Rival firm to acquire troubled Enron

Leading energy trader hit by financial woes


With its stock plunging and its finances in doubt, the world's largest energy trader, Enron Corp., agreed yesterday to be acquired by rival Dynegy Inc., for about $9 billion in stock and the assumption of $13 billion in debt.

The deal is an extraordinary turnabout for Enron, a Houston-based company that had been a driving force behind electricity deregulation nationwide.

Its chairman, Kenneth L. Lay, a major contributor to the Republican Party, provided political influence, and its former chief executive, Jefferey K. Skilling, helped create financial markets for the trading of electricity and natural gas.

But last winter, when California's effort to deregulate the electricity market led to soaring power prices and rolling blackouts, Enron was the target of much criticism and political anger.

Recent disclosures of discrepancies in Enron's financial statements and an investigation by the Securities and Exchange Commission sent the company's shares plunging to their lowest level in a decade this week.

As other companies became wary of doing business with it and additional financing withered, Enron apparently had little choice but to find a buyer.

For critics who had complained about Enron's market power and its dominance, the combination with Dynegy poses additional concerns.

Intense scrutiny expected

Dynegy's acquisition of Enron will be reviewed by state and federal agencies, led by the Justice Department and the Federal Energy Regulatory commission. Analysts said yesterday that they expect intense scrutiny of the combined companies' holdings in California, where Dynegy owns power-generating plants and Enron controls much of the supply of natural gas, fuel for the state's electric power plants.

Buying Enron at a deep discount - the company has lost $60 billion in market value this year - could make Dynegy the dominant trader of electricity and natural gas. But the agreement also carries big risks for Dynegy, which will also take on Enron's substantial debt and a web of partnerships and complex transactions that Enron has spun over the last decade.

The agreement was hastily put together this week after Enron found itself unable to attract additional financing and faced a downgrade in its credit rating that could have forced it to pay off $3.3 billion in debt.

In addition to the $13 billion in debt that Enron carries on its books, it has guaranteed at least $4 billion in loans off its balance sheet, and the hidden debt could total as much as $10 billion, said Carol Coale, a stock analyst with Prudential Securities.

`I'm confident'

Chuck Watson, Dynegy's chairman and chief executive, said yesterday that Dynegy will be able to sort through Enron's tangled finances. "We know the company well," Watson said. "It's not like we just started fresh. I'm confident that it's as solid as we thought it was."

The new company will combine Enron's 25,000-mile natural gas pipeline system with the 1,500 power plants that Dynegy owns worldwide and Illinois Power, a Dynegy subsidiary with 650,000 customers in Illinois.

The most important asset Dynegy will acquire is Enron's trading desk. The combined company will be the largest energy trader in the United States, trading more than twice as much power and natural gas as its closest competitors.

Watson said the company does not expect to sell significant properties and that the deal should pass regulatory scrutiny. "There's really not a lot of overlap in assets," he said.

Watson and Steve Bergstrom, Dynegy's president, will hold those positions in the new company, which will be called Dynegy and will remain in Houston.

Lay, who created Enron in the mid-1980s, will not have a role in the combined company's daily operations. He has been asked to join its board but has not responded.

"The last three weeks haven't been a lot of fun," he said.

In a statement announcing the agreement late yesterday, Watson said he was confident that the merger would produce a strong new company.

"Enron is the ideal strategic partner for Dynegy," Watson said. "We will keep a strong balance sheet and straightforward financial structure as key priorities."

$4 billion infusion

To shore up Enron's finances, Dynegy will immediately put $1.5 billion into Enron. The oil company ChevronTexaco will bolster Dynegy with an additional $2.5 billion. ChevronTexaco owns 27 percent of Dynegy.

Investors appeared comfortable yesterday Friday that Dynegy can make the deal work. After falling $3, to $33, Wednesday, when the companies first said they were in discussions, Dynegy shares rose $5.76 Thursday and yesterday and closed the week at $38.76.

As it works to get the deal approved, Dynegy will have to persuade Enron's traders, the most important asset, to stay with the combined company.

The pain of the stock's 90 percent plunge this year will not be equally shared. Some Enron employees have held onto their shares and seen their retirement accounts eviscerated. Meanwhile, Lay, Skilling and other former and current executives sold hundreds of millions of dollars in Enron stock last year and this year.

Some investors and analysts say the problems with Enron's finances could extend beyond the partnerships that have been the subject of Wall Street's scrutiny in the past month.

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