-Caveat Lector- from: Click Here: <A HREF="http://www.aci.net/kalliste/";>The Home Page of J. Orlin Grabbe</A> ----- Oops! The Energy Crisis that Wasn't
Troubled Enron DYNEGY AGREES TO BUY TROUBLED ENRON FOR $7.8-BIL by James Norman New York�Troubled energy giant Enron agreed late Nov 9 to be taken over by smaller rival Dynegy in a $7.8-bil stock-swap, with assumption of at least $12-bil of Enron debt. The deal includes an immediate "asset-backed" infusion of $1.5-bil from Dynegy's 26.6% owner ChevronTexaco, to shore-up Enron's cash-strained trading operations, with another $1-bil of new equity from ChevronTexaco when the merger closes. Dynegy will offer 0.2685 of its shares for each Enron share, giving Dynegy holders 64% of the combined company. At Dynegy's closing price Nov 9 of $38.76/share, that equates to $10.41/share for Enron, which has seen its stock plummet from more than $90 barely a year ago to a recent low of $7 before rebounding on Dynegy bailout rumors. Enron closed Nov 9 at $8.63/share. The merged company will be named Dynegy Inc and be headed by Dynegy CEO Chuck Watson. The only Enron executive moving to a senior position will be new president Greg Whalley, who will be an executive vice-president and part of a new "office of the chairman" at Dynegy. Enron will get to name three of 14 directors, which could include CEO Ken Lay. ChevronTexaco will maintain its three director seats. ChevronTexaco will make its investment in the form of $1.5-bil of Dynegy convertible preferred shares, with warrants to buy another $1.5-bil of Dynegy stock over three years. Dynegy will invest the initial ChevronTexaco cash in Enron in return for preferred stock and "other rights" in Enron's crown-jewel Northern Natural Gas pipeline unit. If the Dynegy-Enron deal fails to close, Dynegy can acquire Northern and ChevronTexaco can redeem its preferred at cost or convert it to common for 36% ownership of Dynegy. Dynegy said the deal should be "strongly accretive" to earnings in the first year. Merger savings are expected to be $400- to $500-mil a year, from exiting "non-core" businesses, eliminating overlap and lower interest costs. The deal, which will need shareholder and regulatory approval, is not likely to be consummated until the third quarter of next year. But it is by no means a sure thing. Vocal opponents are already emerging to the possible enlargement of Enron's huge trading operations. Among them: crusty Raymond Plank, CEO of US E&P independent Apache. Plank blames electronic over-the-counter systems such as those run by Enron and Dynegy for much of the volatility that has whipsawed natural gas and power markets over the past year. Plank says this volatility is wreaking havoc on producers' capital spending plans and the creditworthiness of small upstream companies. Not to mention the disaster that hit California, PG&E and SoCalEd. Plank extends his opprobrium to the New York Mercantile Exchange, which he views as another venue for moving prices up and down to generate volatility. Of course, volatility is not senseless to public trading companies using mark-to-market accounting. Under US GAAP, traders run through their income statements the theoretical mark-to-market profits being made on even far-out futures and derivatives positions. And under standard option pricing models, volatility is the key variable in calculating their present value. With enough volatility, and a long enough contract, any trader can persuade his accountants even the most far-fetched option position can have current mark-to-market value. The only test is the "reasonableness" of the assumed forward price curve, which Enron can tweek daily with its postings on EnronOnline. Both Enron and Dynegy employ Arthur Andersen as auditors and consultants. Indeed, Enron, Dynegy, El Paso, Duke, Aquila, Williams and any number of other trading houses make no bones about their affinity for volatility. On its last earnings conference call (the one that sparked Wall Street rage over CEO Ken Lay's disclosure of a looming $1.2-bil accounting nightmare), Enron whined its European earnings were a little light due to "not as much volatility as we'd have liked" in power markets there. "They acknowledge the don't make money off price (differentials)," gripes Plank: "They make their money off volatility." Helping drive volatility on these electronic exchanges is the ability to move prices with very small trades, since only Enron or Dynegy see the volumes involved on their EnronOnline and Dynegy Direct systems. As some traders have pointed out to Platts, this can allow a market manipulator to gradually start an upward price stampede that can snowball into a short squeeze, spilling over onto the NYMEX futures and cash markets. Such may have been the case with last winter's irrational run-up in gas prices to some $10/Mcf. Did Enron cause it? Probably not. Would it have been able to see it developing and position itself accordingly? Without question. An added beauty of these electronic systems is the trading goes on with little or no margin deposits by the players. Even with its recent credit-ratings collapse, Enron has been able to make counter-parties rely on its own balance sheet as collateral for trades. And customers who qualify for EnronOnline can simply play off their own net worth without tying up much cash. Compare that to the roughly 10% margin required by NYMEX. Or better yet, the 50% margin required on stock trading. One quick but painful fix for the volatility problem, Plank notes, would be to make futures and options players abide by the same leverage rules stock traders have faced since 1929. If Enron and Dynegy had to post 50% margin, Plank quips, "They'd go home to their wives at night." In other words, they'd return to their historic pipeline business and quit spending so much time in the options pits. Enron is not keen for that, and has spent a lot of time and money lobbying to avoid such regulation. It may have been the company's best investment ever: legislation last year exempts electronic trading systems from oversight by the Commodity Futures Trading Commission, notes energy consultant Philip Verleger. Among the key backers of that law was Sen. Phil Gramm, Republican- Texas, whose wife and former CFTC commissioner Wendy Gramm is an Enron director. It all sounds chillingly similar to what happened to the unregulated "junk" bond market and its principal architect, Drexel Burnham Lambert's Michael Milken. Drexel disappeared in a cloud of government investigations. Milken went to prison.�James Norman Platt's Oilgram, Volume 79 Number 219 November 12, 2001 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, All My Relations. 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