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Dynegy Pulls Plug on Web Trading Unit

Energy: Company's decision delivers another blow to an industry that is still feeling the effects of the fall of Enron.

June 21, 2002|NANCY RIVERA BROOKS | TIMES STAFF WRITER

Dynegy Inc. closed its Internet energy-trading operation Thursday, further shrinking the shell-shocked industry in the wake of several trading scandals and the collapse of Enron Corp.

Dynegy pulled the plug on DynegyDirect a day after the parent company laid off 340 workers, or 6% of its work force, and replaced Chief Financial Officer Rob Doty. Dynegy told customers to contact its Houston energy traders by telephone if they want to buy or sell electricity, natural gas or coal.

"It certainly is a bad omen for the sector, for earnings and for future volatility," said Chris Ellinghaus, an analyst with Williams Capital in New York. "Enron has killed the industry, killed the market, killed the companies and killed many executive careers."

The loss of DynegyDirect, which Dynegy said was temporary and was prompted by an industry credit crunch, could reduce liquidity and increase volatility in energy markets, analysts said.

And it represents another blow to the Houston energy company, whose chief executive, Chuck Watson, resigned abruptly last month after the Securities and Exchange Commission announced it was investigating a gas deal designed to reduce Dynegy's tax bill and the company said it had participated in "wash" trades. In such trades, the same amount of energy is exchanged with another trader at the same price; critics say they are nothing more than sham trades to drive up trading volumes or influence energy price indexes.

Dynegy's stock slipped 21 cents to $7.50 on the New York Stock Exchange. Dynegy's news helped pull down other energy merchants, whose stock has been hammered in recent months as Enron disintegrated and traders were implicated in bogus transactions or were accused of using Enron-like trading ploys during the California energy crisis.

Hours after the markets closed, Reliant Resources Inc. said the SEC ordered an investigation into its wash trades and other transactions that led to a restatement of financial results at the energy trader and its parent, Reliant Energy Inc.

Dynegy's move echoed the travails of Enron, which closed its market-dominating Internet trading business, EnronOnline, in November as the company plunged toward Bankruptcy Court. Enron sold its trading business to UBS Warburg, which has since opened an Internet version.

No one is saying Dynegy, which tried to buy Enron last year for $9 billion, is headed down Enron's road to ruin.

Instead, analysts said, Dynegy is trying to conserve cash as it overhauls its operations in the face of the diminishing trading industry. Dynegy is scheduled to unveil details of a restructuring plan Monday, and asset sales are widely expected as Dynegy struggles to keep an investment-grade rating on its debt.

Dynegy spokesman David Byford said the company opened DynegyDirect in November 2000 for the convenience of its customers, but still did most of its trading by telephone. Dynegy will continue to trade that way and through another Internet operation, TradeSpark, in which it is a partner.

"Our goal is to reactivate DynegyDirect when the market stabilizes and trading demand justifies the service," Byford said. Dynegy is closing the Internet operation because of "market developments and the poor credit environment in the industry," he said.

DynegyDirect operated as EnronOnline did, serving as a "market maker" so Dynegy was the counter party to every trade. When EnronOnline failed, customers became leery of that market structure and many took their business to exchanges that use a "many-to-many" model, bringing buyers and sellers together, said Mike Wilczek, markets editor at Platts energy information service, a division of McGraw-Hill Cos.

"DynegyDirect probably was just not worth the trouble anymore" for Dynegy, which never enjoyed the volume of business that EnronOnline did, Wilczek said.

Other online trading operations remain, including Houston-based TradeSpark, Atlanta-based Intercontinental Exchange and Bloomberg PowerMatch.

Ellinghaus said the shrinking trading business has particularly hurt liquidity in forward markets for energy to be delivered in a year or 18 months, which reduces the ability of companies to protect themselves against price movements.

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