Unable to find a partner with liquidity and stature to boost its own, Dynegy Inc. is winding down contracts and closing down its formerly extensive marketing and trading offices in the United States, Canada and Europe. The former market-maker has mapped a future on the assets it still holds, and will operate them within four entities: power generation, natural gas liquids, regulated energy delivery and communication.

Many analysts and investors believe the overhaul may be Dynegy’s best hopes for survival. In less than a year, Dynegy has lost more than 96% of its value, and faced the resignation of founder and CEO Chuck Watson. CFO Rob Doty also resigned last summer, and last week’s upheaval sent long-time COO Steve Bergstrom also packing. Bergstrom, who had worked for the company for 16 years (one year less than Watson), had overseen the company’s marketing and trading strategy.

The new-and-improved Dynegy management team noted last week that the restructuring was “designed to improve operational efficiencies and performance across its lines of business.” Calling it a “market shift,” Dynegy’s decentralized business structure will streamline corporate operations based in Houston, emphasizing “efficiency, accountability and performance management.”

In a written statement, Dynegy said it would “exit the marketing and trading business over the next several months. “The company will make appropriate arrangements with respect to its longer-term contractual obligations, including retaining personnel and risk management capabilities and continuing capacity to support its customer commitments. Matt Schatzman, currently president of commercial operations, will manage the exit in the United States and Canada, and Mike Flinn, currently president of Dynegy Europe, will manage the exit in Europe.

“The decision to exit this business is expected to reduce the company’s collateral requirements and overall corporate expenses. As a result of its organizational restructuring and exit from marketing and trading, the company will undergo a significant workforce reduction. The exact timing, areas affected and number of employees impacted will be announced in the near future.”

Dynegy employees have been awaiting word on exactly how many would be affected by the workforce reductions. Up to 800 or more employees in the company’s Houston headquarters had been awaiting pink slips last week. As of Friday afternoon, there still had been no official news on layoffs.

“The objective of the restructuring is to maximize the potential and profitability of our existing operating divisions by requiring each business unit to develop its own strategy, while being responsible for its performance and delivering value to our stakeholders,” said Dan Dienstbier, chairman and interim CEO. “This new structure allows our divisions to leverage their unique strengths in operations, customer relationships and leadership, while the corporate center will be responsible for enabling, monitoring and measuring success.” He said corporate also would administer financial and regulatory controls.

Following a “detailed assessment” of Dynegy’s corporate functions and business units, which included its ongoing capital and liquidity plan, management broke the operating divisions into Dynegy Generation, Dynegy Midstream Services, Illinois Power and Dynegy Global Communications. All of the units will have a CEO who will report to Dynegy’s future CEO, who is expected to be named within a few weeks. Under the restructuring, the company will be realigned as follows:

Dynegy Generation: Owns and operates approximately 17,500 gross MW of domestic and international generating capacity. Alec Dreyer, president of the company’s generation business since 2000, will serve as CEO, and the unit will continue to focus on optimizing the company’s owned and controlled generation assets and on the production and delivery of wholesale power.

Dynegy Midstream Services (DMS): Steve Furbacher, president of DMS since 1996, will serve as CEO. The unit will continue to pursue business opportunities in areas related to its North American midstream liquids processing and marketing business and global natural gas liquids marketing and transportation operations.

Illinois Power (IP): Will continue its focus on delivery of electricity and natural gas to its 650,000 customers across a 15,000-square-mile area of Illinois. Larry Altenbaumer, IP’s president since 1999, will be CEO.

Dynegy Global Communications (DGC): This unit, which has been teetering on the brink of financial collapse, still owns and operates a 16,000-route-mile, optically switched mesh network reaching 44 U.S. cities. Dynegy said this unit will continue to “pursue opportunities intended to reduce its financial exposure in this business.” DGC will continue operations to meet current customer commitments and obligations, and Ken Snyder, DGC’s current president, will serve as CEO.

Within Dynegy’s Corporate Center in Houston, an executive team will provide governance, policy, reporting and control support to the operating divisions. Dienstbier will lead the center as Dynegy’s chairman, and will act as interim CEO until someone is named, which is rumored to be as soon as a week. The rest of the corporate team will include Ken Randolph, executive vice president and general counsel; Hugh Tarpley, executive vice president, corporate development; Mike Mott, senior vice president and CAO; and Louis Dorey, executive vice president, finance. Blake Young has been named executive vice president, technology and administration. Formerly president of Global Technology, Young will add internal audit, risk management, corporate communications, human resources and corporate shared services to his functional areas of responsibility.

Bergstrom, who resigned as COO and Dynegy board member, had been considered the top candidate to assume the CEO job. However, his resignation was rumored to center on the company’s plans to close its marketing and trading unit, the business operation that he had helped grow with his former boss Watson. Former Oklahoma entrepreneur Watson had formed Natural Gas Clearinghouse as the first energy marketing company in 1985, transforming the small Houston-based company into an asset-heavy and superb market maker, renaming it “Dynegy” in 1998 for “dynamic” and “energy.”

Bergstrom said last week he fully supported the steps that the new management team had to take to position it for the future. But he made few comments on his departure, calling the changes “the right course for Dynegy.”

Dienstbier said Bergstrom had given Dynegy “outstanding leadership and made immeasurable contributions to our company and the industry. His vision and knowledge were driving forces in the development of the marketing and trading business and the creation of an asset-backed energy delivery network that has served our customers reliably over the past 17 years.”

Bergstrom had been responsible for the day-to-day development and execution of Dynegy’s strategy, which had been focused on trading and marketing in recent years. He had joined Natural Gas Clearinghouse in 1986 as vice president of gas supply, and was promoted to vice president of gas marketing and supply in 1987. In 1990, he was named executive vice president. Bergstrom served as a member of Dynegy’s management committee from 1989 through March 1995, when a public company was formed. In 1996, he was promoted to president and COO of Dynegy Marketing and Trade, and had been COO of the entire operations since August 1999.

Although Dynegy will exit energy marketing and trading, the activities within the unit will not cease, according to spokesman John Sousa. “They will continue as part of the generation and liquids business units.” All of the contracts with ChevronTexaco also will be honored, he said. Dynegy markets all of the major’s natural gas liquids business in the United States, and has since 1996.

With no business coming in, there really was no other avenue for Dynegy, according to analysts. By the second quarter of this year, Dynegy’s trading book had fallen to $620 million. It had to post collateral for that trading book of about $1.2 billion. Without a trading unit, the business will be much less volatile, and Dynegy should be able to immediately boost its liquidity.

Six Fired for Supplying Fake Data to Publications

On Friday, Dynegy fired six employees and said it will discipline seven others in its natural gas trading business for violations of company policies, including provided inaccurate information regarding natural gas trades to various energy industry publications that compile and report index prices.

“Our Code of Business Conduct represents a commitment from all employees that they will conduct themselves in an ethical and responsible manner,” said Dienstbier. “It is our practice to investigate any possible violation fully and take the appropriate corrective actions to maintain the integrity of our workplace.”

Dynegy discovered the inaccuracies during an internal review of its trading activities, which is being conducted as part of an ongoing Commodity Futures Trading Commission investigation. In connection with the investigation, the company also has relieved a corporate compliance officer of his responsibilities. In response to its findings, the company has instituted measures that will ensure the office of the chief risk officer verifies all price information provided to industry publications. Dynegy said it would resume its practice of reporting price information to industry publications in the near future.

As part of its exit from marketing and trading, late Friday Dynegy entered into a letter of intent to sell a “significant” portion of its Canadian physical natural gas marketing business to The Seminole Group Inc., which serves approximately 600 commercial and industrial customers in the country. Dynegy also agreed to sell to Seminole its 50% ownership in Tidal Energy Marketing Inc., a wholesale crude marketing company. The transactions are expected to close next month.

Dienstbier said that until the transactions are completed, the company would serve its customers and honor any contractual obligations to them. Two of Dynegy’s operating units, Dynegy Generation and Dynegy Midstream Services, will continue marketing and trading activities around their physical energy assets, he said.

Seminole said it would keep about 35 of the 70-member Dynegy Canada staff.

Still a question is how ChevronTexaco’s 26% stake will play out. Before the Enron Corp. collapse and resulting demise throughout energy marketing, ChevronTexaco had invested about $2.8 billion, which included $1.5 billion it put up for Dynegy to purchase Northern Natural Gas Co. in the failed Enron merger. That pipeline has since been sold to MidAmerican Energy, a unit of Berkshire Hathaway. ChevronTexaco CEO Dave O’Reilly has so far remained committed to Dynegy, but the commitment has at times confounded analysts and investors alike.

Even if ChevronTexaco has to write off all of its $2.8 billion Dynegy investment, it would not do serious damage to the oil giant, say analysts. Fahnestock & Co. energy analyst Fadel Gheit estimates that a complete write-off would cut $2.75 from ChevronTexaco’s book value per share, which is much less than the $26 a share the stock has dropped since the Dynegy fallout in recent months.

In the second quarter, ChevronTexaco wrote off $531 million of its Dynegy investment, as well as $100 million for the company’s share of Dynegy’s own write-offs and other adjustments. The remaining book value of the company’s investment in Dynegy as of June 30, following the second quarter write-down, was approximately $2 billion. ChevronTexaco said then that an additional charge could be taken in third-quarter earnings “to the extent the fair value of the Dynegy securities at Sept. 30, 2002, is below the remaining $2 billion carrying value.”

O’Reilly said then, “Despite the partial write-down of our Dynegy investment in the second quarter, we are encouraged by Dynegy’s ongoing efforts to improve liquidity…” O’Reilly indicated that besides ChevronTexaco’s ownership in Dynegy, the two companies have commercial arrangements that include Dynegy’s purchase of most of the natural gas and natural gas liquids produced by ChevronTexaco in the United States, as well as ChevronTexaco’s purchase of the same commodities for its plant operations from Dynegy.

Last week, O’Reilly was quoted in an interview with the Wall Street Journal as saying, that he “regretted” some of his company’s moves with Dynegy. “When you make an investment, you assess the downside risk,” he said. “I think we fell short of assessing the downside risk.” O’Reilly added that the success of future energy trading operations will depend on how the industry is regulated. “Partial deregulation doesn’t work,” he said, “and deregulation without some sort of governance structure doesn’t work, either.”

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