Dynegy Chairman, CEO Watson steps down; new management team appointed

May 29, 2002
The board of Houston-based Dynegy Inc. announced Tuesday that it has accepted the resignation of company Chairman and CEO Chuck Watson.

By OGJ editors

HOUSTON, May 29 -- The board of Houston-based Dynegy Inc. announced Tuesday that it has accepted the resignation of company Chairman and CEO Chuck Watson. At the unanimous request of the company's independent directors, Glenn F. Tilton—vice-chairman of Chevron Texaco Corp. and himself a Dynegy director—has been appointed as interim chairman of the company. ChevronTexaco holds a 26.5% equity interest in Dynegy.

In addition, Dan Dienstbier—who is currently serving as interim president of Northern Natural Gas Pipeline following Dynegy's acquisition of the pipeline unit from Enron Corp. earlier this year—will serve as Dynegy's interim CEO. Steve Bergstrom, now serving as Dynegy's president and chief operating officer, will continue in the same capacity.

In a press conference held Tuesday with financial analysts and the press, members of Dynegy's newly cast executive team said that the timing of Watson's resignation was coincidental with that of investigations into some of the company's trading and accounting practices by the US Securities Exchange Commission. Dynegy is one of a growing list of US energy merchant companies being asked by the SEC to provide information about so-called "round trip" electricity trades, particularly those into California's power grid. The companies have until May 31 to comply with FERC's request, and many in the last week have already issued statements either denying or explaining such electricity trading practices.

In addition, Dynegy has recently come under fire for entering into a 5-year physical gas supply transaction last year that provided long-term supply of gas and an $80 million tax benefit to the company. The complex accounting vehicle used in the supply deal was dubbed Project Alpha.

"I know there will be speculation that [Watson's] resignation is about Project Alpha, round trip trades, or other matters under investigation," said Otis Winters, who was recently elected to the newly created position of lead director of Dynegy's board. "This is not about those matters, and this decision was not based on those facts," Winters said.

"The environment surrounding our industry has been changing profoundly," Winters added. "Developments over the past year have challenged the entire merchant energy industry to respond quickly and credibly into public concerns about financial disclosure and corporate governace," he said. Winters has served on Dynegy's board since 1993.

New team's role
Winters emphasized at the press conference that the decision to restructure Dynegy's executive team was made by the company's independent directors. "Just to make sure that you do not misunderstand: ChevronTexaco played no role in making these appointments," he said.

ChevronTexaco released a statement Tuesday backing the actions of Dynegy's board. "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," ChevronTexaco said.

Tilton said, "Dynegy's senior management team is faced with the task of reassuring all of its stakeholders that this company has the best strategy in place with three primary objectives driving that strategy: 1) restore this company's credibility, 2) build on the strengths of our delivery network and energy-producing assets, and 3) solidify our achievements in the merchant energy sector."

First and foremost, the top priority of Dynegy's board, said Tilton, will be the search for a permanent CEO and chairman.

Dynegy's future
When asked whether the appointments could signal a change in focus for the company, Bergstrom stated, "I don't think you ought to read into this that there is any business shift or any focus shift. Obviously with the environment that we find ourselves in, the importance of 'regulated assets' or 'consistent earnings and cash flow' is a lot more acute today than it was a year ago, but. . .I don't think you're going to see a directional change in the company. We still think the energy merchant business model makes a lot of sense."

Questions about Watson's future role with the company were deflected by the new management team. Tilton stated, "Chuck has told the board, unequivocally. . .that [it] can count on his full cooperation and continued engagement in the challenges that the company faces, but we have no specified formal role for Chuck in that context." Then, Tilton read from a letter sent out to all Dynegy employees Monday night: "Today, each of you is presented with a new opportunity to help the company evolve. I'm confident that Dynegy's new and existing leadership will serve Dynegy well and successfully navigate the company through the issues facing our business and our industry.

"Together with Steve Bergstrom—who will continue in his role of president and chief operating officer—interim chairman Glenn Tilton and interim CEO Dan Dienstbier will ensure the company resolves the challenges it faces as quickly as possible and achieves the company's financial and operational objectives," Tilton read from Watson's letter.

Wall Street view
In a research note, UBS Warburg LLC analyst James Yannello said that he was surprised by Watson's move, given his key role in creating Dynegy, his status as a large shareholder, and his overall likeability by both Wall Street and the industry in general. "In hindsight—however—such a step may be necessary to help clear the air on Dynegy as rapidly as possible as various investigations on its accounting-trading continue," Yannello noted.

"If there was ever an industry where credibility commands a premium valuation, it is in the energy merchant space," Yannello said, adding that Dynegy's tax and mark-to-market accounting practices "have grown substantially aggressive recently."

In a previous research note, UBS spotlighted more than $100 million of beyond-2006, noncash, mark-to-model earnings that Dynegy recognized in its first quarter results. "Though apparently allowed under current [Generally Accepted Accounting Principles], we expect that such highly aggressive recognitions will not continue, nor do we expect there to be any additional, Alpha-like vehicle creations," Yannello said.