Dynegy Inc., cast by Enron Corp. as the villain in its bankruptcy filing, has aggressively countered every move by its former rival, and late last week filed a motion requesting the bankruptcy case be moved to Houston, where both of the companies are headquartered. Dynegy, facing a $10 billion breach of contract lawsuit that Enron incorporated into its bankruptcy proceedings on Dec. 2, filed papers with New York Judge Arthur Gonzalez, noting that Enron’s decision to file in the Southern District of New York was “a classic example of the type of forum shopping that should not be condoned.”

In court papers, Dynegy said Houston was a more appropriate location because it met the standards of being closer to Enron’s operations, assets, creditors and witnesses and would be less costly to administer where it was based. Dynegy may claim standing to oppose the venue as a defendant in the lawsuit. In its bankruptcy filing, Enron laid the blame on Dynegy for pulling out of a $9 billion offer to merge (see NGI, Nov. 12).

Enron was allowed to file in New York even though most of its headquarters operations are in Houston because affiliate Enron Metals & Commodity Corp., one of 13 that also filed for bankruptcy, met the requirement of having “its principal place of business and its principal assets in New York.”

“In this time of reduced frequency and increased cost of airline travel…, the costs to both creditors and the debtors in terms of both time and money will be astronomical if these cases remain in the Southern District of New York,” Dynegy wrote in its motion. Dynegy also wrote that Enron’s “litigation strategy seems to be the backbone of the debtors’ reorganization tactics.” Gonzalez will consider Dynegy’s motion on Jan. 7.

Last week, Dynegy countersued Enron to protect its option to buy Enron’s Northern Natural Gas Pipeline with the $1.5 billion invested in the pipeline by Dynegy and its shareholder, ChevronTexaco. In a one-hour conference call last Monday in which he called Enron’s lawsuit “frivolous and disingenuous,” Dynegy CEO Chuck Watson made one point clear: “either Enron’s going to turn over Northern Natural Gas (Pipeline Co.) or it’s going to repay us the $1.5 billion” Dynegy invested in the company when it signed a merger agreement Nov. 9.

Eighteen days after announcing it would merge with Enron, Dynegy called it off, citing “breaches of representations, warranties, covenants and agreements” (see NGI, Dec. 3). Subsequently, Enron’s business continued to falter, and over the weekend, the company filed for bankruptcy protection and claimed Dynegy had caused Enron’s business to disintegrate for its own gain. As part of the reorganization process, Enron alleges breach of contract, accusing Dynegy of wrongful termination of its proposed merger. The Enron lawsuit also seeks the court’s declaration that Dynegy is not entitled to exercise its option to acquire an Enron subsidiary that indirectly owns Northern Natural Gas Pipeline (NNG).

In its countersuit, Dynegy said it wanted to protect its interests in NNG. “Because of Enron’s disingenuous lawsuit, we have protected the pipeline even if we can’t get ownership right away,” said Watson. “We are maintaining the value until we own it. It is irritating, but make no mistake, we have a clear and unambiguous right to NNG, and until we take control, we will protect our shareholders’ interests.”

As part of the last-minute rescue merger agreement with Enron, Dynegy became a preferred shareholder in NNG by investing $1.5 billion in the pipeline through Dynegy’s shareholder ChevronTexaco. In the event that the merger fell apart for several reasons, including material adverse change for Enron, the agreement provided that Dynegy could take control of the pipeline unless Enron repurchased it. Watson said Dynegy is demanding “immediate control and ownership” of NNG. Enron “has the ability to reclaim Northern Natural simply by repaying Dynegy,” said Watson.

“This is a demonstration of the sheer desperation that Enron would attempt to keep both Dynegy’s $1.5 billion and the pipeline. Under terms of the merger agreement, Dynegy had the right to terminate if there was a material adverse change in Enron’s business or financial condition,” Watson said, who then detailed what happened between Nov. 9 when the merger was announced and last Wednesday, when Dynegy withdrew from the agreement.

“We had no choice but to act to protect our shareholders’ interests,” said Watson. “Enron’s charges against Dynegy are false and the public should be wary of Enron’s efforts to deflect attention…[it is] one more failure of Enron’s to not take responsibility in its own demise. Enron’s rapid disintegration was in general the result in a loss in leadership and credibility…Then the pilot light went out, precipitated by the startling disclosures by Enron on its 10Q [filed on] Nov. 19 and on new and adverse information.”

Watson explained that following the 10Q filing, Enron disclosed to Dynegy on the Friday after Thanksgiving that “their core business in the United States and Europe was almost shut down…they needed billions in equity.” Over the Thanksgiving weekend, Watson said Dynegy “worked with Enron and the banks to put the deal back together.”

Watson disclosed that the lenders came up with a $3 billion liquidity package, and asked Dynegy to participate for one third of that. “After some consultation…for less than an hour, Dynegy agreed.” Subsequent to that agreement, Watson said the package fell apart, slipping first to $1 billion from the banks and then to $500,000 million, “and at the same time, Enron’s cash continued to fall sharply.”

On Nov. 26, Watson said, “in one and a half business days, Enron’s cash declined to $880 million, and the next day, it was $700 million or less. The liquidity in this company needed fixing and the long-term viability of its balance sheet needed restoring. None of those things was forthcoming.”

What also “irritated” Watson came from Enron’s lack of communication with its merger partner. “Another important point, and simultaneous to all this, is that Dynegy’s management team was pursuing an accelerated plan to integrate operations and employees. Enron’s management refused to cooperate with that entire process. In fact, Dynegy’s management was never allowed to talk with Enron’s leadership team or Enron employees. So, unfortunately, it became very clear…our efforts were not enough to overcome Enron’s financial and business issues. Dynegy will not lose Enron’s frivolous case and intends to pursue an action for the damages that Enron has caused Dynegy,” said Watson.

Despite the lawsuits and counter-lawsuits, Watson also made it clear that his company will meet its earnings expectations for 2002, announcing that it has come to terms with its 26% shareholder ChevronTexaco to market Texaco’s equity natural gas production beginning Jan. 1. “I think that is a fairly ringing endorsement on Texaco’s strategic relationship with Dynegy,” Watson said. Dynegy has long marketed Chevron’s natural gas production; Chevron was one of Dynegy’s founders.

Watson also reiterated that Dynegy’s 2002 earnings will be between $2.50-$2.60 per share, the same figures the company announced earlier this year. “We were pretty strong going into 2001…our earnings are up, and we forecasted a 25% growth rate next year. We have every reason to believe that notwithstanding our investment in NNG and our original forecast that planned for the recovery of the economy in the second half of 2002, we fell very comfortable to reiterate our earnings forecast.”

When asked during the conference call why Dynegy had moved forward with the merger as long as it did despite the continuing bad news from Enron, Watson said he thought it was a “good strategic merger from day one.” He said that he believed Dynegy would be able to close the merger despite some of the bad news, with support from the market, counterparties and customers. “All seemed to believe in it and were very supportive of the merger.”

Even after Enron released its damaging 10Q statement, “even at that point, Dynegy didn’t give up,” but Watson admitted that “clearly, there were further ramifications that the market had just about had enough of the disclosures.” He said as late as Nov. 28, when he was “getting calls at 2-3 in the morning to find solutions,” they were still trying to come up with liquidity answers,” and it wasn’t until Moody’s Investor Services downgraded Enron to junk status that day that Watson knew the deal was dead.

Reaction to the bankruptcy filing by Enron and the lawsuits and counter-lawsuits brought expected analyst reaction. Credit Suisse First Boston analyst Curt Launer said Dynegy will be impacted by the lawsuits “for some time,” noting that Dynegy will gain market share in its “regular way and electronic trading.” The company’s electronic platform, Dynegydirect’s, business is up about 20% since Oct. 1. “”In our opinion, the Material Adverse Change clause in the deal will be the crux of the legal proceedings.”

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