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Troubled Dynegy to Exit Energy-Trading Business

The Texas firm, vilified during the California energy crisis, also warns of significant job cuts.

October 17, 2002|Nancy Rivera Brooks | Times Staff Writer

Dynegy Inc., accused by state officials of price gouging in the California electricity market, said Wednesday that it would abandon energy trading to conserve cash and restructure its remaining operations to adapt to a post-Enron Corp. world.

In addition, Dynegy President Steve Bergstrom resigned, becoming the third top executive to leave the Houston energy company in the last six months. Bergstrom built the trading business into a powerhouse only to watch it deteriorate -- along with Dynegy's stock price -- in recent months with the rest of the energy-trading industry.

Dynegy also warned of a "significant work force reduction," with analysts estimating that the cuts could number as high as 1,000 out of 5,500 employees. The company dismissed 340 in June.

California is seeking $9 billion in refunds from Dynegy and other power sellers for alleged overcharges during the electricity crisis of 2000 and 2001.

Dynegy owns power plants in the Golden State capable of producing more than 1,500 megawatts of electricity -- enough to supply 1.1 million typical homes -- in a partnership with NRG Energy, a subsidiary of Xcel Energy Inc. of Minneapolis.

The taint of trading scandals, stubbornly low power prices and a general tightening of credit for energy merchants have turned most of the traders into cash-starved, penny-stock firms.

Only Enron has filed for U.S. Bankruptcy Court protection, but other firms are thought to be teetering on the edge, propped up only by the continuing indulgence of creditors. Several other major trading firms, including Williams Cos. of Tulsa, Okla., and El Paso Corp. of Houston, have cut back their trading operations sharply.

Investors were not impressed by Dynegy's restructuring, pushing the company's stock down 27 cents, or 25%, to 81 cents on the New York Stock Exchange. Dynegy's stock sold for as much as $47.20 in the last year.

"Dynegy is trying to save something here," said Jon Kyle Cartwright, senior energy analyst with Raymond James & Associates. "It's very easy to close an operation that's not making any money for you and is firmly in a business that, for all intents and purposes, is dead."

Dynegy, which had been unsuccessfully seeking a partner for its trading business, said it would focus on running its unregulated power plants, its regulated utility Illinois Power, its natural gas liquids business and a telecommunications venture, making each a stand-alone operation within the corporation.

Although the company is ending speculative energy trading, it will continue to sell the production from its power plants and natural gas operations, spokesman David Byford said.

Dynegy said it would continue to market virtually all of the natural gas produced in the U.S. by ChevronTexaco Corp. of San Francisco, which owns 26% of Dynegy.

"We fully expect that Dynegy will continue to fulfill its con- tractual obligations," ChevronTexaco spokesman Fred Gorell said.

Dynegy's moves Wednesday marked a dubious anniversary: Exactly one year earlier, Enron announced a surprise loss and the write-off of $1.2 billion in shareholder equity because the company was taking back onto its balance sheet some of the questionable partnerships that would later push it into filing for bankruptcy.

Dynegy, Enron's smaller cross-town rival, sought to rescue it in November but backed out of a merger when the depths of Enron's problems became evident.

Enron's meltdown changed everything for energy merchants, which had tried to emulate its model of a nimble trader that could profit in any kind of market and that had little use for hard assets, such as power plants and pipelines, said analyst Aaron Tyler of Reed Wasden & Associates, an investment banking firm in Bellevue, Wash.

"There is just no real assurance for investors that anything will survive," Tyler said, estimating that Dynegy would free up about $500 million in cash by pulling out of energy trading. The company has $1.6 billion in debt coming due by May.

"This buys them a little bit of time," Tyler said. "I wish I could say one way or another that Dynegy will survive, but so much is dependent on the banks."

Dynegy spokesman Byford denied that the company's restructuring into a more decentralized corporate form is a prelude to asset sales or a bankruptcy filing.

"We're restructuring to run our businesses and to run our company more efficiently," he said.

Dynegy's headaches have included probes into accounting transactions and bogus, or "round-trip," energy trades. The firm's woes helped push Chief Executive Chuck Watson out the door in May and Chief Financial Officer Rob Doty in June.

The company recently paid $3 million to the Securities and Exchange Commission to settle an accounting dispute over a natural gas venture.

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