Enron, Dynegy confirm talks; Enron restates earnings

By the OGJ Online Staff

HOUSTON, Nov. 8, 2001 — Houston energy marketers Enron Corp. and Dynegy Inc. confirmed published reports Thursday the two companies were in talks for a possible combination.

Enron also restated its earnings for the last 4 years, reflecting consolidation of some of the off-balance sheet partnerships. Neither company would provide any further details.

But analysts said it would be difficult to determine an accurate valuation of Enron at this point because of the unknowns on its balance sheet. Enron will file its third quarter balance sheet with the Securities and Exchange Commission next week.

Nevertheless, Dynegy shareholders appeared enthusiastic about the possibility sending the stock up 13% in noon trading on the New York Stock Exchange. Enron stock continues to hover in the low single digit at about $8.

"We can't make any valuation of Enron," said Louis Gagliardi, analyst with John S. Herold in Stamford, Conn. "Anybody who thinks they can walk right in and buy Enron today doesn't know what Enron's debt is tomorrow."

Enron is involved in dozens of off-balance sheet transactions that are so complicated analysts cannot unravel the relationships to determine the extent of Enron's equity exposure. In an attempt to explain the entities and their impact on Enron's shareholder equity, Enron filed Thursday with the SEC restating earnings for the years 1997 through 2000 and the first two quarters of 2001.

The company footnoted each reduction to retained earnings with an explanation of the off balance sheet transaction that led to the restatement. The 15 odd pages reveal a complicated intertwining relationship between Enron, its affiliates, some officers, and the "special purpose entities."

Enron is the subject of a formal SEC investigation looking into the relationship between Enron officers and some of the off-balance entities. Enron also formed a special committee headed up by a new board member and dean of the University of Texas law school to investigate the partnerships and possibly take company disciplinary action.

Enron revealed in the filing that it is terminating the employment of Ben Glisan, managing director and treasurer of Enron Corp., and Kristina Mordaunt, managing director and general counsel of an unnamed Enron division.

Former chief financial officer Andy Fastow, a managing partner for one of the off-balance sheet entities and also intimately connected with several other partnerships, was put on leave in October. Enron said in the filing Fastow was no longer working for the company. It was also revealed in the filing Fastow received "in excess of $30 million" relating to his management and investment activities for one of the partnerships.

"This filing did nothing," said Gagliardi. "I'm a senior analyst and I have a master's in accounting and still can't get through it."

The problem is the debt issued by the "entities" is linked to Enron equity. It's hard to say if the assets of the entities produce enough cash flow to pay the notes when due. And the lower the stock value goes, the more equity required to pay the notes, Gagliardi explained.

"The question remains are their operations impaired or will someone inject enough capital to keep it out of a death spiral," said Gagliardi.

The restatement of earnings has no impact on the company's current financial condition. The restatement includes a $96 million reduction in 1997, $113 million in 1998, $250 million in 1999, and $132 million in 2000. For 2001, it increased net income by $17 million, $5 million for the second quarter and reduced it by $17 million for the third quarter.

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