Dynegy Inc.’s new management team said restoring investor confidence and focusing on business remain key following the resignation last week of founder Chuck Watson, CEO and chairman. No strategic shifts are expected, but the executive team is now led by ChevronTexaco Vice Chairman Glenn F. Tilton. Steve Bergstrom, Watson’s right-hand man, remains COO and president — already seen by many as a good sign that the board of directors was loyal to Dynegy’s direction, but not its 17-year leader.
Flanked by the new management team during a conference call last week, Bergstrom confirmed Dynegy is actively pursuing a 50% partner for its Northern Natural Gas Pipeline Co. (NNG), which was obtained during failed merger talks with Enron Corp. CFO Rob Doty also reiterated that Dynegy’s planned master limited partnership, which was put on the drawing board last year, should be approved within two months. Both moves are designed to bolster liquidity and improve the company’s credit rating.
Tilton, also a Dynegy director, was appointed interim chairman, and rumors continued that ChevronTexaco, a major shareholder, had forced Watson’s removal. ChevronTexaco owns a 26.5% equity stake in the Houston-based company. Meanwhile, in the quest to find a new leader, Tilton said that Bergstrom will be considered for the top job if he is interested.
Watson, a former Oklahoma entrepreneur who started the former Natural Gas Clearinghouse (NNG) as the first energy marketing company in 1985, transformed the small Houston-based marketer into an asset-heavy energy giant, which he renamed Dynegy in 1998, for “dynamic” and “energy.” Remaining positive, as was his trademark in conference calls and speaking engagements, Watson told the 6,000-plus employees through an e-mail that “stepping down was not an easy decision. It was the right one.”
Watson, 52, sent the e-mail early Tuesday morning, and told his employees that he was “looking forward to retirement from corporate life.” He urged employees to support the new leadership team to ensure it “resolves the challenges it faces as quickly as possible and achieves its financial and operational objectives.”
Tilton praised Watson’s leadership and vision for Dynegy, and said he had played a “critical role in the creation of the merchant energy business and in the emergence of Dynegy as a major force in the global energy industry.” Under Watson’s leadership, Dynegy had evolved “from a small enterprise into a top producer and marketer of energy.”
However, Bergstrom said there had been so many “distractions” in recent months that it had been difficult for him to do his job, which he defined as “making the operation hum.” Although Bergstrom stressed that Dynegy would not change its strategic focus, he admitted that Watson’s departure will be felt by those who worked with him.
“I will miss Chuck Watson,” he said, noting that his former boss had worked “tirelessly to build shareholder value…and was essential to building our business.” Bergstrom, 44, has worked at Dynegy since 1986 and had worked directly with Watson following his promotion to COO in August 1999. After lamenting Watson’s departure, Bergstrom then took a few moments to “clear the air” about what Watson’s resignation was “not.” He said, “this is not about Project Alpha, CMS…,” rather, it was about refocusing Dynegy on business.
Among goals already set before Tuesday’s announcements, said Bergstrom, was finding an equity partner for NNG. “We can do everything we want to do with that asset with a 50% partner,” Bergstrom said about Dynegy’s plans for the pipe. Enron holds the option to repurchase it for $1.5 billion and interest through June 30, however Bergstrom said he had seen no indication from Enron that it would attempt to reclaim it.
Doty said Dynegy also remains on track to form a master limited partnership (MLP) subsidiary. Dynegy Energy Partners would own a portion of the company’s downstream natural gas liquids business and also provide additional funding (see NGI, May 20). Doty said he expected to receive approval for the company to begin the MLP within two months, which is awaiting final regulatory approval..
Interim Chairman Tilton has had a long relationship with Dynegy, in addition to his service on the board of directors. He joined Texaco in 1970 and became president of Texaco USA in 1995, and was made senior vice president and president of Texaco’s Global Businesses unit in 1997. Tilton was appointed chairman of the board and CEO of Texaco Inc. in 2001, before its merger with Chevron, and had been instrumental in setting up several of the key Dynegy partnerships. When ChevronTexaco was formed, Tilton was elected a director of the company’s new board and assumed the vice chairmanship in October 2001.
In a separate statement following Dynegy’s announcements, ChevronTexaco said it “supports the action of Dynegy’s board of directors to ask Glenn Tilton to assume a role as interim chairman of the board and Dan Dienstbier as interim chief executive officer while that company undertakes a comprehensive search for a permanent chairman and chief executive officer.
“Given his extensive industry experience and proven leadership skills, we believe Glenn Tilton is well suited for this interim role. As a major stockholder with strong commercial relationships with Dynegy, ChevronTexaco has a vested interest in supporting a strategy that will restore investor confidence in the company, to the benefit of all Dynegy shareholders. We support the efforts of the entire Dynegy management team, including president and chief operating officer Steve Bergstrom, to continue to take the necessary steps to address the challenges facing the company.”
Besides ChevronTexaco’s shareholder interest in the company, Dynegy also purchases the producer’s North American natural gas, and ChevronTexaco purchases natural gas liquids from Dynegy. In November 2001, ChevronTexaco invested $1.5 billion in mandatory redeemable Dynegy preferred shares to fund Dynegy’s equity infusion into Enron. The preferred shares are convertible into Dynegy common stock at ChevronTexaco’s option, in which event ChevronTexaco would own a 36% equity interest in Dynegy. If ChevronTexaco does not convert the preferred shares by November 2003, Dynegy must redeem them at that time for $1.5 billion in cash.
“Today, Dynegy is in an industry that is changing more rapidly and profoundly than ever before,” said Tilton. “That change creates opportunities, as well as a new set of challenges that must be addressed. In particular, events of the past year have hurt the credibility of this sector and eroded investor confidence. As a result, the changes in the merchant energy sector have been extensive. Fortunately, Dynegy has a solid base of assets and strong business fundamentals.”
Bergstrom said he was “particularly pleased” that ChevronTexaco had reinforced its commitment to Dynegy “by expressing its support for a leadership change.” He said, “ChevronTexaco speaks with actions, not with words. And this speaks very loudly to myself and our employees.”
Watson, chairman and CEO since 1989, saw the energy business he propelled begin to turn south last November after the proposed Enron merger fell apart. As Congress, regulators and credit ratings agencies began taking closer looks at the energy industry — especially those involved in businesses with similar interests to Enron’s — Dynegy was also caught up in the investigations. Its share price plunged and rumors swirled that its operations were just like Enron’s — a claim Watson took to task more than once.
However, Dynegy is the focus of an investigation by the Securities and Exchange Commission (SEC) regarding a natural gas sale last year dubbed “Project Alpha,” and has come under scrutiny by the Federal Energy Regulatory Commission over round-trip gas trades with other energy marketers, as well as gas trades made in California in 2000 and 2001.
Watson has not been the only executive casualty. The round-trip deals have already forced the resignation of several high ranking executives at other energy marketers, including CMS Energy Corp.’s Chairman and CEO William McCormick, who resigned May 24 (see NGI, May 27). CMS had already accepted the resignation of Tamela Pallas, the CEO of its marketing unit, two weeks earlier.
At Reliant Resources Inc., two executives and two traders also have resigned in the wake of the phony trading scandals, and have forced the company and parent Reliant Energy Inc. to restate revenue for 1999, 2000 and 2001. In a one-paragraph statement on May 25, Reliant Resources confirmed that it has received subpoenas from “U.S. attorneys requesting documents pertaining to certain trading activities that have been the subject of recent publicity. Reliant is cooperating fully with the requests.”
The final shoe may have dropped late Friday (May 24) for Watson, when Dynegy also issued a statement that it had received a subpoena from the U.S. Attorney’s Office in Houston requesting documents relating to the company’s transactions, including its buy and sell trades with CMS Energy and its long-term natural gas supply transaction referred to as “Project Alpha.”
The documents requested by the U.S. Attorney’s Office, said Dynegy, are similar to those it has already provided or is in the process of providing to the SEC, FERC and other government agencies. The company “intends to cooperate fully with the U.S. Attorney’s Office, as it has with other similar requests, in its investigation of these matters and remains committed to resolving this and other issues as quickly as possible.”
The Dynegy board of directors, now led by crisis management expert Otis Winters, said it plans to conduct a “comprehensive search to fill the chairman and CEO positions with a leader who has the right combination of experience and skills to address all the opportunities and challenges facing the company as it moves forward.” Bergstrom, “should he so choose, will be a candidate for the position,” Tilton said during the conference call.
Winters, already serving on Dynegy’s board, was appointed by Watson two weeks ago to keep the company focused on restoring shareholder credibility. He is the retired co-founder and chairman of The PWS Group Inc., a Dallas-based consulting and crisis management firm.
“In this environment, Dynegy must convince shareholders and lenders that the company has the best strategy in place to resolve the issues it faces, while generating new momentum in its businesses,” said Winters. “We must move ahead squarely focused on three objectives: restore the company’s credibility; build on the strengths of our energy producing assets; and solidify our achievements in energy marketing.”
S&P Say Dynegy Less Likely to Be Downgraded
In the aftermath of Dynegy’s shakeup last week, Standard & Poor’s on Thursday said it thinks there is less than a 50% “likelihood” that Dynegy will be downgraded to “junk” following Watson’s resignation. In a report, analyst Craig Shere said new leadership, led by Tilton, will make “expeditious changes to shore up credit rating and investor confidence.”
S&P upgraded Dynegy to “four stars accumulate,” from “three stars hold.” Calling Dynegy “among the cheapest in its space despite strong assets and backing of ChevronTexaco,” Shere said he believes the Houston-based company will be among the “leaders in an ultimate industry recovery” in the sector. The analyst said ChevronTexaco’s statement of support for Tilton as Dynegy’s interim chairman was also encouraging.
Shares were up Tuesday, the day Watson announced his resignation, more than 7% , noted S&P. Shere said S&P had recently lowered Dynegy’s 2003 estimate to $1.80, and it now is “just 5.5 times” that price overall. On Thursday, the company’s stock closed up nearly 4%, gaining about 33 cents.
Curt Launer, an analyst with Credit Suisse First Boston, had rated Dynegy a “strong buy” in the midst of Dynegy’s recent problems and long before Tuesday’s announcements. Launer, who reiterated his recommendation, said Watson’s departure was a surprise in some ways, but “reflects the evolution of the industry and Dynegy.”
The reasons behind the change, in Launer’s view, were the “current balance scrutiny, Dynegy’s troubles with credit ratings and the shrinkage of trading as a valuation source.” The move by outside directors to step in as interim executives shows “there is a commitment to existing management,” noting that “in particular, we regard as critical the continuing service of Steve Bergstrom.”
Merrill Lynch analyst Carl Kirst, who rates Dynegy a “neutral,” said he was taking a “wait and see attitude,” but called Watson’s departure a “positive first step to restoring investor confidence in management as well as exhibiting an engaged board of directors.” Kirst said Bergstrom remaining as president and COO was “critical, showing both Bergstrom’s commitment to the new management and the board of directors’ understanding of his vital presence. In our opinion, Bergstrom is the true ‘key-man’ risk at this juncture.”
In other “old” news — publicly released in regulatory documents to the SEC two years ago — the New York Times reported Thursday that Watson will receive at least $33 million more in severance payments than he would have had he served out his contract, which would have lasted another eight months.
Watson’s contract required the company to pay Watson three times the amount of his average compensation in his three best years if he was forced out, including the projected value of stock options he would have received over the next three years. In a contract Watson signed two years ago, his compensation is worth more than $11 million a year, including the projected value of this stock options. He also would receive compensation earned over the next eight months, before his contract expires Feb. 1, 2003, which could be an additional $7 million.
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