Enron Restates Years of Profits, in Talks With Dynegy (Update4)
By Mark Lake
Houston, Nov. 8 (Bloomberg) -- Enron Corp., which began merger talks with Dynegy Inc. after its stock plunged, restated earnings for more than four years to include losses from investment partnerships arranged by senior executives.
The largest energy trader failed yesterday to reach an agreement with Dynegy to sell itself for about $8 billion in stock. Dynegy is concerned credit rating companies may downgrade Enron's debt, people familiar with the situation said. A reduction to junk status would precipitate a cash crisis by requiring Enron to repay early $3.3 billion of bonds.
``Restating earnings for the past five years is suggestive of fraud, which in itself is justification for a downgrade,'' said Donald Coxe, who manages 78,000 Enron shares as part of the Harris Insight Equity Fund. ``I'd be surprised if they're not downgraded.''
The decision by Chairman and Chief Executive Officer Kenneth Lay to reduce earnings by $586 million since 1997 is part of Enron's efforts to regain confidence among investors stung by the 89 percent plunge in the stock this year and a Securities and Exchange Commission investigation into how the company accounted for partnerships it sponsored.
Enron fired Treasurer Ben Glisan and Kristina Mourdant, a lawyer for an Enron division. The company ``now believes'' Glisan, Mourdant and two other employees no longer working for Enron bought interests in subsidiaries of a partnership run by former Chief Financial Officer Andrew Fastow.
Dynegy's shares rose as much as 14 percent on speculation that it may decide not to buy cash-strapped Enron, or, if it did, wouldn't pay much of a premium.
``People are betting for or against a deal with Enron,'' said Andre Meade, an analyst with Commerzbank AG who rates Enron ``accumulate.'' Dynegy ``is unlikely to pay significantly more than Enron's current share price if it does make a bid,'' he said.
Shares Decline
Enron shares declined 40 cents to $8.65 after the company determined it violated generally accepted accounting rules when it failed to consolidate results for three so-called special purpose entities, vehicles for getting access to capital or hedging risk that can be moved off the books under some circumstances.
Enron ousted Fastow last month after revealing an accounting error for transactions with a group of the partnerships resulted in a $1.2 billion reduction in shareholder equity in the third quarter. Arthur Andersen LLP was Enron's independent auditor.
The company today reduced 1997 net income by $96 million, 1998 earnings by $113 million, 1999 results by $250 million, and 2000 earnings by $132 million. In 2001, the changes resulted in an increase to net income of $17 million in the first quarter and $5 million in the second quarter, and a reduction of $17 million for the third quarter.
Enron bonds pared gains after the earnings were restated, as the threat of a credit downgrade dimmed a rally sparked by the Dynegy talks. Enron's debt doubled in the past four years to $13 billion at the end of the third quarter. Both Standard & Poor's and Moody's Investors Service are considering lowering their ratings, which are two levels above junk.
``Enron is running out of time and that's what's pushing them to the bargaining table,'' said Zach Wagner, an analyst with Edward Jones & Co., who cut his recommendation on Enron to ``reduce'' from ``accumulate'' on Oct. 23.
Securities regulators are investigating Enron's web of more than 30 partnerships, including two in which Fastow served as general partner: LJM Cayman LP, known as LJM1, and LJM2 Co- Investment LP, known as LJM2. Fastow received more than $30 million from LJM investments and management fees, Enron said.
Labyrinth
The company reported that Enron and ``Enron-related entities'' participated in 24 ``business relationships'' in which LJM1 or LJM2 participated. They included the sale of assets, such as unused fiber optic cable, the purchase of debt or equity interests in Enron affiliates, and the sale by LJM2 of a call and a put option on assets.
The partnerships involved in the restatement are Chewco Investments LP; Joint Energy Development Investments, known as JEDI; and a wholly owned subsidiary of LJM1 that ``engaged in derivative transactions with Enron to permit Enron to hedge market risks of an equity investment in Rhythms NetConnections Inc.,'' which provides high-speed networking to businesses.
Some companies that trade natural gas, electricity and other commodities with Enron may pull back if Enron's finances deteriorate to the point that it loses its investment-grade credit rating, investors say.
Atlanta-based Mirant Corp., a top U.S. energy trader, has moved most of its trades away from Enron to other exchanges, such as Intercontinenal Exchange, a venture it formed in March 2000 with other partners including BP Plc and Goldman, Sachs & Co., Mirant spokesman James Peters said. ``We are still trading with them, but on a very limited basis,'' said Peters.
``Dynegy has to act fast,'' said Roger Hamilton, a money manager with John Hancock Advisers Inc., which sold its Enron shares in recent weeks. ``If Enron can't get financing and its bonds go to junk, they lose counterparties and their marvelous business vanishes.''
Dynegy would gain a wholesale energy business, the leading energy manager for commercial and small-industrial customers, and an Internet energy trading operation many times larger than its own, said UBS Warburg LLC analyst James Yanello.
``If history is any guide, Dynegy is stingy when it comes to acquisitions, so I don't expect them to do anything stupid'' such as overpaying for Enron, said Yanello. ``A deal could provide Dynegy with tremendous opportunity.'' He rates Dynegy ``strong buy'' and doesn't own shares of either company.
ChevronTexaco Corp., which owns about 27 percent of Dynegy, is considering adding $1.5 billion to the transaction to help Enron. It would provide another $1 billion when the purchase is closed, the New York Times and Wall Street Journal reported.
Breakup Fee
The companies agreed on a breakup fee providing Dynegy with about $400 million if Enron accepts a higher offer, people familiar with the talks said.
Dynegy's shares rose as much as $4.30, or 13 percent, to $37.30. The stock had dropped $3 yesterday when news of the Enron talks was first reported.
Dynegy spokesman Steve Stengel, Enron spokesman Mark Palmer and ChevronTexaco spokesman Fred Gorell declined to comment.
Enron plans to meet with J.P. Morgan Chase & Co., Citigroup Inc. and other lenders tomorrow to discuss the merger plans and a possible increase in the amount the company pays for existing credit lines, according to bankers familiar with the matter.
The company has invited more than 300 creditors to its offices in Houston to listen to presentations by Enron's financial team, led by its new chief financial officer, Jeffrey McMahon, the bankers said.
Dynegy began in 1985 as Natural Gas Clearinghouse, a gas- trading company. In 1998, the company took the name Dynegy -- a combination of the words dynamic and energy -- to reflect its expansion beyond natural gas. Chuck Watson, the company's president from 1985, became chairman and chief executive in 1989.
Watson is an investor with Enron CEO Lay in the Houston Texans, who begin playing in the National Football League next year, and is a board member at Baker Hughes Inc. As of an April filing with the SEC, Watson owned 12.3 million Dynegy shares, or about 5.1 percent of the common stock. |
