Enron Mentions - 11/19/01 ,
 Headed For A Fall ; Companies issued special zero-coupon bonds, assuming th=
ey'd never have to pay them off. Now shareholders could be on the hook for =
a $65 billion tab.
Fortune Magazine, 11/26/01
Manager's Journal: What Enron Did Right
The Wall Street Journal, 11/19/01
J.P. Morgan Wins (by Not Losing as Much)
The Wall Street Journal, 11/19/01
German Bank Is in Talks With Enron To Buy a Unit
The New York Times, 11/19/01
Bond Boom Isn't Likely to Lift Economy As Corporations Swap Old Debt for Ne=
w
The Wall Street Journal, 11/19/01
Preview / WEEK OF NOV. 19-25 Investors Looking for Answers in Enron Filing
Los Angeles Times, 11/19/01
COMPANIES & FINANCE INTERNATIONAL - Dynegy bid faces long wait.
Financial Times, 11/19/01
Russia Fund Surges Amid Global Woes
The Wall Street Journal, 11/19/01
Wessex Water
The Financial News, 11/19/01
India BSES:Dabhol Pwr Proj Due Diligence Done Jan -Report
Emerging Markets Report, 11/19/01
India Dabhol Pwr: No Termination Notice Until Crt Verdict
Dow Jones International News, 11/19/01
Fears raised on Enron deal: $15.6-billion rescue bid
National Post, 11/19/01
Blackout in the power sector
Business Standard, 11/19/01




Features/Toxic Bonds
Headed For A Fall ; Companies issued special zero-coupon bonds, assuming th=
ey'd never have to pay them off. Now shareholders could be on the hook for =
a $65 billion tab.
Janice Revell

11/26/2001
Fortune Magazine
Time Inc.
131
(Copyright 2001)

It was an irresistible proposition: Borrow billions of dollars, pay no inte=
rest, reap millions in tax breaks, and then wait for the debt to simply dis=
appear. That was the promise of zero-coupon convertible bonds, and companie=
s from Enron to Merrill Lynch binged on what seemed like free money.=20
But, of course, there was a catch: For this scenario to play out, a company=
's stock price had to rise sharply--and quickly. That's because investors b=
ought the bonds in the hope of converting them into equity--if the stock ta=
nked, the bonds would no longer be worth converting. So to make them more a=
ttractive to buyers, companies had to build in an escape hatch: If the stoc=
k price failed to rise sufficiently, investors could "put" (that is, sell) =
the bonds back to the company--in many cases, after just one year.
And that's exactly what's about to happen--to the tune of some $65 billion =
over the next three years. Stock prices have fallen so far that for at leas=
t half of these special hybrids, the prospect of conversion is now absurd. =
It simply won't happen. So bondholders are looking to get their money back =
the first chance they can. And because of the put feature, that is possible=
. Suddenly companies like Tyco, Comcast, and dozens more are on the hook fo=
r billions of dollars in debt and interest they thought they'd never have t=
o pay.=20
That could be very bad news for shareholders of these companies. After all,=
 they're the ones who are going to be picking up the tab when all that debt=
 comes due. Huge chunks of cash will disappear from balance sheets to repay=
 bondholders. Companies without enough cash-- and the majority fall into th=
is camp--are likely to face skyrocketing interest charges when they borrow =
money anew. That means sharply reduced earnings. Especially at risk are inv=
estors in companies with poor credit ratings--prime candidates for killer r=
efinancing costs. Some companies may even be forced to issue stock to pay o=
ff the debt, creating significant shareholder dilution, especially at curre=
nt depressed prices. To make matters worse, this is happening at a time whe=
n the economy is barreling downhill and corporate profits are already shrin=
king. "This is a ticking time bomb," warns Margaret Patel, manager of the P=
ioneer High Yield Bond fund, a top-performing junk fund.=20
The seeds of this mess were sown in mid-2000, when the stock market started=
 to falter. Companies in search of capital balked at the thought of selling=
 stock while their share prices were struggling. Zero-coupon convertible bo=
nds presented an attractive alternative because companies didn't have to ma=
ke cash interest payments on the bonds (hence the name "zero"). Instead iss=
uers offered an up-front discount--for instance, investors would buy a bond=
 for $700 and collect $1,000 when it matured.=20
Companies also gave investors the right to convert the bonds into a fixed n=
umber of common shares. But the bonds were structured so that conversion wo=
uld make sense only if the stock price rose significantly--in many cases, b=
y more than 50%. With that protective feature (called the conversion premiu=
m), zeros took off. Corporate issuers would pay no interest, and once their=
 stock prices had climbed back to acceptable levels, the debt would be swep=
t away into equity. "If the bonds are converted, it's a home run for everyb=
ody," says Jonathan Cohen, vice president of convertible-bond analysis at D=
eutsche Bank.=20
That four-bagger, of course, depends entirely on the stock price rising. If=
 it doesn't, the bondholders, armed with that handy put feature, can simply=
 sell the bonds back to the company. Great for bondholders, but not so hot =
for the company or its shareholders. But, hey, what are the odds of that ha=
ppening? "CFOs and CEOs believe that their stock will just continue to go u=
p," says Cohen. "They don't worry about the bond getting put."=20
If all this seems a little complicated, that's because it is. A real-life e=
xample should help. California-based electric utility Calpine issued $1 bil=
lion in zeros in April to refinance existing debt. At the time, the company=
's stock was trading at about $55 a share--severely undervalued in the opin=
ion of company management. "We really didn't want to sell equity at that po=
int," says Bob Kelly, Calpine's senior vice president of finance. So the co=
mpany instead opted to sell zeros, setting the conversion premium at a heft=
y 37%.=20
Still, with no cash interest payments and a stock price that had to rise si=
gnificantly to make conversion worthwhile, the bonds weren't exactly a scre=
aming buy for investors. So Calpine added the put feature: Investors could =
sell the bonds back to the company after one year at the full purchase pric=
e, eliminating any downside risk.=20
Things haven't exactly worked out as management had hoped. The stock has si=
nce plummeted to $25, and it now has to triple before conversion makes sens=
e. So it's looking as though Calpine will be liable for the $1 billion in b=
orrowed money when investors get the chance to put the bonds this April. Th=
ere's also the refinancing cost. According to Kelly, Calpine's borrowing ra=
te could run in the neighborhood of 8.5%--an extra $85 million per year in =
cash. "Obviously, nobody plans for their stock to go down," Kelly says. "I =
don't think there was one person around who thought the bond would be put."=
=20
Calpine's potential costs are particularly high because its credit rating i=
s straddling junk. "If you are a borderline investment-grade company, a fin=
ancing of this nature is not necessarily the most appropriate thing in the =
world," notes Anand Iyer, head of global convertible research at Morgan Sta=
nley. The problem is, there are a slew of companies with far worse credit r=
atings out there: Jeff Seidel, Credit Suisse First Boston's head of convert=
ible-bond research, estimates that about half of all zeros outstanding fall=
 into the junk category. And others are at risk of having their ratings dow=
ngraded before the put date. Today, with junk yielding as much as 5 1/2 per=
centage points above bonds rated investment grade, refinancing can be a pri=
cey proposition.=20
Contract manufacturer Solectron is one that could well get hit by the high =
price of junk. It has $845 million in zeros that it will probably have to b=
uy back this January, and another $4.2 billion coming down the pike over th=
e next couple of years. Because of slower- than-expected sales, the company=
 was recently put on negative credit watch by three rating agencies. And if=
 Solectron's credit is downgraded, the zeros would slide into junk status, =
a situation that could cost the company--and its shareholders--tens of mill=
ions of dollars in refinancing charges.=20
Refinancing isn't the only worrisome cost associated with these zeros. Comp=
anies pay hefty investment banking fees to sell their bonds--up to 3% of th=
e amount raised. If the debt is sold back, many will have spent millions fo=
r what essentially amounted to a one-year loan. "They're getting bad advice=
," claims one banker who didn't want to be named. "Look at the fee the bank=
er earned and look at the kind of financing risk the company got into."=20
As if those potential consequences were not scary enough, shareholders can =
also get whacked when the bonds are first issued. That's because some 40% a=
re bought by hedge funds, which short the company's stock (sell borrowed sh=
ares with the intention of buying them back at a lower price) at the same t=
ime that they buy the bonds. If the stock goes down, the shorts make money =
from their position. If it goes up, they profit by converting the bond to s=
tock. This hedging strategy almost always causes the stock to plummet, at l=
east for a while. Grocery chain Supervalu, for example, recently lost 10% o=
f its market cap the day it announced it was issuing $185 million in zeros.=
=20
Despite all the pitfalls, the love affair with such Pollyanna bonds continu=
es, thanks in large part to the slick tax and accounting loopholes they pro=
vide. In fact, the hit on earnings per share can be the lowest of any form =
of financing. Even better, thanks to a wrinkle in the tax code, companies c=
an rake in huge tax savings by deducting far more interest than they're act=
ually paying. All they have to do is agree to pay small amounts of interest=
 if certain conditions prevail. Verizon Communications, for instance, would=
 pay 0.25% annual interest on its $3 billion in zero bonds if its stock pri=
ce falls below 60% of the issue's conversion price. In the eyes of the IRS,=
 oddly, that clause enables the company to take a yearly interest deduction=
, for tax purposes, of 7.5%--the same rate it pays on its regular debt. (Wh=
y? Trust us, you don't want to know.) That adds up to an annual deduction o=
f more than $200 million, even if Verizon never shells out a dime in intere=
st. Not surprisingly, more than half of the zeros issued in 2001 contain si=
milar clauses. "It's an incredible deal for them," says Vadim Iosilevich, w=
ho runs a hedge fund at Alexandra Investment Management. "Not only are they=
 raising cheap money, they're also doing tax arbitrage."=20
So despite the enormous risks to shareholders, companies continue to issue =
zeros at a steady clip: According to ConvertBond.com, seven new issues, tot=
aling $3.5 billion, have been sold since Oct. 1 alone. "I think the power o=
f the tax advantage is going to keep them around," says CSFB's Seidel. Call=
 it greed or just blind optimism that the markets will recover quickly--it =
doesn't really matter. Either way, it's the shareholders who'll be left pay=
ing the bill.=20
FEEDBACK: jrevell@fortunemail.com=20
The bill comes due=20
Companies issued convertible zeros, with put features, when the stock marke=
t soured. Now repayment looms.=20
1999 2000 2001 2002 2003 2004=20
Amount issued, $5.2 $19.6 $37.5 in billions=20
Amount puttable, $2.4 $2.6 $4.8 $22.0 $19.1 $24.0 in billions=20
SOURCE: CONVERTBOND.COM=20
When zero is a negative number=20
The danger posed by convertible zero bonds depends on a number of factors, =
according to Morgan Stanley's ConvertBond.com: the size of the bond, the pu=
t date, the company's credit rating and cash on hand, and how far the stock=
 must rise for the bond to convert to equity.=20
[A]Date of put [B]Amount owed (millions) [C]Cash on hand[2](millions) [D]St=
ock price as of 11/09/01 [E]% below conversion price=20
Company Bond rating[1] Our risk assessment [A] [B] [C] [D] [E] Tyco 11/17/0=
1 $3,500 $2,600 $54.00 49% Investment grade Not a problem--for now. The con=
glomerate has cash to pay for bonds put this November. Another $2.3 billion=
 is puttable in 2003.=20
Solectron 1/27/02 $845 $2,800 $13.25 155% Investment grade In the danger zo=
ne. May be downgraded to junk if results don't improve. Has additional $4.2=
 billion at risk in 2003 and 2004.=20
Calpine 4/30/02 $1,000 $1,242 $25.50 180% Inv. grade/Junk Possibly a pricey=
 tab. On the border between investment grade and junk, the energy company f=
aces high refinancing charges.=20
Pride International 1/16/03 $276 $176 $12.50 148% Junk May need to drill fo=
r cash. The oil services company already has a heavy debt load in addition =
to its zeros.=20
Western Digital 2/18/03 $126 $201 $4.25 547% Junk Hard drive ahead. The tec=
h outfit has already paid down some of its zeros by issuing stock. More dil=
ution possible.=20
Brightpoint 3/11/03 $138 $67 $3.25 609% Junk Watch out. This mobile-phone d=
istributor plans to repurchase the bonds and is likely to incur high refina=
ncing charges.=20
Aspect Commun. 8/10/03 $202 $134 $2.00 1,016% Junk The credit rating of thi=
s unprofitable call center company is near the lowest grade of junk. High a=
lert!=20
Enron[3] 2/7/04 $1,331 $1,000 $8.50 1,413% Investment grade Very risky. Amo=
ng Enron's myriad woes, its debt is on the verge of being downgraded yet ag=
ain. It's already behaving like junk.=20
Verizon 5/15/04 $3,270 $3,000 $50.00 70% Investment grade Verizon faces lit=
tle risk because of its strong credit rating and the long lead time on its =
put dates.=20
Merrill Lynch 5/23/04 $2,541 $20,000 $49.00 124% Investment grade Also not =
yet a problem. This underwriting leader made sure its own zeros could not b=
e put for three years.=20
[1]Based on ratings from Moody's and Standard & Poor's; Calpine had a split=
 rating at press time. [2]As of most recently reported financial results. [=
3]Now expected to merge with Dynegy.=20
Quote: Contract manufacturer Solectron is one zero-bond issuer that could w=
ell get hit hard. Stocks have fallen so far that for at least half of all b=
onds out there, the prospect of conversion is absurd.

B/W ILLUSTRATION: ILLUSTRATION BY DAVID SUTER=20
Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Manager's Journal: What Enron Did Right
By Samuel Bodily and Robert Bruner

11/19/2001
The Wall Street Journal
A20
(Copyright (c) 2001, Dow Jones & Company, Inc.)

This is a rough era for American business icons. Subject to the vagaries of=
 age (Jack Welch), product failure (Ford/Firestone tires), competition (Luc=
ent, AT&T), technology (Hewlett-Packard and Compaq), and dot-bomb bubbles (=
CMGI), managers and their firms remind us that being an icon is risky busin=
ess. The latest example is Enron, whose fall from grace has resulted in a p=
roposed fire sale to Dynegy.=20
Once considered one of the country's most innovative companies, Enron becam=
e a pariah due to lack of transparency about its deals and the odor of conf=
licts of interest. The journalistic accounts of Enron's struggles drip with=
 schadenfreude, hinting that its innovations and achievements were all a mi=
rage.
We hold no brief regarding the legal or ethical issues under investigation.=
 We agree that more transparency about potential conflicts of interest is n=
eeded. High profitability does not justify breaking the law or ethical norm=
s. But no matter how the current issues resolve themselves or what fresh re=
velations emerge, Enron has created an enormous legacy of good ideas that h=
ave enduring value.=20
-- Deregulation and market competition. Enron envisioned gas and electric p=
ower industries in the U.S. where prices are set in an open market of biddi=
ng by customers, and where suppliers can freely choose to enter or exit. En=
ron was the leader in pioneering this business.=20
Market competition in energy is now the dominant model in the U.S., and is =
spreading to Europe, Latin America, and Asia. The winners have been consume=
rs, who have paid lower prices, and investors, who have seen competition fo=
rce the power suppliers to become much more efficient. The contrary experie=
nce of California, the poster child of those who would re-regulate the powe=
r industry, is an example of not enough deregulation.=20
-- Innovation and the "de-integration" of power contracts. Under the old re=
gulated model of delivering gas and electricity, customers were offered a o=
ne-size-fits-all contract. For many customers, this system was inflexible a=
nd inefficient, like telling a small gardener that you can only buy manure =
by the truckload. Enron pioneered contracts that could be tailored to the e=
xact needs of the customer.=20
To do this, Enron unbundled the classic power contract into its constituent=
 parts, starting with price and volume, location, time, etc., and offered c=
ustomers choices on each one. Again, consumers won. Enron's investors did t=
oo, because Enron earned the surplus typically reaped by inventors. Arguabl=
y, Enron is the embodiment of what economist Joseph Schumpeter called the "=
process of Creative Destruction." But creative destroyers are not necessari=
ly likable, pleasant folks, which may be part of Enron's problem today.=20
-- Minimization of transaction costs and frictions. Enron extended the logi=
c of de-integration to other industries. An integrated paper company, for i=
nstance, owns forests, mills, pulp factories, and paper plants in what amou=
nts to a very big bet that the paper company can run all those disparate ac=
tivities better than smaller, specialized firms. Enron argued that integrat=
ed firms and industries are riddled with inefficiencies stemming from burea=
ucracy and the captive nature of "customers" and "suppliers." Enron envisio=
ned creating free markets for components within the integrated chain on the=
 bet that the free-market terms would be better than those of the internal =
operations. The development of free-market benchmarks for the terms by whic=
h divisions of integrated firms do business with each other is very healthy=
 for the economy.=20
-- Exploiting the optionality in networks. In the old regulated environment=
, natural gas would be supplied to a customer through a single dedicated pi=
peline. Enron envisioned a network by which gas could be supplied from a nu=
mber of possible sources, opening the customer to the benefits of competiti=
on, and the supplier to the flexibility of alternative sourcing strategies.=
 Enron benefited from controlling switches on the network, so that they cou=
ld nimbly route the molecules or electrons from the best source at any mome=
nt in time to the best use, and choose when and where to convert molecules =
to electrons. This policy, picked up by others in the industry, created tre=
mendous value for both customers and suppliers.=20
-- Rigorous risk assessment. The strategy of tailored contracts could easil=
y have broken the firm in the absence of a clear understanding of the tradi=
ng risks that the firm assumed, and of very strong internal controls. Enron=
 pioneered risk assessment and control systems that we judge to be among th=
e best anywhere. Particularly with the advent of Enron Online, where Enron =
made new positions valued at over $4 billion each day, it became essential =
to have up-to-the-second information on company-wide positions, prices and =
ability to deliver.=20
The unexpected bad news from Enron has little to do with trading losses by =
the firm, but with fears among trading partners about Enron's ability to fi=
nance its trading activity. In a world where contracts and trading portfoli=
os are too complex to explain in a sound bite, counterparties look to a thi=
ck equity base for assurance. It was the erosion in equity, rather than tra=
ding risk, that destroyed the firm.=20
-- A culture of urgency, innovation and high expectations. Enron's corporat=
e culture was the biggest surprise of all. The Hollywood stereotype of a ut=
ility company is bureaucratic, hierarchical, formal, slow, and full of excu=
ses. And the stodgy images of a gas pipeline company -- Enron only 15 years=
 ago -- is even duller and slower. Enron became bumptious, impatient, lean,=
 fast, innovative, and demanding. It bred speed and innovation by giving it=
s professionals unusual freedom to start new businesses, create markets, an=
d transfer within the firm.=20
Success was rewarded with ample compensation and fast promotion, and an ope=
n-office design fostered brainstorming. The firm's organization and culture=
 was by all accounts not a safe haven for those who believe the role of a l=
arge corporation is to fulfill entitlements for jobs. This was a lightning =
rod for the firm's detractors. And yet, it could serve as a model for more =
hide-bound enterprises to emulate.=20
Enron was a prolific source of compelling new ideas about the transformatio=
n of American business. It created a ruckus in once-quiet corners of the bu=
siness economy. It rewrote the rules of competition in almost every area in=
 which it did business. It thrived on volatility.=20
The proposed sale of Enron to Dynegy risks the loss of a major R&D establis=
hment, especially given Dynegy's track record as a second mover following E=
nron's lead. Beyond what is likely to be a difficult and time-consuming ant=
itrust review, Dynegy's greater challenge will be to find a way to make Enr=
on's spirit of innovation its own. Or so we all should hope, because prospe=
rity depends on the ability of firms to reinvent themselves and remake thei=
r industries.=20
---=20
Messrs. Bodily and Bruner are professors at the University of Virginia's Gr=
aduate School of Business Administration.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

J.P. Morgan Wins (by Not Losing as Much)
By Susanne Craig
Staff Reporter of The Wall Street Journal

11/19/2001
The Wall Street Journal
C1
(Copyright (c) 2001, Dow Jones & Company, Inc.)

You know things are bad on Wall Street when the winner of a stock-selection=
 contest can't come close to breaking even.=20
J.P. Morgan Chase & Co.'s portfolio was the only one in The Wall Street Jou=
rnal's quarterly stock-picking survey to slide less than 10% during the thr=
ee months ended Sept. 30. The value of its stock basket fell 8.6% during th=
e third quarter.
Just six of the 15 financial firms managed to beat the benchmark Standard &=
 Poor's 500-stock index, which dropped 14.7% during the period. Among the s=
tar performers that came to J.P. Morgan's rescue: Northrop Grumman Corp., S=
BC Communications Inc. and Procter & Gamble Co.=20
"It has turned into a real stock-picker's market," says J.P. Morgan equity =
strategist Douglas Cliggott. "In the first half, the market bought cyclical=
 stocks, such as credit cards and brokers, in hopes of a recovery. We don't=
 think those stocks will get interesting until sometime in 2003." Instead, =
the firm's portfolio is weighted toward health care and consumer staples, a=
s well as cyclical stocks such as energy and farm equipment.=20
The quarter was among the roughest in years for Wall Street investors. The =
terrorist attacks of Sept. 11 helped contribute to the stock-market losses,=
 which drove down the value of all portfolios in the survey, though the mar=
kets have since recovered to their pre-Sept. 11 levels. The last time the g=
roup posted results this bad was during the third quarter of 1998, during t=
he Asian financial crisis.=20
Goldman Sachs Group Inc. and Credit Suisse Group's Credit Suisse First Bost=
on finished at the bottom of the pack, falling 23.2% and 30.1% respectively=
. The performance of last-place finisher CSFB was dragged down by losses at=
 companies such as Veritas Software Corp. (down 72.3% in the quarter), Prae=
cis Pharmaceuticals Inc. (down 64.8%) and software provider Amdocs Ltd. (do=
wn 51%).=20
For CSFB, "it was not a good stock-picking quarter, that's for sure," says =
Al Jackson, the firm's global head of equity research. "It was our tech and=
 telecom . . . and the events of Sept. 11 that hurt us."=20
Credit Suisse First Boston recently changed the approach to its model portf=
olio, opting against sector weightings, Mr. Jackson says. This strategy has=
 hurt CSFB in recent quarters, because of the steep slump in areas such as =
technology and telecom. The firm recently added a number of Old Economy sto=
cks to its portfolio, such as Citigroup Inc., Dow Chemical Co. and Gannett =
Co. Says Mr. Jackson: "We are going back to our roots and asking what our b=
est ideas are."=20
Like CSFB, Goldman was hit by a drop in the share price of technology compa=
nies, such as Check Point Software Technologies Ltd. (down 56.5% in the qua=
rter). Its portfolio was also dragged down by shares of embattled Enron Cor=
p. (down 44.3%). Morgan Stanley and Royal Bank of Canada's RBC Dain Rausche=
r, which placed 6th and 12th respectively, also have the energy company on =
their lists.=20
In addition to Enron, stocks hard it by the terrorist attacks, such as lodg=
ing giant Starwood Hotels & Resorts Worldwide Inc., Walt Disney Co. and air=
lines such as Skywest Inc., also hurt the portfolio performance of many sec=
urities firms.=20
It is unlikely people will buy any company's entire recommended list at one=
 time. The Journal survey is intended to give investors an idea of how thei=
r portfolio would look if they let the professionals do all the picking. Ca=
lculations in the quarterly survey, done for the Journal by Zacks Investmen=
t Research in Chicago, take into account capital gains or losses, dividends=
 and theoretical commissions of 1% on each trade.=20
Overall, Edward D. Jones & Co., of St. Louis, emerged with the most consist=
ent results across the board, placing second in the quarter and for the yea=
r. Its 85% return over five years is the best of the group and ahead of the=
 total return for the S&P 500 of 62.7%. Perhaps more than any other firm, E=
dwards Jones takes a buy-and-hold approach to investing, making very few ch=
anges to its portfolio from quarter to quarter, or even year to year.=20
"It's the old story of the tortoise and the hare, and we believe slow and s=
teady wins the race," says David Otto, Edward Jones director of research. "=
We are really, really proud of the five-year number. We believe in getting =
rich, slowly."=20
On a quarterly basis, the portfolio of Prudential Securities Inc., a unit o=
f Prudential Financial, came in second only to J.P. Morgan, falling 11.8%. =
However, investors sitting with the stocks Prudential recommends haven't do=
ne as well in the long run. The value of its basket of stocks has fallen 45=
.9% in the past year, finishing ahead of only Lehman Brothers Holdings Inc.=
, which posted a one-year loss of 54.9%.=20
Seven firms managed to beat the S&P 500 index during the past 12 months, wh=
ich fell 26.6% in the period.=20
Lehman, which finished last in the survey in the second quarter thanks to i=
ts heavy weighting in technology, managed to move up in the rankings this q=
uarter. This primarily stemmed from its annual shuffle of the 10 stocks in =
its portfolio, known as its "Ten Uncommon Values." This time around, the fi=
rm's portfolio slipped 18.4% in the quarter, for an 11th place finish. Just=
 one of its 10 stocks, Washington Mutual Inc., managed to eke out a positiv=
e return, of 3.1%. Its biggest quarterly loser: Energy company Mirant Corp.=
, which fell 36.3% in the period.=20
"It's a portfolio that has done decently since the market troughed," says J=
eff Applegate, Lehman's chief market strategist. He says he believes the ma=
rket hit bottom Sept. 21.=20
--- Brokerage Houses' Stock-Picking Prowess

Estimated performance of stocks on the recommended lists of 15 major
brokerage houses through Sept. 30. Figures include price changes,
dividends, and hypothetical trading commissions of 1%.

---- Best & Worst Picks ---- ----- Returns ------
Biggest Biggest Latest One- Five-
Gain Loss qtr. Year Year

Raymond James
CACI Intl. +49.7% Skywest -51.1% -14.2% -14.7% +56.8%

Edward Jones
Amr Water Wk +20.5 Celestica -47.1 -11.2 -18.7 +85.1

Merrill Lynch
Triad +20.1 Amer. -34.5 -15.4 -19.8 +64.9
Hospitals Express

UBS Warburg
PepsiCo +9.7 BEA Systems -69.2 -12.9 -19.9 N.A.

J. P. Morgan Sec.
Northrop +26.6 Macrovision -58.5 -8.6 -20.0 N.A.

Bear Stearns
MBNA +19.2 Embraer -60.3 -15.9 -22.2 +50.9

Salomon S.B.
Abbott Labs +8.5 Hewlett- -43.6 -16.0 -25.0 +17.9
Packard

Morgan Stanley DW
Johnson & John +11.2 EMC -59.8 -14.2 -29.0 +33.7

Dain Rauscher
El Paso Energy +17.4 i2 -82.6 -19.6 -32.2 N.A.
Technologies

A.G. Edwards
Verizon +4.4 EMC -59.8 -17.4 -33.4 +34.8

U.S. Bancorp Piper Jaf.
Eli Lilly +9.4 EMC -59.8 -22.0 -39.9 +36.7

Goldman Sachs
Wal-Mart +8.3 Check Pt -56.5 -23.2 -40.6 +60.0
Sftwr

Credit Suisse FB
Johnson & John +11.2 Veritas -72.3 -30.1 -44.9 +38.1

Prudential Sec.
Kraft Foods +12.9 BMC -41.6 -11.8 -45.9 +41.3
Software

Lehman Bros.
Wash. Mutual +3.1 Mirant -36.3 -18.4 -54.9 +29.6

S&P 500 Index
-14.7% -26.6% +62.7%

*In latest quarter; holding period may be less than full quarter

N.A. =3D not available

Source: Zacks Investment Research

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Business/Financial Desk; Section C
German Bank Is in Talks With Enron To Buy a Unit
By SUZANNE KAPNER

11/19/2001
The New York Times
Page 2, Column 6
c. 2001 New York Times Company

LONDON, Nov. 18 -- A large German bank is in talks to buy Wessex Water from=
 the Enron Corporation, people close to the discussions said today.=20
Enron is looking to sell Wessex Water, of Britain, as well as other noncore=
 assets in India and Brazil, after a financial crisis nearly brought its ma=
in energy trading business to a halt. That crisis led to Enron's decision e=
arlier this month to be acquired by Dynegy Inc., a much smaller rival.
The German Bank, Westdeutsche Landesbank Girozentrale of Dusseldorf, or Wes=
tLB, is among several suitors for Wessex Water, people close to the discuss=
ions said. The sale has also attracted the attention of industry rivals lik=
e Thames Water, owned by RWE of Germany. But such a combination would most =
likely incur a long review by regulators, who might either block the merger=
 on antitrust grounds, or exact stiff concessions, industry experts said.=
=20
Wessex Water is likely to be sold for more than $:1 billion ($1.4 billion) =
but less than the $:1.4 billion that Enron paid for it in 1998, analysts sa=
id.=20
''In hindsight, we made some very bad investments in noncore businesses,'' =
Kenneth L. Lay, Enron's chairman and chief executive, told analysts in a co=
nference call last week. Those investments ''have performed far worse than =
we ever could have imagined,'' he said, citing the Azurix water business, o=
f which Wessex Water is a part, and energy assets in Brazil and India.=20
Executives from Enron were not immediately available for comment today. Wes=
tLB executives declined to comment.=20
WestLB has been aggressively pursuing acquisitions in Britain, bidding for =
British Telecommunications' phone network and the nation's railway tracks c=
ontrolled by the troubled Railtrack, which is restructuring under governmen=
t supervision. Neither of those bids has progressed beyond the initial stag=
es.=20
Last summer, WestLB helped finance the management buyout of the Mid Kent Wa=
ter Company through Swan Capital, its private equity vehicle.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Credit Markets
Bond Boom Isn't Likely to Lift Economy As Corporations Swap Old Debt for Ne=
w
By Jathon Sapsford
Staff Reporter of The Wall Street Journal

11/19/2001
The Wall Street Journal
C1
(Copyright (c) 2001, Dow Jones & Company, Inc.)

When AT&T last week completed the second-biggest bond sale in history -- ca=
pping one of the busiest bond periods in years -- it came as welcome news a=
mid fears of a credit crunch. Here was new money, meaning new spending on p=
lants, equipment and jobs that could help pull the economy out of its slump=
.=20
That $10.9 billion AT&T deal, and a slew of similar bond deals from big com=
panies ranging from Boeing and Anheuser-Busch to Kraft Foods and General Mo=
tors, may not provide as big of a boost as economists are banking on. That =
is because corporations, like homeowners, are in the midst of a refinancing=
 boom.
Corporations are hitting the market not just because rates are cheap, but b=
ecause they often can't get money in other crucial markets. In particular, =
they are sidestepping the commercial paper market -- short-term corporate I=
OUs used to finance day-to-day operations, where rates traditionally are lo=
west -- because investors are unwilling to finance many well-known corporat=
ions.=20
The result has been a huge jump in bond sales, the majority of which are us=
ed to reduce existing debt. Since the Sept. 11 terrorist attacks, about $13=
5 billion in investment-grade bonds have been sold, up from about $78 billi=
on in the year-earlier period. Overall issuance this year is likely to set =
a record, clearing $600 billion, compared with $411 billion in 2000.=20
"The driving force behind this surge in bond issuance is refinancing short-=
term commercial paper to long-term debt," says John Lonski, chief economist=
 at Moody's Investors Service, a credit-rating agency.=20
Usually, rising bond issuance presages economic growth. In 1991, corporatio=
ns sold a record number of bonds to exploit falling interest rates. But the=
n, companies poured much of the money they raised back into their operation=
s, a flurry of investment that foreshadowed the economic boom of the late 1=
990s.=20
This time around, the surge in bond deals won't pump in enough new money to=
 the economy to make a dramatic difference. Though, as in the case of the m=
illions of homeowners who are refinancing their mortgages to lower monthly =
payments, it could help ease some pressure on stretched corporate-balance s=
heets and help to fund some of the companies' day-to-day operations.=20
Not all of the money being raised is to refinance short-term debt, of cours=
e, and the string of bond deals shows that many of the nation's biggest bor=
rowers have ready access to funding if they need it.=20
But most companies are similar to AT&T, which last week provided the bigges=
t refinancing example yet.=20
Over the next three months, the telecom company was facing $6.5 billion in =
expiring commercial paper. Under normal conditions, corporations pay off ma=
turing commercial paper by "rolling over" that debt, or issuing new commerc=
ial paper to replace the old. But rolling over commercial paper became much=
 harder for AT&T after Moody's cut the company's short-term and long-term c=
redit ratings. Through the bond deal, AT&T raised money at relatively attra=
ctive rates while avoiding the difficulties of the commercial-paper market.=
=20
Other companies facing downgrades also are scrambling to find alternatives =
to the commercial-paper market through bonds, loans or revolving credit lin=
es. "The ripple effects of this are being felt throughout the capital marke=
ts," says Meredith Coffey, senior vice president at Loan Pricing Corp., a d=
ebt-market-analysis company.=20
For the most extreme cases, the bond markets don't offer refuge. Enron, ham=
mered by a third-quarter loss of $618 million that led to a string of downg=
rades, drew down $3.3 billion from its emergency bank credit line to repay =
investors in its commercial paper. It then turned to its banks for an addit=
ional $1 billion loan to pay off more commercial-paper investors, thus tidi=
ng it over until it could merge with rival Dynegy.=20
Most investment-grade companies aren't nearly so bad off, and thus have rea=
dy access to bond investors. General Motors, for instance, had little troub=
le selling $6 billion in debt last month, while Ford Motor easily sold bond=
s totalling $9.4 billion.=20
But the surge in bond sales masks signs that even investment-grade companie=
s are having trouble convincing investors that they are good for their mone=
y.=20
Take Ford. Standard & Poor's and Moody's downgraded Ford's debt ratings las=
t month to triple-B-plus and single-A-3, respectively. With that rating, Fo=
rd is far enough down the spectrum of investment-grade debt that many of th=
e ultraconservative investors in commercial paper won't touch it, meaning t=
hat it had to turn to corporate bonds to refinance its debt. Ford concedes =
that a big reason it is selling bonds was to avoid the trouble in the comme=
rcial-paper market.=20
Boyce Greer, the money-market group leader at Fidelity Investments, says he=
 often stops buying the commercial paper of a corporation at the first sign=
 of eroding profitability -- even before they get downgraded. "You can't wa=
it around for a rating agency [to downgrade a company]," he says.=20
Moody's has downgraded five times as many corporations as it has raised so =
far this year. Thus, the market for corporate commercial paper has shrunk t=
o $1.4 trillion at the end of October, down from $1.6 trillion at the end o=
f last year.=20
---=20
Friday's Credit Markets=20
Last week was a brutal time to own Treasurys. The market sold off so sharpl=
y as to push yields, which move inversely to prices, almost back up to wher=
e they stood before the terrorist attacks. It was the worst bond selloff si=
nce 1987, according to economists at Banc One Capital Markets.=20
Losses were heaviest in issues like the two-year note, the most sensitive t=
o expectations about Federal Reserve policy. Since hitting a record low of =
2.30% on Nov. 7, the two-year yield has risen 0.80 percentage point to 3.05=
%. In the same period, the 30-year bond yield has risen 0.50 percentage poi=
nt to 5.27%.=20
At 4 p.m. Friday, the benchmark 10-year Treasury note was down 1 3/32 point=
s from late Thursday, or $10.94 per $1,000 face value, at 100 25/32. Its yi=
eld jumped to 4.897% from 4.756% Thursday.=20
The 30-year Treasury bond's price fell 1 19/32 to 100 25/32 to yield 5.317,=
 up from 5.211% Thursday.=20
Why the selloff? People in the market cite a shift toward the view that the=
 U.S. economy may finally be on the brink of recovery. That means the Fed m=
ay not need to employ many more rate cuts to get growth back on track.=20
-- Michael S. Derby and Steven Vames

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Business; Financial Desk
Preview / WEEK OF NOV. 19-25 Investors Looking for Answers in Enron Filing
Bloomberg News

11/19/2001
Los Angeles Times
Home Edition
C-2
Copyright 2001 / The Times Mirror Company

Enron Corp. investors hope the energy trader's third-quarter report to the =
Securities and Exchange Commission will answer some of the questions that s=
ent its shares tumbling and led to a proposed sale to rival Dynegy Inc.=20
Enron, which has been criticized for failing to clearly explain how it make=
s money, may disclose in a filing expected today more on how much is owed b=
y the company and affiliated partnerships, as well as any planned job cuts =
and other cost-saving moves related to Dynegy's $24-billion buyout.
Enron agreed to sell after its stock plunged 67% in three weeks amid an SEC=
 investigation into partnerships run by Enron executives. Investors worry t=
hat new disclosures, such as previously unreported debt, might threaten Enr=
on's credit rating and scuttle the merger, possibly pushing Enron into bank=
ruptcy.=20
Enron Chairman Kenneth Lay acknowledged last week that failed investments a=
nd a loss of investor confidence forced the sale to Dynegy, and he and othe=
r executives pledged to be more open with investors.=20
Enron shares fell 48 cents Friday to close at $9 on the New York Stock Exch=
ange. Dynegy fell $1.53 to $42.47.=20
Enron's third-quarter earnings report, which had been expected last week, w=
as delayed by the Dynegy talks and a restatement of earnings, Chief Financi=
al Officer Jeffrey McMahon said.=20
Enron reduced net income for four years by a combined $586 million to inclu=
de losses from affiliated partnerships.=20
Today's filing, called a 10-Q, will include a balance sheet summarizing ass=
ets and debts. Enron for years has omitted balance sheets, which the SEC re=
quires as part of the 10-Q, from its press releases announcing earnings.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09



COMPANIES & FINANCE INTERNATIONAL - Dynegy bid faces long wait.
By NANCY DUNNE and ANDREW HILL.

11/19/2001
Financial Times
(c) 2001 Financial Times Limited . All Rights Reserved

Dynegy's $9.8bn rescue bid for Enron, the larger rival energy group, poses =
complex and unprecedented regulatory challenges for the Federal Energy Regu=
latory Commission (Ferc), which is likely to lead the review of the bid.=20
Officials from the two Houston-based companies, which announced the deal 10=
 days ago, estimated the regulatory process would take six to nine months t=
o complete.
But the Ferc review could take longer, according to experts, and approval o=
f the deal is further complicated by such issues as the parallel Securities=
 and Exchange Commission investigation into Enron's finances.=20
"It's very complicated. It will be very time-consuming," said one person cl=
ose to the Ferc commissioners. As of Friday, the groups had not yet filed f=
or Ferc approval.=20
"(The deal) raises issues that have never been considered before by Ferc," =
said Edward Comer, general counsel to the Edison Electric Institute, the as=
sociation of US electric utilities.=20
"It has never considered the merger of two huge marketers, and in the past,=
 marketing wasn't considered as significant a portion of the energy sector =
as it has become."=20
A typical deal now takes about 200 days to win Ferc approval. But Mr Comer =
said approval of the Dynegy bid could take anywhere from six months to two =
years.=20
The agency's guidelines prohibit mergers if they give the new company the m=
arket power to push prices above competitive levels for "a significant peri=
od of time".=20
It analyses market power by identifying the products sold, the customers an=
d suppliers affected and market concentration.=20
"Mergers in the past have been considered on the basis of assets," said Pat=
ti Harper-Slaboszewicz of Frost & Sullivan, a market research and consultin=
g firm. "The rules were written when the industry was vertically integrated=
."=20
Now the question is how ownership of energy trading services will be calcul=
ated. It could be difficult to assess if the companies are exerting market =
power because information on the trading books of companies such as Enron a=
nd Dynegy is closely guarded, she said.=20
The two companies must also win consent from either the Justice Department =
or the Federal Trade Commission, and from states where the companies have p=
ipelines and provide retail services.=20
(c) Copyright Financial Times Ltd. All rights reserved.=20
http://www.ft.com.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Fund Track
Russia Fund Surges Amid Global Woes
By Victoria Marcinkowski
Dow Jones Newswires

11/19/2001
The Wall Street Journal
C17
(Copyright (c) 2001, Dow Jones & Company, Inc.)

Everything is relative in the investing world, so with U.S. investors nervo=
us about homeland stocks, European and Asian markets sagging and terrorism =
worries abounding, Russia's risky markets seem less so these days.=20
So far this year, Pilgrim Russia Fund, which was bought by ING Groep NV lat=
e last year, has been the top-performing regional mutual fund, gaining 53%,=
 according to fund tracker Morningstar Inc. By comparison, the Standard & P=
oor's 500-stock index has slumped nearly 14%.
Of course, the risks in Russia remain. Despite recent economic gains, the c=
ountry still is struggling with a weak banking system, inadequate state ins=
titutions to enforce contract laws and few businesses run by the "modern" r=
ules of corporate governance, according to Samuel Oubadia the 37-year-old m=
anager of the Russia fund.=20
"But they are getting more open," Mr. Oubadia said, though Russia's lax fin=
ancial reporting standards are still one of the main roadblocks for foreign=
 investors. With $49 million in assets, the Pilgrim Russia fund invests bet=
ween 90% and 95% in Russian stock, with the balance held in cash.=20
"While the global economy is slowing, Russia is still in an expansion mode,=
" Mr. Oubadia said. After years of economic reforms, consumer spending is u=
p 10% and the former Soviet Union's gross domestic product is expected to g=
row 3% to 5% next year, more than twice as much as that of the U.S. and Eur=
ope.=20
Two-thirds of the fund's stocks are oil and gas companies, which are still =
the most liquid stocks in Russia. Utilities, mining, telecommunications com=
panies and breweries make up the rest. "There's no escaping oil and gas if =
you want to manage a Russia fund," Mr. Oubadia said.=20
The spike in oil prices earlier this year made the investment in oil worthw=
hile, propelling earnings growth for Russia's oil and gas companies. Higher=
 oil prices also worked wonders for the Russian economy, which is largely d=
ependent on oil and gas. More recently, however, falling oil prices have th=
reatened the companies' profit growth.=20
But the fund manager, who is based in The Hague, said he doesn't think peop=
le should invest in Russian oil stocks because of their earnings prospects.=
 "You don't invest because of earnings growth -- there will be none for Rus=
sian oil companies this year. You invest because of the stocks' low valuati=
on," Mr. Oubadia said, adding that most of the Russian oil companies still =
trade well below the world-wide average for the sector.=20
Yukos Oil is one of the fund's largest investments, making up about 12% of =
the fund's holdings. Surgutneftegaz and Lukoil Holdings also make up more t=
han 5% each of Pilgrim Russia's assets. While Mr. Oubadia said the companie=
s should be able to handle falling oil prices, partly by cutting production=
, he worries that further price erosion could hamper a fragile Russian stoc=
k market that relies so heavily on oil and gas stocks.=20
"Can Russian markets do well with lower prices for oil?" he asked. "The sho=
rt answer is yes. But how low will prices drop?" Mr. Oubadia acknowledged t=
hat weak oil prices might cause him to shift some investments from oil and =
gas into other Russian sectors, including telecom stocks and consumer produ=
cts.=20
The Russia fund isn't for the timid. In 1998, when the Russian economy coll=
apsed, the fund -- then called Lexington Troika Dialog Russia, lost 83% of =
its value. A year later, the fund soared 160%. In 2000 the fund finished do=
wn almost 18%.=20
---=20
JANUS STOCK SHUFFLE: Janus Capital Corp. bulked up on lower-priced value st=
ocks and shed some shares of its long-held technology companies during the =
third quarter, a new Securities and Exchange Commission filing showed.=20
The Denver fund firm reported that during the third quarter, it lowered its=
 investments in 14 of the 20 largest holdings it had owned as of June 30. T=
he largest reduction was a 43.6 million-share sale of Nokia Corp. stock. Af=
ter the sale, Janus still owned a large 183.2 million-share position in the=
 wireless-phone company at the end of the third quarter.=20
During the quarter, Janus also sold more than half of its stakes in tech co=
mpanies EMC Corp. and Sun Microsystems Inc. In addition, the fund company, =
a unit of Stilwell Financial Inc., trimmed its exposure to energy company E=
nron Corp., selling 1.5 million shares to reduce its overall position to 41=
.4 million shares at the end of September.=20
On the buying side, Janus, one of the hottest fund firms of the late 1990s =
thanks to bets on leading technology stocks, about doubled its position in =
software company Microsoft Corp. It also boosted its holding in the investm=
ent company run by Warren Buffett, Berkshire Hathaway Inc., while starting =
a small position in Philip Morris Cos., whose dividend-rich stock is usuall=
y more popular with price-sensitive "value" managers. Janus has introduced =
new value portfolios recently, but most of its investors' assets still foll=
ow faster-growing companies.=20
-- Aaron Lucchetti and Todd Goren

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Wessex Water

11/19/2001
The Financial News
Copyright (C) 2001 The Financial News; Source: World Reporter (TM)

The Sunday Telegraph=20
The German state-owned bank, WestLB, is in talks to buy Wessex Water from i=
ts troubled US parent Enron.
WestLB is thought to be one of a number of financial buyers to have approac=
hed Enron with a view to acquiring Wessex, which is valued at more than AGB=
P1bn (e1.63bn).=20
Enron, the energy trading group which bought Wessex in 1998 for AGBP1.4bn, =
is being bought by its much smaller US rival Dynegy after collapsing into f=
inancial crisis.=20
The Independent on Sunday=20
The water and sewage company Wessex Water is understood to be up for sale f=
ollowing an offer to take over its owner, Enron.=20
Three years ago, Enron spent AGBP1.4bn on Wessex Water.=20
But Dynegy is understood to want to concentrate on US and European energy a=
ssets and is not interested in non-core assets.=20
Any hope to regain the same amount of money could be derailed as the indust=
ry is put off by regulatory problems, and the company's results have worsen=
ed due to imposed price cuts over the past year.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09


India BSES:Dabhol Pwr Proj Due Diligence Done Jan -Report

11/19/2001
Emerging Markets Report
(Copyright (c) 2001, Dow Jones & Company, Inc.)

NEW DELHI -(Dow Jones)- India's BSES Ltd. (P.BSX) said Monday due diligence=
 on the 2,184 megawatt Dabhol power project is expected to be completed by =
January 2002, the Press Trust of India news agency reported.=20
"The due diligence process will take six-eight weeks after signing of the c=
onfidentiality agreement with Enron-promoted Dabhol Power Co.," the report =
said, quoting BSES' Chairman and Managing Director R.V. Shahi.
The U.S.-based energy company Enron Corp. (ENE) has a controlling 65% stake=
 in the Dabhol power project located in the western Indian state of Maharas=
htra.=20
The Maharashtra State Electricity Board, or MSEB, has 15%, while U.S.-based=
 companies General Electric Co. (GE) and Bechtel (X.BTL) each own 10% in DP=
C.=20
Enron wants to sell its stake in DPC because of payment defaults by its sol=
e customer, the MSEB, and the Indian federal government's failure to honor =
payment guarantees.=20
In August, the U.S. company said it was willing to sell its stake at cost.=
=20
BSES would appoint three separate consultants for technical, financial and =
legal due diligence on the Dabhol project, Shahi said.=20
After signing the confidentiality agreement, BSES will formally look into t=
he books of DPC, its loans, sponsors and other assets and legal wrangles be=
fore deciding on the acquisition price of the company, the report said.=20
The Dabhol project, at a cost of $2.9 billion, is India's largest single fo=
reign investment to date.=20
-By Himendra Kumar; Dow Jones Newswires; 91-11-461-9426; himendra.kumar@dow=
jones.com

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

India Dabhol Pwr: No Termination Notice Until Crt Verdict

11/19/2001
Dow Jones International News
(Copyright (c) 2001, Dow Jones & Company, Inc.)

NEW DELHI -(Dow Jones)- Dabhol Power Co. will wait for the Bombay High Cour=
t's verdict before sending a final termination notice to its sole customer =
- the Maharashtra State Electricity Board, a source close to the company to=
ld Dow Jones Newswires Monday.=20
"Nothing is going to happen until Dec. 3. The Bombay High Court has adjourn=
ed all proceedings...(and)...DPC will wait for the court's verdict before d=
eciding its future course of action," said the source.
Enron Corp. (ENE) has a controlling 65% stake in the 2,184-megawatt Dabhol =
power project in the western Indian state of Maharashtra. Enron wants to se=
ll its stake in DPC because of payment defaults by the MSEB and the Indian =
federal government's failure to honor payment guarantees. In August, the U.=
S. company said it was willing to sell its equity at cost.=20
At $2.9 billion, Dabhol is India's largest single foreign investment to dat=
e. MSEB has 15%, while U.S.-based companies General Electric Co. (GE) and B=
echtel (X.BTL) own 10% each in DPC.=20
-By Himendra Kumar; Dow Jones Newswires; 91-11-461-9426; himendra.kumar@dow=
jones.com

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Financial Post: News
Fears raised on Enron deal: $15.6-billion rescue bid
Andrew Hill and Sheila McNulty
Financial Times

11/19/2001
National Post
National
FP3
(c) National Post 2001. All Rights Reserved.

NEW YORK - Companies that trade with Enron Corp., the Houston, Texas-based =
energy group, are taking precautions in case Dynegy Inc., also of Houston, =
withdraws its $15.6-billion rescue bid for its rival, a decision that could=
 trigger a crisis in the energy trading market.=20
Counter-parties to Enron, which is one of the principal market-makers provi=
ding liquidity in the energy market, are seeking to limit their exposure to=
 the group, in spite of reassurances from both Enron and Dynegy that the ta=
keover will go through.
Experts also say the implications of the deal are so complex that the regul=
atory review could take much longer than the six to nine months company off=
icials have estimated.=20
Analysts say the 27% spread between the value of Dynegy's offer price and E=
nron's share price suggests a 65% to 75% chance the bid will succeed. But b=
ankers and energy executives are still worried about systemic risk, both in=
 the energy market and in financial markets, where companies such as Enron =
use derivatives to offset the risk of energy price fluctuations.=20
Enron was close to meltdown until Dynegy stepped in with a rescue bid 10 da=
ys ago, having persuaded credit rating agencies not to downgrade Enron's de=
bt to below investment grade.=20
Clauses built into the merger agreement signed with Enron give Dynegy the r=
ight to walk away under certain circumstances, although the two companies' =
officials and advisors differ on how easy it would be for Dynegy to pull ou=
t.=20
While the situation remains uncertain, companies that deal with Enron are r=
eluctant to lock themselves into long-term contracts to buy or sell power, =
said John Olson, an analyst at Sanders Morris Harris, the investment bankin=
g arm of Houston, Texas-based Sanders Morris Harris Group.=20
Keith Stamm, chief executive of Aquila Inc., the energy marketing and risk-=
management company, said his company had begun preparing contingency plans =
in case the deal fell through.

Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. =09

Blackout in the power sector
A V Rajwade

11/19/2001
Business Standard
10
Copyright (c) Business Standard

Every foreign company in the Indian power sector wants to exit. Of these, t=
he most controversial has been Enron and its Dabhol Power Company Ltd (DPCL=
). This apart, the experience of investors in the "reformed" power sector i=
n Orissa is also unhappy. Five years ago, Orissa was the first state to ado=
pt the World Bank-recommended model of separating generation, transmission =
and distribution of power, and an independent regulator. The Godbole Commit=
tee has recently recommended the same for Maharashtra as well.=20
Clearly, separating the three functions is a complex restructuring. Maybe i=
t helps privatisation, the current fashion on the subject having been set i=
n Thatcherite Britain. While some privatisations in UK have succeeded, the =
experience has not been consistent all over.
Take UK's rail sector. While privatising, the government in its wisdom deci=
ded to separate the ownership of the rail network (Railtrack) and the owner=
ship and operation of trains. The contractual relationship between the vari=
ous operating companies and Railtrack were governed by a byzantine, bewilde=
ringly complex system of penalties and incentives, to be monitored by an in=
dependent regulator.=20
Such separation had no parallel. Besides, Railtrack suffered from poor mana=
gement, cost escalation in modernisation of tracks, etc. Several serious ac=
cidents occurred and fixing responsibility became difficult. The "reform" d=
id not work, and Railtrack was put back under public control last month.=20
What are the chances of trifurcation of the power sector in India succeedin=
g? Pretty poor, if the experience of Orissa is any guide. It faithfully sep=
arated the three functions, and privatised distribution and part of generat=
ion. AES, a foreign company, was 49 per cent investor in a generating compa=
ny, and 51 per cent in CESCO, a distribution company. As Gajendra Haldea an=
alysed in this paper on August 27, "The policy and regulatory framework was=
 inadequate and myopic."=20
Distribution losses, a euphemism for power theft, were much larger than the=
 companies had been led to believe at the time of privatisation. CESCO defa=
ulted in paying the dues of GRIDCO, the transmission company, which in turn=
 defaulted to the generating company. Indeed, all CESCO's cash inflows are =
now escrowed, leaving it no money even to pay salaries. For all practical p=
urposes, the distribution companies seem to be in a difficult situation, pe=
rhaps beyond redemption, and the "reform" is a total mess.=20
The crux of the problem in the power sector is not whether a unified SEB is=
 less efficient than trifurcated companies it is the political unwillingnes=
s to charge a price which covers the cost to all consumers. For a while, cr=
oss subsidisation worked with commercial consumers subsidising the househol=
d and the agricultural segments.=20
However, as the burden became too large, the commercial sector started movi=
ng to captive generation, further worsening SEB finances. An "independent" =
regulator for power tariffs may not solve the problem. He may fix economic =
prices but will the state come forward to protect the bill collectors, puni=
sh power thiefs, face social unrest if power to recalcitrant consumers is c=
ut off? So long as the answers to these questions are in the negative, as, =
sadly, they are, the institutional restructuring is no substitute for subst=
antive action. No wonder all foreign investors in the power sector want to =
get out!=20
Enron too wants out but it has many more problems in its home country, over=
 and above its dispute with MSEB. It had attracted a lot of adverse publici=
ty for gouging power consumers in California, a state in a power crisis (se=
e World Money, February 2, 2001). The Internet craze also had a hand in Enr=
on's misfortunes. It became an energy trader, established an electronic tra=
ding platform, had broadband ambitions, went into a disastrous diversificat=
ion in water supplies which, if I remember correctly, led to Rebecca Mark's=
 exit. Perhaps it went into too many areas too quickly under Jeffery Skilli=
ng, ex-McKinsey, and was notorious for opaque, complex accounts.=20
To top it all, last month it announced that it will take an extraordinary $=
1.2 billion charge in its third quarter results for losses in financial act=
ivities. Enron's chief financial officer, who was supposed to be in charge =
of these, has resigned amidst reports that a private equity fund associated=
 with him was involved in them. The SEC is investigating the affair and Enr=
on's share price is down 67 per cent since mid-October. There are some repo=
rts that Shell may make a bid for Enron.=20
After its ratings were downgraded, Enron is desperate for liquidity and anx=
ious to dispose its assets. DPCL was already on the platter; now a sale has=
 become even more urgent. Reportedly, Tatas and BSES are interested; so are=
 the lending institutions. Clearly, if a settlement is to be reached, this =
is the optimum time.=20
But one is not very optimistic. For one, Delhi and Mumbai will be involved,=
 and bureaucracies never understand opportunity costs. Our byzantine decisi=
on-making processes make timely decisions impossible. Further, if a deal do=
es take place, there will be the inevitable allegations of corruption. It i=
s much safer for the reputation of the concerned ministers in Mumbai and De=
lhi to allow the drift to continue, to "let the law take its own course", w=
hatever the costs! Sadly, as Jairam Ramesh said in this paper, Indian polit=
icians respond to developments only out of compulsion, not conviction.

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