Power companies across Europe are feeling the squeeze of the Dynegy-Enron $9bn merger collapse as they prepare for the worst due to Enron’s 25 per cent power share of the European market.
European power traders and analysts are expecting huge job losses and a big change for the worst. Some analysts believe that despite the Dynegy pullout, the troubled Enron can still influence its short-term future. Paul Lund, energy analyst, Standard & Poor’s, London, said, “A lot depends on whether Enron decide to terminate or honour the contracts that they are involved in. Obviously, they are a major player in Europe and anything they do is getting to send shock waves across the power market.”
TXU Europe, which have traded with Enron on many fronts, is preparing itself for a ‘negative outcome’. Mike Wilson, senior energy trader, TXU Europe Switzerland noted, “The Dynegy walkout is going to affect energy trading hugely.” One US power company looking on the bright side is Kansas-based UtiliCorp United, which later hopes to trade under the same name as its subsidiary, Aquila. The company has confirmed an interest in increasing its share of Enron’s $1.2bn, 1875 MW combined cycle, gas-fired power station based in Teeside, northeast England.
The recent pullout means that Enron’s rating has now been demoted to junk status making potential acquirers even more reluctant to bid. One trading partner said the loss of investment grade credit nullified trading agreements between Enron and its counterparts. EnronOnline was no longer trading as a result of the downgrade. Power officials believe this is end for Enron and that the, once energy giant, will ultimately file for bankruptcy. A spokesperson for RWE in Germany agreed with a spokesperson at US-based Mirant, who predicted, “It is highly likely that Enron could be bankrupt before Christmas.” He added that Mirant has thrived since Enron’s downfall began and that the company has seen new business opportunities develop. The spokesperson declined to give specific detail.
Dynegy terminated the merger agreement with Enron blaming Enron’s breaches of representations, warranties, covenants, and other details in the merger agreement. It made a stock-for-stock offer to buy Enron for about $10 /Enron share. But Enron’s shares started to slide even after the merger was announced on fears the deal couldn’t go through as proposed. The shares plummeted on Wednesday morning to 68 cents /share at mid afternoon after a halt of several hours by the New York Stock Exchange. Officials were waiting for dissemination of the news about the deal breaking up and then were clearing up an imbalance of buy and sell orders. More than 305.5m shares traded by the close, a new trading volume record for a single stock on the NYSE.
Officials at Enron said it was suspending all payments except those ‘necessary to maintain core operations’ whilst exploring ‘other’ unnamed options. But this is unlikely to bother companies like Calif.-based Calpine Corp. which are owed capital from Enron. It said a netting agreement is in place, allowing Calpine to offset the amounts owed by Enron with the amounts Calpine owes Enron. Calpine’s transactions with Enron have been contracts for sales and purchases of power and gas for both hedging and optimization purposes and physical delivery. Calpine said it had been decreasing its trading activity with Enron over the last several months.
Enron wrote down $500m in earnings over four years and revealed billions in debt incurred by off balance sheet partnerships that were linked to company equity. The US Securities and Exchange Commission is investigating. The company has said it is cooperating.
Despite Enron breaching the merger agreement, Dynegy will walk away the happiest as it now has rights to acquire Enron’s Northern Natural Gas pipeline for $1.5bn, the sum that Dynegy’s largest shareholder ChevronTexaco put into the deal. The acquisition is considered very profitable by market watchers. The pipeline may give Dynegy and ChevronTexaco too much market power a subject that could see Enron battle this out in court pledging that Dynegy planned the whole thing from the beginning without any intention of completing the deal in the first place.