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-----Original Message----- From: =09Schmidt, Ann M. =20 Sent:=09Monday, November 19, 2001 7:52 AM Subject:=09Enron Mentions - 11/19/01 Headed For A Fall ; Companies issued special zero-coupon bonds, assuming th= ey'd never have to pay them off. Now shareholders could be on the hook for = a $65 billion tab. Fortune Magazine, 11/26/01 Manager's Journal: What Enron Did Right The Wall Street Journal, 11/19/01 J.P. Morgan Wins (by Not Losing as Much) The Wall Street Journal, 11/19/01 German Bank Is in Talks With Enron To Buy a Unit The New York Times, 11/19/01 Bond Boom Isn't Likely to Lift Economy As Corporations Swap Old Debt for Ne= w The Wall Street Journal, 11/19/01 Preview / WEEK OF NOV. 19-25 Investors Looking for Answers in Enron Filing Los Angeles Times, 11/19/01 COMPANIES & FINANCE INTERNATIONAL - Dynegy bid faces long wait. Financial Times, 11/19/01 Russia Fund Surges Amid Global Woes The Wall Street Journal, 11/19/01 Wessex Water The Financial News, 11/19/01 India BSES:Dabhol Pwr Proj Due Diligence Done Jan -Report Emerging Markets Report, 11/19/01 India Dabhol Pwr: No Termination Notice Until Crt Verdict Dow Jones International News, 11/19/01 Fears raised on Enron deal: $15.6-billion rescue bid National Post, 11/19/01 Blackout in the power sector Business Standard, 11/19/01 Features/Toxic Bonds Headed For A Fall ; Companies issued special zero-coupon bonds, assuming th= ey'd never have to pay them off. Now shareholders could be on the hook for = a $65 billion tab. Janice Revell 11/26/2001 Fortune Magazine Time Inc. 131 (Copyright 2001) It was an irresistible proposition: Borrow billions of dollars, pay no inte= rest, reap millions in tax breaks, and then wait for the debt to simply dis= appear. That was the promise of zero-coupon convertible bonds, and companie= s from Enron to Merrill Lynch binged on what seemed like free money.=20 But, of course, there was a catch: For this scenario to play out, a company= 's stock price had to rise sharply--and quickly. That's because investors b= ought the bonds in the hope of converting them into equity--if the stock ta= nked, the bonds would no longer be worth converting. So to make them more a= ttractive to buyers, companies had to build in an escape hatch: If the stoc= k price failed to rise sufficiently, investors could "put" (that is, sell) = the bonds back to the company--in many cases, after just one year. And that's exactly what's about to happen--to the tune of some $65 billion = over the next three years. Stock prices have fallen so far that for at leas= t half of these special hybrids, the prospect of conversion is now absurd. = It simply won't happen. So bondholders are looking to get their money back = the first chance they can. And because of the put feature, that is possible= . Suddenly companies like Tyco, Comcast, and dozens more are on the hook fo= r billions of dollars in debt and interest they thought they'd never have t= o pay.=20 That could be very bad news for shareholders of these companies. After all,= they're the ones who are going to be picking up the tab when all that debt= comes due. Huge chunks of cash will disappear from balance sheets to repay= bondholders. Companies without enough cash-- and the majority fall into th= is camp--are likely to face skyrocketing interest charges when they borrow = money anew. That means sharply reduced earnings. Especially at risk are inv= estors in companies with poor credit ratings--prime candidates for killer r= efinancing costs. Some companies may even be forced to issue stock to pay o= ff the debt, creating significant shareholder dilution, especially at curre= nt depressed prices. To make matters worse, this is happening at a time whe= n the economy is barreling downhill and corporate profits are already shrin= king. "This is a ticking time bomb," warns Margaret Patel, manager of the P= ioneer High Yield Bond fund, a top-performing junk fund.=20 The seeds of this mess were sown in mid-2000, when the stock market started= to falter. Companies in search of capital balked at the thought of selling= stock while their share prices were struggling. Zero-coupon convertible bo= nds presented an attractive alternative because companies didn't have to ma= ke cash interest payments on the bonds (hence the name "zero"). Instead iss= uers offered an up-front discount--for instance, investors would buy a bond= for $700 and collect $1,000 when it matured.=20 Companies also gave investors the right to convert the bonds into a fixed n= umber of common shares. But the bonds were structured so that conversion wo= uld make sense only if the stock price rose significantly--in many cases, b= y more than 50%. With that protective feature (called the conversion premiu= m), zeros took off. Corporate issuers would pay no interest, and once their= stock prices had climbed back to acceptable levels, the debt would be swep= t away into equity. "If the bonds are converted, it's a home run for everyb= ody," says Jonathan Cohen, vice president of convertible-bond analysis at D= eutsche Bank.=20 That four-bagger, of course, depends entirely on the stock price rising. If= it doesn't, the bondholders, armed with that handy put feature, can simply= sell the bonds back to the company. Great for bondholders, but not so hot = for the company or its shareholders. But, hey, what are the odds of that ha= ppening? "CFOs and CEOs believe that their stock will just continue to go u= p," says Cohen. "They don't worry about the bond getting put."=20 If all this seems a little complicated, that's because it is. A real-life e= xample should help. California-based electric utility Calpine issued $1 bil= lion in zeros in April to refinance existing debt. At the time, the company= 's stock was trading at about $55 a share--severely undervalued in the opin= ion of company management. "We really didn't want to sell equity at that po= int," says Bob Kelly, Calpine's senior vice president of finance. So the co= mpany instead opted to sell zeros, setting the conversion premium at a heft= y 37%.=20 Still, with no cash interest payments and a stock price that had to rise si= gnificantly to make conversion worthwhile, the bonds weren't exactly a scre= aming buy for investors. So Calpine added the put feature: Investors could = sell the bonds back to the company after one year at the full purchase pric= e, eliminating any downside risk.=20 Things haven't exactly worked out as management had hoped. The stock has si= nce plummeted to $25, and it now has to triple before conversion makes sens= e. So it's looking as though Calpine will be liable for the $1 billion in b= orrowed money when investors get the chance to put the bonds this April. Th= ere's also the refinancing cost. According to Kelly, Calpine's borrowing ra= te could run in the neighborhood of 8.5%--an extra $85 million per year in = cash. "Obviously, nobody plans for their stock to go down," Kelly says. "I = don't think there was one person around who thought the bond would be put."= =20 Calpine's potential costs are particularly high because its credit rating i= s straddling junk. "If you are a borderline investment-grade company, a fin= ancing of this nature is not necessarily the most appropriate thing in the = world," notes Anand Iyer, head of global convertible research at Morgan Sta= nley. The problem is, there are a slew of companies with far worse credit r= atings out there: Jeff Seidel, Credit Suisse First Boston's head of convert= ible-bond research, estimates that about half of all zeros outstanding fall= into the junk category. And others are at risk of having their ratings dow= ngraded before the put date. Today, with junk yielding as much as 5 1/2 per= centage points above bonds rated investment grade, refinancing can be a pri= cey proposition.=20 Contract manufacturer Solectron is one that could well get hit by the high = price of junk. It has $845 million in zeros that it will probably have to b= uy back this January, and another $4.2 billion coming down the pike over th= e next couple of years. Because of slower- than-expected sales, the company= was recently put on negative credit watch by three rating agencies. And if= Solectron's credit is downgraded, the zeros would slide into junk status, = a situation that could cost the company--and its shareholders--tens of mill= ions of dollars in refinancing charges.=20 Refinancing isn't the only worrisome cost associated with these zeros. Comp= anies pay hefty investment banking fees to sell their bonds--up to 3% of th= e amount raised. If the debt is sold back, many will have spent millions fo= r what essentially amounted to a one-year loan. "They're getting bad advice= ," claims one banker who didn't want to be named. "Look at the fee the bank= er earned and look at the kind of financing risk the company got into."=20 As if those potential consequences were not scary enough, shareholders can = also get whacked when the bonds are first issued. That's because some 40% a= re bought by hedge funds, which short the company's stock (sell borrowed sh= ares with the intention of buying them back at a lower price) at the same t= ime that they buy the bonds. If the stock goes down, the shorts make money = from their position. If it goes up, they profit by converting the bond to s= tock. This hedging strategy almost always causes the stock to plummet, at l= east for a while. Grocery chain Supervalu, for example, recently lost 10% o= f its market cap the day it announced it was issuing $185 million in zeros.= =20 Despite all the pitfalls, the love affair with such Pollyanna bonds continu= es, thanks in large part to the slick tax and accounting loopholes they pro= vide. In fact, the hit on earnings per share can be the lowest of any form = of financing. Even better, thanks to a wrinkle in the tax code, companies c= an rake in huge tax savings by deducting far more interest than they're act= ually paying. All they have to do is agree to pay small amounts of interest= if certain conditions prevail. Verizon Communications, for instance, would= pay 0.25% annual interest on its $3 billion in zero bonds if its stock pri= ce falls below 60% of the issue's conversion price. In the eyes of the IRS,= oddly, that clause enables the company to take a yearly interest deduction= , for tax purposes, of 7.5%--the same rate it pays on its regular debt. (Wh= y? Trust us, you don't want to know.) That adds up to an annual deduction o= f more than $200 million, even if Verizon never shells out a dime in intere= st. Not surprisingly, more than half of the zeros issued in 2001 contain si= milar clauses. "It's an incredible deal for them," says Vadim Iosilevich, w= ho runs a hedge fund at Alexandra Investment Management. "Not only are they= raising cheap money, they're also doing tax arbitrage."=20 So despite the enormous risks to shareholders, companies continue to issue = zeros at a steady clip: According to ConvertBond.com, seven new issues, tot= aling $3.5 billion, have been sold since Oct. 1 alone. "I think the power o= f the tax advantage is going to keep them around," says CSFB's Seidel. Call= it greed or just blind optimism that the markets will recover quickly--it = doesn't really matter. Either way, it's the shareholders who'll be left pay= ing the bill.=20 FEEDBACK: jrevell@fortunemail.com=20 The bill comes due=20 Companies issued convertible zeros, with put features, when the stock marke= t soured. Now repayment looms.=20 1999 2000 2001 2002 2003 2004=20 Amount issued, $5.2 $19.6 $37.5 in billions=20 Amount puttable, $2.4 $2.6 $4.8 $22.0 $19.1 $24.0 in billions=20 SOURCE: CONVERTBOND.COM=20 When zero is a negative number=20 The danger posed by convertible zero bonds depends on a number of factors, = according to Morgan Stanley's ConvertBond.com: the size of the bond, the pu= t date, the company's credit rating and cash on hand, and how far the stock= must rise for the bond to convert to equity.=20 [A]Date of put [B]Amount owed (millions) [C]Cash on hand[2](millions) [D]St= ock price as of 11/09/01 [E]% below conversion price=20 Company Bond rating[1] Our risk assessment [A] [B] [C] [D] [E] Tyco 11/17/0= 1 $3,500 $2,600 $54.00 49% Investment grade Not a problem--for now. The con= glomerate has cash to pay for bonds put this November. Another $2.3 billion= is puttable in 2003.=20 Solectron 1/27/02 $845 $2,800 $13.25 155% Investment grade In the danger zo= ne. May be downgraded to junk if results don't improve. Has additional $4.2= billion at risk in 2003 and 2004.=20 Calpine 4/30/02 $1,000 $1,242 $25.50 180% Inv. grade/Junk Possibly a pricey= tab. On the border between investment grade and junk, the energy company f= aces high refinancing charges.=20 Pride International 1/16/03 $276 $176 $12.50 148% Junk May need to drill fo= r cash. The oil services company already has a heavy debt load in addition = to its zeros.=20 Western Digital 2/18/03 $126 $201 $4.25 547% Junk Hard drive ahead. The tec= h outfit has already paid down some of its zeros by issuing stock. More dil= ution possible.=20 Brightpoint 3/11/03 $138 $67 $3.25 609% Junk Watch out. This mobile-phone d= istributor plans to repurchase the bonds and is likely to incur high refina= ncing charges.=20 Aspect Commun. 8/10/03 $202 $134 $2.00 1,016% Junk The credit rating of thi= s unprofitable call center company is near the lowest grade of junk. High a= lert!=20 Enron[3] 2/7/04 $1,331 $1,000 $8.50 1,413% Investment grade Very risky. Amo= ng Enron's myriad woes, its debt is on the verge of being downgraded yet ag= ain. It's already behaving like junk.=20 Verizon 5/15/04 $3,270 $3,000 $50.00 70% Investment grade Verizon faces lit= tle risk because of its strong credit rating and the long lead time on its = put dates.=20 Merrill Lynch 5/23/04 $2,541 $20,000 $49.00 124% Investment grade Also not = yet a problem. This underwriting leader made sure its own zeros could not b= e put for three years.=20 [1]Based on ratings from Moody's and Standard & Poor's; Calpine had a split= rating at press time. [2]As of most recently reported financial results. [= 3]Now expected to merge with Dynegy.=20 Quote: Contract manufacturer Solectron is one zero-bond issuer that could w= ell get hit hard. Stocks have fallen so far that for at least half of all b= onds out there, the prospect of conversion is absurd. B/W ILLUSTRATION: ILLUSTRATION BY DAVID SUTER=20 Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Manager's Journal: What Enron Did Right By Samuel Bodily and Robert Bruner 11/19/2001 The Wall Street Journal A20 (Copyright © 2001, Dow Jones & Company, Inc.) This is a rough era for American business icons. Subject to the vagaries of= age (Jack Welch), product failure (Ford/Firestone tires), competition (Luc= ent, AT&T), technology (Hewlett-Packard and Compaq), and dot-bomb bubbles (= CMGI), managers and their firms remind us that being an icon is risky busin= ess. The latest example is Enron, whose fall from grace has resulted in a p= roposed fire sale to Dynegy.=20 Once considered one of the country's most innovative companies, Enron becam= e a pariah due to lack of transparency about its deals and the odor of conf= licts of interest. The journalistic accounts of Enron's struggles drip with= schadenfreude, hinting that its innovations and achievements were all a mi= rage. We hold no brief regarding the legal or ethical issues under investigation.= We agree that more transparency about potential conflicts of interest is n= eeded. High profitability does not justify breaking the law or ethical norm= s. But no matter how the current issues resolve themselves or what fresh re= velations emerge, Enron has created an enormous legacy of good ideas that h= ave enduring value.=20 -- Deregulation and market competition. Enron envisioned gas and electric p= ower industries in the U.S. where prices are set in an open market of biddi= ng by customers, and where suppliers can freely choose to enter or exit. En= ron was the leader in pioneering this business.=20 Market competition in energy is now the dominant model in the U.S., and is = spreading to Europe, Latin America, and Asia. The winners have been consume= rs, who have paid lower prices, and investors, who have seen competition fo= rce the power suppliers to become much more efficient. The contrary experie= nce of California, the poster child of those who would re-regulate the powe= r industry, is an example of not enough deregulation.=20 -- Innovation and the "de-integration" of power contracts. Under the old re= gulated model of delivering gas and electricity, customers were offered a o= ne-size-fits-all contract. For many customers, this system was inflexible a= nd inefficient, like telling a small gardener that you can only buy manure = by the truckload. Enron pioneered contracts that could be tailored to the e= xact needs of the customer.=20 To do this, Enron unbundled the classic power contract into its constituent= parts, starting with price and volume, location, time, etc., and offered c= ustomers choices on each one. Again, consumers won. Enron's investors did t= oo, because Enron earned the surplus typically reaped by inventors. Arguabl= y, Enron is the embodiment of what economist Joseph Schumpeter called the "= process of Creative Destruction." But creative destroyers are not necessari= ly likable, pleasant folks, which may be part of Enron's problem today.=20 -- Minimization of transaction costs and frictions. Enron extended the logi= c of de-integration to other industries. An integrated paper company, for i= nstance, owns forests, mills, pulp factories, and paper plants in what amou= nts to a very big bet that the paper company can run all those disparate ac= tivities better than smaller, specialized firms. Enron argued that integrat= ed firms and industries are riddled with inefficiencies stemming from burea= ucracy and the captive nature of "customers" and "suppliers." Enron envisio= ned creating free markets for components within the integrated chain on the= bet that the free-market terms would be better than those of the internal = operations. The development of free-market benchmarks for the terms by whic= h divisions of integrated firms do business with each other is very healthy= for the economy.=20 -- Exploiting the optionality in networks. In the old regulated environment= , natural gas would be supplied to a customer through a single dedicated pi= peline. Enron envisioned a network by which gas could be supplied from a nu= mber of possible sources, opening the customer to the benefits of competiti= on, and the supplier to the flexibility of alternative sourcing strategies.= Enron benefited from controlling switches on the network, so that they cou= ld nimbly route the molecules or electrons from the best source at any mome= nt in time to the best use, and choose when and where to convert molecules = to electrons. This policy, picked up by others in the industry, created tre= mendous value for both customers and suppliers.=20 -- Rigorous risk assessment. The strategy of tailored contracts could easil= y have broken the firm in the absence of a clear understanding of the tradi= ng risks that the firm assumed, and of very strong internal controls. Enron= pioneered risk assessment and control systems that we judge to be among th= e best anywhere. Particularly with the advent of Enron Online, where Enron = made new positions valued at over $4 billion each day, it became essential = to have up-to-the-second information on company-wide positions, prices and = ability to deliver.=20 The unexpected bad news from Enron has little to do with trading losses by = the firm, but with fears among trading partners about Enron's ability to fi= nance its trading activity. In a world where contracts and trading portfoli= os are too complex to explain in a sound bite, counterparties look to a thi= ck equity base for assurance. It was the erosion in equity, rather than tra= ding risk, that destroyed the firm.=20 -- A culture of urgency, innovation and high expectations. Enron's corporat= e culture was the biggest surprise of all. The Hollywood stereotype of a ut= ility company is bureaucratic, hierarchical, formal, slow, and full of excu= ses. And the stodgy images of a gas pipeline company -- Enron only 15 years= ago -- is even duller and slower. Enron became bumptious, impatient, lean,= fast, innovative, and demanding. It bred speed and innovation by giving it= s professionals unusual freedom to start new businesses, create markets, an= d transfer within the firm.=20 Success was rewarded with ample compensation and fast promotion, and an ope= n-office design fostered brainstorming. The firm's organization and culture= was by all accounts not a safe haven for those who believe the role of a l= arge corporation is to fulfill entitlements for jobs. This was a lightning = rod for the firm's detractors. And yet, it could serve as a model for more = hide-bound enterprises to emulate.=20 Enron was a prolific source of compelling new ideas about the transformatio= n of American business. It created a ruckus in once-quiet corners of the bu= siness economy. It rewrote the rules of competition in almost every area in= which it did business. It thrived on volatility.=20 The proposed sale of Enron to Dynegy risks the loss of a major R&D establis= hment, especially given Dynegy's track record as a second mover following E= nron's lead. Beyond what is likely to be a difficult and time-consuming ant= itrust review, Dynegy's greater challenge will be to find a way to make Enr= on's spirit of innovation its own. Or so we all should hope, because prospe= rity depends on the ability of firms to reinvent themselves and remake thei= r industries.=20 ---=20 Messrs. Bodily and Bruner are professors at the University of Virginia's Gr= aduate School of Business Administration. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 J.P. Morgan Wins (by Not Losing as Much) By Susanne Craig Staff Reporter of The Wall Street Journal 11/19/2001 The Wall Street Journal C1 (Copyright © 2001, Dow Jones & Company, Inc.) You know things are bad on Wall Street when the winner of a stock-selection= contest can't come close to breaking even.=20 J.P. Morgan Chase & Co.'s portfolio was the only one in The Wall Street Jou= rnal's quarterly stock-picking survey to slide less than 10% during the thr= ee months ended Sept. 30. The value of its stock basket fell 8.6% during th= e third quarter. Just six of the 15 financial firms managed to beat the benchmark Standard &= Poor's 500-stock index, which dropped 14.7% during the period. Among the s= tar performers that came to J.P. Morgan's rescue: Northrop Grumman Corp., S= BC Communications Inc. and Procter & Gamble Co.=20 "It has turned into a real stock-picker's market," says J.P. Morgan equity = strategist Douglas Cliggott. "In the first half, the market bought cyclical= stocks, such as credit cards and brokers, in hopes of a recovery. We don't= think those stocks will get interesting until sometime in 2003." Instead, = the firm's portfolio is weighted toward health care and consumer staples, a= s well as cyclical stocks such as energy and farm equipment.=20 The quarter was among the roughest in years for Wall Street investors. The = terrorist attacks of Sept. 11 helped contribute to the stock-market losses,= which drove down the value of all portfolios in the survey, though the mar= kets have since recovered to their pre-Sept. 11 levels. The last time the g= roup posted results this bad was during the third quarter of 1998, during t= he Asian financial crisis.=20 Goldman Sachs Group Inc. and Credit Suisse Group's Credit Suisse First Bost= on finished at the bottom of the pack, falling 23.2% and 30.1% respectively= . The performance of last-place finisher CSFB was dragged down by losses at= companies such as Veritas Software Corp. (down 72.3% in the quarter), Prae= cis Pharmaceuticals Inc. (down 64.8%) and software provider Amdocs Ltd. (do= wn 51%).=20 For CSFB, "it was not a good stock-picking quarter, that's for sure," says = Al Jackson, the firm's global head of equity research. "It was our tech and= telecom . . . and the events of Sept. 11 that hurt us."=20 Credit Suisse First Boston recently changed the approach to its model portf= olio, opting against sector weightings, Mr. Jackson says. This strategy has= hurt CSFB in recent quarters, because of the steep slump in areas such as = technology and telecom. The firm recently added a number of Old Economy sto= cks to its portfolio, such as Citigroup Inc., Dow Chemical Co. and Gannett = Co. Says Mr. Jackson: "We are going back to our roots and asking what our b= est ideas are."=20 Like CSFB, Goldman was hit by a drop in the share price of technology compa= nies, such as Check Point Software Technologies Ltd. (down 56.5% in the qua= rter). Its portfolio was also dragged down by shares of embattled Enron Cor= p. (down 44.3%). Morgan Stanley and Royal Bank of Canada's RBC Dain Rausche= r, which placed 6th and 12th respectively, also have the energy company on = their lists.=20 In addition to Enron, stocks hard it by the terrorist attacks, such as lodg= ing giant Starwood Hotels & Resorts Worldwide Inc., Walt Disney Co. and air= lines such as Skywest Inc., also hurt the portfolio performance of many sec= urities firms.=20 It is unlikely people will buy any company's entire recommended list at one= time. The Journal survey is intended to give investors an idea of how thei= r portfolio would look if they let the professionals do all the picking. Ca= lculations in the quarterly survey, done for the Journal by Zacks Investmen= t Research in Chicago, take into account capital gains or losses, dividends= and theoretical commissions of 1% on each trade.=20 Overall, Edward D. Jones & Co., of St. Louis, emerged with the most consist= ent results across the board, placing second in the quarter and for the yea= r. Its 85% return over five years is the best of the group and ahead of the= total return for the S&P 500 of 62.7%. Perhaps more than any other firm, E= dwards Jones takes a buy-and-hold approach to investing, making very few ch= anges to its portfolio from quarter to quarter, or even year to year.=20 "It's the old story of the tortoise and the hare, and we believe slow and s= teady wins the race," says David Otto, Edward Jones director of research. "= We are really, really proud of the five-year number. We believe in getting = rich, slowly."=20 On a quarterly basis, the portfolio of Prudential Securities Inc., a unit o= f Prudential Financial, came in second only to J.P. Morgan, falling 11.8%. = However, investors sitting with the stocks Prudential recommends haven't do= ne as well in the long run. The value of its basket of stocks has fallen 45= .9% in the past year, finishing ahead of only Lehman Brothers Holdings Inc.= , which posted a one-year loss of 54.9%.=20 Seven firms managed to beat the S&P 500 index during the past 12 months, wh= ich fell 26.6% in the period.=20 Lehman, which finished last in the survey in the second quarter thanks to i= ts heavy weighting in technology, managed to move up in the rankings this q= uarter. This primarily stemmed from its annual shuffle of the 10 stocks in = its portfolio, known as its "Ten Uncommon Values." This time around, the fi= rm's portfolio slipped 18.4% in the quarter, for an 11th place finish. Just= one of its 10 stocks, Washington Mutual Inc., managed to eke out a positiv= e return, of 3.1%. Its biggest quarterly loser: Energy company Mirant Corp.= , which fell 36.3% in the period.=20 "It's a portfolio that has done decently since the market troughed," says J= eff Applegate, Lehman's chief market strategist. He says he believes the ma= rket hit bottom Sept. 21.=20 --- Brokerage Houses' Stock-Picking Prowess Estimated performance of stocks on the recommended lists of 15 major brokerage houses through Sept. 30. Figures include price changes, dividends, and hypothetical trading commissions of 1%. ---- Best & Worst Picks ---- ----- Returns ------ Biggest Biggest Latest One- Five- Gain Loss qtr. Year Year Raymond James CACI Intl. +49.7% Skywest -51.1% -14.2% -14.7% +56.8% Edward Jones Amr Water Wk +20.5 Celestica -47.1 -11.2 -18.7 +85.1 Merrill Lynch Triad +20.1 Amer. -34.5 -15.4 -19.8 +64.9 Hospitals Express UBS Warburg PepsiCo +9.7 BEA Systems -69.2 -12.9 -19.9 N.A. J. P. Morgan Sec. Northrop +26.6 Macrovision -58.5 -8.6 -20.0 N.A. Bear Stearns MBNA +19.2 Embraer -60.3 -15.9 -22.2 +50.9 Salomon S.B. Abbott Labs +8.5 Hewlett- -43.6 -16.0 -25.0 +17.9 Packard Morgan Stanley DW Johnson & John +11.2 EMC -59.8 -14.2 -29.0 +33.7 Dain Rauscher El Paso Energy +17.4 i2 -82.6 -19.6 -32.2 N.A. Technologies A.G. Edwards Verizon +4.4 EMC -59.8 -17.4 -33.4 +34.8 U.S. Bancorp Piper Jaf. Eli Lilly +9.4 EMC -59.8 -22.0 -39.9 +36.7 Goldman Sachs Wal-Mart +8.3 Check Pt -56.5 -23.2 -40.6 +60.0 Sftwr Credit Suisse FB Johnson & John +11.2 Veritas -72.3 -30.1 -44.9 +38.1 Prudential Sec. Kraft Foods +12.9 BMC -41.6 -11.8 -45.9 +41.3 Software Lehman Bros. Wash. Mutual +3.1 Mirant -36.3 -18.4 -54.9 +29.6 S&P 500 Index -14.7% -26.6% +62.7% *In latest quarter; holding period may be less than full quarter N.A. =3D not available Source: Zacks Investment Research Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business/Financial Desk; Section C German Bank Is in Talks With Enron To Buy a Unit By SUZANNE KAPNER 11/19/2001 The New York Times Page 2, Column 6 c. 2001 New York Times Company LONDON, Nov. 18 -- A large German bank is in talks to buy Wessex Water from= the Enron Corporation, people close to the discussions said today.=20 Enron is looking to sell Wessex Water, of Britain, as well as other noncore= assets in India and Brazil, after a financial crisis nearly brought its ma= in energy trading business to a halt. That crisis led to Enron's decision e= arlier this month to be acquired by Dynegy Inc., a much smaller rival. The German Bank, Westdeutsche Landesbank Girozentrale of Dusseldorf, or Wes= tLB, is among several suitors for Wessex Water, people close to the discuss= ions said. The sale has also attracted the attention of industry rivals lik= e Thames Water, owned by RWE of Germany. But such a combination would most = likely incur a long review by regulators, who might either block the merger= on antitrust grounds, or exact stiff concessions, industry experts said.= =20 Wessex Water is likely to be sold for more than $:1 billion ($1.4 billion) = but less than the $:1.4 billion that Enron paid for it in 1998, analysts sa= id.=20 ''In hindsight, we made some very bad investments in noncore businesses,'' = Kenneth L. Lay, Enron's chairman and chief executive, told analysts in a co= nference call last week. Those investments ''have performed far worse than = we ever could have imagined,'' he said, citing the Azurix water business, o= f which Wessex Water is a part, and energy assets in Brazil and India.=20 Executives from Enron were not immediately available for comment today. Wes= tLB executives declined to comment.=20 WestLB has been aggressively pursuing acquisitions in Britain, bidding for = British Telecommunications' phone network and the nation's railway tracks c= ontrolled by the troubled Railtrack, which is restructuring under governmen= t supervision. Neither of those bids has progressed beyond the initial stag= es.=20 Last summer, WestLB helped finance the management buyout of the Mid Kent Wa= ter Company through Swan Capital, its private equity vehicle. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Credit Markets Bond Boom Isn't Likely to Lift Economy As Corporations Swap Old Debt for Ne= w By Jathon Sapsford Staff Reporter of The Wall Street Journal 11/19/2001 The Wall Street Journal C1 (Copyright © 2001, Dow Jones & Company, Inc.) When AT&T last week completed the second-biggest bond sale in history -- ca= pping one of the busiest bond periods in years -- it came as welcome news a= mid fears of a credit crunch. Here was new money, meaning new spending on p= lants, equipment and jobs that could help pull the economy out of its slump= .=20 That $10.9 billion AT&T deal, and a slew of similar bond deals from big com= panies ranging from Boeing and Anheuser-Busch to Kraft Foods and General Mo= tors, may not provide as big of a boost as economists are banking on. That = is because corporations, like homeowners, are in the midst of a refinancing= boom. Corporations are hitting the market not just because rates are cheap, but b= ecause they often can't get money in other crucial markets. In particular, = they are sidestepping the commercial paper market -- short-term corporate I= OUs used to finance day-to-day operations, where rates traditionally are lo= west -- because investors are unwilling to finance many well-known corporat= ions.=20 The result has been a huge jump in bond sales, the majority of which are us= ed to reduce existing debt. Since the Sept. 11 terrorist attacks, about $13= 5 billion in investment-grade bonds have been sold, up from about $78 billi= on in the year-earlier period. Overall issuance this year is likely to set = a record, clearing $600 billion, compared with $411 billion in 2000.=20 "The driving force behind this surge in bond issuance is refinancing short-= term commercial paper to long-term debt," says John Lonski, chief economist= at Moody's Investors Service, a credit-rating agency.=20 Usually, rising bond issuance presages economic growth. In 1991, corporatio= ns sold a record number of bonds to exploit falling interest rates. But the= n, companies poured much of the money they raised back into their operation= s, a flurry of investment that foreshadowed the economic boom of the late 1= 990s.=20 This time around, the surge in bond deals won't pump in enough new money to= the economy to make a dramatic difference. Though, as in the case of the m= illions of homeowners who are refinancing their mortgages to lower monthly = payments, it could help ease some pressure on stretched corporate-balance s= heets and help to fund some of the companies' day-to-day operations.=20 Not all of the money being raised is to refinance short-term debt, of cours= e, and the string of bond deals shows that many of the nation's biggest bor= rowers have ready access to funding if they need it.=20 But most companies are similar to AT&T, which last week provided the bigges= t refinancing example yet.=20 Over the next three months, the telecom company was facing $6.5 billion in = expiring commercial paper. Under normal conditions, corporations pay off ma= turing commercial paper by "rolling over" that debt, or issuing new commerc= ial paper to replace the old. But rolling over commercial paper became much= harder for AT&T after Moody's cut the company's short-term and long-term c= redit ratings. Through the bond deal, AT&T raised money at relatively attra= ctive rates while avoiding the difficulties of the commercial-paper market.= =20 Other companies facing downgrades also are scrambling to find alternatives = to the commercial-paper market through bonds, loans or revolving credit lin= es. "The ripple effects of this are being felt throughout the capital marke= ts," says Meredith Coffey, senior vice president at Loan Pricing Corp., a d= ebt-market-analysis company.=20 For the most extreme cases, the bond markets don't offer refuge. Enron, ham= mered by a third-quarter loss of $618 million that led to a string of downg= rades, drew down $3.3 billion from its emergency bank credit line to repay = investors in its commercial paper. It then turned to its banks for an addit= ional $1 billion loan to pay off more commercial-paper investors, thus tidi= ng it over until it could merge with rival Dynegy.=20 Most investment-grade companies aren't nearly so bad off, and thus have rea= dy access to bond investors. General Motors, for instance, had little troub= le selling $6 billion in debt last month, while Ford Motor easily sold bond= s totalling $9.4 billion.=20 But the surge in bond sales masks signs that even investment-grade companie= s are having trouble convincing investors that they are good for their mone= y.=20 Take Ford. Standard & Poor's and Moody's downgraded Ford's debt ratings las= t month to triple-B-plus and single-A-3, respectively. With that rating, Fo= rd is far enough down the spectrum of investment-grade debt that many of th= e ultraconservative investors in commercial paper won't touch it, meaning t= hat it had to turn to corporate bonds to refinance its debt. Ford concedes = that a big reason it is selling bonds was to avoid the trouble in the comme= rcial-paper market.=20 Boyce Greer, the money-market group leader at Fidelity Investments, says he= often stops buying the commercial paper of a corporation at the first sign= of eroding profitability -- even before they get downgraded. "You can't wa= it around for a rating agency [to downgrade a company]," he says.=20 Moody's has downgraded five times as many corporations as it has raised so = far this year. Thus, the market for corporate commercial paper has shrunk t= o $1.4 trillion at the end of October, down from $1.6 trillion at the end o= f last year.=20 ---=20 Friday's Credit Markets=20 Last week was a brutal time to own Treasurys. The market sold off so sharpl= y as to push yields, which move inversely to prices, almost back up to wher= e they stood before the terrorist attacks. It was the worst bond selloff si= nce 1987, according to economists at Banc One Capital Markets.=20 Losses were heaviest in issues like the two-year note, the most sensitive t= o expectations about Federal Reserve policy. Since hitting a record low of = 2.30% on Nov. 7, the two-year yield has risen 0.80 percentage point to 3.05= %. In the same period, the 30-year bond yield has risen 0.50 percentage poi= nt to 5.27%.=20 At 4 p.m. Friday, the benchmark 10-year Treasury note was down 1 3/32 point= s from late Thursday, or $10.94 per $1,000 face value, at 100 25/32. Its yi= eld jumped to 4.897% from 4.756% Thursday.=20 The 30-year Treasury bond's price fell 1 19/32 to 100 25/32 to yield 5.317,= up from 5.211% Thursday.=20 Why the selloff? People in the market cite a shift toward the view that the= U.S. economy may finally be on the brink of recovery. That means the Fed m= ay not need to employ many more rate cuts to get growth back on track.=20 -- Michael S. Derby and Steven Vames Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Business; Financial Desk Preview / WEEK OF NOV. 19-25 Investors Looking for Answers in Enron Filing Bloomberg News 11/19/2001 Los Angeles Times Home Edition C-2 Copyright 2001 / The Times Mirror Company Enron Corp. investors hope the energy trader's third-quarter report to the = Securities and Exchange Commission will answer some of the questions that s= ent its shares tumbling and led to a proposed sale to rival Dynegy Inc.=20 Enron, which has been criticized for failing to clearly explain how it make= s money, may disclose in a filing expected today more on how much is owed b= y the company and affiliated partnerships, as well as any planned job cuts = and other cost-saving moves related to Dynegy's $24-billion buyout. Enron agreed to sell after its stock plunged 67% in three weeks amid an SEC= investigation into partnerships run by Enron executives. Investors worry t= hat new disclosures, such as previously unreported debt, might threaten Enr= on's credit rating and scuttle the merger, possibly pushing Enron into bank= ruptcy.=20 Enron Chairman Kenneth Lay acknowledged last week that failed investments a= nd a loss of investor confidence forced the sale to Dynegy, and he and othe= r executives pledged to be more open with investors.=20 Enron shares fell 48 cents Friday to close at $9 on the New York Stock Exch= ange. Dynegy fell $1.53 to $42.47.=20 Enron's third-quarter earnings report, which had been expected last week, w= as delayed by the Dynegy talks and a restatement of earnings, Chief Financi= al Officer Jeffrey McMahon said.=20 Enron reduced net income for four years by a combined $586 million to inclu= de losses from affiliated partnerships.=20 Today's filing, called a 10-Q, will include a balance sheet summarizing ass= ets and debts. Enron for years has omitted balance sheets, which the SEC re= quires as part of the 10-Q, from its press releases announcing earnings. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 COMPANIES & FINANCE INTERNATIONAL - Dynegy bid faces long wait. By NANCY DUNNE and ANDREW HILL. 11/19/2001 Financial Times © 2001 Financial Times Limited . All Rights Reserved Dynegy's $9.8bn rescue bid for Enron, the larger rival energy group, poses = complex and unprecedented regulatory challenges for the Federal Energy Regu= latory Commission (Ferc), which is likely to lead the review of the bid.=20 Officials from the two Houston-based companies, which announced the deal 10= days ago, estimated the regulatory process would take six to nine months t= o complete. But the Ferc review could take longer, according to experts, and approval o= f the deal is further complicated by such issues as the parallel Securities= and Exchange Commission investigation into Enron's finances.=20 "It's very complicated. It will be very time-consuming," said one person cl= ose to the Ferc commissioners. As of Friday, the groups had not yet filed f= or Ferc approval.=20 "(The deal) raises issues that have never been considered before by Ferc," = said Edward Comer, general counsel to the Edison Electric Institute, the as= sociation of US electric utilities.=20 "It has never considered the merger of two huge marketers, and in the past,= marketing wasn't considered as significant a portion of the energy sector = as it has become."=20 A typical deal now takes about 200 days to win Ferc approval. But Mr Comer = said approval of the Dynegy bid could take anywhere from six months to two = years.=20 The agency's guidelines prohibit mergers if they give the new company the m= arket power to push prices above competitive levels for "a significant peri= od of time".=20 It analyses market power by identifying the products sold, the customers an= d suppliers affected and market concentration.=20 "Mergers in the past have been considered on the basis of assets," said Pat= ti Harper-Slaboszewicz of Frost & Sullivan, a market research and consultin= g firm. "The rules were written when the industry was vertically integrated= ."=20 Now the question is how ownership of energy trading services will be calcul= ated. It could be difficult to assess if the companies are exerting market = power because information on the trading books of companies such as Enron a= nd Dynegy is closely guarded, she said.=20 The two companies must also win consent from either the Justice Department = or the Federal Trade Commission, and from states where the companies have p= ipelines and provide retail services.=20 © Copyright Financial Times Ltd. All rights reserved.=20 http://www.ft.com. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Fund Track Russia Fund Surges Amid Global Woes By Victoria Marcinkowski Dow Jones Newswires 11/19/2001 The Wall Street Journal C17 (Copyright © 2001, Dow Jones & Company, Inc.) Everything is relative in the investing world, so with U.S. investors nervo= us about homeland stocks, European and Asian markets sagging and terrorism = worries abounding, Russia's risky markets seem less so these days.=20 So far this year, Pilgrim Russia Fund, which was bought by ING Groep NV lat= e last year, has been the top-performing regional mutual fund, gaining 53%,= according to fund tracker Morningstar Inc. By comparison, the Standard & P= oor's 500-stock index has slumped nearly 14%. Of course, the risks in Russia remain. Despite recent economic gains, the c= ountry still is struggling with a weak banking system, inadequate state ins= titutions to enforce contract laws and few businesses run by the "modern" r= ules of corporate governance, according to Samuel Oubadia the 37-year-old m= anager of the Russia fund.=20 "But they are getting more open," Mr. Oubadia said, though Russia's lax fin= ancial reporting standards are still one of the main roadblocks for foreign= investors. With $49 million in assets, the Pilgrim Russia fund invests bet= ween 90% and 95% in Russian stock, with the balance held in cash.=20 "While the global economy is slowing, Russia is still in an expansion mode,= " Mr. Oubadia said. After years of economic reforms, consumer spending is u= p 10% and the former Soviet Union's gross domestic product is expected to g= row 3% to 5% next year, more than twice as much as that of the U.S. and Eur= ope.=20 Two-thirds of the fund's stocks are oil and gas companies, which are still = the most liquid stocks in Russia. Utilities, mining, telecommunications com= panies and breweries make up the rest. "There's no escaping oil and gas if = you want to manage a Russia fund," Mr. Oubadia said.=20 The spike in oil prices earlier this year made the investment in oil worthw= hile, propelling earnings growth for Russia's oil and gas companies. Higher= oil prices also worked wonders for the Russian economy, which is largely d= ependent on oil and gas. More recently, however, falling oil prices have th= reatened the companies' profit growth.=20 But the fund manager, who is based in The Hague, said he doesn't think peop= le should invest in Russian oil stocks because of their earnings prospects.= "You don't invest because of earnings growth -- there will be none for Rus= sian oil companies this year. You invest because of the stocks' low valuati= on," Mr. Oubadia said, adding that most of the Russian oil companies still = trade well below the world-wide average for the sector.=20 Yukos Oil is one of the fund's largest investments, making up about 12% of = the fund's holdings. Surgutneftegaz and Lukoil Holdings also make up more t= han 5% each of Pilgrim Russia's assets. While Mr. Oubadia said the companie= s should be able to handle falling oil prices, partly by cutting production= , he worries that further price erosion could hamper a fragile Russian stoc= k market that relies so heavily on oil and gas stocks.=20 "Can Russian markets do well with lower prices for oil?" he asked. "The sho= rt answer is yes. But how low will prices drop?" Mr. Oubadia acknowledged t= hat weak oil prices might cause him to shift some investments from oil and = gas into other Russian sectors, including telecom stocks and consumer produ= cts.=20 The Russia fund isn't for the timid. In 1998, when the Russian economy coll= apsed, the fund -- then called Lexington Troika Dialog Russia, lost 83% of = its value. A year later, the fund soared 160%. In 2000 the fund finished do= wn almost 18%.=20 ---=20 JANUS STOCK SHUFFLE: Janus Capital Corp. bulked up on lower-priced value st= ocks and shed some shares of its long-held technology companies during the = third quarter, a new Securities and Exchange Commission filing showed.=20 The Denver fund firm reported that during the third quarter, it lowered its= investments in 14 of the 20 largest holdings it had owned as of June 30. T= he largest reduction was a 43.6 million-share sale of Nokia Corp. stock. Af= ter the sale, Janus still owned a large 183.2 million-share position in the= wireless-phone company at the end of the third quarter.=20 During the quarter, Janus also sold more than half of its stakes in tech co= mpanies EMC Corp. and Sun Microsystems Inc. In addition, the fund company, = a unit of Stilwell Financial Inc., trimmed its exposure to energy company E= nron Corp., selling 1.5 million shares to reduce its overall position to 41= .4 million shares at the end of September.=20 On the buying side, Janus, one of the hottest fund firms of the late 1990s = thanks to bets on leading technology stocks, about doubled its position in = software company Microsoft Corp. It also boosted its holding in the investm= ent company run by Warren Buffett, Berkshire Hathaway Inc., while starting = a small position in Philip Morris Cos., whose dividend-rich stock is usuall= y more popular with price-sensitive "value" managers. Janus has introduced = new value portfolios recently, but most of its investors' assets still foll= ow faster-growing companies.=20 -- Aaron Lucchetti and Todd Goren Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Wessex Water 11/19/2001 The Financial News Copyright (C) 2001 The Financial News; Source: World Reporter (TM) The Sunday Telegraph=20 The German state-owned bank, WestLB, is in talks to buy Wessex Water from i= ts troubled US parent Enron. WestLB is thought to be one of a number of financial buyers to have approac= hed Enron with a view to acquiring Wessex, which is valued at more than AGB= P1bn (e1.63bn).=20 Enron, the energy trading group which bought Wessex in 1998 for AGBP1.4bn, = is being bought by its much smaller US rival Dynegy after collapsing into f= inancial crisis.=20 The Independent on Sunday=20 The water and sewage company Wessex Water is understood to be up for sale f= ollowing an offer to take over its owner, Enron.=20 Three years ago, Enron spent AGBP1.4bn on Wessex Water.=20 But Dynegy is understood to want to concentrate on US and European energy a= ssets and is not interested in non-core assets.=20 Any hope to regain the same amount of money could be derailed as the indust= ry is put off by regulatory problems, and the company's results have worsen= ed due to imposed price cuts over the past year. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 India BSES:Dabhol Pwr Proj Due Diligence Done Jan -Report 11/19/2001 Emerging Markets Report (Copyright © 2001, Dow Jones & Company, Inc.) NEW DELHI -(Dow Jones)- India's BSES Ltd. (P.BSX) said Monday due diligence= on the 2,184 megawatt Dabhol power project is expected to be completed by = January 2002, the Press Trust of India news agency reported.=20 "The due diligence process will take six-eight weeks after signing of the c= onfidentiality agreement with Enron-promoted Dabhol Power Co.," the report = said, quoting BSES' Chairman and Managing Director R.V. Shahi. The U.S.-based energy company Enron Corp. (ENE) has a controlling 65% stake= in the Dabhol power project located in the western Indian state of Maharas= htra.=20 The Maharashtra State Electricity Board, or MSEB, has 15%, while U.S.-based= companies General Electric Co. (GE) and Bechtel (X.BTL) each own 10% in DP= C.=20 Enron wants to sell its stake in DPC because of payment defaults by its sol= e customer, the MSEB, and the Indian federal government's failure to honor = payment guarantees.=20 In August, the U.S. company said it was willing to sell its stake at cost.= =20 BSES would appoint three separate consultants for technical, financial and = legal due diligence on the Dabhol project, Shahi said.=20 After signing the confidentiality agreement, BSES will formally look into t= he books of DPC, its loans, sponsors and other assets and legal wrangles be= fore deciding on the acquisition price of the company, the report said.=20 The Dabhol project, at a cost of $2.9 billion, is India's largest single fo= reign investment to date.=20 -By Himendra Kumar; Dow Jones Newswires; 91-11-461-9426; himendra.kumar@dow= jones.com Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 India Dabhol Pwr: No Termination Notice Until Crt Verdict 11/19/2001 Dow Jones International News (Copyright © 2001, Dow Jones & Company, Inc.) NEW DELHI -(Dow Jones)- Dabhol Power Co. will wait for the Bombay High Cour= t's verdict before sending a final termination notice to its sole customer = - the Maharashtra State Electricity Board, a source close to the company to= ld Dow Jones Newswires Monday.=20 "Nothing is going to happen until Dec. 3. The Bombay High Court has adjourn= ed all proceedings...(and)...DPC will wait for the court's verdict before d= eciding its future course of action," said the source. Enron Corp. (ENE) has a controlling 65% stake in the 2,184-megawatt Dabhol = power project in the western Indian state of Maharashtra. Enron wants to se= ll its stake in DPC because of payment defaults by the MSEB and the Indian = federal government's failure to honor payment guarantees. In August, the U.= S. company said it was willing to sell its equity at cost.=20 At $2.9 billion, Dabhol is India's largest single foreign investment to dat= e. MSEB has 15%, while U.S.-based companies General Electric Co. (GE) and B= echtel (X.BTL) own 10% each in DPC.=20 -By Himendra Kumar; Dow Jones Newswires; 91-11-461-9426; himendra.kumar@dow= jones.com Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Financial Post: News Fears raised on Enron deal: $15.6-billion rescue bid Andrew Hill and Sheila McNulty Financial Times 11/19/2001 National Post National FP3 © National Post 2001. All Rights Reserved. NEW YORK - Companies that trade with Enron Corp., the Houston, Texas-based = energy group, are taking precautions in case Dynegy Inc., also of Houston, = withdraws its $15.6-billion rescue bid for its rival, a decision that could= trigger a crisis in the energy trading market.=20 Counter-parties to Enron, which is one of the principal market-makers provi= ding liquidity in the energy market, are seeking to limit their exposure to= the group, in spite of reassurances from both Enron and Dynegy that the ta= keover will go through. Experts also say the implications of the deal are so complex that the regul= atory review could take much longer than the six to nine months company off= icials have estimated.=20 Analysts say the 27% spread between the value of Dynegy's offer price and E= nron's share price suggests a 65% to 75% chance the bid will succeed. But b= ankers and energy executives are still worried about systemic risk, both in= the energy market and in financial markets, where companies such as Enron = use derivatives to offset the risk of energy price fluctuations.=20 Enron was close to meltdown until Dynegy stepped in with a rescue bid 10 da= ys ago, having persuaded credit rating agencies not to downgrade Enron's de= bt to below investment grade.=20 Clauses built into the merger agreement signed with Enron give Dynegy the r= ight to walk away under certain circumstances, although the two companies' = officials and advisors differ on how easy it would be for Dynegy to pull ou= t.=20 While the situation remains uncertain, companies that deal with Enron are r= eluctant to lock themselves into long-term contracts to buy or sell power, = said John Olson, an analyst at Sanders Morris Harris, the investment bankin= g arm of Houston, Texas-based Sanders Morris Harris Group.=20 Keith Stamm, chief executive of Aquila Inc., the energy marketing and risk-= management company, said his company had begun preparing contingency plans = in case the deal fell through. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09 Blackout in the power sector A V Rajwade 11/19/2001 Business Standard 10 Copyright © Business Standard Every foreign company in the Indian power sector wants to exit. Of these, t= he most controversial has been Enron and its Dabhol Power Company Ltd (DPCL= ). This apart, the experience of investors in the "reformed" power sector i= n Orissa is also unhappy. Five years ago, Orissa was the first state to ado= pt the World Bank-recommended model of separating generation, transmission = and distribution of power, and an independent regulator. The Godbole Commit= tee has recently recommended the same for Maharashtra as well.=20 Clearly, separating the three functions is a complex restructuring. Maybe i= t helps privatisation, the current fashion on the subject having been set i= n Thatcherite Britain. While some privatisations in UK have succeeded, the = experience has not been consistent all over. Take UK's rail sector. While privatising, the government in its wisdom deci= ded to separate the ownership of the rail network (Railtrack) and the owner= ship and operation of trains. The contractual relationship between the vari= ous operating companies and Railtrack were governed by a byzantine, bewilde= ringly complex system of penalties and incentives, to be monitored by an in= dependent regulator.=20 Such separation had no parallel. Besides, Railtrack suffered from poor mana= gement, cost escalation in modernisation of tracks, etc. Several serious ac= cidents occurred and fixing responsibility became difficult. The "reform" d= id not work, and Railtrack was put back under public control last month.=20 What are the chances of trifurcation of the power sector in India succeedin= g? Pretty poor, if the experience of Orissa is any guide. It faithfully sep= arated the three functions, and privatised distribution and part of generat= ion. AES, a foreign company, was 49 per cent investor in a generating compa= ny, and 51 per cent in CESCO, a distribution company. As Gajendra Haldea an= alysed in this paper on August 27, "The policy and regulatory framework was= inadequate and myopic."=20 Distribution losses, a euphemism for power theft, were much larger than the= companies had been led to believe at the time of privatisation. CESCO defa= ulted in paying the dues of GRIDCO, the transmission company, which in turn= defaulted to the generating company. Indeed, all CESCO's cash inflows are = now escrowed, leaving it no money even to pay salaries. For all practical p= urposes, the distribution companies seem to be in a difficult situation, pe= rhaps beyond redemption, and the "reform" is a total mess.=20 The crux of the problem in the power sector is not whether a unified SEB is= less efficient than trifurcated companies it is the political unwillingnes= s to charge a price which covers the cost to all consumers. For a while, cr= oss subsidisation worked with commercial consumers subsidising the househol= d and the agricultural segments.=20 However, as the burden became too large, the commercial sector started movi= ng to captive generation, further worsening SEB finances. An "independent" = regulator for power tariffs may not solve the problem. He may fix economic = prices but will the state come forward to protect the bill collectors, puni= sh power thiefs, face social unrest if power to recalcitrant consumers is c= ut off? So long as the answers to these questions are in the negative, as, = sadly, they are, the institutional restructuring is no substitute for subst= antive action. No wonder all foreign investors in the power sector want to = get out!=20 Enron too wants out but it has many more problems in its home country, over= and above its dispute with MSEB. It had attracted a lot of adverse publici= ty for gouging power consumers in California, a state in a power crisis (se= e World Money, February 2, 2001). The Internet craze also had a hand in Enr= on's misfortunes. It became an energy trader, established an electronic tra= ding platform, had broadband ambitions, went into a disastrous diversificat= ion in water supplies which, if I remember correctly, led to Rebecca Mark's= exit. Perhaps it went into too many areas too quickly under Jeffery Skilli= ng, ex-McKinsey, and was notorious for opaque, complex accounts.=20 To top it all, last month it announced that it will take an extraordinary $= 1.2 billion charge in its third quarter results for losses in financial act= ivities. Enron's chief financial officer, who was supposed to be in charge = of these, has resigned amidst reports that a private equity fund associated= with him was involved in them. The SEC is investigating the affair and Enr= on's share price is down 67 per cent since mid-October. There are some repo= rts that Shell may make a bid for Enron.=20 After its ratings were downgraded, Enron is desperate for liquidity and anx= ious to dispose its assets. DPCL was already on the platter; now a sale has= become even more urgent. Reportedly, Tatas and BSES are interested; so are= the lending institutions. Clearly, if a settlement is to be reached, this = is the optimum time.=20 But one is not very optimistic. For one, Delhi and Mumbai will be involved,= and bureaucracies never understand opportunity costs. Our byzantine decisi= on-making processes make timely decisions impossible. Further, if a deal do= es take place, there will be the inevitable allegations of corruption. It i= s much safer for the reputation of the concerned ministers in Mumbai and De= lhi to allow the drift to continue, to "let the law take its own course", w= hatever the costs! Sadly, as Jairam Ramesh said in this paper, Indian polit= icians respond to developments only out of compulsion, not conviction. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09
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