Dynegy Says Pipeline Option Not Dependent on Enron (Update3)
By Mark Johnson
Houston, Nov. 30 (Bloomberg) -- Dynegy Inc. said it plans to take over Enron Corp.'s Northern Natural Gas Co. pipeline unit next month, even if Enron seeks Chapter 11 bankruptcy protection or challenges Dynegy's decision to call off their merger.
The Nov. 9 merger agreement gave Dynegy $1.5 billion in preferred stock in Northern Natural Gas, as well as the right to buy all of the unit's common stock for about $23 million. Dynegy backed out of the $23 billion merger on Wednesday and said it would exercise its right to take over the 16,500-mile pipeline.
Enron, on the brink of bankruptcy after the merger's collapse, has said it is reviewing options for Northern Natural, one of its most valuable assets. Enron likely will argue that Dynegy didn't have the right to end their merger and therefore shouldn't get the pipeline, New York bankruptcy lawyer Robert Christmas said.
``This whole thing is going to be in the courts, regardless of whether Dynegy wants this asset,'' said Kathleen Vuchetich, who helps manage $1.4 billion in assets, 4.2 percent of them Dynegy shares, in the Strong American Utilities fund. ``Dynegy may as well be fighting for something worthwhile.''
Watson said Enron can buy the pipeline back if it pays Dynegy $1.5 billion, plus interest, within 180 days of the merger's collapse. Enron has been unable to raise enough cash to ensure it can pay debts and is having trouble financing daily operations.
Dynegy Chairman Chuck Watson said yesterday he would rather take over the pipeline than get back the $1.5 billion investment. Dynegy's right to Northern Natural ``is not dependent on Enron's agreement to our right to terminate the merger,'' Dynegy Chief Financial Officer Rob Doty said today in a statement.
Biggest Pipeline
Northern Natural, the biggest of Enron's four natural-gas pipelines, stretches from the Permian Basin in Texas to the Great Lakes. Enron pledged the assets of Northern Natural and Transwestern Pipeline Co. as collateral this month to get a $1 billion loan from J.P. Morgan Chase & Co. and Citigroup Inc.'s Salomon Smith Barney Inc.
Dynegy said today it plans to complete the pipeline purchase on Dec. 12 and will assume $950 million of Northern Natural debt. Enron is unlikely to find allies among its bankers, who are more likely to be repaid by Dynegy for loans secured by the pipeline, said Fahnestock & Co. analyst Fadel Gheit.
``I expect to see Enron, J.P. Morgan, Citibank and Dynegy all in court fighting over who owns the pipeline,'' said Jon Kyle Cartwright, a fixed-income senior analyst at Raymond James & Associates. ``At this point we put our chips on Dynegy. We suspect they had the time and expertise to perfect their purchase.''
Shares of Enron fell 8 cents to 28 cents in late morning trading. They had fallen 99 percent since mid-October. Dynegy fell $1.75, or 5.2 percent, to $31.90. Enron's unsecured bonds were bid at 18 cents on the dollar this morning, down about 3 cents from yesterday, traders said.
Preferred Stockholder
Northern Natural can't take any action, including filing for bankruptcy, without the consent of Dynegy as a preferred stockholder, Dynegy said in the statement.
``From what I understand, Dynegy has as strong a legal claim to the pipeline as they can have,'' said Commerzbank Securities analyst Andre Meade. ``They structured the deal in a way, with bankruptcy as a likely scenario, to have good legal standing.''
Meade rates Enron ``sell'' and Dynegy ``buy'' and doesn't own shares of either company.
Watson said yesterday he hopes that Northern Natural employees won't quit after the takeover. Enron and Dynegy are both based in Houston.
``Dynegy has contacted Enron to begin a transition of the pipeline's management and expect Enron's full cooperation,'' Doty said today.
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