Posted on 11/28/2001 9:19:46 AM PST by RCW2001
Wednesday November 28 1:06 PM ET
HOUSTON (Reuters) - Energy trader Dynegy Inc. (NYSE:DYN - news) on Wednesday pulled out of a deal to buy larger rival Enron Corp. (NYSE:ENE - news), saying conditions had changed since the takeover was agreed on almost three weeks ago.
Dynegy had planned to buy its Houston rival for about $9 billion in stock, but the collapse of Enron's stock led Dynegy to invoke escape clauses allowing it to get out of the deal.
The buyout offer finalized Nov. 9 would have had Dynegy paying about $10.41 for each share of Enron, but its shares have since cratered and were trading at $1.19, down 71 percent for the day. Enron could not be immediately reached for comment.
A series of negative disclosures about Enron's finances made since October, have strangled the once-proud energy giant, which was forced to lower its reported earnings by $600 million over the last four years as a result of questionable off-balance sheet transactions.
Its trading business, the crown jewel most coveted by Dynegy, has also suffered from lower volumes as wary trading partners have shifted business away from the cash-poor and credit-threatened Enron.
One Andersen employee was quoted by a newspaper recently as saying that if they hadn't dressed up the 10k report, that they would have lost all of that consulting income.
In other words, they didn't perform an audit so much as they performed a cover up of Enron - in exchange for lucrative consulting fees.
Yet fellow CPA's won't enforce any disbarrment punishment on one of their major corporate players for that sort of chicanery...
Thanks
Accenture's business is I.T. consulting, and it does business with many, many firms in the energy sector, including Enron. Nothing incriminating about them selling "consulting resources" (people's time and talent) to Enron.
If you have any real proof of your assertion, then post it. If, however, it's based on something you read about what some Andersen employee supposedly said, then it's a mighty weak assertion.
Dynegy officials announced their decision shortly after two agencies downgraded Enron's credit rating to junk status -- triggering an obligation to immediately repay billions of dollars in debt that the once-mighty energy trader probably doesn't have the money to cover.
Trading in both stocks were halted on the news. Enron shares had plunged $2.91, or 71 percent to $1.20 in extremely heavy trading Wednesday on the New York Stock Exchange; less than a year ago, they were trading at $84.87. Dynegy shares were off $4.08, or 10 percent, to $36.81.
Analysts said the dire situation left Enron, the seventh largest U.S. company in terms of revenue, facing almost certain bankruptcy.
``It's the end of Enron, no question about it,'' said Gordon Howald, an analyst at Credit Lyonnais Securities in New York. ``I don't know who else could step in.''
Dynegy said Enron had breached its acquisition agreement, triggering a ``material adverse'' clause and causing it to call off the deal.
``Sometimes, a company's best deals are the very ones it did not do,'' Dynegy chairman and chief executive Chuck Watson said in a conference call.
Dynegy said it is no longer trading with Enron, and that the dissolution of the deal does not reflect a failure of the energy trading business.
``The industry has had several weeks to prepare for this event,'' said Steve Bergstrom, Dynegy's president. ``There are no signs of degradation, just a shifting of business between players.''
Dynegy acted shortly after Standard & Poor's and Moody's Investors Service both cited a loss of confidence that the deal would be consummated. They also that Dynegy's willingness to go through with the buyout had been compromised by continued erosion in investor confidence and Enron's core energy trading business.
The downgrades make $3.9 billion of Enron debt due immediately, and up to $16 billion in other debt originally due next year could come due earlier.
Dynegy also said it would exercise its right to purchase Enron's Northern Natural Gas pipeline, an option it received after it and ChevronTexaco Inc. -- which holds a 26 percent stake in Dynegy -- pumped $1.5 billion into the ailing Enron.
Despite Dynegy's claim to the pipeline, analysts are anticipating a battle over Enron's assets in bankruptcy court.
``It's going to be a fight'' between Dynegy and Enron's creditors, Howald said.
Spokesmen for both Enron and Dynegy didn't return repeated calls seeking comment Wednesday. Neither Watson nor Bergstrom would take questions during their conference call.
Enron and Dynegy, both based in Houston, had spent the last several days trying to hammer out a revision to their Nov. 9 merger agreement, which valued Enron stock at more than $10 per share.
``This comes in response to the fact that they weren't able to craft a deal last night. They were working on getting more cash (from banks shepherding the merger) last night, but they didn't get it,'' said A.G. Edwards & Sons analyst Mike Heim said. ``I think bankruptcy's not too far away.''
Raymond James analyst Jon Kyle Cartwright predicted Dynegy will survive with a few battle scars.
``I believe we all misunderstood how dramatic a credibility crisis can be in a recession in a bear market,'' he said. ``The speed at which Enron collapsed caught us all off guard.''
Enron, which earned $979 million on $100.8 billion in revenue in 2000, last month revealed that partnerships run by its executives had allowed the company to keep about half a billion in debt off its books and allowed the executives to profit from the arrangements. Enron's dealings with those partnerships are now the subject of a Securities and Exchange Commission investigation.
The company ousted its top financial officer in October, and several weeks ago restated its earnings back to 1997 -- eliminating more than $580 million in reported income over that span.
There are really two ways to look at this scenario from a big picture perspective:
1. Andersen (Accounting) is inept, hence Enron's badly inflated public 10k and audit, or
2. Andersen (Accounting) is corrupt, hence Enron's badly inflated public 10k and audit.
There is certainly evidence that executives at Enron are corrupt. This evidence includes one $20 million deal that went to Enron's CFO, in the name of a new corporation formed by that CFO. Further evidence includes Forbes listing of a $500,000 payment to a close relative of an Enron executive. Non-evidence, but still rather suspicious behavior, is that Enron's CEO turned down his $60 million golden parachute.
What remains to be proven is whether the corrupt executives at Enron took advantage of merely "slower" executives at Andersen, or whether those executives voluntarily colluded to hide insider deals and inflate Enron's balance sheets.
Instead of having several hundred thousand dollars in their retirement accounts, they are now going to get pink slips next week and nothing to show for their years of work.
A year ago, who ever would have thunk little Dumbya's biggest source of financial support would be a penny stock on November 28, 2001? And if the puny presidential pretender actually has the nerve to run for re-election in spite of his mishandling of the economy, Dumbya shouldn't expect much support from ENE option holders.
Dynegy today terminated its agreement to buy Enron Corp., making it likely that Enron will forced into filing for bankrupty protection.
The announcement came after Enron's credit rating was downgraded to so-called junk status by two rating agencies this morning.
"A move by Enron to seek protection from its creditors through a voluntary filing under Chapter 11 of the U.S. Bankruptcy Code is a distinct possibility if the merger falls through," Standard and Poor's wrote in downgrading Enron's credit rating.
Since Dynegy reached a deal to buy Enron on Nov. 9, there have been new troubling financial disclosures about Enron as well as increasing concerns about the health of its core trading business.
In terminating the deal, Dynegy cited "Enron's breaches of representations," as well as a so-called "material adverse change provision" in the merger deal.
Even though it is backing out, Dynegy will exercise its option to buy all of the Enron's Northern Natural Gas Pipeline.
Dynegy got that option because it immediately gave Enron $1.5 billion in cash after the deal was announced. That money came from Dynegy shareholder ChevronTexaco.
Enron said this afternoon it is temporarily suspending all payments other than those needed to maintain its core energy trading operations and is reviewing whether or not Dynegy is indeed entitled to buy the Northern Natural Gas Co.
"With Dynegy's termination of the merger and the ratings agency downgrades, we are evaluating and exploring other options to protect our core energy businesses," said Enron Chairman and CEO Ken Lay in a statement. "To do this, we will work to retain the employees necessary to the continuing operations of our trading and other core energy businesses."
Enron's debt rating reduction means it will have to immediately repay $3.9 billion more in debt obligations, something it can ill afford.
It also makes it very difficult for Enron to keep running its core trading and marketing business, which depends heavily on access to cash and credit.
Andre Meade, an analyst with Commerzbank Securities, said Enron's junk bond status will effectively shut down the bulk of Enron's trading and marketing operations as would-be trading partners won't be willing to take Enron's credit.
Meade also said he thought it was unlikely Enron could raise the money it needed to pay off the new obligations and keeping operating it business.
Enron's trading franchise -- a major reason that Dynegy wanted to buy Enron in the first place -- was already in trouble as other energy companies moved business elsewhere and raised credit requirements for doing business with Enron.
Monday night, Enron, Dynegy and other parities continued negotiations to try to keep the merger deal on track. The players, among other issues, were negotiating a lower purchase price for Enron and a new equity infusion for Enron.
In its report, S&P said it was concerned the merger agreement wouldn't be rescued and about "the liquidity implications of the possible failure of that transaction."
Enron's trading franchise, S&P said, has sustained significant damage that together with a rising potential legal liabilities weakens Dynegy's commitment to purchase Enron.
Cooperation from Enron key in probe-- Federal officials say they are willing to be more lenient with companies that cooperate in securities fraud cases, an attitude that could help get Enron Corp. off the hook in its current SEC investigation. But it could also put individual executives -- including its former chief financial officer and other former employees -- in the hot seat.
Well, at least the CPA's and consultants won't be prosecuted...
< /SARCASM >
Economically speaking, the city has taken a few high-profile hits this year (Compaq, Continental Air, Enron), and recent saber-rattling by OPEC to flood world markets with petroleum would cause oil prices to fall and deal the local economy a very painful blow.
No, but I am holding some shares of SFY and EGN, both in the natural gas business. Like ENE, they were supposed to do well in the Dumbya economy but got caught with their pants down after gas prices tumbled this year.
From the Houston Chronicle:
Nov. 19, 2001, 11:14PM
Enron Corp.'s financial well-being continues to be a moving target as the company made more adjustments to its earnings Monday.
In a Securities and Exchange Commission filing, Enron said it reduced third-quarter earnings by 3 cents per share and increased earnings for the first nine months of 2001 by 1 cent to reflect recently discovered accounting errors.
The company also said that its recent credit rating drop may force it to pay off a $690 million note by Nov. 27 if it doesn't find collateral to guarantee the debt.
The revelations came in the embattled energy trader's 10-Q document, which companies must file every quarter with details of their earnings and balance sheet. Enron delayed releasing the 10-Q by five days and said the filing made Monday had not been fully audited by its accounting firm, Andersen, because of an ongoing investigation by the company's board of directors and the need for more time.
"We are continuing to review the transactions in question and are making progress with our investigation," said William K. Powers Jr., chairman of Enron's special investigation committee and dean of the University of Texas School of Law.
Enron's pending $690 million IOU is related to a limited partnership to buy natural gas assets in Brazil. One of the terms of the partnership requires Enron to repay the debt if its credit rating slips to BBB- on rating agency Standard & Poor's scale, which it did Nov. 12. If Enron doesn't put up collateral equal to the amount of the note or repay it, the other partners in the deal can sell off the partnership's assets.
Enron officials said in the filing they are working with lenders to come up with an acceptable agreement on the debt.
If Enron's debt rating continues to drop, which would put it below investment grade, the company would face another $3.9 billion in debt repayments, the company said in the filing, mainly by two other partnerships formed in recent years: $2.4 billion owed by Osprey Trust and $915 million by Marlin Water Trust.
Enron is under a negative review by most rating agencies, but a cash infusion from Dynegy combined with additional lines of credit from a number of investment banks and a possible $500 million to $1 billion equity investment by other investors is expected to keep the ratings afloat.
The turmoil around Enron's finances started after Oct. 16, when steep losses in its third-quarter earnings drew renewed attention to a pair of investment partnerships created by the former chief financial officer with the approval of the company's board of directors.
The LJM partnerships were formed using Enron equity and outside capital as a way to hedge against the risks involved in some of the company's new lines of business and were designed to help the company grow quickly without adding too much debt to its books or diluting the value of the company's stock.
The CFO's dual roles as a company executive and managing director of the entities prompted an SEC investigation as well as an internal Enron investigation that led the company to cut its earnings over the past 4 1/2 years by nearly $600 million.
Those problems shook investor and trading partner confidence in Enron, which led to a sharp drop in its stock price and cuts in its credit rating. The company eventually reached a deal with rival Dynegy to be acquired for almost $9 billion in stock plus the assumption of almost $13 billion in debt and $2 billion in preferred stock.
The fallout from Enron's crumble is spreading to its major service providers, including Andersen. That firm has been named as a defendant in at least one shareholder lawsuit, while on Monday Rep. John Dingell, D-Mich., called for an investigation of Andersen in connection with its audits of Enron and Houston-based Waste Management.
"The best accounting standards in the world are meaningless if the accounting and audit processes are so inept or corrupt that they produce unreliable numbers and untruthful reporting," Dingell wrote in a letter to the Public Oversight Board requesting the investigation.
Andersen, based in Chicago, has a large Houston office and a strong foothold in the energy industry with clients, including Enron and Dynegy. Critics of Andersen have said the firm should have done more as Enron's auditor to draw investors' attention to the company's unusual finances.
A lawsuit filed in Oregon alleged Andersen's judgment was swayed by lucrative consulting fees that it received from Enron while it was auditor.
In June, Andersen was fined $7 million by the SEC to settle charges that it filed false and misleading audit reports of Waste Management, the largest civil penalty against a Big Five accounting firm. Andersen did not admit or deny the charges.
In June, Andersen was fined $7 million by the SEC to settle charges that it filed false and misleading audit reports of Waste Management, the largest civil penalty against a Big Five accounting firm..."
Andersen has been sued by numerous clients. O'Neal Steel here in Alabama hammered Andersen over their ethics, claims, and lack of performance.
Waste Management is a particularly nasty company (some of its former executives are serving time in Club Fed for their illegal shenanigans), and one has to wonder just what Andersen executives were doing with the mob-related-firm's books, and why.
Inept or corrupt, thy name is Andersen...
So true, and yet because narrow minded nitwits have a thing (right or wrong) for Gray Davis we're expected to believe Enron and other energy traders never manipulated the ("deregulated"?) market or gouged Californian citizens in the phony "deregulation" mess...
Economically speaking, the city has taken a few high-profile hits this year (Compaq, Continental Air, Enron), and recent saber-rattling by OPEC to flood world markets with petroleum would cause oil prices to fall and deal the local economy a very painful blow."
I'm afraid that it is going to get worse before it gets better in Houston (a city that I love, but not for these reasons).
U.S. News and World Report stated earlier this year that telecommunications firms would default on $600 Billion in debt during 2001. Houston-based SBC's response to that situation was to hire, you guessed it, Andersen and Accenture.
Does anyone sense a trend here (or a good short play)?!
The idiot Davis signed long term contracts for high gas prices. That's a fact.
Meanwhile, you've produced no evidence that Californians were gouged by Enron or anybody else.
You just despise business, lewislynn.
Hey, how's the California Attorney General's witchhunt in that regard coming? Did you ever claim your share of the reward for turning in the "gougers"?
And as with your love of Bill Clinton, you saw them with their pants down and knew you just HAD to get 'involved'...
I've got a better tip for you. Short Reliant Energy stock. They've have the stadium naming rights for the new home of the Houston Texans NFL franchise.
You've seen what has happened what happened to Compaq (Houston Rockets) and Enron (Houston Astros).
No, not for that reason. The reason that I would be reluctant to claim "market manipulation" would be the paltry $900 million in 10-Q dressed up (courtesy of Andersen) profits on $100 Billion in trades/revenue. One normally associates larger profit margins than .9% with criminal market manipulations.
And we see far larger margins in Enron's fantastic stock charge to $80 per share, followed by the inevitable fall below $1 to eventual bankruptcy. The "market manipulation" is therefor more likely to have been in the stock market than in the energy trading market.
Their credit rating is so bad their bonds are now trading at 28 cents on the dollar. That may force them into Chapter 7, which would be a disaster.
Well, somehow I think that Andersen and Accenture are about to be short at least one more major customer. The market is about to become flooded with CPA's and software consultants looking for quick placements, anywhere.
By Jonathan Stempel
NEW YORK, Nov 28 (Reuters) - Now that Enron Corp.'s (NYSE:ENE - news) credit and debt ratings have fallen to junk status, crippling what once was the largest U.S. energy trader, observers are pointing fingers, and wondering what took the top three U.S. credit rating agencies so long to act.
``The rating agencies are at fault here for waiting so long and thinking they could hold the deal together,'' said Tom Burnett, a director of Merger Insight, a research and analysis firm. ``That's not their job. There's not one new piece of information available today that wasn't available last week.''
The agencies -- Standard & Poor's, Moody's Investors Service and Fitch -- denied being influenced to keep Enron's once investment-grade ratings, or they declined to discuss the issue.
Observers, though, said investment banks arranging Enron's now-dissolved merger with once-smaller rival Dynegy Inc. (NYSE:DYN - news) -- Citigroup Inc. (NYSE:C - news) and J.P. Morgan Chase & Co. (NYSE:JPM - news) -- had been fighting to preserve those ratings. They now stand to lose millions of dollars of advisory fees with the merger's collapse.
``S&P and Moody's have stated that they're not going to be the cause of problems for a company, and in my opinion waited until Dynegy decided not to proceed with the merger,'' said Sean Egan, managing director at Egan-Jones Ratings Co. in Philadelphia. Egan-Jones on Wednesday cut its own debt rating for Enron to ``C,'' one notch above default.
ANGER GROWS
Prices on Enron's distressed bonds had been in a tailspin for several sessions, and after Wednesday's cuts they fell by more than half. Traders bid them on Wednesday near 25 cents on the dollar, with often triple-digit yields.
``I do get the feeling there is a lot of anger and feeling that something should have occurred before'' Wednesday, said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson in Seattle. ``There was talk in the markets that the absence of official statements from Dynegy and Enron (on) Tuesday should have been taken by the rating agencies as a clue that the merger was about to fall apart.''
That happened on Wednesday.
Within about a two-hour period, the rating agencies cut their senior unsecured debt ratings for Enron -- to ``B-minus'' by S&P, to ``B2'' by Moody's, and to ``CC'' by Fitch.
Almost simultaneous with the Fitch downgrade, Dynegy announced it had backed out of the $9 billion merger.
The three big rating agencies are paid by companies to assess their ability to repay debt. Many companies need these ratings to raise money from investors. Sometimes, though, the agencies face criticism for being too slow to act, or being susceptible to outside pressure.
Indeed, in January they were criticized for waiting for actual defaults before downgrading California utilities Pacific Gas & Electric Co. (NYSE:PCG - news) and Southern California Edison (NYSE:EIX - news) to junk status.
ROLE OF AGENCIES
With regard to the proposed Enron-Dynegy merger, on Nov. 8, a day before the merger was announced, top Citigroup and J.P. Morgan officials met with Moody's, a person familiar with the meeting said. A day later, Moody's cut Enron's rating, but not to junk.
John Diaz, a Moody's managing director, denied facing new pressures this week. ``In any rating activity, we're discussing developments with the companies, so we've been in touch with the companies as we normally would do,'' he said. ``We have not had contact with the banks.''
Ron Barone, an S&P director, denied getting pressure from banks this week to hold off on a rating downgrade.
``None whatsoever,'' he said in a conference call. ``No substance at all. We have not been in contact with the banks.''
Meanwhile, Glen Grabelsky, a senior director in Fitch's policy group, said ``our conversations with the issuers and the agents are confidential.''
Diaz and Grabelsky said their respective agencies did not decide until Wednesday morning to downgrade Enron.
``There wasn't one specific event to trigger the downgrade,'' said Diaz. ``In the last couple of days our concerns were heightened given the rate of erosion of the (Enron) franchise, and the declining probability the merger would be consummated as originally expected.''
Grabelsky said: ``when we lost confidence in the transaction, that's when we started preparing to notify the markets.''
D.A. Davidson's Hurley said the delays could be understandable.
``Given that the merger or buyout by Dynegy wasn't officially called off'' until Wednesday, she said, ``it would have been really hard for the rating agencies to move (Enron) to junk status when there was a buyout that was pending.''
How much did Enron contribute to Bush's campaign?
What are derivatives...and was Enron involved in them?
How are J.P. Morgan's problems today connected to Enron?
Enron's executives get caught with their own personal corporations getting lucrative insider deals, and the name "Waste Management", often associated with Chicago mob activity - keeps popping up (as does at least two other major Chicago firms).
Who woulda thunk it?!
It's called the Ken Lay YMCA Center.
It's just my hunch, but I'll bet he wrote them a big check, although not recently.
SEARCH CRITERIA:
Donor name: ENRON
Election cycle(s): 2000
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I don't have the link, perhaps someone else can repost it, but I believe that Platt's Oil Journal ran an interesting article that mentioned that the two Andersen's together received about $52 million in fees last year-$1 million per week. Not bad for an old oil town beancounter!
SBC is based in San Antonio. At 175 E Houston.
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