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November 8, 2001
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Enron, Dynegy in merger talks

Dynegy Inc is in talks to buy troubled Enron Corp in a deal that would involve a stock swap and a $1.5 billion capital infusion from ChevronTexaco, which has a big stake in Dynegy, a source close to the talks said on Wednesday.

The deal, which could be announced officially this week, was expected to give what the source called a "modest premium" to Enron shareholders, whose stock has plummeted in value as a fast-moving financial crisis enveloped the company.

For Dynegy, the merger would catapult it to the top of the energy trading industry now dominated by Enron. Last year, the company had $29 billion in revenues, compared to $100 billion for Enron.

For Enron, it would cap an astonishingly rapid fall from grace for a company that not long ago was ballyhooed as one of the world's most innovative, not to mention profitable.

The source said the form of ChevronTexaco's capital infusion was not yet clear. Chevron, which recently merged with Texaco, was one of Dynegy's founding investors and still owns 26.5 per cent of the company.

STOCK HAMMERED

Enron has seen its stock hammered and credit ratings lowered in recent weeks after reporting its first quarterly loss in four years and taking a $1.2 billion equity writedown linked to financial transactions under investigation by the US Securities and Exchange Commission.

Enron shares, which traded as high as $90 in August of last year, dropped to a 10-year-low of $7 during Wednesday's trading session before rallying on news of the Dynegy talks.

The stock ended down 62 cents at $9.05 on volume of 72.4 million shares, the day's most active issue on the New York Stock Exchange. Dynegy stock fell $3 to $33.

Enron, the nation's largest trader of natural gas and electricity, has been under fire for failing to explain off-balance sheet transactions conducted with partnerships run by ousted chief financial officer Andrew Fastow. Investors said they reeked of conflict of interest and demanded a full explanation they never got.

Fastow left the company last month in what has become a growing line of high-profile departures from Enron, topped by the August resignation of chief executive Jeff Skilling after just six months on the job.

The crisis has undermined confidence in Enron's financial stability, which in turn has forced the company to seek cash and credit to back the energy trading operations that provide most of its revenue and earnings.

The New York Times said on Wednesday Enron had approached at least a dozen buyout firms and investor Warren Buffett, chairman of Berkshire Hathaway Inc, but none took the bait.

Analysts have said would-be investors are wary because no one knows what financial liabilities, if any, lurk in Enron's labyrinthine books.

FIRESALE

But Andre Meade of Commerzbank Securities said the firesale price for Enron apparently was too attractive to pass up.

"Certainly, Enron at $9 a share appeals to some energy companies. Dynegy appears to be one of them and is looking at putting something together," he said.

In contrast to Dynegy, rival El Paso Corp said on Wednesday it wanted no part of Enron, except perhaps for a few hard assets. El Paso also said Enron was perhaps neither as big or important to markets as analysts believe.

"If Enron goes away, which we don't think is going to happen and we hope it doesn't happen, we don't see the market missing a beat, frankly," Ralph Eads, head of El Paso's merchant energy business, told a meeting of analysts.

Eads said El Paso calculates that Enron accounts for about 10 per cent of trading in US wholesale gas and power, well below the 25 per cent usually attributed to them by analysts.

At least one company, Apache Corp, said it ended some hedging agreements because of concerns about increasing risk in the energy derivatives market caused by the Enron crisis.

Pat Wood, chairman of the Federal Energy Regulatory Commission, told reporters the agency was keeping an eye on the markets, watching for an Enron effect.

"We're watching the impact that Enron or any other firm would have on the overall workings of the market, but we're not intervening where other agencies have jurisdiction," he said.

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