputed, Barron's Says
2001-11-24 13:52 (New York)

Accounting Peer Review Gets More Scrutiny
Compiled by Jeff Sommer
11/25/2001
The New York Times

Reckonings
An Alternate Reality
By PAUL KRUGMAN
11/25/2001
The New York Times

Will New York Be Told, Once Again, to Drop Dead?
By ALEX BERENSON
11/25/2001
The New York Times

Dot-Com Is Dot-Gone, And the Dream With It
By JOHN SCHWARTZ
11/25/2001
The New York Times

California Wary of Dynegy Bid to Buy Out Enron Energy: Both companies are prominent players in the state's power market. The move to combine their strength is raising some concerns.
NANCY RIVERA BROOKS
TIMES STAFF WRITER
11/25/2001
Los Angeles Times

Enron's Troubles Could Spur Securities Reforms
James Flanigan
11/25/2001
Los Angeles Times

Hooked On a Fast- Growth Habit; CEOs Reach for Double-Digit Results Despite Downturn, and Some Are Making Costly Mistakes
Steven Pearlstein
Washington Post Staff Writer
11/25/2001
The Washington Post

The Enron scandal
A V Rajwade
11/26/2001
Business Standard

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

Enron Says It's Still in Talks With Possible Investors for Cash
2001-11-25 17:36 (New York)

FREE AND CLEAR OF ENRON'S WOES
Edited by Sheridan Prasso; By Stephanie Anderson Forest
11/26/2001
BusinessWeek

COMPANIES & FINANCE UK - Enron seeks survival pact to aid Dynegy's $9bn rescue.
By ANDREW HILL and SHEILA MCNULTY.
11/24/2001
Financial Times

USA: Enron employees sue as pension savings evaporate.
By Andrew Kelly
11/25/2001
Reuters English News Service

INDIA PRESS: Aditya Birla May Buy Enron's Dabhol Stake
11/25/2001
Dow Jones International News

Canadian Oil and gas companies on high alert after terror alert
11/25/2001
The Canadian Press

USA: FERC rule on natgas shipping needs more work-industry.
By Chris Baltimore
11/21/2001
Reuters English News Service
-------------------------------------------------------------------------------------------------
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.

Circling the Wagons Around Enron
Risks Too Great To Let Trader Just Die
By ANDREW ROSS SORKIN and RIVA D. ATLAS

11/22/2001
The New York Times
Page 1, Column 2
c. 2001 New York Times Company
Officials of Dynegy yesterday weighed whether to seek to renegotiate the terms of the company's agreement to acquire Enron, its Houston rival, while Enron and its bankers sought to shore up its finances, executives close to the two companies said.
The discussions came as the stock and energy markets continued to register doubts about the financial stability of Enron, the energy trading concern. Enron's stock fell another 27 percent, even though the company won a three-week reprieve from its banks on a $690 million note that would have come due next Tuesday if Enron had been unable to come up with collateral.
An executive close to Enron described the loan extension, by J. P. Morgan Chase and Citigroup, as a Band-Aid, given the approach of Thanksgiving. ''People are trying to take the time to come up with something for the intermediate term,'' the executive added.
The bankers also met with investors, including leveraged buyout firms and two industrial companies, which might inject up to $2 billion into Enron under arrangements that would protect them from a further collapse in the company's stock, the executives said.
The new investments would be in Enron's Transwestern Pipeline, which links natural gas fields in Texas to the California market, they said. The deals would be structured like Dynegy's agreement, as part of the merger, to infuse $1.5 billion into the Enron subsidiary that owns the Northern Natural Gas pipeline. That arrangement lets Dynegy keep the pipeline even if the merger falls apart.
Besides talking with other potential investors, J. P. Morgan Chase and Citigroup agreed to terms that have each taking a $250 million equity stake in such a deal, the executives said. The bankers plan to meet with Enron officials on Monday to complete the transactions, they added.
Karen Denne, an Enron spokeswoman, noted that the company had previously said it was seeking a further infusion of up to $1 billion in equity. ''We are not going to discuss the specifics of who we are talking to,'' she said.
Though investors again manhandled the stock of Enron, which is down 94 percent this year, the banks, Dynegy and credit-rating agencies all sought to proceed delicately. Executives explained that hasty moves could only deepen the crisis of confidence in Enron, wiping out the energy trading operations that only months ago made it one of the nation's most admired and politically influential companies.
Dynegy officials worried yesterday that even talking about renegotiating the merger deal could damage confidence in Enron among investors and other energy traders.
An executive close to Dynegy said that there did not yet appear to be legal grounds on which to break up the deal unilaterally. Nor, he added, was Dynegy prepared to demand that Enron allow the terms of the deal to be changed. But he indicated that the situation could change.
Ms. Denne, the Enron spokeswoman, said that she was not aware of any attempts by Dynegy to renegotiate the deal. Dynegy issued a statement saying that its chief executive, Chuck Watson, was encouraged by the steps Enron had taken with its bankers. Mr. Watson said the company was continuing its due diligence on the deal.
Dynegy's shares, which rose as high as $46.94 in the days after the merger was announced, on Nov. 9, closed yesterday at $39.76, down more than 4 percent for the second consecutive day.
Enron was the most actively traded stock on the New York Stock Exchange, closing at $5.01, down $1.98. That means the premium that Dynegy would be paying for Enron has risen to 115 percent.
Analysts following Enron's debt said that bankers had little choice but to support the company, given that most of Enron's bank debt is not secured. That means that if bankers pushed Enron into bankruptcy, they would receive no better treatment than the holders of more than $6 billion in Enron bonds and other debt.
Enron said it was in talks with lenders to restructure $9.15 billion in debt that will come due by the end of 2002. ''If the Dynegy deal closed, that would be the best thing for the banks,'' said one analyst following the debt.
James B. Lee Jr., vice chairman of J. P. Morgan Chase, echoed that thought in a statement issued by Enron. ''We believe the interests of Chase and Enron's other primary lenders are aligned in this restructuring effort,'' he said. ''We will work with Enron and its other primary lenders to develop a plan to strengthen Enron's financial position up to and through its merger with Dynegy.'' Along with Citigroup, J. P. Morgan Chase is Enron's lead bank, and it is also an adviser on the merger with Dynegy.
Another group with the power to push Enron to the brink, the big credit-rating agencies, continued to step gingerly. The agencies have held Enron's debt rating one step above ''junk'' status, knowing that downgrading it further would force the company to pay or refinance up to $3.9 billion in debt -- effectively rendering Enron insolvent. One rating agency official said yesterday that such a move would roil the entire debt market, adding that it was ''patriotic'' to hold off.
Still, one rating agency, Fitch, put out a strongly worded commentary yesterday.
''If Dynegy steps away entirely from the merger, Enron's credit situation seems untenable, with a bankruptcy filing highly possible,'' wrote Ralph Pellecchia and Glen Grabelsky, the Fitch analysts following Enron. ''Our present BBB- rating rests on the merger possibility and continued support of the lending banks, without which Fitch would consider lowering the rating.''
Analysts and energy executives said that Enron's collapse -- though unthinkable just weeks ago -- would be unlikely to cause a meltdown in the nation's energy markets. While Enron has been the nation's biggest trader of electric power and natural gas, many other companies -- including Dynegy -- make markets in those commodities. Analysts say the gradual unfolding of Enron's financial woes this fall has given its trading partners time to unwind deals and limit their exposure to Enron.
Yet even one of Enron's most stubborn supporters was forced to concede yesterday that his confidence had been shattered by the company's problems, including the rapid depletion of its cash reserves, restatements that erased $600 million in earnings and the surprise disclosure of the $690 million debt.
That fan, Goldman, Sachs & Company's energy analyst, David Fleischer, downgraded the shares to neutral. Until yesterday, Goldman had kept the stock on its recommended list.

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.

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.

Deal still on as Enron shares drop 6%
Houston Chronicle
By NELSON ANTOSH
Staff
11/24/01

Shares of Enron dropped another 6 percent Friday, as the investment community fretted that the acquisition price for the company by Dynegy may be reduced, or the deal might not go through at all.
The two sides didn't offer anything new for worried investors.
Dynegy stuck to its Wednesday statement that it is working to accelerate regulatory approvals in order to complete the deal as previously announced.
Dynegy is continuing to take a close look at Enron as part of the due diligence process, which will involve careful study of Enron 's books, Dynegy spokesman John Sousa said on Friday.
On Wednesday, Dynegy Chief Executive Chuck Watson said he was encouraged that Enron had closed a $450 million credit security and received an extension on a $690 million IOU.
Dynegy remains optimistic that the deal can be done, said a source close to the company.
Enron spokeswoman Karen Denne said she was unaware of any meetings planned between top executives of the two companies this weekend, which could signal alterations to the deal.
Enron 's stock, which was the most active on the New York Stock Exchange on Friday, dropped 30 cents to close at $4.71 per share.
This made it the worst performing stock in the Standard & Poor's 500 index for the week, with a loss of 48 percent for the holiday-shortened period.
It was a bad week for a stock that has come down from a 52-week high of $84.87 on Dec. 28 last year. For the year to date, Enron 's price is off 94 percent.
More than 40 million shares traded hands Friday. On Wednesday, 116 million shares were traded.
Analyst Ron Barone of UBS Warburg said the odds of a reduced exchange ratio in the deal were rising.
As announced Nov. 9, Dynegy would exchange 0.2685 of its shares for each share of Enron . According to Barone, 0.15 might be more appropriate.
Traders also speculated that Enron might need to issue more stock to stabilize its finances, which would dilute the shares currently outstanding.
Dynegy's stock gained 64 cents to close Friday at $40.40 per share, on trading of 2.1 million shares. For the year to date, Dynegy's price is off 28 percent.

Analysis: Travails of the Enron Corporation

11/24/2001
NPR: Weekend Edition - Saturday
Copyright 2001 National Public Radio, Inc. All Rights Reserved.

SCOTT SIMON, host: This is WEEKEND EDITION from NPR News. I'm Scott Simon. Coming up, recognizing New Yorkers by their lunch orders.
But first, trading energy. This week, stock in the Enron Corporation fell like a 14-pound turkey carcass thrown from a third-story kitchen window--kathunk. Continues a trend over the past few months. Enron shares have plunged more than 90 percent since the departure of the company's chief executive and the reworking of some balance sheets resulting in a restatement of income, about $580 million less than previously reported. Joe Nocera is the executive editor of Fortune magazine and a frequent contributor to this program.
Joe, thank you for being with us.
JOE NOCERA (Executive Editor, Fortune Magazine): Thanks for having me, Scott.
SIMON: Now Enron, we ought to explain, it's more than pipelines and gas. Yes?
NOCERA: It's a lot more--or a lot less, depending on how you look at it.
SIMON: A lot less perhaps, yes, now.
NOCERA: They've actually shed most of their hard assets when they became a trading company, trading energy futures, weather futures, broad band futures, a very complicated New Age, modern type company. And for a long time, everybody really believed in what Enron was. They were the kind of the dot-com of the energy world and were thought to do no wrong. And then, Scott, people stopped believing; people stopped having faith and, in particular, people stopped believing anything management said. This is a case study in what happens when management loses credibility. These guys kept saying, `All the problems are behind us,' and every time they said it, a week later, some new problem would crop up. And people started examining their balance sheet and finding all this squirrelly stuff in it. And now basically, if Enron doesn't do this deal that it's negotiated to do with Dynegy, they're going to go bankrupt. It's really an incredible story.
SIMON: Explain to us, if you could, what you refer to--and I guess it's a technical term among economists--`squirrelly stuff.'
NOCERA: Yeah, the squirrelly stuff.
SIMON: Yeah.
NOCERA: Well, the worst that happened was that they had--it turned out that they had all these side partnerships that included Enron officials that were doing billion-dollar trades with Enron, and nobody quite knows why they were doing this. Some people believe it was to enrich the officers in question, but other people believe that they were doing this to help smooth out their earnings. In other words, it was a form of hyping the stocks to keep the earnings going up, and they would take their losses--they'd bundle their losses and they'd throw them in these partnerships so they wouldn't be on the balance sheet.
And when this stuff started to emerge in the newspapers, that's when the wheels really started to fall off, and people were saying, `If this is going on, what'--I mean, this his terrible in and of itself--`but what else could there be?' And it turns out there've been other things as well.
SIMON: Well, you know, I think I understand why now Enron wants the deal with Dynegy to go through, but what does Dynegy see in this?
NOCERA: Well, Enron still does somewhere 25 and 33 percent of all the natural gas and energy futures trade in the United States. It's a huge marketplace, and Dynegy is a much smaller and more conservative player and, you know, by buying Enron, suddenly they became a much, much bigger player. Also, Dynegy actually has hard physical assets and, unlike Enron, they wouldn't just be a middleman on these trades, they would actually be delivering the natural gas. There is something in it for Dynegy. They're buying a very big company at for what now looks like $5 a share. It's really incredible.
SIMON: And let me ask about this, finally; some Enron employees--a good number of Enron employees are suing the company, contending, credibly, that they've been essentially defrauded out of pension money.
NOCERA: Right. Their big gripe is that when the thing started to tank, when the stock started to go down, they were unable to move their--get out of Enron stock and their pension fund--that Enron actually throws the stock in their fund, so they couldn't move out into a different investment vehicle. Now they're saying that, you know, they've been defrauded because the stock was fraudulently hyped. And you know what, Scott? When all is said and done, I think they've got a case. I think they're going to be able to, in fact, show that much of what Enron did, the reason they did the things they did was to hype the stock. And this is a classic case of what happens when you put the stock in front of the company instead of the company in front of the stock.
SIMON: I hate to ask a question like this with just five seconds left, but could there be a criminal investigation?
NOCERA: Oh, I think there will be. The SEC is already circling around.
SIMON: OK, Joe, thanks very much.
NOCERA: Thank you, Scott.
SIMON: Joe Nocera, executive editor of Fortune magazine, and speaking with us from the studios of member station WFCR, Amherst.

Dynegy's Right to Enron Pipeline May Be Disputed, Barron's Says
2001-11-24 13:52 (New York)

     Houston, Nov. 24 (Bloomberg) -- Dynegy Inc. may have a hard
time claiming one of Enron Corp.'s pipelines if their merger
agreement collapses, because the asset has been pledged as
collateral for $1 billion in bank loans, Barron's reported.

     Dynegy has said its initial investment of $1.5 billion in
Enron, using cash from ChevronTexaco Corp., gave Dynegy the right
to acquire Northern Natural Gas Co. if the deal falls through.

     Enron, though, has pledged the assets of its Transwestern and
Northern Natural Gas pipelines to get $1 billion in loans from
J.P. Morgan Chase and Salomon Smith Barney Inc. Dynegy's claim to
the pipeline may be challenged by Enron's lenders if Enron is
forced into bankruptcy, Barron's said.

     Dynegy may also be concerned about Enron affecting its credit
rating, Barron's said. Dynegy, which has a market value of more
than $10 billion and assets worth only $2.5 billion, is listed two
notches above junk status and is on watch for a possible
downgrade, the weekly newspaper said.

     Barron's said renegotiating the purchase in response to a
recent decline in Enron's shares might not make sense because the
company's debt accounts for most of the deal's value, now around
$23 billion.

Money and Business/Financial Desk; Section 3
INVESTING: DIARY
Accounting Peer Review Gets More Scrutiny
Compiled by Jeff Sommer

11/25/2001
The New York Times
Page 8, Column 1
c. 2001 New York Times Company

The accounting industry's watchdog group is examining the industry's ''peer review'' process in light of enormous accounting problems at the Enron Corporation.
The group, called the Public Oversight Board, will meet next week to consider whether reviews of audits being conducted by accounting firms adequately safeguard the public interest, according to its chairman, Charles Bowsher. The session comes after revelations by Enron that it had overstated earnings by nearly $600 million over four years and that it had inflated shareholder equity by $1.2 billion because of ''an accounting error.''
Arthur Andersen has been Enron's outside auditor for more than a decade, and its work has been submitted periodically to Deloitte & Touche for ''peer reviewing.'' One such review is being conducted now.
Representative John Dingell, a Michigan Democrat, said in a letter to Mr. Bowsher that no Big Five accounting firm had ever issued a negative report after a peer review. Mr. Bowsher told Bloomberg News that the Oversight Board would ask: ''How can you have peer reviews and still have these kinds of failures?''

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

Editorial Desk; Section 4
Reckonings
An Alternate Reality
By PAUL KRUGMAN

11/25/2001
The New York Times
Page 11, Column 1
c. 2001 New York Times Company

Most Americans get their news from TV. And what they see is heartwarming -- a picture of a nation behaving well in a time of crisis. Indeed, the vast majority of Americans have been both resolute and generous.
But that's not the whole story, and the images TV doesn't show are anything but heartwarming. A full picture would show politicians and businessmen behaving badly, with this bad behavior made possible -- and made worse -- by the fact that these days selfishness comes tightly wrapped in the flag. If you pay attention to the whole picture, you start to feel that you are living in a different reality from the one on TV.
The alternate reality isn't deeply hidden. It's available to anyone with a modem, and some of it makes it into quality newspapers. Often you can find the best reporting on what's really going on in the business section, because business reporters and commentators are not expected to view the world through rose-colored glasses.
From an economist's point of view, the most revealing indicator of what's really happening is the post-Sept. 11 fondness of politicians for ''lump-sum transfers.'' That's economese for payments that aren't contingent on the recipient's actions, and which therefore give no incentive for changed behavior. That's good if the transfer is meant to help someone in need, without reducing his motivation to work. It's bad if the alleged purpose of the transfer is to get the recipient to do something useful, like invest or hire more workers.
So it tells you something when Congress votes $15 billion in aid and loan guarantees for airline companies but not a penny for laid-off airline workers. It tells you even more when the House passes a ''stimulus'' bill that contains almost nothing for the unemployed but includes $25 billion in retroactive corporate tax cuts -- that is, pure lump-sum transfers to corporations, most of them highly profitable.
Most political reporting about the stimulus debate describes it as a conflict of ideologies. But ideology has nothing to do with it. No economic doctrine I'm aware of, right or left, says that an $800 million lump-sum transfer to General Motors will lead to more investment when the company is already sitting on $8 billion in cash.
As Jonathan Chait points out, there used to be some question about the true motives of people like Dick Armey and Tom DeLay. Did they really believe in free markets, or did they just want to take from the poor and give to the rich? Now we know.
Of course, it's not all about lump-sum transfers. Since Sept. 11 there has also been a sustained effort, under cover of the national emergency, to open public lands to oil companies and logging interests. Administration officials claim that it's all for the sake of national security, but when you discover that they also intend to reverse rules excluding snowmobiles from Yellowstone, the truth becomes clear.
So what's the real state of the nation? On TV this looks like World War II. But though our cause is just, for 99.9 percent of Americans this war, waged by a small cadre of highly trained professionals, is a spectator event. And the home front looks not like wartime but like a postwar aftermath, in which the normal instincts of a nation at war -- to rally round the flag and place trust in our leaders -- are all too easily exploited.
Indeed, current events bear an almost eerie resemblance to the period just after World War I. John Ashcroft is re-enacting the Palmer raids, which swept up thousands of immigrants suspected of radicalism; the vast majority turned out to be innocent of any wrongdoing, and some turned out to be U.S. citizens. Executives at Enron seem to have been channeling the spirit of Charles Ponzi. And the push to open public lands to private exploitation sounds like Teapot Dome, which also involved oil drilling on public land. Presumably this time there have been no outright bribes, but the giveaways to corporations are actually much larger.
What this country needs is a return to normalcy. And I don't mean the selective normalcy the Bush administration wants, in which everyone goes shopping but the media continue to report only inspiring stories and war news. It's time to give the American people the whole picture.

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

Money and Business/Financial Desk; Section 3
MARKET WATCH
Will New York Be Told, Once Again, to Drop Dead?
By ALEX BERENSON

11/25/2001
The New York Times
Page 1, Column 2
c. 2001 New York Times Company

NEARLY 11 weeks after the worst terrorist attack in history, New York is discovering just how much the rest of the United States cares about the nation's business and financial center.
Not much.
Early hopes that the nation would rally to help the city overcome the devastating economic impact of Sept. 11 appear to have been misplaced. Not only is Gov. George E. Pataki's ill-advised pitch for $54 billion in federal aid all but dead, apparently the city will struggle to get the $20 billion that President Bush promised.
Yes, many of the city's economic problems are self-inflicted. With a municipal work force of 250,000, New York employs one-seventh as many people as the federal government, excluding the armed forces. To support that bureaucracy, the city has the highest taxes of any local government in America. Development is absurdly difficult, even outside Manhattan. Roads and bridges are a mess.
But all of that was true before Sept. 11, and New York somehow made do. In fact, a record number of new jobs were created here in 2000, according to Steven Malanga, senior fellow at the Manhattan Institute, a conservative policy group. ''In the last seven or eight years, the city's economy has rebounded in a way that's very encouraging,'' he said.
The attacks changed all that. By discouraging people from coming to crowded places like Times Square, terrorism strikes at the heart of New York, said Mitchell Moss, director of the Taub Urban Research Center at New York University. ''New York's economy is built on interaction,'' he said. The industries that have suffered most severely are New York's most important employers: tourism, media, advertising and financial services, which was due for cuts even before the attacks.
Last month, the city lost 79,000 jobs, a record. The slowdown has blown a hole in city and state budgets, which are precariously balanced at the best of times. The Citizens Budget Commission, a nonpartisan fiscal watchdog organization, predicts that the city will face a budget deficit of $4 billion next year.
Mayor Rudolph W. Giuliani has asked city agencies to cut their budgets by 15 percent. More cuts are coming. Libraries will close earlier. Parks will be dirtier. And city workers, who had been asking for big raises, will have to accept layoffs or pay cuts.
Even so, the city cannot get out of this hole alone. With taxes already too high, it cannot reach much deeper into its citizens' pockets. And there are limits to how much it can cut services. A little federal help would go a long way toward righting the city's budget gap and restoring confidence in New York.
Mr. Moss suggests the federal government take two steps to show its commitment to the city. First, it should help create a hub in Lower Manhattan that would connect transit lines from New Jersey and Long Island with the subway. Second, it should support ''security zones'' where high-profile securities firms and media companies could congregate if they wished.
For now, at least, it appears that Washington will let New York sink or swim on its own. That decision is foolish for both economic and symbolic reasons.
If New York cannot right itself, the securities firms that are among its most important employers are as likely to move jobs to London or Hong Kong as Chicago or Atlanta. And if New York's streets grow dirty and its crime rate soars, other countries may question Washington's promises of aid to those that try to deter terrorism. Will a government that does not bother to aid its largest city in the wake of the worst terror attack in history really do much for Islamabad or Cairo?
''What do we have a federal government for if it's not to give aid to state and local governments, at the level people live and get most of their government services?'' asks James A. Parrot, an economist at the Fiscal Policy Institute, a labor-backed research organization.
It is worse than unseemly that lawmakers are offering to pass a tax bill that will give billions of dollars to companies like Enron and I.B.M. while refusing to send New York money that that city has already been promised. It is (whisper this word) unpatriotic.

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

Style Desk; Section 9
Dot-Com Is Dot-Gone, And the Dream With It
By JOHN SCHWARTZ

11/25/2001
The New York Times
Page 1, Column 2
c. 2001 New York Times Company

MARK LEIBOVICH recalled the day in 1999 when he showed up early for an appointment at a Washington dot-com. Mr. Leibovich, a reporter for The Washington Post, was there to interview the company's executives. ''I got there just in time to see the C.E.O. himself wheeling a foosball table into the lobby'' to give the impression that the high-tech firm possessed the desired quantum of wackiness that its Silicon Valley counterparts are famous for.
That is so over, and so much more over, even, than before. The popular obsession with the dot-com revolution, fading for more than a year, seems to have simply winked out since mid-September, as firemen and warriors have become the new heroes, and e-commerce's whiz kids are consigned to the cultural boneyard.
Not much more than a year ago, boosters of the New Economy and their true believers in the press were claiming to have changed all the rules. Not just in tech-fetish magazines like Wired, but in self-styled cultural arbiters like New York magazine, which declared the 1990's the ''e-Decade.'' In a 1999 cover story, the essayist Michael Wolff -- himself a failed dot-com executive -- announced a brave new world. ''There is, at the elusive center of the e-experience, the fantasy that we might become free of economic laws,'' he wrote. ''All it takes to make otherworldly riches is the will and desire.'' It wasn't enough to make money. They had to make history.
Now they themselves are history. Each day, the old idols seem to fade further into the dim past, barely recollected in a country where the languages of ''revolution'' and ''warfare'' are no longer just business metaphors. This is the next step after the bursting of the dot-com economic bubble -- the bursting of the cultural bubble, the end of the nerd as a crossover hit, of the I.P.O. zillionaire as role model to college students.
The changing of the guard can be seen in little things. Like Henry Blodget, the industry analyst who became famous for predicting early that Amazon.com would reach $400 a share, announcing that he is taking a buyout and leaving Merrill Lynch at the grand old age of 35.
Like the growing wave of books that focus not on the dot-com path to riches but on the wild plunge into the abyss. Having failed to sell their dreams, they are now attempting to sell their failure. A documentary of the rise and fall of a Silicon Alley company was chronicled in ''Startup.Com'' by Sebastian Nokes, released last winter. Books by former dot-com executives are arriving in stores. Two of the first are ''A Very Public Offering: A Rebel's Story of Business Excess, Success, and Reckoning'' by Stephan Paternot, founder of Theglobe.com, and ''Dot.bomb: My Days and Nights at an Internet Goliath,'' by J. David Kuo. Another is coming soon: ''Boo Hoo,'' the chronicle of the spectacular failure of Boo.com, the luxury fashion site that burned through $185 million of its investors' cash and had an online life of just six months, told by its profligate founders.
Did we mention that Mr. Blodget is writing a book?
For the most part, however, the flood of dot-com failure stories is being met with a national yawn. The tell-all books have bounced around the Amazon.com rankings without making inroads into best-seller territory. And why not? Because former idols have feet of clay. In ''A Very Public Offering,'' a book written as amateurishly as the company was run, did we need the image of Mr. Paternot dancing the night away in plastic pants?
Ellen DeGeneres's new sitcom, ''The Ellen Show,'' is built around the notion of an executive returning to her hometown after the collapse of her dot-com, but the show sits at the miserable ranking of 93rd for the season -- behind ''Emeril,'' the celebrity chef comedy -- despite Ms. DeGeneres's own considerable appeal.
To Amitai Etzioni, a sociologist at George Washington University, the country is experiencing an abrupt cultural shift away from the libertarian, individualistic values that were expressed in the celebration of the New Economy and toward more old-fashioned values in the wake of the terrorist attacks, when government is not The Problem and people are not The Market. ''There's been a sea change,'' he said. The surge in charitable giving and blood donations after Sept. 11, he said, underscores ''the sense that you're willing to give priority to the common good, to public safety and public health.''
Paulina Borsook, the author of ''Cyberselfish,'' a critical look at dot-com values published last year, said: ''People really crave a reminder of human bonds that have to do with sacrifice and fellowship and getting to know each other over time. It's not about changing jobs every six months and getting stock options.''
In the 90's, college students hoping to emulate Marc Andreessen of Netscape and other geek stars migrated to Silicon Valley or New York's Silicon Alley with thin resumes and visions of Testarossas dancing in their heads. That's all changing, said Thomas T. Field, director of the Center for the Humanities at the University of Maryland, Baltimore County. ''Many of the young adults that I see coming to campus now say they want fulfilling jobs, not just ways of earning money,'' he said. ''Sounds awfully familiar, when you come from the 60's generation.''
Professor Field suggested that protests over globalism, and the sense of security that flourished during the boom, made young people more willing to question the status quo and to take chances. During the I.P.O. frenzy, he said, students could not wait to get out of school and begin earning. This year, many of his students have chosen to study abroad in China, Nepal, India and Egypt.
The country is in dot-com denial, Ms. Borsook said, adding, ''No one wants to admit that they were caught up in it,'' an attitude she calls ''I don't want to think that I drank the Kool-Aid.''
Good riddance, said Thomas Frank, the author of ''One Market Under God: Extreme Capitalism, Market Populism and the End of Economic Democracy.'' The book is a withering attack on the ideas underlying the selling of the New Economy, which he says co-opted hipness and the language of populism to serve greed and gain. The book has come out in paperback with a new afterword. ''It's going to take some time for it to sink in,'' Mr. Frank said. ''The Dow isn't going to go to 36,000, and the dot-coms aren't going to come back -- and a lot of people lost a lot of money.''
Though dot-com executives might seem irrelevant these days, the technologies they sold, by and large, are not, pointed out Paul Saffo, an analyst at the Institute for the Future in Menlo Park, Calif. ''People haven't stopped using the Internet,'' he said. ''The fact is that it is changing the world, and it has changed the world.'' People now expect to be able to buy a book or make an airline reservation in the middle of the night, ''and it's washed into the rest of their lives.''
Kevin Kelly, who as a longtime editor of Wired magazine helped create the heroic ethos surrounding dot-com entrepreneurs, acknowledged ''it came tumbling down with the towers.'' But Mr. Kelly insisted that these people would rise again. The generation of tyro executives who crashed and burned ''got better business education than they could if they had gotten a Harvard M.B.A.,'' he said. ''They didn't set out to learn, but, boy, they are much smarter now.'' He predicts that the last decade has been the ''layup'' for a true cultural revolution to come -- he could not be specific, and his words may strike many as more dot-com hyperbole.
It takes a special kind of gall for the same people who argued that the ''long boom'' suspended the laws of economics, and even unraveled the cycles of history, to fall back now on analysis of historical cycles to support their arguments.
But to believe any less goes against the American grain, argued Jason McCabe Calacanis, the editor of the now-defunct Silicon Alley Reporter. The dot-commer, seen today as a scam artist, will be reborn, he said, smarter and tougher, because he represents optimism itself. ''It's the belief that the future -- the individual's future and the future of the economy -- are going to be better in five years than they are today.''
But still. Take a look at the book ''Radical E'' by Glenn Rifkin and Joel Kurtzman, which offers ''Lessons on How to Rule the Web'' after the bust. It extols companies that truly understand how to marry the World Wide Web to business. ''After five tumultuous years of hype and hysteria,'' the authors promise, ''the real advent of the Web and e-business is now.''
One of the book's chief examples of a company that does it right, Enron, has been in the news a lot lately, though not because of astute exploitation of e-commerce. No, Enron -- which trades energy via the Web -- has seen its stock collapse 90 percent.

Photos: The giants of e-commerce, who walked among us, are culturally extinct now with a war on. (Reuters)(pg. 1); NO SURE THING -- Ellen DeGeneres, left, with Cloris Leachman, in a sitcom about a dot-commer who has moved back home. The show ranks 93rd. (Monty Brinton/CBS)(pg. 4)
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Business; Financial Desk
California Wary of Dynegy Bid to Buy Out Enron Energy: Both companies are prominent players in the state's power market. The move to combine their strength is raising some concerns.
NANCY RIVERA BROOKS
TIMES STAFF WRITER

11/25/2001
Los Angeles Times
Home Edition
C-1
Copyright 2001 / The Times Mirror Company

Dynegy Inc. of Houston has been hailed as a hero on Wall Street, as it rides to deliver cross-town rival Enron Corp. from its self-inflicted ills and save energy markets from serious distress through its proposed $9-billion buyout of the world's largest energy trader.
But in California, Dynegy has a different image.
Dynegy, co-owner of several Southern California power plants, has been the quietest member of the "Big Five" group of energy producers commonly portrayed as villains by California politicians and regulators. Gov. Gray Davis and others have called Dynegy and its fellow energy suppliers "gougers" and "pirates" who manipulated the market and charged too much for electricity, precipitating California's blackout-studded energy crisis.
Partly because of the heightened political sensitivities to all things surrounding California's energy problems, the state is expected to play a central role in the proposed merger between Dynegy and Enron, antitrust experts and others say. The state's Attorney General's office already has begun scrutinizing the proposed combination.
If it merges with Enron, another favorite Davis target, Dynegy would be a powerhouse in energy trading, electricity generation and natural gas transmission. And the combined firm would have a strong presence in California, which some find troubling.
"I would hope that the people who look at the antitrust implications would consider this one carefully," said state Sen. Steve Peace (D-El Cajon), one of the architects of California's failed foray into electricity deregulation, who became a fierce critic of power producers and resellers. "If anything, Dynegy would be in an even stronger position to be able to manipulate markets than it was before."
Dynegy agreed on Nov. 9 to buy Enron through a stock swap valued at about $9 billion and to inject $2.5 billion into crumbling Enron provided by cash-rich ChevronTexaco Corp., the San Francisco-based oil company that owns nearly 27% of Dynegy. But a continuing trickle of disturbing financial disclosures keep slamming Enron's stock price, indicating that investors have their doubts that the deal will be completed as negotiated.
The Enron purchase would hurl Dynegy, which is about a quarter of Enron's size, into the top ranks of energy merchants.
In California's energy world, Dynegy already is a key company. At every significant twist in the state energy crisis, Dynegy was there, although not as visibly as some of the other power-plant owners and electricity resellers.
Enron and Reliant Energy Inc., also of Houston, and Duke Energy Corp. of Charlotte, N.C., drew particular fire from politicians and consumer advocates during the last 18 months as energy leaped higher. But Dynegy also was accused by the state's grid operator of reaping excessive profit through its electricity bidding practices and, to a lesser extent, by holding back some electricity from its Southern California power plants.
In addition, Dynegy signed long-term electricity contracts with the state that have been singled out by critics for containing potentially lucrative clauses requiring that the state pay emissions costs and other costs.
The California Independent System Operator, which runs the long-distance power transmission grid serving much of the state, has asked federal regulators to ban Dynegy from selling power at market prices. Cal-ISO has made the same request concerning the other major power plant owners: Duke, Reliant, Atlanta-based Mirant Inc. and AES Corp. of Arlington, Va., which markets its power through an agreement with Williams Cos. of Tulsa, Okla.
"Dynegy has sort of slid by under the radar," said Doug Heller of the Foundation for Taxpayer & Consumer Rights, a consumer activist group.
"Not only did Dynegy do very well, but particularly its trading and marketing division did very well over the course of the last two years. It profited wildly."
For its part, Dynegy rejects accusations of market manipulation, saying it has played a constructive role in the California marketplace, stepping forward to be one of the first companies to sign long-term contracts with the state when its need was greatest despite an electricity debt of $300 million owed the company by the state and its utilities.
"Dynegy has acted ethically and responsibly in California," said Dynegy spokesman John Sousa. "The fundamental problem in California is that supply did not keep up with demand."
"Dynamic Energy"
Accused of Overcharging
Dynegy was created in 1984 as a natural gas trading operation known as Natural Gas Clearinghouse to take advantage of the deregulation of natural gas prices. Under Chief Executive Chuck Watson, the company has expanded into natural gas processing and distribution and electricity generation, changing its name along the way to Dynegy, a word created by combining "dynamic" and "energy."
In California, Dynegy owns power plants capable of generating 2,800 megawatts of electricity through a partnership with NRG Energy Inc. of Minneapolis. (A megawatt can supply about 750 average homes with electricity.)
The state's big investor-owned utilities were required to sell some of their power plants by the landmark 1996 deregulation legislation. By the end of 1998, the Dynegy/NRG partnership had purchased three large power plants in Long Beach, El Segundo and San Diego and a collection of 17 small "peaker" plants from Southern California Edison Co. and San Diego Gas & Electric Co.
Under the arrangement between the partnership, NRG operates the power plants and Dynegy markets the electricity from them. It is Dynegy's bidding practices in selling that power into state markets that put it, along with other energy producers, on the wrong side of the state grid operator and federal energy regulators.
Among the allegations:
* In a report released in March, Cal-ISO accused energy producers and resellers, including Dynegy, of overcharging Californians by $6.7 billion between May 2000 and March 2001. Power suppliers have denied the allegations. The report also found that Dynegy reaped about $32 million in "monopoly rents" between May and November of last year, or profits beyond what a competitive market would bear. That was the fourth-highest total for any company noted in the report. Enron was ranked sixth, taking $27.9 million in such profits.
* Cal-ISO said Dynegy maximized profits primarily through a practice known as "economic withholding," or bidding electricity at prices so high that they would be rejected, thereby pushing up the price charged for the remaining generation sold into the market. Dynegy also did some "physical withholding," Cal-ISO said, meaning that the company withheld electricity supplies to drive up the price.
* Dynegy was accused last April in hearings before state legislators of hoarding space on a key natural gas pipeline into California in 1998 and 1999, causing natural gas prices to soar. Dynegy executives testified that the charge was untrue.
* When federal regulators ordered $125 million in potential refunds for the first four months of the year, Dynegy's portion was the largest among the power sellers named, representing slightly more than one third. Dynegy said its prices were justified by high natural gas prices, emissions costs and other factors.
Dynegy President Stephen Bergstrom said in April that the company was "unfairly and inaccurately accused of withholding power from the California market."
"As we have repeatedly communicated to California policymakers and regulators and to industry officials, we remain ready and willing to generate and sell power to any and all buyers at fair and reasonable prices when they are able to provide appropriate assurances that they will fulfill their obligation to pay for those purchases."
A recent report by the state Department of Water Resources backs up Dynegy's assertions that its prices have been in line with the rest of the market.
During the first three months of this year, after sky-high prices pushed Edison and PG&E so close to insolvency that the state had to step in and buy power for their customers, Dynegy sold power to the DWR at an average price of $239.63 per megawatt-hour for electricity. That was slightly below the average of $268.90 per megawatt-hour charged by all sellers.
Dynegy portrays itself as a minor player in the California market, representing about 4% of the state's generation.
But Cal-ISO, in asking federal regulators to revoke Dynegy's authority to sell power at market rates, said "Dynegy has profited systematically from the exercise of market power to the significant harm of California's electric consumers and economy." A decision is pending.
Officials reviewing the Dynegy-Enron merger will closely review the companies' operations in California.
Although Enron owns no power plants in California, it is believed to have long-term contracts with some generators, although spokesman Eric Thode refused to detail them.
In addition, Enron has a hand in 25% of the energy trades around the nation, with a significant portion of that in California. Thode would not detail California operations, citing company policy.
Finally, Enron controls an undetermined amount of natural gas, which is used to generate about one-third of the state's electricity, through its transwestern pipeline, which crosses into California, and through natural gas marketing and trading arrangements.
It is those largely unregulated energy trading operations that have many energy watchdogs worried. They say that middlemen such as Enron and Dynegy can drive up the price of power by reselling it at higher prices each time.
A lawsuit filed in May against the Big Five generators by Lt. Gov. Cruz Bustamante, acting as a private citizen, described it this way: "The Dynegy trading floor, working with the trading floors operated by Williams, Mirant, Reliant and Duke Energy is one of the principal tools the defendants used to inflate the price of electricity within their respective markets, as well as throughout the state of California."
"These defendants engaged in trading of electricity futures, forwards, options and other risk products that had the effect of manipulating and inflating the price of electricity within their respective markets," the suit charged.
"These defendants engaged in 'megawatt laundering,' in which they made trades with the primary purpose of inflating the costs of electricity within their respective markets."
State Is Examining Proposed Merger
California Atty. Gen. Bill Lockyer has begun examining what effects such a merger would have on California, spokeswoman Sandra Michioku said. The Federal Trade Commission and the Federal Energy Regulatory Commission also will scrutinize the merger in a process that Dynegy and Enron expect will take no more than nine months.
Senate Energy Committee Chairwoman Debra Bowen (D-Marina del Rey) said she plans to urge FERC to look beyond traditional measurements of how much the companies own in the market to examine "inputs" into the market such as gas pipeline capacity controlled by the companies and gas trading by Dynegy and Enron.
"It really raises many questions about how the market works," Bowen said.
Opposition by California could be a severe hindrance to the merger, said Garret Rasmussen, a lawyer with Patton Boggs in Washington, D.C., and formerly a Federal Trade Commission antitrust investigator.
The state, if it chooses, could play as pivotal a role as it has in negotiations over the antitrust settlement between the federal government and Microsoft Corp., he said.
"While this administration has been quite tolerant of mergers ... an action by the California attorney general could have a significant chance of success," Rasmussen said.
Merger Might Reopen Contract Negotiation
The proposed merger might give California leverage to renegotiate its power contract with Dynegy, which contains the unusual provision that the state would pay for any emission costs that the company incurred, said V. John White, director of the Center for Energy Efficiency & Renewable Technologies in Sacramento. Dynegy's large San Diego plant lacks crucial pollution control equipment, he said.
"The California attorney general needs to carefully examine Dynegy's environmental stewardship activities and renegotiate that provision in the long-term contract," White said. "Dynegy has a Texas, the-least-we-can-do attitude as far as the environment is concerned."
David Freemen, the former Los Angeles Department of Water & Power general manager who helped negotiate Dynegy's and other long-term contracts, said that while opportunities to renegotiate may present themselves, the agreements, now maligned as too expensive, were key to stabilizing the electricity market. Freeman praised Dynegy for its part in that process.
"There's a difference between companies that bargained hard with us and reached agreement--like Dynegy, Calpine and Williams--and those that were reaching for the moon and we didn't reach agreement," Freeman said. "Dynegy knew that they wanted to do business in California, and do it in a businesslike manner."

PHOTO: Enron chairman and chief executive Kenneth Lay, left, and to Chuck Watson, chairman and chief executive of Dynegy, announce the companies' proposed merger during a news conference in Houston.; ; PHOTOGRAPHER: Associated Press
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Business; Financial Desk
JAMES FLANAGAN
Enron's Troubles Could Spur Securities Reforms
James Flanigan

11/25/2001
Los Angeles Times
Home Edition
C-1
Copyright 2001 / The Times Mirror Company

Ultimately, the fall of Enron Corp., the onetime rising star of the energy industry, may be remembered as a landmark in the annals of securities law and shareholder rights.
The firm's practices are under investigation by the Securities and Exchange Commission. Enron is the focus of numerous shareholder lawsuits that seek to recover damages from the $60-billion plunge in the company's value in the last year.
The Enron case could result in new securities laws, experts say. It also could result in massive damage awards because of the extent of stockholder losses. Shares sold at more than $84 apiece a year ago, and at $36 a month ago before the emergence of hidden losses sent the price reeling downward to current levels below $5 a share. (The stock closed Friday at $4.71 on the New York Stock Exchange.)
Significantly, two suits against Enron charge that the firm's top executives breached their fiduciary duty of loyalty and prudence by failing to inform Enron employees of dangers to the company's finances while those employees held Enron stock in their 401(k) retirement plans.
The firm's troubles raise fundamental questions of what a company owes shareholders in the management and understandable disclosure of its accounts.
But Enron's predicament also goes to the heart of the U.S. financial system, says former SEC Chairman Arthur Levitt. Enron "represents a lack of the kind of disclosure that is fundamental to maintaining confidence in U.S. public markets," Levitt says.
Enron, technically speaking, disclosed in annual reports and proxy statements for 1999 and 2000 the existence of partnerships that in some cases "acquired debt and certain equity securities of certain Enron subsidiaries." But it did not disclose the significance of the partnerships, nor did it consolidate their transactions in its reports to shareholders and the SEC.
Its references to the partnerships were in footnotes to financial statements, written in the arcane legal language typical of such documents. For example, disclosure of one partnership, LJM Cayman, read in part: "LJM received 6.8 million shares of Enron common stock, subject to certain restrictions and Enron received a note receivable and certain financial instruments hedging an investment held by Enron."
Enron entered into at least 33 partnerships, attracting investments from pension funds and other investors in return for pledges of Enron stock at a guaranteed value. One partnership held 12 million Enron shares, which at one point were worth more than $1 billion.
Yet until this year, Enron treated the partnerships as insignificant to its overall business, and so they were not required to be included in its overall accounts.
By treating its partnerships as non-consolidated subsidiaries, Enron could report lower debt burdens than it actually had, thus strengthening its credit and enabling itself to grow into the largest energy trader in the world.
Enron became a pioneer of energy trading, a way of using financial techniques of trading forward commitments in natural gas and electricity to establish future prices on long-term supply contracts. As the business boomed, Enron's revenue soared, from $20 billion in 1997 to $100 billion in 2000. Through three quarters of this year, the firm was on course to exceed $200 billion in revenue.
But in October, Enron announced that it had lost more than $600 million in the third quarter and that it needed to reduce shareholder equity by more than $1 billion due to transactions with one of its partnerships.
Then on Nov. 8, Enron restated its accounts back to 1997, acknowledging that some of its partnerships should have been included in company accounts all along. The restatement resulted in a reduction of reported profit by more than $500 million. Enron's board of directors and auditors had ordered the restatement, the firm said.
The stock price fell further, lawsuits ensued and Enron sought refuge in a merger with Dynegy Inc. Enron's financial position and stock price have weakened since the merger announcement Nov. 9., so the Dynegy deal may go through at a reduced price, says analyst Stanley Foster Reed, who runs MergerCentral.com, an online information service.
But the question remains of how such a large, significant company could collapse with so little advance notice.
Enron was a prominent company, not least because of Chairman Kenneth Lay's connections to the White House as formal energy advisor to the first Bush administration and as informal advisor to the current Bush administration.
The firm had more than 20,000 employees before recent layoffs, and it had millions of investors through the holdings of pension funds such as the California Public Employees' Retirement System, the college teachers retirement plan TIAA-CREF and major mutual funds. Yet for all its prominence, Enron's disclosures about its business were inadequate. "Disclosure" sounds like a technical term, but it is the principle behind the laws passed in 1933 and subsequent years to regulate securities markets and protect the public.
Companies issuing stock to raise financing from public investors are required to disclose accurate and complete information about their business and to have accounts certified by independent public accounting firms. The SEC, created in 1933, could not stop a company from issuing stock, but it could make it disclose all relevant facts about risks in its business.
The laws were written in the midst of the Great Depression, which followed the 1929 stock market crash. They were designed to remedy abuses such as the case of Charles Mitchell, head of City National Bank (a predecessor firm of today's Citgroup), who sold his own company's shares short--that is, he bet on their price declining--just before the crash, without informing other shareholders. Before securities laws, Mitchell had no legal requirement to disclose his activities; once the laws were passed, all top managers and directors of public companies had such legal, fiduciary duty.
The Enron case probably will lead to new laws regulating investments in subsidiaries, experts say. The SEC staff has contemplated such regulations in the past but never made them law.
And the fallout from Enron could lead to tighter restrictions on firms putting their stock in employee retirement accounts. Also, it could lead to tighter regulations on statements by top managers on the condition of the business.
"This will be a case, with major issues of concealment from shareholders," says San Francisco attorney Steven Siderman, who is preparing a class-action lawsuit against Enron and Arthur Andersen, Enron's accounting firm.
Enron executives gave no indication of the company's troubles as late as August, when Jeffrey Skilling, president and chief executive for only six months, abruptly resigned. In response to questions of trouble in the company, Skilling said, "There's nothing to disclose. The company's in great shape."
Lay, who stepped back into the top post, told employees in August that Enron's business was strong. "We've got a lot of great stuff going on and we're not getting credit for it in the marketplace, but we will," Lay said.
However, both Lay and Skilling had been selling Enron stock for more than a year at that point, Lay cashing out more than $140 million in stock options and Skilling more than $60 million in options.
Meanwhile, employee 401(k) accounts, heavily laden with Enron stock, were frozen this year because the firm changed account managers. Employees were stuck as the stock plummeted.
The principle behind securities laws is that management of a public company, with so many employees, pensioners and other institutions depending on it, is a public trust.
The charge in the lawsuits being filed against Enron is that the firm, its executives and directors betrayed that trust.
Everyone is entitled to a fair trial, and Enron and its executives will surely have many days in court in the months and years to come in which to defend against the charge of betrayal of shareholders and employees.
The Enron case will be a landmark.
*
James Flanigan can be reached at jim.flanigan@latimes.com.

GRAPHIC: Restated and Mostly Reduced, Los Angeles Times;
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.

Financial
Hooked On a Fast- Growth Habit; CEOs Reach for Double-Digit Results Despite Downturn, and Some Are Making Costly Mistakes
Steven Pearlstein
Washington Post Staff Writer

11/25/2001
The Washington Post
FINAL
H01
Copyright 2001, The Washington Post Co. All Rights Reserved

At this point, they almost can't help themselves -- it's become an addiction for the top executives of Corporate America.
Delivering double-digit earnings growth year after year is no longer simply what corporate re-engineers call a "stretch goal" for an organization, or a rare achievement to be celebrated. It's become a mandate, a benchmark, a test of corporate manhood, an expectation hard-wired into the corporate culture -- a narcotic that company leaders reach for the way most people reach for an aspirin.
Never mind that the economy is contracting, or that prices are falling and profit margins are getting squeezed, or that most industries are unlikely to grow more than 5 percent a year even after the recovery is here. The name of the game these days is boosting the stock price, and the surest way to do that is to promise -- and deliver -- double-digit profit growth to Wall Street's cadre of analysts and money managers.
It's not just in the tech and telecom sectors, where the inflated growth expectations first took root. The addiction to double-digit growth has spread across the corporate landscape to firms in older, mature industries desperate for the "growth company" moniker that qualifies them for Wall Street's highest reward: a stock price equal to 20, 30, even 40 times their expected annual earnings.
In the 1990s, "we went through a period of extraordinary high growth in profitability, and both managers and stock analysts have unthinkingly come to the conclusion that that was the norm," said Michael Jensen, a professor of finance at the Harvard Business School. "Top-level management came to believe they could get a big company to grow 20, 30, 40 percent year after year -- it was insanity. And in the process of trying to make that real, rather than acknowledging it was a transitory phenomenon, more than a few wound up destroying shareholder value rather than enhancing it."
Jensen said that it is now common for Wall Street earnings expectations to be the starting point for corporate budgeting and strategy-setting rather than the result of it. "Nothing could be more irresponsible," he said.
James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, says this fascination with high growth rates peaked in 1999, at the height of the stock market boom, when only 50 stocks in the Standard & Poor's 500-stock index -- the hottest 50 growth companies -- actually went up in value. In fact, these nifty 50 went up so much so that they lifted the overall market indexes with them. The other 450 stocks declined.
"At that point, investors were only paying for growth," Paulsen said. "Dividends, good cash flow, reliability -- they all meant nothing."
"If you were just growing at a stodgy 8 or 9 percent a year, you were neglected, ignored," said Jeremy Siegel, finance professor at the Wharton School of Management at the University of Pennsylvania. "You couldn't get good valuations."
In desperation, boring old electric utilities refashioned themselves into "merchant energy companies," while highly profitable pork producers added new product lines in order to be viewed as ready-to-eat food companies. And perfectly good retail companies threw millions of dollars into misguided Web ventures.
With the dot-com bust and the broader stock market collapse over the past year, many executives, investors and analysts claim to have learned their lesson and reduced expectations for growth. But according to Siegel, Paulsen and other experts, expectations remain unreasonably high by historical standards. Many of those executives, investors and analysts believe business to be in a temporary lull before the "norm" of double-digit growth reasserts itself sometime next year.
"Most people's expectations are still way too optimistic," said Bill Miller, the legendary manager of Legg Mason's Value Trust, a $12 billion mutual fund.
David Nadler, chairman of Mercer Delta Consulting, says this "tyranny of growth" continues to lead too many companies to expand too quickly, make ill-advised acquisitions or diversify out of their areas of expertise. "The experience on that is that their shareholders wind up paying dearly for those mistakes," he said.
Indeed, many of the celebrated corporate crackups of the past year -- think of Conseco Inc.'s costly foray into manufactured-home financing, Providian Financial Corp.'s debacle with sub-prime credit card lending, Freightliner LLC's truck glut and the record $50 billion write-off of acquisition costs by JDS Uniphase Corp. -- came about as a result of companies trying to push earnings growth to the limit.
Corporate executives certainly have plenty of incentive to play the growth game, whether consciously or unconsciously. Most have multimillion-dollar compensation packages that include bonuses, stock and stock options, all tied directly to growth in earnings and share price. And a rising stock price gives them a valuable new currency -- currency that can be used to buy short-term earnings growth through mergers and acquisitions and to offer valuable stock options when recruiting top management and technical talent.
The stock option has a particularly pernicious impact, according to David Morrison, vice chairman of Mercer Management Consulting Inc. and co-author of "The Profit Zone." Options become more valuable as the price of the company stock rises above the point at which the options are issued. On the other hand, if things go bad, it doesn't matter how much the price of the stock goes below the "strike price" -- the value remains zero. As a result of this asymmetry between upside potential and downside risk, says Morrison, it is common for executives to take bigger risks with their companies than they otherwise would have.
Ego also plays a role. Chief executives who deliver year after year of double-digit earnings growth wind up being lionized in business books, on magazine covers and on cable-TV news shows. They are invited to serve on other corporate boards and to speak at investor conferences organized by celebrity analysts. Their boards of directors give them wide latitude in running the company.
By contrast, CEOs who don't have a good growth story to tell, or can't deliver on it, risk finding themselves in early retirement.
Jeff Garten, dean of the Yale School of Management, recently interviewed 40 of the leading corporate chief executives for a new book, "The Mind of the CEO." And more often than not, Garten said, the executives told him off the record that while they knew the expectations about earnings growth are often unreasonable and unsustainable, they had no choice but to participate, or risk being dismissed as someone who simply "doesn't get it."
"The system penalized anyone who didn't play the game," Garten said. As a result, executives find themselves on a treadmill -- always in a desperate search for ways to deliver the next increment of growth that will justify the unrealistic earnings expectations in which they themselves were complicit.
Analyst William Steele said he has seen it time and again in the consumer products sector that he follows for Bank of America Securities Inc., as companies that had always been "solid singles hitters" suddenly started swinging for the fences.
"What you've seen is companies making ill-advised acquisitions, abusing their balance sheets [by taking on too much debt or issuing too much stock] and under-investing in their brands," said Steele.
Take the case of Freeport, Ill.-based Newell Co., which for more than 30 years had enjoyed steady earnings growth by buying up underperforming housewares companies and "Newellizing" them -- bringing in new management, cutting costs, scrapping unprofitable products, consolidating distribution and winning more space on retail shelves. But by the late 1990s, after 75 acquisitions that included Calphalon cookware, Levelor window blinds and Rolodex card files, the number of good turnaround prospects had dwindled. And with growth in sales of consumer products slowing to single digits, Newell executives needed something that would keep them in double-digit territory.
That something, they thought, was Rubbermaid, for years one of the most respected companies among executives and investors, but one that had stumbled badly beginning in 1996. It was far and away Newell's biggest acquisition, bought with newly issued Newell stock valued at $5.8 billion, a 50 percent premium over Rubbermaid's market price at the time.
The Rubbermaid deal closed in the spring of 1999, and Newell Rubbermaid's financial performance has declined ever since, a reflection not only of the slowing economy but of problems within the company itself. Total profits for the combined firm are barely higher than they were before the acquisition, and because of the debt taken on and new shares issued to finance the purchase, the best measures of financial performance -- earnings per share and return on assets -- have both declined. After the company repeatedly failed to meet the quarterly sales and growth target it had promised Wall Street, chief executive John J. McDonough was fired in October of last year.
Given that history, the current economic uncertainty and continued weakness in quarterly earnings, one might think that Newell's new executive team would steer clear of making grand promises to Wall Street. But in June, after barely six months on the job, the new chief executive, Joseph Galli Jr., told Wall Street analysts that a restructuring program he had instituted would allow the company to post a 15 percent earnings increase in 2002. At $26, analysts say the stock price now reflects an expectation that Newell Rubbermaid will meet this double-digit growth target.
In an interview last week, William T. Alldredge, Newell's chief financial officer, explained that the 15 percent growth target for next year was reasonable because the company's profits this year, against which next year's will be compared, are so depressed. Going forward, however, he acknowledged that growth rates would be closer to 10 percent than 15 percent, and they would come from squeezing more profit out of existing brands rather than through acquisitions.
"I'm not sure we see the enormous upside potential that we once did," said Alldredge, who insisted, nonetheless, that Wall Street should continue to value Newell Rubbermaid as a "growth company."
To this day, "old-fashioned" chief executives such as Warren Buffett remain puzzled as to why executives still can't resist the urge to promise investors any particular level of earnings growth, given all the uncertainties of running a business. In the annual report to shareholders of his Berkshire Hathaway Inc. in February, he noted that only a handful of companies have ever been able to sustain 15 percent earnings growth for more than a decade. Such promises, he said, not only spread "unwarranted optimism" among investors, he said, but "corrode" behavior by top executives -- in some cases behavior so corrosive that it spills over into deceptive accounting. As it turns out, the chief executives of Sunbeam, Xerox, Waste Management and Enron all lost their jobs in recent years after major-league earnings overstatements were uncovered during their watch.
(Buffett's Berkshire Hathaway is a significant investor in The Washington Post Co., which, like Berkshire, provides no earnings guidance to Wall Street investors.)
James Johnson, the former chairman of Fannie Mae, has heard all these criticisms, and can even add a few of his own. But he said that for every company that overpromised and overreached, there were others where the focus on earnings growth has led to breakthrough innovations, successful new corporate strategies and big gains in productivity.
"It's what makes American capitalism so unique -- and so successful," said Johnson, whose ability to deliver on a promise of double-digit earnings growth in every year but one led to a dramatic increase in Fannie Mae's stock price during his tenure. It also made Johnson a very rich man.
"It's a tricky balance," said David Winters, president and chief investment officer of Mutual Series Fund Inc., a New Jersey-based mutual fund. "You don't want companies to be sleepy, or set the bar so low that they can easily step over it. But you don't want companies that overpromise and underdeliver."
Certainly no chief executive took the goal of posting double-digit earnings growth each year more seriously than John F. Welch Jr., who recently retired as chairman of General Electric Co. On Jack Welch's watch, division managers who failed to contribute to the corporate goal were routinely fired or had their divisions sold off. And critics have charged that the unrelenting pressure led, on occasion, to accounting gimmicks and questionable business practices -- a charge Welch repeatedly denied.
Yet according to Noel Tichy, a professor at the University of Michigan Business School, it was the demand for double-digit earnings growth year after year that forced managers of GE's old-line manufacturing divisions to get into the growing and profitable business of servicing and financing the turbines and medical equipment they made.
"I don't know when it would ever be the right decision not to try to grow fast," said Tichy, co-author of a book titled "Every Business Is a Growth Business." And even while acknowledging that companies have been known to do dumb things in the pursuit of earnings growth, the good ones don't.
"If you don't have goals that force executives to stretch themselves and their organization, you don't optimize performance," Tichy said.
Business guru James Collins disagrees. In a new book, "Good to Great," Collins argues that the companies that sustain really high growth rates over long periods of time are those that don't set growth as an explicit goal. Rather, Collins says, the best companies operate less out of some corporate bravado than a determination to understand their business and their success and to capitalize on that understanding.
"Great companies don't come about because the CEO wants to be a celebrity or please the share-flippers, and certainly not because he or she wants to hit the top targets on the compensation plan," Collins said last week. "The common thread among the CEOs of the truly great companies is that their ambition is to build something that can outlast themselves. The growth comes as a byproduct of that."
Harvard's Jensen said that the only way to lick Corporate America's growth addiction is for more executives to muster the courage to stand up to Wall Street and begin setting realistic expectations for their companies. Such a strategy might occasionally require a CEO to tell investors that his company's stock is overvalued -- a truly novel idea in today's environment, where executives almost reflexively complain that their share price is too low. And it might require executives at some companies to make clear that their stock may be inappropriate for growth funds and hedge-fund managers.
"Companies generally get the shareholders they deserve," said Miller, Legg Mason's money manager.
But Norman Augustine, the retired chairman of Lockheed Martin Corp., warns that "standing up to Wall Street" may not be as easy as it sounds.
"We all sit around complaining about the short-term mentality on Wall Street and the fund managers who say they'll dump our stocks if we don't show double-digit earnings growth every quarter," Augustine said. "And then the manager of our own corporate pension fund comes in and says, 'We have two funds that didn't do well for us this quarter, so I dumped them.'
"And there it is," Augustine said. "We have met the enemy, and it is us!"

http://www.washingtonpost.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

Enron Says It's Still in Talks With Possible Investors for Cash
2001-11-25 17:36 (New York)

Enron Says It's Still in Talks With Possible Investors for Cash

     Houston, Nov. 25 (Bloomberg) -- 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,'' said Enron spokeswoman
Karen Denne.

     Shares of the Houston company fell by 48 percent in the past
three trading sessions. 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., the Blackstone Group and the Carlyle Group for a private
equity investment, said industry analyst David Snow of
PrivateEquityCentral.Net. The firms have declined to comment.

     On 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
these sources.

     On Wednesday, Enron got a three-week reprieve from lenders on
a $690 million note due this week, giving the company 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 will acquire preferred stock and other rights in an
Enron unit that owns the Northern Natural Gas pipeline.

     Barron's reported over the weekend that Dynegy may have a
difficult time walking away from the deal because its right to the
pipeline might be challenged by J.P. Morgan Chase & Co. and
Salomon Smith Barney Inc., who accepted the asset as collateral
for $1 billion 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.

--Mark Johnson in the Princeton newsroom (609) 750-4662

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

11/26/2001
BusinessWeek
Page 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.

COMPANIES & FINANCE UK - Enron seeks survival pact to aid Dynegy's $9bn rescue.
By ANDREW HILL and SHEILA MCNULTY.

11/24/2001
Financial Times
(c) 2001 Financial Times Limited . All Rights Reserved

Crisis-hit Enron is seeking to extend its survival pact with its key lenders long enough to be rescued by Dynegy, the rival energy group.
Dynegy said it was "continuing with confirmatory due diligence" for its all-stock rescue bid. The offer is still worth $9.3bn ( #6.5m), even though Enron's market capitalisation has halved this week to $3.5bn.
Enron's survival is crucial to the smooth running of the electricity and power markets, where it claims to be the principal in 25 per cent of all transactions.
Enron sought to allay fears that Dynegy might change the terms of its offer, or withdraw.
Withdrawal of the rescue bid would call into question Enron's credit ratings, which remain one notch above "junk" status. Ratings agencies held off downgrading Enron two weeks ago, because such a decision would trigger repayment of debt issued by off-balance-sheet partnerships that Enron used to support its rapid expansion over the past two to three years.
Even so, the terms of recent credit lines extended to Enron suggest lenders already regard the company as a non-investment grade risk. The bonds are trading as though the company is heading for a Chapter 11 bankruptcy filing.
Glen Grabelsky of Fitch, the rating agency, said there were two possible outcomes for Enron: "One is that the transaction goes through; and the other is that the viability of this company is in question."
Enron's shares fell to $4.74, a further 5.4 per cent drop, in a shortened session of trading yesterday morning in New York, as investors continued to express concern about Dynegy's commitment to the deal.
John Olson, vice president of research at Sanders Morris Harris, the Houston-based investment banking and securities firm, said: "With Enron trading at 4 bucks and change it might make sense for them to go into bankruptcy and salvage this thing the right way."
Observers close to Enron say Wednesday's decision by JP Morgan Chase and Citigroup to finalise a $1bn secured credit line, and the deferral of a $690m repayment of notes due next Tuesday, have reduced the pressure on the group. If Dynegy were to renegotiate the terms of its deal - and that may depend on legal clauses within the original merger agreement - that would not affect Enron's financial situation, they say.
As well as negotiating with its lenders through the weekend, Enron is also seeking further investments from JP Morgan Chase, Citigroup and private equity firms in an attempt to shore up confidence. www.ft.com/enron.
(c) Copyright Financial Times Ltd. All rights reserved.
http://www.ft.com.

USA: Enron employees sue as pension savings evaporate.
By Andrew Kelly

11/25/2001
Reuters English News Service
(C) Reuters Limited 2001.

HOUSTON, Nov 25 (Reuters) - After climbing utility poles in all kinds of weather for 35 years, Roy Rinard was hoping to retire in a few years, but that was before the collapse in Enron Corp.'s stock price devoured his retirement savings.
"I'm basically wiped out," said Rinard, 54, who works for Portland General Electric, an Oregon utility company acquired by the Houston-based energy trading giant in 1997.
"I'm right back to ground zero and I'll have to go on working as long as I can," said Rinard, who suffers from arthritis and a lung condition that leaves him short of breath.
Encouraged by Enron's then-strong performance and the company's bullish view of its future prospects, Rinard moved all of the money invested in his 401(k) retirement account into Enron stock earlier this year.
But it proved to be a costly decision as the value of his account fell from $470,000 a year ago to around $40,000 today.
Rinard now hopes a lawsuit filed in U.S. District Court in Houston will recover at least some of his money.
The suit, filed on behalf of Enron employees by Seattle-based law firm Hagens Berman, alleges that Enron breached its fiduciary duty by encouraging its employees to invest heavily in Enron stock without warning them of the risks of doing so.
Enron's stock, which peaked at $90 in August 2000, closed at $4.74 on Friday, after falling sharply in recent weeks amid a series of damaging financial disclosures.
A broadly similar suit filed by the Keller Rohrback law firm, also Seattle based, alleges that another Enron employee, Pamela Tittle, lost $140,000 on Enron stock held in her retirement account.
According to that suit, the Enron retirement savings plan had assets worth $2.1 billion at the end of last year, including $1.3 billion, or 62 percent of the total, in Enron stock.
DOUBTS EMERGE ABOUT DYNEGY DEAL
Enron, a former Wall Street favorite, agreed to be bought out earlier this month by smaller energy trading rival Dynegy Inc., but continuing problems at Enron have caused some analysts to question whether the deal will be completed.
Doubts have also been expressed about a planned sale of Portland General to Northwest Natural Gas .
Hagens Berman plans to seek class-action status for its suit and says 21,000 Enron employees could be eligible to join it.
The suit alleges that Enron "locked down" 401(k) retirement accounts on Oct. 17, preventing employees from changing the investments they held in their accounts until Nov. 19.
During that period Enron reported its first quarterly loss in four years and took a charge of $1.2 billion against stockholders' equity as a result of off-balance-sheet deals that would later come under investigation by U.S. regulators.
In that time, Enron shares fell from $30.72 at the close of trading Oct. 16 to $11.69 on Nov. 19.
Enron spokeswoman Karen Denne said employees' access to the accounts was blocked as part of a previously planned change in the administration of the retirement plan and that the measure was in effect from Oct. 26. to Nov. 19.
Steve Lacey, a 45-year-old emergency repair dispatcher who has worked for Portland General Electric for 21 years, said the measure came at a time when bad news about Enron was flying thick and fast, driving the stock price down at a dizzying pace.
"We couldn't take our money out of Enron stock into another portfolio. Basically they had us locked down to where we had no say over our own future," he said.
Lacey declined to quantify his own losses but said he and many of his colleagues had invested most of their retirement funds in Enron stock because it had performed better in the past than the other investments available under the Enron plan.
Denne said Enron employees were normally able to choose among 18 different investment options, but Enron's matching contributions were always made in the form of its own stock.
Lacey said he felt sorry for older colleagues at Portland General who had suffered a heavy financial blow just before they were due to retire, adding that he was only beginning to realize how serious the consequences could be for himself.
"My goal was to have an extremely comfortable retirement and that may be a little clouded now," he said.

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

INDIA PRESS: Aditya Birla May Buy Enron's Dabhol Stake

11/25/2001
Dow Jones International News
(Copyright (c) 2001, Dow Jones & Company, Inc.)

NEW DELHI -(Dow Jones)- India's Aditya Birla group is considering acquiring Enron Corp.'s (ENE) stake in Dabhol Power Co., reports the Economic Times.
Dabhol is a 2,184-megawatt joint venture power plant located in the western Indian state of Maharashtra. It is a unit of U.S.-based energy company Enron.
The newspaper says the group is exploring the possibility of submitting an expression of interest with Indian financial institutions to buy Enron's stake in Dabhol.
Officials from Aditya Birla weren't available for comment, the report says.
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. Newspaper Web site: www.economictimes.com

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

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

Canadian Oil and gas companies on high alert after terror alert

11/25/2001
The Canadian Press
Copyright (c) 2001 The Canadian Press. All rights reserved.
VANCOUVER (CP) _ Canadian oil and gas companies are on high alert after being warned that Islamic terrorists loyal to Osama bin Laden may be planning to blow up energy installations and pipelines in North America.
The warning, issued last week by the American Petroleum Institute, said ``such an attack would allegedly take place in the event that either bin Laden, or Taliban leader Mullah Omar, are either captured or killed.''
The alert was distributed to select officials of utility companies throughout North America by the institute, the industry's official voice.
It said the information ``that Osama bin Laden may have approved plans to attack natural gas supplies'' is currently ``uncorroborated,'' pending further FBI checks.
But it advised utility companies that ``the planning that went into the Sept. 11 attacks strongly suggests that terrorist cells are already established inside the U.S. and may simply be awaiting instructions to strike.''
``Failing to strike a high-profile blow against targets on American soil will raise the question of Taliban and al-Qaida legitimacy in their global fight against the United States.''
The institute did not identify the source of the information nor potential targets. It is understood the RCMP have been notified of the alert.
B.C. Gas spokesman Dean Pelkey said it has received the alert and will ``stay vigilant.''
The priority, he said, is pipeline security.
``Some additional precautions have been taken but I do not want to go into any details,'' Pelkey said.
A security analyst, who asked not to be named, said measures taken by Canadian utility companies are likely to include restricting access to sensitive areas, a high-profile presence with guards and closing off areas such as above-ground wells and pipeline junctions.
Aerial surveillance of pipeline routes and installation of remote-sensing devices may also be part of the plan.
``Generally, underground pipelines and storage facilities are difficult to target,'' he said.
``What is key when you are dealing with Islamic terrorists is to prevent the use of suicide bombers and car bombs to attack above-ground installations.''
In addition to B.C. Gas's hundreds of kilometres of gas pipelines and storage facilities, security has also been stepped up at B.C. Hydro's 29 dams, four thermal plants and 1,825 kilometres of major transmission lines.
Even before last week's alert, the Alberta government formed a ministerial security task force to enhance security at energy production and transmission facilities.
The facilities include Edmonton's Refinery Row, Fort Saskatchewan's petrochemical and chemical projects and the pipeline network.
That includes the collector point at Empress, Alta., east of Calgary near the Saskatchewan border, the petrochemicals plants at Joffre, Alta., east of Red Deer, and Fort McMurray's oilsands project.

USA: FERC rule on natgas shipping needs more work-industry.
By Chris Baltimore

11/21/2001
Reuters English News Service
(C) Reuters Limited 2001.
WASHINGTON, Nov 21 (Reuters) - The Federal Energy Regulatory Commission's (FERC) proposal to loosen scheduling rules for natural gas pipeline shippers, meant to boost competition and supplies, could have the opposite effect, some companies and industry groups told the agency this week.
FERC proposed the changes last month to enhance competition on the U.S. interstate natural gas pipeline grid by allowing gas shippers to make same-day changes to their schedules to meet changing supply and demand.
The changes are supported by the American Gas Association, which represents U.S. gas producers.
FERC stepped in after the Gas Industry Standards Board (GISB), the industry's self-regulating rulemaking body, failed to reach consensus on the issue.
Current GISB standards require pipeline operators to wait at least a day before changing their preset shipment schedules, which slows the market's ability to react to changing conditions, FERC said.
Instead, FERC proposed allowing pipeline shippers to make same-day changes in schedules.
The agency's comment period on the proposal, which ended on Monday, produced a mixed reaction from pipeline operators and industry groups.
The Electric Power Supply Association (EPSA) warned FERC in a written filing the change could reduce the flexibility of electric generators to obtain natural gas supplies.
The trade group, which represents independent power generators and marketers, asked FERC to limit pipeline operators' authority to change schedules to give power plant operators greater supply certainty.
A group representing pipeline owners also expressed concern.
The Interstate Natural Gas Association of America said the new rules could "increase market volatility and thereby could reduce flexibility and reliability for other parties." The pipeline group asked FERC to clarify some language in the rule to allay concerns.
A Dynegy Inc letter to FERC also warned the rule could degrade reliability.
An Enron Corp. subsidiary agreed the changes could increase flexibility and competition, but raised concerns that newly available capacity might not be offered equitably to market participants.
Enron and El Paso Corp. , which owns one of the largest U.S. pipeline systems, asked FERC to hold a technical conference on how the changes would be implemented.
Williams Cos Inc. , which owns gas production and pipelines, said it favored the measure but asked FERC to give industry enough lead time to change their systems to accommodate it. The company also asked FERC to "grandfather" existing capacity arrangements to exempt them from the requirements.
Gas producers said they welcomed the proposed change in pipeline scheduling rules.
The American Gas Association, which represents major gas producers, said the measure would boost competition in the U.S. natural gas market. The changes would also "better ensure continued reliability of natural gas service, enhance daily balancing abilities and make more capacity available on the interstate grid," the group said.