ENE,,,In mentioning DYN as a favorite, we recognize the inter-relationship of its
performance with the ENE/DYN merger. Comments below summarize ENEs 10Q filing
and liquidity issues. In our opinion, the DYN/ENE merger is likely to be
completed because ENE requires it to survive, DYN benefits by it and
Chevron/Texaco (CVX, 83.19) supports it. We note the merger provisions allowing
a re-setting of the exchange ratio if ENE issues $2 billion of additional equity
while the deal is pending in calculating a 0.2309 exchange ratio as opposed to
the originally stated 0.2685. This values ENE at $9.32 currently.
Our previously published analysis points to a "full" ENE deal being 25%-30%
accretive to DYN. Our target price for DYN in this scenario would likely rise
from $54 to $65 per share. In the event that DYN ends up with ownership of the
Northern Natural Gas pipeline unit of ENE only, accretion of 2% would result,
making DYN still attractive, but less so that a fully completed deal.
ENE Debt Extended, Cash Analysis. Industry Still Trading w/ENE
Concerns about liquidity and the performance of ENEs trading units caused a
further 28% decline on Wed. Drops of 3%-5%% at Duke (DUK 37.52, Strong Buy),
Dynegy, (DYN 39.76, Strong Buy), El Paso (EPG 48.96, Strong Buy), & Williams
(WMB 27.75, Buy) were related to ENE as well.
Our industry contacts and discussions with traders indicate that while trading
with ENE has slowed, it certainly has not stopped. Each of the "majors"
reiterated confidence in their own projected earnings and returns.
ENE announced that it had achieved a deferral in the due date for a date of $690
million from Nov 27 until mid-December. Comments were made by major banks
stating a willingness to work with ENE to restructure its debt
Separately, DYN stated its encouragement at the increase in ENE credit lines by
$450 million, and the delay in the due date of the debt. DYN also restated its
support and that of Chevron/Texaco (CVX, 86.08) for the deal as well.
ENE shows about $1.5 billion in cash currently and, with a newly approved $450
million credit facility has about $1 billion in un-drawn credit lines.
Our analysis suggests that ENE has "used" about $3 billion in cash during the
past month in collateral and margin requirements, debt service and general and
administrative expenses. Much of the collateral will be recovered as performance
on contracts continues.
In our opinion, the negative reaction of EPG, WMB and DUK to the ENE issues is
significantly overdone. We continue to regard the merchant business as a highly
visible growth contributor for each.
For DYN, we continue to hold the view that the ENE deal represents a dramatic
plus. (see report dated Nov 9).
We also hold the opinion that ENE is significantly undervalued, despite its
issues, and that ultimately it will trade up in concert with the exchange ratio
of the DYN deal. (see report dated Nov 20).
ENE 10Q Info Consistent With Plusses For DYN In Deal
ENE filed its 3Q'01 10Q last week with information ranging from updates on
accounting restatements, balance sheet details and discussions of off-balance
sheet obligations
Important disclosures were made related to acceleration of debt repayment due to
recent credit rating downgrades, reduced 4Q'01 eps expectations and liquidity.
ENE had $690 million in debt due on Nov 27 because of recent downgrades. We had
expected this obligation to be renegotiated, satisfied out of the current cash
position of $1.5 billion or collateralized. As noted above, ENE has extended the
maturity of this obligation until mid December, 2001.
A reduction in 4Q'01 eps expectations because of ENE issues and other items was
part of our recent estimate reduction from $0.48 to $0.40 for 4Q'01, (before
non-recurring items) discussed in a report dated Nov 5, 2001. We now expect 4Q
eps to be in a $0.25-$0.35 range.
Also in the 10Q, ENE describes other items discussed in the conference call of
Nov 14 including $8 billion of "non-core" (principally international and
broadband assets) that are for sale, an ability to issue $2 billion of
additional equity before the Dynegy (DYN, 43.60, Strong Buy) deal closes and a
total debt balance of $16.3 billion ($13.0 "on balance sheet" and $3.3 billion
"off balance sheet").
The "material adverse change (MAC)" clause in the DYN/ENE deal was described as
considered if other ENE liabilities (primarily litigation) exceed $2 billion net
of insurance or reserves. If an additional $1.5 billion in liabilities is
assessed a MAC is deemed to have occurred.
In assessing a 90% probability that the DYN/ENE deal will be completed, we note
that ENE is not a going concern without it, DYN demonstrably benefits by it
(please see report dated Nov 9,'01) and Chevron/Texaco (CVX, 82.91) supports it.
In our view, positive comments by CVX yesterday, and the $1.5 billion cash
infusion to ENE from CVX on Nov 13, add to the support shown for the deal.
We continue to rate DYN Strong Buy because of its earnings and valuation upside
potential in this deal. Our current eps est for DYN of $2.55 for '02 moves to
$3.25 or higher with a completed deal. Our DYN target price of $54 is subject to
upward revision as well. For ENE, our Strong Buy rating expects that the deal
spread will narrow as progress is made toward a closing.
CREDIT SUISSE FIRST BOSTON CORPORATION CREDIT SUISSE FIRST BOSTON CORPORATION
Analyst: Launer, C Telephone: (212) 538-4269 curt.launer@csfb.com |
