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Enron Mail |
Dynegy Is in Talks on Purchasing Enron --- Deal Would Include Infusion Of C=
ash to Assist Firm In Shoring Up Finances The Wall Street Journal, 11/08/01 Dynegy Is Said to Be Near to Acquiring Enron for $8 Billion The New York Times, 11/08/01 Trading Places: Fancy Finances Were Key to Enron's Success, And Now to Its = Distress --- Impenetrable Deals Have Put Firm in Position Where It May Lose= Independence --- Talks With Rival Dynegy The Wall Street Journal, 11/08/01 Unit of Enron Is Challenged The New York Times, 11/08/01 Enron in Takeover Talks With Dynegy Los Angeles Times, 11/08/01 FRONT PAGE - FIRST SECTION: Enron board considering takeover by rival Dyneg= y: Energy trader seeks emergency talks with banks amid fears over cash cris= is=20 Financial Times; Nov 8, 2001 FRONT PAGE - COMPANIES & MARKETS: Dynegy in last-ditch attempt to save Enro= n=20 Financial Times; Nov 8, 2001 COMPANIES & FINANCE THE AMERICAS: Enron in crunch banks meeting=20 Financial Times; Nov 8, 2001 Dynegy may acquire Enron Houston Chronicle, 11/08/01 Enron deals downshifted at breakneck speed Houston Chronicle, 11/08/01 Azurix completes sales of two units Houston Chronicle, 11/08/01 Troubled Enron Negotiates Sale To Rival Dynegy The Washington Post, 11/08/01 Dynegy May Offer as Much as $8 Billion for Enron: WSJ (Update1) 2001-11-08 05:32 (New York) Reports: Dynegy close to deal to buy Enron for $8 billion Associated Press Newswires, 11/08/01 ChevronTexaco affiliate Dynegy in talks to buy Enron for 7-8 bln usd - repo= rt AFX News, 11/08/01 USA: UPDATE 1-Fund alleges fat fees biased Andersen on Enron. Reuters English News Service, 11/08/01 Enron's power company reverses itself, says it is meeting with Indian repre= sentatives in Singapore Associated Press Newswires, 11/08/01 Enron India unit's lenders issue court challenge to prevent project pullout AFX News, 11/08/01 Dabhol Pwr Co Confirms Creditors Mtg In Singapore Thu Dow Jones Energy Service, 11/08/01 India: Enron not to move on termination till Friday Business Line (The Hindu), 11/08/01 Dabhol agrees to meet FIs after a day-long drama Business Standard, 11/08/01 Dynegy Holds Talks to Buy Enron, Inject $1.5 Billion to Shore Up Firm Dow Jones Business News, 11/07/01 Dynegy reportedly close to deal to buy Enron for $8 billion Associated Press Newswires, 11/07/01 USA: WRAPUP 2-Enron, Dynegy in merger talks. Reuters English News Service, 11/07/01 Dynegy Looking to Acquire Enron TheStreet.com 11/07/01 Azurix Corp. Closes Sale of Azurix North America PR Newswire, 11/07/01 Dynegy Is in Talks on Purchasing Enron --- Deal Would Include Infusion Of C= ash to Assist Firm In Shoring Up Finances By Robin Sidel and Rebecca Smith Staff Reporters of The Wall Street Journal 11/08/2001 The Wall Street Journal A3 (Copyright © 2001, Dow Jones & Company, Inc.) Dynegy Inc., the Houston-based energy trading and power company, was attemp= ting to strike a deal yesterday evening to buy Enron Corp., its beleaguered= hometown rival, for roughly $7 billion to $8 billion in stock, one-tenth o= f what Enron was worth 15 months ago.=20 Because any merger of the two would likely be scrutinized for many months a= nd Enron needs to shore up its beleaguered finances now, Dynegy also is exp= ected to inject an additional $1.5 billion into Enron immediately, people f= amiliar with the matter said. ChevronTexaco Corp., which owns a 26% stake i= n Dynegy, is expected to provide Dynegy with the funds for the cash infusio= n and is playing a significant role in the negotiations. ChevronTexaco then= will inject an additional $1 billion into the combined company once the de= al is concluded so that its stake in Dynegy isn't substantially reduced and= so the combined company has a healthy balance sheet. With Enron in a weak bargaining position, Dynegy, which is one-fifth Enron'= s size, was hoping to clinch a deal which would have it paying little, if a= ny, premium for Enron. The boards of Dynegy, Chevron and Enron were meeting= yesterday to discuss a potential deal, but a seesawing Enron stock price a= nd the complexity of a transaction yet could derail a deal, people familiar= with the matter warned. "This is far from over," said one person familiar = with the negotiations. Several important points, including the exchange rat= io, were still being worked out. Dynegy expects to argue that Enron shareho= lders will benefit from the upside of combining the two companies and that = a transaction will add to Dynegy's earnings because of potential synergies.= =20 Spokesmen from Enron and Dynegy declined to comment.=20 If approved by regulators, the deal would be a stunning development for Enr= on, which transformed itself from a staid natural-gas-pipeline company into= a highflying power-trading giant only to see its share price -- and hefty = market valuation -- plummet in a matter of weeks. And for Enron to sell its= elf for a low price is sure to stun investors.=20 Under the terms being worked out last night, Enron Chairman Kenneth Lay wou= ld have a seat on the combined company's board, but wouldn't hold any forma= l management position, said the people familiar with the matter. Mr. Lay ma= y take on a consulting role. Meanwhile, Chuck Watson, chairman and chief ex= ecutive of Dynegy, would be CEO of the combined company, while his No. 2, S= tephen Bergstrom, will president.=20 Enron has been scrambling for days to line up quick financing from a promin= ent outside investor and has been in discussions with private-equity firms = and power-trading companies. The company desperately needs to win back its = credibility on Wall Street following the disclosure that the Securities and= Exchange Commission was investigating the partnerships created to serve as= a hedge against fluctuating market conditions. Discussions between Dynegy = and Enron began about 10 days ago, but intensified last weekend.=20 Enron also is expected today to disclose more financial dealings about the = partnerships. A person close to Dynegy said the potential acquirer feels it= understands Enron's business and is apprised of the liabilities, which hav= e been factored into the transaction.=20 Should Enron strike a deal, it hopes to stabilize its stock price. Enron fe= ll 6.4%, or 62 cents, to $9.05 at 4 p.m. composite trading on the New York = Stock Exchange. At one point yesterday morning, Enron's stock had fallen 25= % on news reports that Enron's efforts to line up investors had failed. The= stock recovered after CNBC and Dow Jones Newswires reported the talks with= Dynegy. The shares are at a new 52-week low and far from the 52-week high = of $84.88.=20 Dynegy fell $3, or 8.3%, to $33, at 4 p.m. in Big Board trading. However, s= ome investors believed the company's share price could benefit from the dea= l.=20 Jason Selch, an energy analyst at Wanger Asset Management in Chicago, a lar= ge Dynegy shareholder, said the company has a history of pulling off compli= cated deals and added that because Enron is in such bad shape, Dynegy could= dictate the terms of the deal, shielding itself from potential losses due = to shareholder lawsuits or problems with Enron's complicated off-balance sh= eet dealings.=20 "If they make an offer, they will be making an offer in order to get a stea= l," said Mr. Selch, who says Enron's core energy-trading business is being = valued at about half the normal market valuation of these operations. "I th= ink they will be acquiring a business that will launch them into the No. 1 = market-share position in energy trading," Mr. Selch added.=20 Whether a deal with Dynegy materializes, the fact that Enron is willing to = consider a sale shows how its fortunes have sagged and underscores how desp= erate it is for a savior. The company, which was at the pinnacle of its suc= cess just a year earlier, boasted a market capitalization of $71 billion ab= out a year ago and is now valued at about $7 billion.=20 In exchange for the immediate capital infusion, Dynegy is expected to get c= onvertible preferred stock. In that type of deal, an investor receives a sa= fe, bondlike interest payment and then can convert that holding into common= stock after the share price rises to a specified level. Enron also had bee= n soliciting interest from private equity firms, but any discussions with t= hose parties were proceeding on a slower track.=20 People familiar with the negotiations said it was possible the financial pl= ayers could still play some sort of role in any Enron transaction, although= details weren't immediately available. Buyout firms Clayton, Dubilier & Ri= ce and Blackstone Group, which had been approached by Enron to make an inve= stment, decided against doing so, according to people familiar with the mat= ter. Indeed, Enron's move to publicly disclose new information about the pa= rtnerships could provide intriguing details to any other potential bidders = who are interested in a deal, but were reluctant to pursue Enron without kn= owing more about those transactions. And because Dynegy may only be paying = a small premium, another suitor may be able to step up to the plate.=20 The deal, if agreed to, will add to Dynegy's earnings in the first year. Th= e new entity will focus on the core business of North American and European= wholesale, commercial and industrial energy markets and will capitalize on= the opportunities generated by the combined, diversified asset-backed netw= ork supported by the strongest intellectual capital in the industry.=20 Aside from restoring confidence among its investors, Enron has faced growin= g pressure from its trading partners. The company is offering special prote= ctions to some trading partners, hoping to prevent a mass exodus due to fea= rs it could face further credit downgrades or wind up seeking the protectio= n of a federal bankruptcy court.=20 The protection takes the form of a "netting agreement" that permits a tradi= ng partner to offset the sums it is owed by various Enron entities against = the amounts that it owes the Enron concerns.=20 Without such an arrangement, a company might owe money to one Enron entity = but have to stand in a long, slow line to collect sums owed by a different = Enron concern should the company seek bankruptcy-court protection. With net= ting, positions could cancel each other out, at least to some extent, and r= educe a firm's ultimate credit exposure.=20 Enron spokesman Mark Palmer said the company has plenty of cash and has no = need or intention of seeking protection from creditors, with whom it is cur= rent.=20 ---=20 Jathon Sapsford, Robert Frank and Ken Brown contributed to this article. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section C Dynegy Is Said to Be Near to Acquiring Enron for $8 Billion By RICHARD A. OPPEL Jr. and ANDREW ROSS SORKIN 11/08/2001 The New York Times Page 1, Column 2 c. 2001 New York Times Company The board of Dynegy Inc. tentatively approved a deal last night to acquire = the Enron Corporation, the once-mighty energy-trading company laid low by a= financial crisis and government investigation, executives close to the tra= nsaction said.=20 A deal would enable Dynegy to buy the much bigger Enron at a fire-sale pric= e -- about $8 billion in stock, or roughly $10 a share, for a company that = less than a year ago had a market value of nearly $70 billion. But with sto= ck and bond investors fleeing, some of its trading partners refusing to do = business with it, Enron had few choices but to talk to Dynegy. As part of the deal, Chevron Texaco, which owns a 27 percent stake in Dyneg= y, would give Enron a cash infusion of at least $1.5 billion up front and a= n additional $1 billion when the deal closed.=20 The executives said the companies hope to finalize the details and announce= the deal today.=20 If completed, a takeover by Dynegy, a company only about one-quarter its si= ze in revenue, would represent a remarkable humbling of Enron, the nation's= biggest buyer and seller of natural gas and electricity. Enron had $139.7 = billion in revenue for the first nine months of the year.=20 As recently as last spring Enron was lionized by investors as an innovator = that had in many ways created and cleverly dominated the nation's deregulat= ed energy markets. It would also vindicate not only Dynegy, which took a mo= re measured approach to doing business in those markets, but also critics u= ncomfortable with energy deregulation who said Enron's energy trading was r= uthless, its finances murky and its power and influence too extensive.=20 The company's chairman and chief executive, Kenneth L. Lay, is a close frie= nd of President Bush. He has been one of Mr. Bush's largest campaign contri= butors, and no other energy company gave more money to Republican causes la= st year than Enron. Mr. Lay would be on the board of the combined companies= , the executives said, but it was unclear if he would have an operational r= ole.=20 Enron's problems came to light last month when the company disclosed $1 bil= lion in write-downs and an unusual $1.2 billion reduction in shareholder eq= uity. The reduction in equity arose from transactions with investment partn= erships involving Andrew Fastow, the chief financial officer, who was force= d to resign on Oct. 24. The Securities and Exchange Commission is investiga= ting those transactions.=20 Enron is expected today to send the S.E.C. answers to questions the agency = has posed in its investigation. The answers have been reviewed by Dynegy of= ficials, the executives said, and are expected to be released publicly.=20 Enron is scheduled to meet its creditors tomorrow about the company's conti= nuing crisis -- and about the merger deal, if there is one.=20 People close to the deal say the company hopes that a deal with Dynegy, and= the release of the answers to the S.E.C., will calm the crisis that has en= gulfed the company and led other energy companies that trade with Enron to = curtail their credit exposure to the company.=20 Besides worries about the huge losses and the S.E.C. investigation, investo= rs and creditors are nervously watching Enron's credit rating. Moody's Inve= stors Service and Standard and Poor's have already cut the rating to two no= tches above junk status, and on Monday, Fitch Inc. cut it to one notch abov= e junk.=20 As part of the acquisition, Dynegy would be taking on Enron's $12.8 billion= debt load -- a number that does not include billions of dollars of other d= ebt, accumulated off the balance sheet, that has played a major role in Enr= on's current problems. The executives said they expected the deal would lea= d to the sale of some Enron assets to pay down the $12.8 billion debt.=20 Should Enron lose its investment grade rating, other energy trading compani= es could curtail their business with the company even further, and Enron co= uld be forced to issue tens of millions of shares of stock to cover off-bal= ance sheet debts that it has guaranteed.=20 Early Wednesday, shares of Enron plunged 28 percent, to about $7, on fears = that the company was unable to line up new investors.=20 But the stock took back most of its losses in the afternoon after CNBC repo= rted the talks with Dynegy. Shares of Enron closed at $9.05, off 62 cents. = Dynegy shares closed at $33, down $3.=20 In addition to both companies' very large presence in energy trading, Enron= owns the Portland General Electric Company, a utility in Oregon it had alr= eady agreed to sell, and Dynegy owns the Illinova Corporation, a retail ele= ctricity and natural gas utility in Illinois.=20 Regulators may take a hard look at those utilities in reviewing a merger de= al, said Jeff Dietert, an analyst with Simmons & Company in Houston. ''Then= you've got concerns about market power,'' he said. ''It's just a lot of di= fferent issues to deal with before we get too excited that this deal is goi= ng to get done.''=20 The acquisition would combine Enron, which dominates United States trading = of electricity and natural gas and has been shedding its hard assets, with = Dynegy, a company that has pursued a much different strategy of using tradi= ng to maximize earnings from its power plants.=20 Enron has always concentrated on sophisticated financial trading strategies= , a senior executive at a rival energy-trading firm, said. ''Dynegy has alw= ays been more of a logistical player of physical assets,'' he said. ''Those= are very different cultures and very different mentalities.'' The executiv= e noted that there had been an immense talent drain from Enron in the last = two weeks. ''It has become a frenzy,'' he said. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Trading Places: Fancy Finances Were Key to Enron's Success, And Now to Its = Distress --- Impenetrable Deals Have Put Firm in Position Where It May Lose= Independence --- Talks With Rival Dynegy By Rebecca Smith and John R. Emshwiller Staff Reporters of The Wall Street Journal 11/08/2001 The Wall Street Journal A1 (Copyright © 2001, Dow Jones & Company, Inc.) When Enron Corp. convened its annual conference with credit analysts and bo= nd investors in Houston last February, the energy-trading giant was soaring= and looking to climb higher.=20 The company's stock was trading at about $80 a share, giving it a stock mar= ket value of $70 billion. Though up fourfold from three years earlier, the = stock price wasn't nearly high enough, Enron's new chief executive, Jeffrey= Skilling, told the audience. With its dominant position in energy-trading = markets and its highly touted new moves into telecommunications, Enron stoc= k should be at $126 a share, Mr. Skilling argued. All in all, a vintage performance for a company not known for being bashful= . "A lot of hype. A lot of spin," recalls Todd Shipman, a Standard & Poor's= analyst who attended the conference. "That was Enron."=20 Yesterday, Enron stock closed at $9.05 in New York Stock Exchange trading. = Mr. Skilling is no longer around to promote the stock. In August, he unexpe= ctedly resigned as chief executive after only six months in the top job. Ch= ief financial officer Andrew Fastow was replaced last month as controversy = escalated over his role in running private partnerships involved in billion= s of dollars of transactions with Enron. Kenneth Lay, Enron's chief executi= ve, has had to give up retirement plans to return to the helm.=20 Lately, the company has been offering special credit protection to increasi= ngly nervous trading partners, including Reliant Energy Inc. and Entergy Co= rp. The goal: to provide assurance that Enron is a creditworthy partner and= to prevent an exodus of customers. Enron's trading operation generates 90%= of the company's profits.=20 It looked yesterday as if the endgame might be beginning. Mr. Lay and Enron= 's board were discussing a possible acquisition of Enron by its much-smalle= r hometown energy-trading rival, Dynegy Inc., in a stock swap valued at $7 = billion to $8 billion. (See related article on page A3.)=20 Any merger of the two companies would probably face lengthy regulatory scru= tiny, so Dynegy is also considering injecting $1.5 billion into Enron immed= iately to help stabilize the company's finances, according to people famili= ar with the situation. The deal would also include a significant role for o= il powerhouse ChevronTexaco, which owns a 26% stake in Dynegy and would be = likely to provide much of the cash for any Enron transaction.=20 Dynegy's emergence as a serious bidder for Enron could indicate to other in= terested parties that Enron's problems can be solved. In fact, the collapse= in Enron's stock price would make it fairly easy for another large energy = player to top any Dynegy offer. Royal Dutch/Shell Group is one such promine= nt company.=20 A takeover by Dynegy or any other company would almost certainly presage th= e departure of the 59-year-old Mr. Lay. He oversaw the transformation of En= ron from a nondescript natural-gas pipeline company with annual revenue of = under $5 billion in the late 1980s to a global energy colossus with revenue= that is expected to approach $200 billion this year.=20 It has turned out that the formula behind that transformation contained the= seeds for the company's current troubles. Executives created an ever-more-= labyrinthine financial structure to support Enron's explosive growth rate. = Billions of dollars of debt -- which could have weakened Enron's credit rat= ing and slowed growth -- was kept off the balance sheet through tangled web= s of transactions with dozens of related entities. As the financial demands= became greater and the transactions more complex, Enron officials began cr= eating and heading some of the entities, raising serious conflict-of-intere= st questions.=20 Neither Enron nor Dynegy would comment. Royal Dutch/Shell also declined to = comment. Messrs. Lay, Skilling and Fastow either declined to comment or did= n't return phone calls seeking interviews.=20 Enron officials have maintained that the markets are overreacting to a spat= e of bad, but nonfatal, news. On Oct. 16, the company announced a $618 mill= ion third-quarter loss and disclosed a $1.2 billion reduction of shareholde= r equity due in part to dealings with the Fastow-related partnerships. The = company has said that its ongoing businesses are strong and it has the fina= ncial wherewithal to weather the crisis. All of its actions have been legal= and properly disclosed, Enron has stressed.=20 Still, its predicament is daunting. The Securities and Exchange Commission = has started a formal investigation into possible violations of federal secu= rities law involving the Fastow-related partnerships. Several shareholder l= awsuits seeking class-action status have been filed against top company off= icials, alleging fraud and seeking to recover some of the $20 billion in ma= rket value that Enron shares have lost in the past month. To address growin= g jitters in the energy and financial markets, Enron has drawn down billion= s of dollars of credit lines, negotiated new ones and sought a new equity i= nfusion.=20 As turmoil has engulfed the company, Mr. Lay and other top Enron executives= have kept largely out of public view -- in sharp contrast to the company's= normally outspoken public persona. The one recent public-relations initiat= ive, a conference call for analysts and big investors, turned into what eve= n Enron officials concede privately was a debacle. It left company executiv= es looking evasive and defensive rather than open and confident.=20 How did Enron, which routinely made published lists of the most-admired and= innovative companies in America, fly so high and fall so fast? The answer = lies in a combination of brilliance and overconfidence on a scale rarely se= en in the business world.=20 In the process, the company helped redefine much of the energy marketplace = on matters as fundamental as how power is bought and sold and how a company= produces a profit from doing so. For example, the company helped create an= electricity-trading market in which participants rarely take physical deli= very of the commodity but instead merely tally profits or losses from trans= actions.=20 In the accounting realm, it pioneered techniques that allowed energy compan= ies to record profits or losses on long-term contracts that hadn't yet prod= uced any revenue. "We caught a little flak in the early 1990s from people w= ho, I guess, thought we were pulling a fast one," Enron's chief accounting = officer, Richard Causey, said in an interview in August. He added that this= accounting method was the most accurate way to measure energy-trading resu= lts.=20 Enron's audacity and success sent other energy companies scrambling to emul= ate it, a process that ABN Amro analyst Paul Patterson calls "Enron envy."= =20 The company tested the limits of securities and accounting rules. For examp= le, Enron's SEC filings have included statements about the Fastow-related t= ransactions that might meet the letter of disclosure laws but are so comple= x that even some Wall Street analysts and accounting professors have found = them indecipherable.=20 Enron's seemingly impenetrable financial structure, hardly noticed by Wall = Street in the company's heyday, is now a matter of serious concern in a sud= denly skeptical investment community. "It's not easy to regain something as= basic as trust," says Goldman Sachs analyst David Fleischer, a longtime En= ron fan. In the recent conference call with Enron executives, Mr. Fleischer= pleaded with the company to be more forthcoming about its operations -- so= mething it has been promising to do for months.=20 While Enron employs some 20,000 people, its rise and fall can, in large mea= sure, be traced to three men: Messrs. Lay, Skilling and Fastow. Mr. Lay joi= ned the company in 1984 when it was still called Houston Natural Gas, a reg= ional pipeline operator. Back then, the natural-gas industry was a largely = regional business and about as exciting as watching a pipeline operate.=20 But Mr. Lay had big plans for his company, always preaching that natural ga= s was the fuel of the future. His prediction has been largely borne out whe= n it comes to such functions as fueling electric-power plants.=20 He wanted to take the company beyond natural gas. Enron bought an electric = utility in Portland, Ore., and built power plants around the world. It deve= loped its potent energy-trading operation, which buys and sells contracts t= o provide electricity in the same way that contracts for wheat and pork bel= lies are traded. These deals were done with utilities, industrial power use= rs and other trading firms.=20 To help enlarge this empire, he recruited aggressive young executives. None= was brighter or more assertive than Mr. Skilling, a Harvard Business Schoo= l graduate and former McKinsey & Co. consultant who joined Enron in 1990.= =20 Under Messrs. Lay and Skilling, the company pushed zealously for the deregu= lation of energy markets -- particularly that bastion of monopoly businesse= s, the electric-utility industry. Enron officials argued that open, competi= tive markets could help consumers and, not coincidentally, provide huge pro= fit opportunities in energy trading.=20 Mr. Skilling called the energy-trading business "a once-in-a-lifetime oppor= tunity to establish a position to last for the next 100 years." By the late= 1990s, Enron had evolved into primarily a trading company, rather than an = owner of power plants and pipelines.=20 In pursuit of their deregulation goals, Enron officials became major player= s in American politics. Mr. Lay has given nearly $2 million to President Bu= sh during his political career and is a personal friend of the president, V= ice President Cheney and several members of the cabinet.=20 One of Mr. Skilling's early hires after joining Enron was Mr. Fastow, at th= e time a 29-year-old MBA from Northwestern's Kellogg School who had been wo= rking on leveraged buyouts and other complicated deals at Continental Bank = in Chicago. Former Enron officials and others say that Mr. Skilling quickly= became Mr. Fastow's mentor in the same way that Mr. Lay had become Mr. Ski= lling's.=20 As Mr. Skilling oversaw the building of Enron's vast trading operation, Mr.= Fastow saw to the financing of it. "Andy was the guy you saw when you want= ed money" for a project, says one former Enron senior manager.=20 Mr. Skilling was named Enron's chief operating officer in 1997. Mr. Fastow = got the top finance job a year later, at the age of 36. Under Mr. Fastow, E= nron's finance department tripled in size, to more than 100 people.=20 Enron needed the added financial brainpower. As it expanded, debt and liqui= dity were constant concerns. What's more, the company's ambitions were rovi= ng beyond therms and kilowatts as it began to make markets in everything fr= om water to weather.=20 Enron's most highly touted non-energy initiative, and Mr. Skilling's pet pr= oject, came in the area of telecommunications. The company built a coast-to= -coast fiber-optic network and envisioned trading "bandwidth," or network c= apacity, the way it traded electricity or natural gas. Enron has invested s= everal hundred million dollars so far in the project, which has produced lo= sses of over $400 million. Yet at the February analyst meeting in Houston, = Mr. Skilling unabashedly valued Enron's fiber-optic business at $36 billion= , according to people who were at the meeting.=20 But to make all of its growth dreams possible, Enron had to make sure that = its balance sheet didn't become too laden with debt. Too much debt would le= ad major ratings agencies, such as Moody's Investors Service and Standard &= Poor's, to lower Enron's credit rating. Such downgrades could significantl= y increase the company's cost of borrowing and make it more difficult to fi= nance its continued expansion.=20 In typically aggressive fashion, Enron lobbied the ratings agencies with th= e same vigor that it lobbied legislators. At the February meeting, Mr. Fast= ow urged analysts to raise Enron's credit rating on long-term debt from tri= ple-B-plus to single-A-minus. But the analysts shrugged off Mr. Fastow's en= treaties. They didn't see the cash flow, earnings, or debt coverage require= d for such an upgrade, says one attendee.=20 Undeterred, Mr. Fastow said the higher rating would strengthen the company'= s basic finances, which could then justify the higher rating. This circular= argument provoked derision among analysts, and Enron didn't get its `A' ra= ting. Instead, the company was recently downgraded by the major ratings age= ncies as a result of its financial turmoil.=20 In moves that kept down its reported debt burden, Enron turned increasingly= to off-balance-sheet transactions through limited partnerships with outsid= e parties. In such an arrangement, Enron could contribute money, stock or o= ther assets to the partnership. The partnership could then borrow large sum= s to purchase assets or do business deals without the debt showing up on En= ron's books.=20 While such partnership transactions had long been used in the natural-gas i= ndustry to finance deals, Enron took the practice to new heights of complex= ity. Leading that effort was Mr. Fastow and his team of young financial exp= erts.=20 In recent years, Enron has done myriad deals with more than 30 partnerships= . By far the most controversial to come to light, so far, are the ones it h= as done with two partnerships -- known as LJM Cayman LP and LJM2 Co-Investm= ent LP -- which were formed and operated by Mr. Fastow. The company has sai= d that its transactions with these partnerships were designed to hedge agai= nst fluctuating market values of company assets and energy contracts.=20 It isn't clear why Enron would allow its chief financial officer to be in a= fiduciary position at partnerships that stood to profit, possibly at the c= ompany's expense, from doing deals with it. To make matters worse, private = LJM partnership documents indicate that Mr. Fastow personally made millions= of dollars from the partnerships -- much more than he was being paid as En= ron's chief financial officer.=20 Enron officials have repeatedly said that Mr. Fastow's actions were reviewe= d and approved by top management and the board of directors. However, the c= ompany has refused to answer numerous specific questions about its dealings= with the partnerships. Enron has said that Mr. Fastow formally severed his= ties with the partnerships in July in the face of rising discomfort about = the arrangements on the part of analysts and major company investors.=20 It is nearly impossible to stitch together anything comprehensible about th= e partnership deals from Enron's SEC filings. The only thing clear is that = millions of shares of Enron stock and billions of dollars of assets and not= es were involved in the transactions.=20 ---=20 Robin Sidel and Jathon Sapsford contributed to this article. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section C Unit of Enron Is Challenged 11/08/2001 The New York Times Page 12, Column 6 c. 2001 New York Times Company A consortium of Indian lenders to the Enron Corporation's power company in = India asked the Bombay High Court today to prevent the unit, the Dabhol Pow= er Company, from pulling out of a distressed energy project.=20 The consortium, led by the Industrial Development Bank of India, sought a s= tay on the final termination notice and stopping the transfer of Dabhol's a= ssets. In response, Dabhol canceled a meeting with the Indian lenders sched= uled for later this week. Dabhol Power has been wrangling with the state utility for the last several= months over unpaid bills, and the 2,184 megawatt plant is now shut down. I= ndian financial institutions have a combined exposure of about $1.5 billion= in the $2.9 billion project in the form of loans and guarantees. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business; Financial Desk Enron in Takeover Talks With Dynegy THOMAS S. MULLIGAN; JAMES FLANIGAN; NANCY RIVERA BROOKS TIMES STAFF WRITERS 11/08/2001 Los Angeles Times Home Edition C-1 Copyright 2001 / The Times Mirror Company NEW YORK -- Enron Corp., the troubled energy-trading giant, was in talks We= dnesday over a possible takeover by Houston neighbor and rival Dynegy Inc.,= industry sources said.=20 The boards of both companies were meeting late Wednesday concerning a poten= tial deal, which almost certainly would mean the end of the line for Chairm= an and Chief Executive Kenneth Lay, architect of Enron's emergence as the d= ominant force in the relatively new electronic markets for natural gas and = electricity. The Houston Chronicle reported that ChevronTexaco Corp., which owns 27% of = Dynegy, would inject an immediate $1.5 billion to enable Enron to maintain = its investment-grade credit status, without which it would have to suspend = its crucial trading operations.=20 Enron, Dynegy and ChevronTexaco representatives declined to comment.=20 Enron appeared to be running out of options short of an outright sale, as i= ts stock had plunged toward 10-year lows, its credit had been downgraded an= d it had failed to secure emergency financing from parties that would let i= t retain its independence.=20 Enron's shares plunged again Wednesday but then recovered on the news, firs= t reported by CNBC, that it had opened talks with Dynegy.=20 Enron shares sank as low as $7 on the New York Stock Exchange but rebounded= to close down 62 cents at $9.05, still the lowest since April 1992; the st= ock is down 89% year to date. Dynegy shares also moved on the speculation, = losing $3 to close at $33.=20 At Wednesday's closing price, Enron has a market value of $6.8billion, down= from an August 2000 peak of $63.6 billion.=20 The catalyst for Enron's shocking slide was the disclosure last month that = the company had taken a $1.2-billion equity reduction connected with off-ba= lance-sheet partnerships from which Enron managers had profited.=20 The matter is being investigated by the Securities and Exchange Commission.= =20 Enron also reported an unexpected $618-million loss in the third quarter.= =20 The energy market's confidence in Enron's ability to meet its obligations h= as ebbed along with the company's stock price, and trading partners have be= gun shying away from entering new long-term transactions with Enron, indust= ry sources said.=20 Competitors Reliant Energy Inc., Aquila Inc. and El Paso Corp. all reported= a pickup in business as companies attempt to reduce their exposure to Enro= n.=20 In addition, energy brokers on the New York Mercantile Exchange are demandi= ng higher margin deposits from Enron, according to Platts, a private energy= news service. Enron in recent days has been raising cash by turning over t= rading positions to other companies at a sizable discount, Platts said.=20 Banking sources told the Financial Times in London that Enron has called an= emergency meeting of its lenders to persuade them to extend credit lines.= =20 Enron last week won a commitment for a $1-billion credit line from J.P. Mor= gan Chase and Salomon Smith Barney, but other banks declined to join in. To= get the financing, Enron had to pledge some natural gas pipeline assets.= =20 Although there has been no crisis akin to a run on a bank, Enron cannot sur= vive for long without a major infusion of capital, Todd A. Shipman, analyst= for Standard & Poor's, said Wednesday.=20 "There's a difference between reducing exposure to Enron and not doing busi= ness or demanding cash upfront," he said, but he added that the company's t= rading partners have been "reexamining their attitude towards Enron every m= oment of every day."=20 Energy analysts and executives said Wednesday that Dynegy Chairman and CEO = Charles L. Watson could be taking a big risk buying into Enron.=20 "Chuck Watson is a brave guy but also a smart one," one expert said. "I hav= e to assume he knows what he's getting with Enron."=20 Would-be partners Watson and Lay have competed for prominence in Houston, a= rguing over stadiums and investing to bring the National Football League to= the city.=20 Consumer activists wasted no time protesting a potential merger of Enron an= d Dynegy.=20 Dynegy, which owns California power plants in partnership with NRG Energy I= nc. that are capable of generating 2,800 megawatts of electricity, was amon= g the companies Gov. Gray Davis and other politicians have repeatedly slamm= ed as "pirates" that charged the state too much for electricity during its = recent energy crisis.=20 "The energy cartel already has done so much damage in California, and the o= nly thing worse than that would be a more tightly controlled energy cartel,= " said Doug Heller of the Foundation for Taxpayer & Consumer Rights in Sant= a Monica. "These are two lawless cowboys forming a single bandit."=20 As board meetings continued Wednesday night in Houston, sources said a deal= was probable at about $8 billion, or $10 to $11 an Enron share.=20 Despite Enron's serious troubles, its trading business remains potentially = powerful. Even in the company's duress, the trading operation has gone forw= ard, accounting for more than 25% of all electric power and natural gas tra= ded globally. Enron, which took in $147 billion in revenue in the first nin= e months of this year, processes transactions worth an estimated $2billion = a day.=20 If Dynegy were to add the immense trading operations of Enron and prove abl= e to hold the franchise together, it would become a major power in global e= nergy tradingDynegy also has a trading operation, but mostly it trades for = the benefit of its own electric power and natural gas holdings; partner Che= vronTexaco, the recently merged oil giant, would gain a significant edge in= energy trading over its competitors.=20 "Dynegy is conservative, while Enron has been very aggressive in trading," = said Mark Gurley, senior vice president of Aquila.=20 *=20 Mulligan reported from New York, Flanigan and Rivera Brooks from Los Angele= s. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 FRONT PAGE - FIRST SECTION: Enron board considering takeover by rival Dyneg= y: Energy trader seeks emergency talks with banks amid fears over cash cris= is=20 Financial Times; Nov 8, 2001 By ROBERT CLOW, ANDREW EDGECLIFFE-JOHNSON, WILLIAM LEWIS, SHEILA MCNULTY an= d PETER THAL LARSEN The board of Enron, the embattled US energy trading group, was meeting last= night to discuss a takeover by its rival Dynegy.=20 Terms of the proposed deal remain under discussion but are understood to in= volve an all-stock bid from Dynegy at an undetermined premium to its Dollar= s 6.8bn market capitalisation.=20 ChevronTexaco, which owns about 27 per cent of Dynegy, was expected to prov= ide about Dollars 1.5bn of financial support. An announcement could come th= is morning, though people familiar with the talks cautioned that they might= still fail.=20 Enron agreed to call an urgent meeting of its banks for tomorrow amid growi= ng concerns on Wall Street that it would not be able to survive its financi= al crisis without a strategic partner.=20 If Enron's board rejects the full takeover offer, other potential options i= nclude an equity injection by Dynegy to save the troubled energy trader fro= m a deeper financial crisis.=20 Dynegy, which trades with Enron, has an interest in keeping the struggling = group in business to maintain stability in the energy market but also sees = an opportunity to expand its own market share.=20 Banks are describing tomorrow's meeting at Enron's headquarters in Houston = as "make or break". One bank executive said: "This is a pivotal meeting. Th= ere are lots of credit lines due in the next six months and we need to talk= ." Enron drew down Dollars 3.3bn in credit lines in the last month, in an a= ttempt to build confidence.=20 With time running out for the company and pressure increasing on Kenneth La= y, its chief executive, Enron has urgently explored several options in rece= nt days. Shell-owned Coral Energy has also been approached and there have b= een calls to private equity groups.=20 If the Dynegy deal goes through, Mr Lay will stay on at Enron, at least unt= il the takeover is complete.=20 But the efforts have been hampered by the Securities and Exchange Commissio= n investigation into Enron's dealings with funds associated with the former= chief financial officer of the company. Bankers say that companies that do= not already know Enron intimately have been put off entering negotiations = because of the uncertainty.=20 If the company fails to complete a deal ahead of tomorrow's crucial meeting= , it will need to persuade the banks to extend credit lines, as it battles = to shore up confidence among investors and its trading counterparties.=20 The banks with the greatest exposure to Enron include Credit Suisse, Deutsc= he Bank, Citigroup and Barclays. Off-balance-sheet vehicles affiliated to E= nron have Dollars 8bn-Dollars 9bn in debt. Enron itself is carrying Dollars= 12.8bn in debt. Its bonds ended the day bid at 74 cents in the dollar. Enr= on's share price had dropped as low as Dollars 7 early in the day but finis= hed at Dollars 9.05, down 62 cents, after reports of Dynegy's interest.=20 Investors' concern about Dynegy assuming Enron's liabilities sent Dynegy sh= ares down 8.3 per cent to Dollars 33 yesterday, giving it a market value of= Dollars 10.8bn.=20 Enron has been under pressure since October 16, when it disclosed a surpris= e balance sheet adjustment that exacerbated concerns about lack of transpar= ency. Lex, Page 16 www.ft.com/energy=20 Copyright: The Financial Times Limited FRONT PAGE - COMPANIES & MARKETS: Dynegy in last-ditch attempt to save Enro= n=20 Financial Times; Nov 8, 2001 By ANDREW EDGECLIFFE-JOHNSON, WILLIAM LEWIS, SHEILA MCNULTY and PETER THAL = LARSEN Dynegy is in talks about a possible equity injection into Enron, in a last-= ditch attempt to save the troubled US energy trader from a deeper financial= crisis. The talks could lead to a full merger between the rival energy gro= ups, according to people familiar with the negotiations.=20 Enron also agreed to call an emergency meeting of its banks tomorrow amid g= rowing concerns on Wall Street that the troubled energy trader will not be = able to survive its financial crisis unless it finds a strategic partner.= =20 Detailed terms of a deal with Dynegy remained under discussion yesterday af= ternoon, but an announcement could come as early as this morning.=20 The purpose of the talks was to inject Enron with sufficient liquidity to a= vert a growing crisis of confidence.=20 Dynegy, as a major counter-party to Enron, wants to keep Enron in business = to maintain stability in the energy trading market.=20 Dynegy's interest prompted speculation of how the group would fund an equit= y infusion or fuller merger, with analysts saying that it may require appro= val and funding from ChevronTexaco, which owns about 27 per cent of Dynegy.= =20 Banks with approximately Dollars 3.3bn of exposure to Enron are describing = Friday's meeting at Enron's headquarters in Houston as "make or break". One= bank executive said: "This is a pivotal meeting. There are lots of credit = lines due in the next six months and we need to talk."=20 With time running out for the company, Enron executives were yesterday maki= ng frantic efforts to secure a deal with rival energy group Dynegy. Some at= the company hoped to be able to announce a deal today. Shell-owned Coral E= nergy has been approached and there have been calls to private equity group= s such as Blackstone Group.=20 But the efforts have been hampered by the Securities and Exchange Commissio= n investigation into Enron's dealings with funds associated with former exe= cutives of the company. Lex, Page 22 www.ft.com/energy=20 Copyright: The Financial Times Limited COMPANIES & FINANCE THE AMERICAS: Enron in crunch banks meeting=20 Financial Times; Nov 8, 2001 By WILLIAM LEWIS Enron has called an emergency meeting of its banks tomorrow amid concerns o= n Wall Street that the troubled energy trader will not be able to survive i= ts financial crisis unless it finds a strategic partner.=20 Banks with approximately Dollars 3.3bn of exposure to Enron are describing = the meeting at its headquarters in Houston, Texas, as "make or break".=20 One bank executive said: "This is a pivotal meeting. There are lots of cred= it lines due in the next six months and we need to talk."=20 With time running out for the company, Enron executives were yesterday maki= ng frantic efforts to secure a deal with rival energy group Dynegy. Some at= the company hoped to be able to announce a deal today.=20 Shell-owned Coral Energy has also been approached, and there have been call= s to private equity groups such as Blackstone Group.=20 But the efforts have been hampered by the SEC investigation into Enron's de= alings with funds associated with former executives of the company. Bankers= say that companies that do not already know Enron intimately have been put= off entering negotiations because of the uncertainty.=20 If the company fails to complete a deal ahead of the meeting, it will need = to persuade the banks to extend credit lines, as it fights to shore up conf= idence among investors and trading counterparties. The banks with the great= est exposure to Enron include Credit Suisse, Deutsche Bank, Citigroup and B= arclays.=20 Off-balance-sheet vehicles affiliated to Enron have Dollars 8bn-Dollars 9bn= in debt. Enron is carrying Dollars 12.8bn in debt.=20 The company has been under increasing pressure since October 16, when it di= sclosed a surprise balance sheet adjustment that only exacerbated concerns = about a lack of transparency at the energy trading group.=20 Enron is the principal in a quarter of all electricity and natural gas trad= es in the US. Yesterday the company did not immediately return calls seekin= g comment.=20 Its share price had lost 21.92 per cent by midday, at Dollars 7.55.=20 "What we have here is a run on the bank by equity investors," said John Ols= on, vice-president of research at Sanders Morris Harris, an investment bank= ing and securities firm. "And they have done nothing to alleviate it."=20 Enron's competitors have begun taking business away from the US's biggest e= nergy trading company.=20 Shahid Malik, president of trading and marketing at Reliant Energy, a big p= articipant in the trading that is central to Enron's business, said: "We're= seeing more business come our way."=20 He said Reliant had maintained normal relations with Enron, noting it was s= till creditworthy. But he added: "We are monitoring the situation."=20 Copyright: The Financial Times Limited Nov. 8, 2001 Houston Chronicle Dynegy may acquire Enron=20 Merger talks in advanced stage=20 By LAURA GOLDBERG=20 Copyright 2001 Houston Chronicle=20 Dynegy was in advanced talks Wednesday night to acquire troubled rival Enro= n Corp., according to people familiar with the matter.=20 The sources said a merger could be announced as early as today between the = two Houston-based energy traders, which had been talking for about a week.= =20 If the smaller Dynegy does buy Enron -- known as a pioneer in the world of = energy trading -- it would mark a surprising end for a company that until e= arly this year was among Wall Street's darlings.=20 Since then, a series of problems has tarnished the image of Enron, which ba= sed on revenues is Houston's largest company. Enron's woes quickly multipli= ed after it made troubling financial disclosures in its third-quarter earni= ngs report last month.=20 After the report, Enron's stock price plummeted, the Securities and Exchang= e Commission launched an investigation into certain Enron dealings and the = company's credit rating has been downgraded, leaving it in a weakened state= .=20 That's where Dynegy comes in.=20 Dynegy proposed a stock swap with a modest premium over Enron's stock price= , the sources said, adding that Enron had been pressing for a higher premiu= m than Dynegy offered. Shares in Enron closed down 62 cents Wednesday, at $= 9.05. Based on Enron's market capitalization, the stock deal is likely to b= e worth more than $7 billion.=20 As part of the deal being discussed, ChevronTexaco Corp., which owns about = 27 percent of Dynegy, would also immediately give $1.5 billion to Enron, th= e people said.=20 The money would be intended to help Enron keep its investment-grade credit = rating, which it needs to keep running its energy trading business.=20 Wall Street has been questioning Enron's ability to maintain that core busi= ness, which relies heavily on access to credit and cash.=20 Enron's board started meeting around 6:30 p.m. Wednesday, while Dynegy's bo= ard began meeting earlier during the day.=20 Spokesmen for Dynegy, Enron and ChevronTexaco declined comment Wednesday.= =20 Enron is significantly larger than Dynegy, which last year reported $29.4 b= illion in revenues and as of earlier this year had almost 1,600 employees i= n Houston. Enron reported $100.8 billion in revenues last year and as of ea= rlier this year had more than 7,000 Houston employees.=20 The two energy traders have complementary capabilities, said Jeff Dietert, = an analyst with Houston-based Simmons & Co. International who follows Dyneg= y and Enron.=20 Enron excels in the area of financial tools and contracts used by businesse= s to manage risk, while Dynegy has strong physical assets, including power = plants and natural gas storage facilities, he said.=20 Without the specifics of the deal, Dietert said it was hard to evaluate whe= ther it made sense for Dynegy.=20 But he noted that Chuck Watson, Dynegy's chairman and chief executive, has = a history of doing complex deals that have boosted the company's earnings.= =20 Both Enron and Dynegy grew from natural gas companies. Both expanded into t= he business of trading energy, but Dynegy has also focused on acquiring ass= ets such as power plants.=20 Enron's current strategy has been to shed assets and expand its trading int= o a variety of commodities ranging from paper to metals.=20 Enron has been under heavy fire since Oct. 16 when it released third-quarte= r earnings. It disclosed that day it had taken a $35 million loss and reduc= ed shareholders equity by $1.2 billion related to ending business dealings = with two investment partnerships formerly run by Andrew Fastow, its chief f= inancial officer.=20 The disclosures served to heighten Wall Street's ongoing concerns that Enro= n's financial reporting was too difficult to understand and skimped on deta= ils. It also led to fears that Enron would be on the hook for billions of d= ollars related to other financial vehicles.=20 Days later, Enron revealed that the SEC was investigating transactions betw= een Enron and the partnerships, called LJM Cayman and LJM2 Co-investment. I= t also replaced Fastow and has been hit with a growing number of shareholde= r lawsuits.=20 In the last couple days, Wall Street has grown more concerned at Enron's si= lence. It's led to speculation the company has more problems than are publi= cly known. Since Oct. 16, Enron's closing share price has declined by 73 pe= rcent.=20 There have also been increasing questions about the stability of Enron's co= re wholesale energy trading business, which is responsible for generating t= he vast majority of Enron's profits.=20 Enron's attempts so far to bolster investor confidence have failed.=20 Last week, it announced it had lined up $1 billion in new credit lines, but= some investors reacted negatively to the fact that Enron used a significan= t portion of its pipeline assets as collateral.=20 The week before, Enron tapped into $3.3 billion in credit lines that weren'= t secured by collateral. It banked about $1.1 billion and is using the rest= to pay off short-term debt obligations.=20 Even before the earnings release, shares in Enron -- which in late January = hit a closing high for the year of $82 -- had been under pressure for a var= iety of reasons, including a troubled power project in India, problems with= its new broadband unit and the unexpected resignation of CEO Jeff Skilling= , who stepped down in August, citing personal reasons.=20 Until the deal is announced, it's difficult to gauge how many layoffs could= result, what could happen to Enron's two downtown headquarters towers, Enr= on Chairman and Chief Executive Officer Ken Lay's fate, and whether the Enr= on name will disappear, including from Enron Field.=20 Nov. 8, 2001, 12:07AM Enron deals downshifted at breakneck speed=20 Bottom fell out of creative accounting=20 By TOM FOWLER=20 Copyright 2001 Houston Chronicle=20 Many companies say hard work and vision are secrets to success. For Enron C= orp., the cornerstone of its late-1990s triumphs was something more obscure= : innovative finance.=20 Under the leadership of former Chief Financial Officer Andrew Fastow, the c= ompany took a widely used accounting procedure, off-balance-sheet financing= , and raised it to an art form.=20 The practice, which sets up partnerships with investors to buy large assets= , allowed the company to grow quickly without adding significant debt or as= sets to its books.=20 Fastow's prowess with these partnerships earned him gushing praise from Wal= l Street and superstar status among his peers. As one analyst said in a 199= 9 interview with CFO Magazine during the height of Enron's glory, "Fastow h= as invented a groundbreaking strategy."=20 But the once rock-solid strategy turned to loose gravel under Enron's feet.= =20 A number of the complex off-balance-sheet deals came undone in recent month= s, leading the company to report close to $1 billion in related write-offs = last month. This brought renewed interest to Fastow's dual roles as Enron C= FO and general partner in some of the deals, from which he is reported to h= ave profited personally. The Securities and Exchange Commission has launche= d a formal investigation. Even if Enron comes clean on the deals, giving th= e details Wall Street has demanded for weeks, it may be too little too late= .=20 Pressure from investors, a stock price plummet of more than 75 percent and = downgrades from the major credit rating agencies all have followed. The fal= l has come so steep and so fast that local competitor Dynegy Corp. is now w= orking to acquire Enron in a multibillion-dollar deal.=20 Off-balance-sheet financing is a common tool among many capital-intense bus= inesses.=20 In the simplest of terms, a company can grow without showing additional deb= t on its balance sheet, said Ron Singer, a University of Houston professor = of economics. Too much debt can cut cash flow and make a company look like = a higher-risk borrower.=20 While there are many variations, creating an off-balance-sheet vehicle is r= elatively straightforward.=20 "You create an entity in which you have less than a 50 percent equity stake= , so you can claim you don't have a controlling interest," Singer said. "Yo= u finance it with a large amount of debt from other investors, but that deb= t doesn't appear on your balance sheet."=20 Continental Airlines and other carriers have used a type of off-balance-she= et financing to buy planes, while truck rental company Ryder creates partne= rships that fund the purchase of fleets that Ryder leases from the partners= hips.=20 Enron's most troubling deals are different from others in three ways:=20 First, they were complex, involving many layers of partnerships. Investment= s were in more than hard assets, including securities like equity stakes in= companies and even stock options.=20 Second, Fastow's direct involvement in the partnerships created the appeara= nce of a conflict of interest, something most companies avoid by not having= corporate officers in leadership roles. The company maintains it carefully= monitored the partnerships, double-checking them with a legal fine-toothed= comb.=20 Third, and perhaps most important, Enron was loath to share details of the = financing and their consequences, even after they began to unravel. The rel= ative silence left investors and analysts to assume the worst.=20 Houston-based El Paso Corp. uses two types of off-balance-sheet financing v= ehicles for major asset purchases. Under one model, the company works with = a bank to create a 50/50 partnership to finance something like the construc= tion of a power plant.=20 The bank's loan would have a particularly long term and low interest rate, = and would be paid back using revenue generated by the power plant.=20 The other model, used most recently at El Paso, went into two special purpo= se projects: Project Electron, funding the purchase of U.S. power-producing= operations, and Project Gem Stone, funding the creation of energy generati= on facilities in Brazil.=20 Under the two projects El Paso puts some of its own funds into the partners= hips; institutional investors put up the lion's share of the money. The ins= titutional investors, which can include pension funds, hedge funds, banks a= nd other corporations, have their investments backed by the hard assets of = the partnership.=20 Enron used simple off-balance-sheet deals in the past, but its strategy bec= ame more complex in the late 1990s as it began fueling aggressive growth pl= ans.=20 In 1997 the company's growth from a pipeline company into a leading gas and= energy trading business led it to a huge debt load that didn't match up wi= th its credit ratings. Maintaining that rating was crucial to the company's= electricity and gas trading, which involved negotiated contracts with doze= ns of partners.=20 The company could have put up its hard assets as backing to continue financ= ing acquisitions and purchases, but Enron's top brass were reluctant. Inste= ad, under Fastow's guidance, Enron's finance department became the equivale= nt of a bank, with a mission to raise capital.=20 "We transformed finance into a merchant organization, one engaged in the in= termediation of both commodity and capital risk positions," Fastow told CFO= Magazine in 1999. "Essentially, we would buy and sell risk positions."=20 The company also needed to raise more cash but couldn't issue equity, which= would dilute shareholders' value, or issue more debt, a threat to its cred= it rating.=20 Fastow's solution was to make it clear to the rating agencies that he was s= erious about keeping the good ratings by generating fast-growing cash flow,= even though the company would issue more stock. A roadshow for analysts wa= s organized to outline the plan and demonstrate the finance team's skills a= t maintaining the high-wire act.=20 The sales pitch worked. When Enron issued 17.2 million shares in an offerin= g and raised about $800 million, rating agencies liked it and share values = didn't drop.=20 The second part of the plan involved selling off nonstrategic assets, such = as pipelines and other business units, to create even more cash flow. That = cash was reinvested.=20 Under this new, more aggressive strategy, Enron grew in different ways. For= example, in October 1998 the company acquired three New Jersey power plant= s from Cogen Technologies by going to the capital markets to issue about $1= .5 billion in equity and debt. Enron kept that capital off its own balance = sheets by creating a special-purpose entity to which it sold a 50 percent i= nterest in the plants.=20 Another deal involved Enron's $2.3 billion purchase of Wessex Water, a Brit= ish water company, in 1998. Enron created a special off-balance-sheet partn= ership named Atlantic Water Trust and issued $1.3 billion in Enron shares i= nto it. The trust then went to the capital markets to raise $1 billion in d= ebt that was backed by those shares.=20 The trust purchased Wessex, and because Enron owned no more than 50 percent= of Wessex, it didn't experience earnings dilution and didn't have that $1 = billion in debt counted on its books.=20 These complex deals won Fastow and his team praise and industry awards.=20 So what went wrong?=20 While many of Enron's off-balance-sheet deals worked with little controvers= y, the accounting innovation eventually worked against the company.=20 Details on the more complicated deals, particularly the partnerships named = LJM Cayman and LJM2 Co-Investment, which left the company with a $1 billion= charge last quarter, have been hard to come by so far. But they appear to = have been used to hedge against the risk of some of the company's newer lin= es of business beyond its core.=20 "Power plants in India, water companies, extension of their franchise to th= e mass retail market and using a fiber optic network to deliver content ove= r the Internet are all unrelated or only tangentially related to their core= merchant energy business," said Ray Niles, an analyst with Salomon Smith B= arney. "All of the write-offs appear to be in these noncore, nonenergy merc= hant areas."=20 The off-balance-sheet partnerships also went on to buy the stock of other c= ompanies, said John Olson, an analyst with Sanders Morris Harris.=20 "They own pieces of a variety of companies they've done asset trades with, = oil-services companies, producers," Olson said. "And many of those shares a= re underwater right now."=20 The partnerships also appear to have invested in options to buy shares of E= nron at a fixed price with plans to make money by later selling them at a h= igher price.=20 "It was perfectly sound logic when their stock was going up, but when it st= arted to go down, it came as quite a shock," Olson said.=20 While the details of Enron's partnerships remain elusive for the time being= , there's little doubt that unraveling their true nature will be difficult = for even the keenest financial and legal minds.=20 "There's a saying that in Houston there are three major law firms: Vinson &= Elkins, Baker Botts and Enron," Olson said. "Enron is overstaffed with man= y smart, smart lawyers, creating these complex and sophisticated contracts.= The problem is they're all in the same room just canceling each other out.= "=20 Nov. 8, 2001 Houston Chronicle Briefs: City and state=20 Azurix completes sales of two units=20 An Enron Corp. subsidiary has closed the sales of two of its divisions that= contributed to the company's steep loss this past quarter.=20 Azurix Corp. sold Azurix North America Corp. and Azurix Industrial Corp. to= American Water Works Co. for $141.5 million. The sale includes American Wa= ter Works assuming $6.1 million of debt.=20 Azurix counted for $287 million of the $1.01 billion in losses Enron report= ed for the third quarter.=20 Financial Troubled Enron Negotiates Sale To Rival Dynegy Peter Behr Washington Post Staff Writer 11/08/2001 The Washington Post FINAL E01 Copyright 2001, The Washington Post Co. All Rights Reserved Officials of Enron Corp. are negotiating a sale of their embattled energy-t=
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