Carrier Channel: Energy Companies Cut Power to Telecom Units

Posted: 1/2003

Energy Companies Cut Power to
Telecom Units

By Josh Long

ENERGY
COMPANIES, KNOWN FOR A HISTORY of conservative growth, continue to suffer losses
in the wholesale telecom business. And some want out.

American Electric Power (AEP), owner
of C3 Networks and a majority stakeholder in AFN Communications (alongside
Allegheny Energy Inc.), posted a $7 million loss in the third quarter related to
its communications investments, down from a $13 million loss in the third
quarter of 2001.

However, AEP is soliciting buyers
for C3 Networks and working with AFN’s other stakeholders to determine available
options, says AEP spokesman Pat Hemlepp. C3 sells private-line services to
carriers in Arkansas, Louisiana, Oklahoma and Texas.

"We’ve dramatically reduced
operations of our communications business, but it continues to show
losses," says E. Linn Draper Jr., chairman, president and CEO of AEP, in a
third-quarter earnings statement. "Even in today’s market environment where
communications assets have few buyers, we are evaluating options for exiting
this business."

C3, based in Austin, continues to
serve its customers and is working with AEP to find a buyer, says Jeff Vondeylen,
C3’s vice president of corporate development. C3 has sent a number of companies
information and is scheduling meetings to discuss the sales opportunity, he
says. C3 made an undisclosed number of job cuts in October, Vondeylen says.

AFN, based in Tulsa, Okla., has been
quiet since its former chief executive, Gordon Martin,left the company in the
fall of 2001 to take a job at Qwest Communications International Inc.
AFN, a regional wholesale carrier, serves seven of the eight largest carriers in
the country, three of the six largest wireless providers and three of the six
largest cable companies, says Mike Friloux, vice president of marketing and
network planning. The company also is operating in markets where it can demand
prices five to 10 times higher than in Tier 1 cities, he says.

"A lot of people still think
this is a very positive asset to have," Friloux says. "We are very
close even today … to getting to break-even point. It’s not like we have four
years left in our model to get to break even and we are burning a lot of
cash."

FirstEnergy Corp. sold its 31
percent interest in AFN to Allegheny Energy in July. Allegheny Energy, the owner
of regional wholesale carrier Allegheny Communications Connect, is grappling
with its own liquidity crisis. The company, which defaulted under its bank
covenants, received waivers from its creditors extending through Nov. 29.

Allegheny spokesperson Debbie Beck
declined to talk specifically about AFN. "We are experiencing some
short-term liquidity issues. As a result of this we have been certainly
reviewing all of our business lines and focusing on our core businesses, but at
this point we have not made any type of determination about where we are going
with any particular business line at this point," Beck says. "We are
still in the review phase on trying to refocus our company on our core
businesses."

AEP is not the only energy company
aiming to stem losses in telecom. Dynegy Inc., the beleaguered energy giant,
posted a $30 million third-quarter loss in its communications unit Dynegy Global
Communications, doubling the $15 million net loss it took the third quarter of
2001.

"During the year, the
communications segment has taken measures to reduce losses by limiting capital
spending and reducing operating and administrative costs through the
renegotiation of long-term contractual commitments," the company says in
its third-quarter earnings release. "Dynegy continues to pursue partnership
and sale opportunities for this business."

A Dynegy spokesman declined further
comment.

Holding On

In September FPL Group Inc.
announced a plan to restructure its telecom and energy businesses, which include
Florida wholesale carrier FPL FiberNet. The communications unit has deferred its
planned buildout of metro fiber rings in certain cities and "reduced its
expectations for future revenue growth due to continued deterioration in the
market," FPL Group says in a statement.

As a result, FPL FiberNet expects to
record $50 million to $60 million in after-tax charges. The company also
announced a separate $30 million charge associated with MCI/Worldcom Inc. fiber
leases that are now in default.

There are no plans to sell the
telecom unit, spokeswoman Pat Davis says. FPL FiberNet contributed 9 cents per
share to FPL Group in 2001 — the latest number available to the public. FPL
FiberNet owns a backbone network throughout Florida and metro rings in Boca
Raton, Jacksonville, Miami, Orlando and West Palm Beach.

"We are not going to be doing
the extensive buildouts that were once planned. Our buildout is essentially
complete," Davis says. "Mainly we are just being prudent about how we
do business." FPL FiberNet made an undisclosed number of job cuts in the
third quarter within its construction unit, Davis says.

Not all energy companies are scaling
back their telecom subsidiaries completely, but not many are immune to the
storm. In the third quarter, Progress Energy recorded a one-time charge of
$224.8 million, or $1.04 per share, due to the write down of its telecom
investments in Progress Telecom, CaroNet and Interpath Communications. Progress
Telecom, including CaroNet’s operations, recorded $1.7 million in third-quarter
net income, excluding the write-down, compared with a net loss of $2.4 million
for the same period last year.

The company has let go 100 employees
since January, reducing its workforce to 190 people. No further job cuts are
planned, spokesman Keith Poston says.

Progress Telecom is funding its own
operations going forward and has posted $3 million in earnings before interest,
taxes, depreciation and amortization (EBITDA) year to date, Poston says.
"It’s been a difficult couple of years," Poston says, but Progress
Energy is not actively seeking to sell the telecom subsidiary.

However, much like any holding
company aiming to strengthen its balance sheet, Progress Energy is "always
willing to entertain opportunities," he says.

Energy companies typically have
built fiber-optic networks in less densely populated regions and metropolitan
areas where there are fewer carriers and less of a bandwidth glut than in the
largest cities. Their exit from smaller markets could leave the Bells mostly
alone, says Seth Libby, a Yankee Group analyst covering the wholesale market.
"I think it could seriously impact competition," Libby says.
"It’s a concern, absolutely."

Technology analysts covering the
wholesale market are divided on how difficult it will be for C3 and AFN to sell
their fiber-optic networks. "I would be surprised if anybody makes a move
on either network right now, just because a lot of these companies that might be
in a position to do this — I don’t think they want to spend the money right
now," says Rod Woodward, an analyst with Frost & Sullivan Inc. If a
carrier cannot easily integrate its own infrastructure with a new network and
operations system, "I don’t think anyone wants to be responsible for those
costs," Woodward adds.

However, Libby says a variety of
telecom providers are likely to show interest in the regional networks of C3 and
AFN because they extend to smaller cities where there is less competition.
Possible suitors could include the baby Bells, AT&T Corp., Sprint Corp. and
long-haul carriers Level 3 Communications Inc. and Global Crossing Ltd., he
says.

"The key … would be the price
they would have to pay for the assets," the analyst says. "Pennies on
the dollar, I would think."

Taher Bouzayen, vice president of
analyst firm Atlantic-ACM, says it’s plausible a buyer would be more interested
in acquiring the customer base rather than the network. "It’s very, very
capital intensive to just maintain those networks," he says.