Updated from 11:46 a.m. EST

Enron

(ENE)

shares plunged a second straight day Wednesday as fear mounted that the struggling energy trader's bailout merger plan will unravel.

A potentially lethal cash crunch appears to be gripping Enron, even though its planned acquirer

Dynegy

(DYN)

has injected $1.5 billion of cash, and banks have opened new credit lines. An Enron collapse would cause weeks of dislocation in the energy markets that would damage other energy traders, and it would cause big losses for the Houston company's creditors.

Just before noon EST, Enron announced in a press release that it had extended to mid-December a $690 million obligation that was due next week. It also said that it had agreed with its bankers to draw down the remaining $450 million of a previously announced $1 billion secured credit line that has

J.P. Morgan Chase

as its lead banker.

Investors have been fleeing Enron since the company last month disclosed a $1.2 billion writedown to unwind some related-party hedging transactions. The

Securities and Exchange Commission

is probing Enron deals with related parties. The October disclosure made investors uneasy because it suggested the company hadn't been forthcoming about the true state of its finances, and it showed that Enron was facing serious liquidity problems.

Those fears were temporarily quieted earlier this month when Enron agreed to be acquired by smaller rival Dynegy. But Enron's disclosure Monday that it faces additional earnings and financing troubles renewed the rush to the exits. In the Wednesday release, Enron CEO Ken Lay said his company was still committed to the merger: "We continue to believe that this merger is in the best interests of our shareholders, employees and lenders." Dynegy later issued a press release indicating it is "continuing our confirmatory due diligence" regarding the merger. Neither Enron nor Dynegy returned calls seeking comment.

After plunging 23% Tuesday to $6.99, Enron was down a staggering 34% at one point Wednesday. It moved slightly higher after the midday press release to trade at $4.90. Enron shares have lost more than 80% of their value since the company issued its third-quarter earnings release last month. Dynegy dropped $2.44, to $39.26, though it remains substantially above premerger levels.

Off the Cliff Again
Enron plunges once more

At the heart of Enron's trouble is the sense that the company isn't letting on the full extent of its troubles. The selloff in Enron shares began in earnest Oct. 16, when the company disclosed in an earnings conference call that it would take a $1.2 billion writedown to unwind some related-party transactions. Critics of the company said those deals, in which the company did business with separate entities involving Enron managers, raised serious ethical and disclosure issues.

The Dynegy merger was taken as a vote of confidence for Enron, since as a big trading partner Dynegy would appear to have a solid grasp of Enron's situation. As a result, shares in both companies rallied after the deal's announcement. But Monday's disclosure that Enron faced $690 million in bond payments next week reignited worries that the company faced steeper challenges than it has detailed. According to a Merrill Lynch report cited in

The New York Times

Wednesday, Dynegy wasn't aware of the $690 million obligation.

Critics of the deal wondered whether Enron had told Dynegy about all its obligations.

Liquidity fears have also been rekindled by information contained in a filing of quarterly results that show the company consumed as much as $5 billion of cash in recent weeks. By the end of 2002, Enron has to find around $9 billion to pay back various obligations. It had $1.2 billion in cash on hand as of Nov. 16, according to the filing.

Tellingly, Dynegy shares haven't plunged along with Enron, suggesting that investors see a collapse of the merger as catastrophic for Enron but not for Dynegy. At current levels, Enron shares are trading at more than a 50% discount to the Dynegy offer.

J.P. Morgan has taken a leading role in helping Enron. It has lent funds and it helped restructure the $690 million obligation. The bank's stock was down 78 cents to $38.62. "We will work with Enron and its other primary lenders to develop a plan to strengthen Enron's financial position up to and through its merger with Dynegy," said James Lee, a top banker at Morgan, in the Enron release.

Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to

peavis@thestreet.com.

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.