Dynegy Chairman Chuck Watson said his company is “encouraged” by Enron’s success in extending a deadline on a $690 million obligation until mid-December and is “working to accelerate the regulatory approvals required to complete the merger with Enron Corp.” in light of the continuing free fall of Enron’s stock Wednesday. The stock fell more than $2 early in the day to $4.75 but moved back above $5 following Enron’s announcement that it was able to find some breathing room.

However, several analysts now say the merger most likely will have to be renegotiated for it to proceed. The current merger agreement stipulates a fixed exchange ratio of 0.2685 DYN shares for each share of ENE at closing. But at that ratio, the deal could be dilutive to Dynegy, said UBS Warburg’s Ronald J. Barone.

Furthermore, the merger has a condition that Enron should not incur a material adverse change to its operations. “We believe the odds of Enron incurring a material adverse change on its operations is soaring, which suggests that — assuming Dynegy wants to continue to move forward with the deal — the 0.2685 ratio will not hold,” said Barone. He added that a more likely scenario would be a much lower exchange ratio “of say 0.15 DYN shares or less for each ENE share.”

Another veteran energy analyst, who asked not to be named, said “this deal (with Dynegy) has to be re-traded or it’s going to blow.” He gave it a 50-50 chance of getting done. He said he read Dynegy’s announcement Wednesday as “lukewarm” toward the merger. “Watson wasn’t out there saying what a great deal it was. He wasn’t leading any cheering squad. He said they were continuing their due diligence.”

The analyst said the main danger to Dynegy is in the partnerships and in dilution of its own stock. If the sale of an asset held by one of Enron’s partnerships comes up short, Enron has to make up the difference with its own stock, he said. That would mean Enron, or subsequent to a merger, Dynegy, would have to issue more stock. In Enron’s case this would simply contribute to the downward stock price spiral. The analyst also said he believed Dynegy could use the surprise $690 million debt obligation as an out.

If the merger were to run into further obstacles, ENE shares could come under “severe pressure as investors may question its ability to sustain liquidity (and normal business activities) for an extended period of time,” Barone noted. “Under such a scenario, bankruptcy would not be out of the question.”

If the merger and other attempts to shore up Enron fail and the company is forced to declare bankruptcy, it could have a ripple effect through the energy markets, severely crippling other energy companies and causing others to fail, one veteran market source said.

“I’ve been trying to find out if a market maker of this size has ever failed before. So far, I haven’t found one. If Enron fails it will probably take some companies with it,” the source said. Beyond that, “Enron is probably a party in just about every deal,” he said, explaining that a parcel of gas or power can go through as many as eight or 10 transactions from the production point to the end user. Since Enron is likely somewhere in the chain, the deals could fail and winter is coming.

Also, most companies have hedged and booked results and reported earnings on deals for the future that could come apart without Enron in the middle.

While a few companies are refusing to trade with Enron now, most are simply limiting their business, the source said. “I can’t imagine a company that doesn’t have an edict from its chief financial officer to keep trading to a minimum.” The next question, he said, is at what price point for Enron stock will other loans, for which the stock is collateral, be triggered for payment, or what value must the stock have to avoid rating downgrades to junk bond status. “Trading companies won’t trade with a company whose bonds are junk. They just can’t. At that point, Enron’s toast.”

“At this point it seems if they stick one finger in the dike, the water starts spurting out of another hole.”

The analyst who asked to remain anonymous said he didn’t think the market would suffer much in the long term if Enron were forced to declare bankruptcy. “Would there be turmoil for awhile? Absolutely. Would there be volatility? Absolutely. Margins likely would widen because of the increased risk, but there are a number of big companies out there which will step in and fill up the holes.”

Also, if Enron were to go into Chapter 11, it wouldn’t have to make interest payments, “and a lot of liquidity comes back into the market. Bondholders go to the back of the line. Any bankruptcy trustee is going to work to keep its day-to-day trading business going.” The court’s first order of business would be to make sure the company honored its obligations in the market, he said.

John Olson, an analyst with Houston-based Sanders Morris, said if Enron fell into bankruptcy, he believes “it would have fairly widespread ripple effects” on the energy trading market. Although the day-trading market for prompt gas needs would be little affected, he said it would be a different story in the term market (three months and more) where EnronOnline has “maintained the most liquid markets with the tightest spreads.”

He also said the EnronOnline trading operation “might be better off in bankruptcy because it would have much better access to debtor-in-possession financing, which would give them more breathing room to re-schedule all of the maturities of their debt.”

When asked what level Enron stock would have to fall to trigger possible bankruptcy, he noted that Enron has “long since gone through those triggers” in the stock market when its stock fell below the $28-$35 range. Once it fell below that range, he said it constituted one part of a default on various securities. When the company’s credit ratings go down to junk status — which they are “one more notch” away from — banks will start calling in their loans.

He also noted that the stock market is telling a different story than the comments made by Watson and Enron officials Wednesday. The market is convinced the merger deal is “definitely going into the toilet,” he said. This, he noted, “may turn out to be one of the biggest head fakes [sports term] in modern time.”

In Enron’s announcement Wednesday, CFO Jeffrey McMahon said, “We have been in continuous contact with our banks and believe we can identify a mutually beneficial restructuring to enhance our cash position, strengthen our balance sheet and address upcoming maturities. For example, we have been informed by the lead bank on the facility that the maturity on our $690 million note payable obligation, disclosed on Nov. 19 in a Form 10-Q filed with the Securities and Exchange Commission, will be extended to mid-December, providing the time necessary to restructure the facility. We expect that extension to be formalized shortly.”

“We believe the interests of Chase and Enron’s other primary lenders are aligned in this restructuring effort,” said James B. Lee, vice chairman of JP Morgan Chase & Co. “We will work with Enron and its other primary lenders to develop a plan to strengthen Enron’s financial position up to and through its merger with Dynegy.”

Enron also said it has closed on the remaining $450 million of a previously announced $1 billion in secured credit lines from JP Morgan and Salomon Smith Barney. The $450 million credit facility is secured by the assets of Enron’s Northern Natural Gas Company. A $550 million credit facility, secured by the assets of Enron’s Transwestern Pipeline Company, closed on Nov. 16. Proceeds are being used to supplement short-term liquidity and to refinance maturing obligations.

Houston-based Reliant Energy believes “Enron’s credit situation has not substantially changed. We continue to trade with them on a daily basis,” spokesman Richard Wheatley told NGI Wednesday. “Our net exposure is not significant and we’re being careful. We’re not going to increase it, but, we’re comfortable.”

Wheatley said that a lot of the reaction was in the equity market and not in the energy commodities market, which is continuing to trade as normal, given it’s the day before a long holiday.

Meanwhile, Goldman Sachs dropped it rating on both Enron and Dynegy Wednesday, moving both off its “recommended” list to “market perform.” Goldman Sachs analyst David Fleischer said an even greater issue than Enron’s ability to meet its debt obligations “may be the lack of confidence that customers now appear to have in Enron as a counterparty and their increased requirement for collateral before engaging in transactions.”

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