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After several desperate days of renegotiations, Houston energy merchant Dynegy Inc. said Nov. 28 it was walking away from its $9 billion acquisition of ailing cross-town rival Enron Corp., citing breaches of representations, warranties, covenants and agreements in their merger agreement, including the material adverse change provision. The move sent Enron’s stock plummeting 85 percent to close at 61 cents, setting the stage for what could be one of the biggest corporate collapses in U.S. history. The U.S. Treasury Department said it was “monitoring” the market impact of a possible Enron collapse, and other companies were scrambling to identify their exposure to the once high-flying energy merchant. “It’s a sad day,” said John Olson, a longtime Enron follower. “You can curse the darkness or burn a candle, and a lot of people are cursing the darkness right now.” In a tersely worded statement, Dynegy said it would exercise its right to acquire Enron’s Northern Natural Gas pipeline system for $1.5 billion, which shareholder ChevronTexaco Corp. of San Francisco put up to boost Enron’s cash situation when the deal was signed Nov. 9. “Dynegy has sent a notice to Enron that we are exercising this option,” Dynegy Chairman and CEO Chuck Watson told investors and analysts in a conference call Wednesday. “Enron has 180 days from the merger signing date, Nov. 9, 2001, to repurchase Northern for $1.5 billion including accrued and unpaid dividends.” Dynegy’s shares dipped 12 percent to close at $35.97. Watson admitted he was forced into the decision given recent events, including continued bad news about Enron’s finances, its falling stock price and the deterioration of its business operations, including its Web-based trading arm, EnronOnline, which was shut down Wednesday. Sources have said Dynegy may have trouble claiming its right to the pipeline, given that Enron put it up as collateral in exchange for a $1 billion credit line from its investment bankers, J.P. Morgan and Citigroup’s Salomon Smith Barney Inc. The banks’ stocks also fell on the news of the deal’s collapse and Enron’s impending demise. J.P. Morgan’s stock slid 5.8 percent to close at $37.50, while Citigroup’s shares slipped 5.4 percent to close at $47.80. Dynegy spokesman John Sousa disputed that the company would not be able to claim the pipeline. “We now own 100 percent of the preferred stock of Northern Natural Gas and 100 percent of the voting rights, which includes blocking rights,” he said. “So we own it.” In the conference call, Watson tried to calm fears that a collapsing Enron would hurt the prospects of the energy merchant industry, in which it’s a big player. “While it is regrettable to see a leading industry player in difficulties, this does not reflect a failure of the energy merchant business,” Watson said. “Dynegy’s customer-based, asset-backed energy delivery network has been the driver of our 45 percent compounded annual growth rate for the past 16 years and will continue to provide us with earnings sustainability and future growth.” Dynegy president and COO Stephen Bergstrom said on the conference call that Dynegy’s exposure to Enron was $75 million, which changed from Dynegy owing Enron $50 million at the time of their merger announcement. “We will continue to manage this exposure as we have the last 30 days as we do with any other,” he said. “As of this morning, we are no longer trading with Enron unless they put up trading support.” Analysts and attorneys said the only option for Enron at this point is bankruptcy protection, given the downgrade of Enron’s debt to junk level by Standard & Poor’s and other rating agencies Wednesday. “The downgrade that triggers calls on $3.5 billion in obligations they have will probably steer them into bankruptcy,” said Robert Christmas, a partner specializing in bankruptcy at Nixon Peabody in New York. “Because of obligations that will come home to roost over the next year and don’t look like they can be paid, they may need some bankruptcy protection.” In response to the downgrade, Enron said it was taking actions designed to preserve value in its core trading and other energy businesses, including a temporary suspension of all payments other than those necessary to maintain core operations. What advice would Christmas give Enron? Keep hold of its cash and file soon. “Their trading partners are not allowing them to trade on margin, and the most profitable part of their business is long-term, structured deals, and people won’t want to do deals with them if they’re not going to be around,” he said. “With that and all the lawsuits being filed, it would probably be better to file for bankruptcy sooner rather than later.” Olson hopes Enron can finagle Chapter 11 and reorganization, versus Chapter 7 and liquidation. “The biggest unknown: Do they have enough assets to collateralize?” he said. “Most of their assets are spoken for, leaving only leases on pipelines and power plants.” If Enron does file for protection, it will have what many consider to be one of the best bankruptcy-minded legal minds on its side: Weil, Gotshal & Manges, which worked on the Dynegy deal with usual local counsel Vinson & Elkins. The Federal Energy Regulatory Commission did not return calls seeking comment about Enron’s prospects. But it told news wires it is “monitoring” the Enron situation, declining to comment further. FERC does have the latitude under its authority to pursue generic policymaking in an effort to limit any further damage to the energy market that a complete collapse of Enron could cause, said a source close to the agency who declined to be identified. But that is unlikely, the source said. “As far as the health of Enron goes, I don’t see any immediate intervention by the commission,” the source said. “I don’t think the shrinkage of Enron or even its potential collapse will destroy the energy markets. There’s still plenty of liquidity there, and traders have already accounted for risk.” Dynegy said exercising its option to the pipeline is still subject to the satisfaction of closing conditions, which it didn’t specify. Northern Natural, with headquarters in Omaha, Neb., owns and operates 16,500 miles of interstate natural gas pipeline spanning from the Permian Basin of Texas to the Great Lakes. Dynegy said it has historically been a strong earnings contributor and will be a positive addition to its energy delivery network. “While we have positioned Dynegy over the years to take advantage of opportunities, including this one, we wouldn’t do anything to jeopardize our shareholders,” Watson said. “Sometimes a company’s best deals are the ones they do not do. We have never been willing to risk our franchise, our credit or our credibility. We knew when to say no, and this morning, we said no.” Shanon D. Murray in Washington, D.C., contributed to this report. Copyright (c)2001 TDD, LLC. All rights reserved.

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