Why Dynegy Backed Out

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Chuck Watson, president and CEO of Dynegy

Thereís a new "white knight" for the damsel in distress that is Enron. Oak Brook, Ill.-based power-plant developer Standard Power and Light wants to buy Enron for less than $1 a share (about what itís trading at right now). But the company might want to proceed cautiously — look what happened to Dynergy, Enronís last would-be savior. As Enron filed for the biggest corporate bankruptcy in U.S. history, it sued Dynegy for "not less than" $10 billion, charging them with using disingenuous merger talks to "put an end to Enron as a competitive force."

The news sent Dynegy's stock tumbling Monday, along with dozens of banks whose cash injections into Enron have exposed them to losses mounting to at least $6.5 billion — at the very least — and put Dynegy's Chairman and CEO Chuck Watson back on the defensive again about bailing out of his bailout. In a conference call Monday, Watson called his rival's lawsuit "frivolous" and "one more example of Enron's failure to take responsibility for its demise."

TIMEís Cathy Booth Thomas, after talking with Watson last week, tells the story of the fall of the house of Enron from the point of view of a white knight who ultimately decided that saving Enron was going to be far more trouble than it was worth:

[an error occurred while processing this directive] Chuck Watson, for the record, is the kind of guy you think of when you imagine someone in the energy business of old. He went to Oklahoma State University, not Harvard, and he's more interested in running pipelines than trading commodities. Dynegy is located in downtown Houston, just a block away from Enron (which, by the way, has plenty of Harvard grads eager to trade in commodities). But the two companies regularly do business together, and their families play together. So while others watched like voyeurs as Enron's value slid, the 51-year-old Watson had a different thought: he would buy the troubled firm and restore confidence in the energy markets.

News of the merger leaked out Nov. 9, when Enron was valued around $9 billion. By Nov. 28th, when the S&P downgraded Enron to junk status, it was worth $2 to $3 billion at most, says Watson, but none of Enron's bankers were willing to put up enough money to soothe his fears about $18 billion in debt coming due in the next few years. In an attempt to keep the deal going, Watson had pulled three all-nighters in the last week of negotiations —something he hadn't done since his college days — but it had to be revalued almost daily. The "death blow", he says, was the Nov. 19th surprise filing by Enron with the SEC detailing $690 million in new debt that had to be paid almost immediately on the same troublesome partnerships that have gotten Enron in trouble with the SEC.

"We were in panic mode," Watson told TIME. "We were renegotiating daily because every time I turned around their stock price was falling. It got to the point where there was hardly any equity left in the business. All I got was just 'trust us' from the bankers. They wanted me to go to the market and say okay, Dynegy is here to save 'em again. Maybe it's my Oklahoma upbringing but I'm not going to stand in front of people and say something I don't believe. I'm not going to put my credibility and my company's financials and 16 years of growing this company at risk when I know damn well it doesn't work."

The new debt, triggered by Enron's troublesome partnerships, had not been in the original merger documents and Watson thinks it was a rude surprise for Enron head Ken Lay and the Enron team as well as Dynegy and its 30-percent owner, Chevron. Enron, he says, had not envisioned all of the possibilities that could trip them up. Operating in "panic mode," Watson's team began trying to sort out the details of the100-page SEC filing the next day, on Nov. 20th, but with a sinking feeling. A week later, on Nov. 27th, after renegotiating the deal almost daily, Watson told his board that he thought the chances of succeeding with the merger were down to 50-50.

When Enron was relegated to junk bond status the next morning, he opted out. "If there was any hope of the merger, that put a nail in the coffin," he says. As part of the agreement, he exercised Dynegy's option to take Enron's 16,500-mile pipeline in return for its investment of $1.5 billion plus assumption of $950 million in debt on the Northern Natural Gas system. Watson told TIME that he is confident the deal was "very carefully crafted" to avoid any risk. "It is an entity immune from bankruptcy proceedings. I expect to get the pipeline. Unless Enron gets $1.5 billion — then they can take it right back. I fully expect to get the pipeline, or get our money back with interest."

Watson bristles at people who say he just wanted to get the pipeline all along, not the core business. While he admits no interest in Enron's commodity trading, Watson was keenly interested in the core businesses of energy marketing. "Remember Enron was a company that had set itself up as a market maker for all commodities around the world any place, any time. I have no interest in that and never did," says Watson. "Our strategy would have been to sell off all those commodities except the core gas and power businesses and keep all the pipelines. I would have sold all the partnerships overseas too. On the 9th, the markets liked it. They hailed it as a great deal. Strategically it was a strong move for both of us. It's absolutely crazy to think I didn't want this to happen. "

But he said his first job was to turn the tide around for Enron's tattered credibility with investors. "This was about arresting a company that had eroded in value because of problems with confidence in their disclosures. I didn't believe those things about lack of integrity and leadership over at Enron. There's 20,000 people over there. We know them. We trade with them every day, we play with them every day."

With the decline in stock prices over the past six months stopped, people began to go back to Enron for deals. "We were high-fiving ourselves," Watson recalls. "The one thing that could hurt us was another surprise. The infamous one more shoe. Well, the closet hit us on Monday, when they filed the Q-10 [with the SEC] and it contained surprises. They weren't enough to kill the deal, but the fact was they were a surprise. On Tuesday and Wednesday, the stock lost over 50 percent. On Tuesday we were in panic mode. We were scrambling to get the answers to help Enron help themselves. Problem was, everybody was mad. They had just lost all confidence and credibility. This has been an integrity and credibility issue all along. That was a death blow we could not recover from. On Wednesday, we were in panic mode, through Thanksgiving, through the weekend. We worked 24-hour days. There wasn't a day the teams weren't not working all night."

Enron needed money from the bankers to buy back confidence, but the bankers couldn't cough up enough to satisfy Watson that the long-term problems — including $18 billion in debt coming due over the next couple of years — could be dealt with. "Business started going south quickly. Earnings were not coming in the door so now I have a moving target. Look at stock price Wednesday to Wednesday, it wasn't pretty.

"The sad thing, darn it, is we had this deal and it would have worked if we hadn't more surprises," says Watson. "Don't minimize the fact that this is the largest most severe degradation of value in American corporate history. From $90 billion to virtually zero? We tried our best to stand in front of the train and slow it down. I thought we had stopped it and had it rolling the other way when this other engine came in and smacked us. At that point, nobody wanted to put more money in. I don't want to blame anybody."

Enron, apparently, does. Now the courts can sort it out.