As early as today an announcement may be forthcoming that downtown Houston rival Dynegy Corp. may ride to the rescue of Enron Corp. in either a merger or a $2 billion cash infusion through its 27% shareholder ChevronTexaco. Several sources, including the The Wall Street Journal, report that the companies’ directors were in talks to work out a deal to revive Enron — still responsible for 25% of the energy trades made around the world. Neither Dynegy nor Enron would comment.

Dynegy apparently has proposed a stock swap and a premium for Enron shares, and would receive a breakup fee of about $400 million if the deal is called off or if Enron obtains another offer. Chuck Watson, Dynegy’s well known and well liked CEO, has a reputation for making smart deals — but in the past had been hesitant in talking about Enron in terms of being competitors in the trading arena.

Along with the supposed deal making, Enron has apparently invited as many as 300 creditors to its Houston offices on Friday to hear about the financial stability of the company from newly appointed CFO Jeffrey McMahon and the financial team of the company. McMahon replaced former CFO Andrew Fastow, who was ousted two weeks ago following allegations that Fastow set up related-party transactions that he benefited from while managing them for Enron. The transactions are being formally investigated by the U.S. Securities and Exchange Commission (SEC).

Any news to help the beleaguered Enron could not come too soon, for apparently it has been rebuffed in other attempts to secure outside investors this week. Its stock rose and sank throughout the day on Wednesday, finally losing about 6% of its value to close at $9.05. Dynegy’s shares, meanwhile, did not respond well to the rumors of a supposed $2 billion bailout or merger. Dynegy lost 8% on Wednesday, with the stock closing down $3 to stand at $33. ChevronTexaco’s stock, meanwhile, was up slightly.

By mid-week, the Houston-based energy trader had apparently been turned down by more than a dozen buyout firms as well as Berkshire Hathaway and had found no takers for the risky business, according to reports from various sources. Meanwhile, word on the street has traders meeting to discuss tightening their credit standards with Enron, while Enron “wanna-bes” are reassessing their marketing and trading strategies — and even FERC is watching the proceedings with a wary eye.

Still entrenched in the Houston offices with barely a word to outsiders, rumors persist that Chairman and CEO Kenneth Lay might resign as early as Friday after losing the confidence of Enron’s board of directors. Meanwhile, former whiz kid and Lay protege Jeffrey Skilling apparently testified before the SEC on Tuesday about the financial transactions set up by the company before his abrupt departure last August.

Although Enron has obtained several million dollars in secured credit lines against some of its assets, the nature of its trading business requires a huge infusion of cash to operate, and it has continued to seek billions from both private investors and buyout firms in recent days. However, The New York Times reported Wednesday that the buyout firms approached by Enron apparently are concerned about buying stock in public companies, while private investors worry that they would be required to spend several months on due diligence issues now that the company is under investigation by the SEC.

On Wednesday, analysts began talking about the worst-case scenario — if Enron’s demise is imminent.

“If Enron falls, it could have a ripple effect on the marketing and trading industry,” said Ben Schlesinger, head of Bethesda, MD-based BSA Energy. “There are some Enron ‘wanna-bes’ out there that may reassess their strategies.” Schlesinger put the Enron debacle in the same category as the California energy crunch — “a major event that can alter the direction of the market and the industry.”

For instance, those who would follow Enron’s strategy of creative financing in place of hard assets may be taking a look at how that works in a down market. “Banks want hard assets to back up their loans. They want something they can grab,” Schlesinger said. Enron’s major business and money-maker, trading and risk management, consists of its intellectual capital and its contracts going forward. Schlesinger pointed out that the value of Enron’s forward book, assuming it had countered forward contracts to deliver with a supply hedge, would consist of the margin it planned to collect — a hard sell to a banker.

Already, it appears that strategic moves are being made, including one by Kansas City, MO-based UtiliCorp, whose trading arm subsidiary Aquila Inc. has continued to strengthen in recent months. On Wednesday, UtiliCorp’s board of directors voted to make an exchange offer to acquire all of the outstanding publicly held common shares of its 80%-owned Aquila subsidiary due to the “recent significant changes in the merchant energy sector, the general economy and the impact of these changes on the capital markets” (see related story).

Citing Enron’s credit problems and the fear that its demise could disable the natural gas derivatives market, Houston-based producer Apache Corp. announced it would pull out of most of its gas hedges. It now has only one position with Enron that it wants to unwind, and has realized a $70 million gain so far.

“We have been unwinding our hedge positions because of uncertainty created by Enron’s credit problems,” Apache spokesman Bill Mintz said.

Enron’s financing strategy, as engineered by Fastow, was the subject of a lengthy 1999 article in the online journal CFO.com, which credited Fastow with convincing then-President Skilling to embark on an “out of the box” financing strategy, which included disposing of hard assets (see CFO.com article). The company sold more than a billion dollars worth of assets in 1998, including power plants and pipelines, and Fastow picked up the CFO Excellence Award for Capital Structure Management.

One trader, speaking on the condition of anonymity, told NGI, “We’re among those that think Enron troubles are part of the reason gas prices have stayed unexpectedly high recently. We have a group meeting right now to consider tightening our credit standards for Enron.”

The Federal Energy Regulatory Commission, while not having a direct role in the ongoing SEC investigation, also is watching what effect Enron’s financial problems may have on interstate electricity and natural gas markets, according to Commission Chairman Pat Wood.

“We’re watching the impact that Enron or any other firm would have on the overall workings of the market, but we’re not intervening where other agencies have jurisdiction,” Wood said at the Commission’s regular meeting.

Meanwhile, AG Edwards downgraded Enron’s stock on Wednesday from “hold” to “sell”, and Standard & Poors lowered the ratings on Enron’s Credit Linked Notes Trust to BBB from BBB+, adding a Watch negative to them. The downgrade affects about $500 million worth of notes, which are derivatives linked to Enron’s senior unsecured debt, now rated BBB. S&P also cut Yosemite Securities Co. Series 2000-A to BBB from BBB+. Yosemite uses Enron’s corporate rating as a backup. “The investors are taking the risk of Enron credit” if they purchase the securities from the trust, even though they are not issued by Enron, said S&P’s Tom Fritz.

More cutbacks were also confirmed Wednesday. Enron said it would close its Asian broadband telecommunications business, although the company noted that the move had been planned before October. In another development, Enron’s Indian power unit, Dabhol Power Co., was sued by four Indian creditors this week who demand that the company’s energy project resume operations. Enron has been trying to unload the troubled company for several months but so far has found no takers.

If a Dynegy-Enron deal is announced, it won’t be welcomed by all. On Wednesday, the Santa Monica, CA-based Foundation for Taxpayer and Consumer Rights (FTCR) said it would “strongly oppose” a merger.

“The two companies have been major players in the California deregulation debacle, both responsible for selling wildly overpriced electricity into the dysfunctional California market,” said FTCR advocate Doug Heller in a written statement. “The only thing worse than the current energy cartel would be the more tightly controlled cartel to come out of an Enron-Dynegy merger. We will oppose this merger and urge state and federal authorities to oppose it as well.”

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