Dynegy Global Communications to Pursue Ventures

Dynegy Inc. (www.dynegy.com), the Houston-based energy merchant, has assured investors for months its telecommunications unit will get out of the red.

In the meantime, Dynegy has disclosed its network isn’t worth its original value. For the second consecutive quarter, Dynegy said it would post approximately a $300 million charge to reflect a noncash writedown in its telecom business. The impairment charge does not affect $370 million in assets the company is leasing through a consortium of banks.

"Communications will no longer be a key business for us," interim CEO Dan Dienstbier told investors and the media during a late June conference call. "We will continue to maintain our operations in order to fulfill our obligations in this business and we will meet our goal for this business which is to reduce and eventually eliminate our financial exposure."

Dynegy Global Communications president Ken Snyder wants to make one thing clear, though: "It doesn’t mean we are shutting off [the network] and walking away."

In fact, the carrier had a stellar sales month in June, particularly in Europe, where pan-European operator KPNQwest (www.kpnqwest.com) and others have collapsed, Snyder said. The meltdowns have triggered a "flood" of customers, he said.

Dynegy executives say one way to bolster the telecom unit’s earnings is through a joint venture. Snyder said the company is looking at "merging in some fashion with other industry participants so we can reduce the number of people chasing the same market."

Energy trading giant Dynegy has buckled under liquidity concerns resulting in credit rating agency downgrades, a Securities and Exchange Commission (www.sec.gov) investigation into its accounting practices and questions surrounding its role in the California energy crisis among other woes.

Dynegy let go 340 employees last month representing 6 percent of its workforce. Former CEO Chuck Watson resigned in late May and CFO Rob Doty stepped down the following month.

Dynegy Global Communications employs 135 people in the United States and Europe. In line with its parent company’s restructuring the unit laid off 10 percent of its workforce. But the streamlining measures began much earlier within the telecom unit. Dynegy Global Communications cut its workforce in half by the first of the year, Snyder said.

The broadband unit has not helped Dynegy win favor on Wall Street. A month before Watson resigned, he declared the company was committed to getting the telecom unit out of the red.

"In the case of communications the unprecendented chaos in the telecom industry and our recognition of further losses in that business have diminished our credibility," he said during a first quarter conference call with investors. "We are committed to seeing losses will not be tolerated beyond 2002."

Watson said a vendor’s failure to deliver equipment on time set back Dynegy’s plan to support customers over the national network by the beginning of the first quarter. The delay required Dynegy to purchase off-net capacity to support a new customer contract, he said.

Dynegy has invested approximately $700 million in broadband assets as of last year. The company operates a 16,800-route mile optically meshed network in the United States and a European network that reaches 22 cities in seven countries.

Snyder maintains his sales force will make or break the telecom unit. He is counting on Dick Sayers, former president of Rochester Telephone, former 360Networks Corp. (www.360.net) executive Joel Allen and a handful of others to sign anchor tenants over the network Dynegy has built.

Dynegy recently signed a wholesale agreement with a communications company that has so much demand "they alone could take us to break-even," Snyder said. To start with, Dynegy Global Communications is provisioning a few circuits for the company. If all goes well, Dynegy anticipates earning additional business.

The communications unit has not been idle during the past six months. Dynegy Global Communications has more than 100 customers, up from 25 since the beginning of the year, Snyder said.

Still, it’s tough to get a read on how much money those accounts are worth. Dynegy does not break down the telecom unit’s revenue. That could change. Dynegy executives have promised to give more detailed descriptions of the company’s separate units in future earnings.