Although the official word at Dynegy Corp. is that its merger with downtown Houston rival Enron Corp. remains on track, a source close to the negotiations said Dynegy is “talking to all of the parties involved in this transaction,” and suggested that the deal could be revised in the very near future.

Dynegy CEO Chuck Watson remained upbeat before the Thanksgiving holidays about the merger remaining on track, but privately, behind the scenes a due diligence team apparently worked through the Thanksgiving holiday on the labyrinth of Enron’s corporate financials to determine whether material changes should be made in the original agreement between the two companies. They agreed to a $24 billion merger Nov. 9, with Dynegy offering what was then about $10 a share for Enron’s stock. However, in the past three weeks, Enron’s shares declined on an almost daily basis.

On Monday, Enron again was the most actively traded utility stock on the New York Stock Exchange, closing down in heavy trading at $4.01. It fell as low as $3.76 during the day. However, by the end of the day, the merger had not officially been revised in any way.

“The status of the merger has not changed,” said Dynegy spokesman John Sousa Monday afternoon. He added that he was not aware of any scheduled press conferences regarding the merger either.

However, a source close to the negotiations told NGI that changes may be forthcoming. The source said that both companies had been in meetings about the transaction, but the source added that progress was still moving forward to complete a merger, which would not close in any event before the middle of 2002.

Under Dynegy’s Nov. 9 buyout plan, Enron’s shareholders would receive 0.2685 of a Dynegy share of each Enron share, putting Enron’s share value on the day of the merger announcement at $10.41.

Investors appear wary of a merger coming together under Dynegy’s current offer. On Monday, Enron’s bond prices also fell, with investors dropping their asking price for 6.4% notes that mature in 2006 to 59 cents on the dollar, down from 60 cents on Friday. The bonds yield 22.6%.

In a rating analysis report Monday by Egan-Jones Ratings Co., analysts lowered Enron’s rating from “BB” to “BB-“, noting that most of Enron’s funds are “encumbered” and “raising more funds will be difficult.” Egan-Jones analysts found seven ways the merger could collapse, including the following reasons:

Enron does not raise additional capital;

Enron’s legal liabilities including investor and employee lawsuits exceed $3.5 billion (a $850 million employee lawsuit — the third employee lawsuit so far — was announced Monday);

Trading partners lose confidence in Enron;

Auditors refuse to provide a going concern opinion;

The other ratings firms cut ratings;

Banks tighten their credit terms; or

Dynegy walks.

“Bankruptcy might be needed to settle suits,” wrote Egan-Jones analysts. “Dynegy needs to show its support or Enron will slide.”

The newest lawsuit on Monday was filed on behalf of Enron employees by Seattle-based Hagens Berman. The lawsuit — the third employee lawsuit in less than a week — was filed in U.S. District Court in Houston, and alleges that Enron breached its fiduciary duty by encouraging its employees to invest heavily in Enron stock, without warning them of the risks of doing so. Enron employees have lost an estimated $850 million on Enron stock held in their 401(k) retirement accounts. Hagens Berman said that if it reaches class-action status, about 21,000 Enron employees would be eligible to join it.

Hagens Berman also alleges that Enron “locked down” its 401(k) on Oct. 17, which prevented employees from changing their investment plans until Nov. 19. In that period, Enron reported its devastating third quarter losses and took a $1.2 billion charge against shareholder equity — and sent its shares from $30.72 on Oct. 16 to $11.69 on Nov. 19. Enron noted that accounts were blocked as part of a previously announced change in the retirement plan administration.

In another of the three lawsuits, another Seattle law firm, Keller Rohrback, alleges that another Enron employee Pamela Tittle lost $140,000 on Enron stock held in her retirement account. According to Keller Rohrback’s lawsuit, the Enron retirement savings plan had assets worth an estimated $2.1 billion at the end of 2000, including $1.3 billion, or 62% of the total, in Enron stock. The Keller Rohrback lawsuit is also seeking class-action status.

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