A $9 billion merger between cross-town rivals Dynegy Inc. and Enron Corp. unraveled Wednesday in a stunning series of events.

Enron, until recently the nation’s largest energy trader, was on the brink of one of the fastest corporate meltdowns in US history as a rescue by Dynegy disintegrated. After ratings agency Standard & Poor downgraded Enron bonds to below investment grade, Dynegy terminated the Nov. 9 merger agreement, and said it exercised an option to acquire the common stock of Enron’s Northern Natural Gas pipeline.

Dynegy obtained the right to buy the pipeline in exchange for a $1.5 billion cash infusion contributed to the deal by ChevronTexaco Corp., Dynegy’s major stakeholder.

Late Wednesday, Enron said the company was “reviewing Dynegy’s actions today including its assertion that it is entitled to exercise an option to purchase Enron’s interest in the Northern Natural Gas Co.” Enron has 180 days to buy back the pipeline. Observers speculated the fate of the pipeline will be disputed in court.

Enron also said the company was suspending all payments except those “necessary to maintain core operations” in the wake of Dynegy’s termination of their merger agreement and the downgrading of Enron’s credit rating to junk bond status.

The rating action triggered payment of $3.3 billion in liabilities, said Andre Meade, an analyst with Commerzbank Securities in New York. Standard & Poor’s said a collapse of the Dynegy deal would create “enormous pressure” on Enron’s credit profile because the company’s access to capital is limited at a time extensive debt restructuring is necessary.

The ratings agency also said a “distinct possibility” existed Enron would file for bankruptcy protection, if the Dynegy deal fell through. One trading partner said the loss of investment grade credit nullified trading agreements between Enron and its trading partners. Dynegy Chairman Chuck Watson said the company has cut its exposure to $75 million and stopped trading with Enron.

Liquidity an issue
The downgrade by Standard & Poor’s, and subsequently, Moody’s Investors Services and Fitch IBCA, essentially crippled Enron’s trading organization. EnronOnline was reported no longer trading as a result of the downgrade.

Liquidity was becoming a big issue, said Jon Cartwright, bond analyst at Raymond James & Associates Inc. “We suspect the liquidity that Enron was accumulating was used to support their trades,” he said. “We think that is where the liquidity went.”

Dynegy initially agreed to buy Enron in a stock deal worth about $10/Enron share. Tuesday, Dynegy confirmed the companies were attempting to renegotiate the terms of the deal, after a precipitous slide in Enron’s stock to under $5/share. But the efforts proved unsuccessful.

Enron’s financial performance, including the “significant consumption of cash in operations from counter party demand for cash margin had diminished prospects for the completion of the merger,” Moody’s said. The stock closed at 61¢/share Wednesday, down $3.50/share. More than 342 million shares traded by the close, a new trading volume record for a single stock on the New York Stock Exchange.

The stunning freefall began with a $638 million quarterly loss 6 weeks ago and other surprise revelations, including the sudden resignation of the former CEO, an admission the company overstated earnings by almost $600 million since 1997, and kept huge debts off its books. The off-balance sheet transactions are now the subject of an Securities and Exchange Commission investigation. Enron has said it is cooperating with federal regulators.

One of the earliest and most aggressive advocates of power deregulation, Enron prided itself on its trading expertise and advocated an “asset light” approach to the business. Its huge trading operation once dominated the gas and power market.