Watson, Days Before Resigning, Vowed No Changes at Dynegy
Chuck Watson, chairman and chief executive of Dynegy Corp., sat down for an interview with a group of Journal reporters in Los Angeles last Friday as turmoil grew over Dynegy's involvement in controversial "round-trip" trading practices. Four days later, he resigned.
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Mr. Watson, in the interview, described plans for weathering the crisis, defended Dynegy's trading practices and sought to distance the company from the Enron Corp. accounting scandal. "I am not going to let my team get distracted. ... We aren't going to change a thing," he said.
But Mr. Watson became the latest executive to be swept away by the energy-trading investigations. (On Friday, CMS Energy Corp.'s longtime chief executive, William T. McCormick Jr., stepped down.) Here are excerpts from the interview with Mr. Watson:
On Dynegy's approach to getting through the crisis:
"We are in a tremendous credibility crisis in our company and in our industry. We are trying to delineate Dynegy from everyone else. If you go back just a couple of years, traditional utilities were getting multiples of eight, nine, ten times earnings and the trading companies were getting much higher multiples. They did spinoffs and before too long, we weren't among the top ten players [in the power-trading industry]. The market was judging performance on revenues and volumes. We were saying look at earnings."
On the ongoing investigations:
"I am not going to let my team get distracted over and over again. I am going to set up a team to handle all the investigations, the lawsuits and the noise. This business needs to be done and done well. We will generate $1 billion in cash this year, just like the last. We aren't changing the way we do our business. We aren't going to change a thing. Our stock is now below its asset value -- 10-15% of my business is dragging down the other 85% because of a perception of wrong doing which isn't correct. Dynegy is not like Enron."
On inflating trading volumes through round-trip trading:
"I founded this company 17 years ago and it was irritating to have [other trading companies] saying they were doing several billion of dollars a day when they weren't. I had not a clue the CMS trades had happened. Neither [Dynegy President] Steve [Bergstrom] nor I saw it. We were testing the system to see if it worked. There was no intent. But it was a significant event that gave us a black eye. When you lose credibility and confidence, people want to look back at everything we've done. That's what people are doing right now.
We have a strong franchise and a strong group of assets. Seventy percent of our revenues and 83% of our cash flow comes from our hard assets. We have a good franchise in marketing, as a middleman for thousands of producers. We do inventory management for them -- somebody has to gauge demand. Back in the 1980s, it was the pipeline companies. Now it is marketing companies like ourselves. In this business, when Kansas burps, other states get indigestion. It's a 30-day business, a cruel business, you have to know your stuff. You need the right blend of assets to play this game -- firm transport, firm storage, firm supply. We've never been driven by volume or even been intrigued by it. What's important to us is gross margin.
The reason that Dynegy has done well is by fixing up noncustomer needs when they get in a jam. The real value of the energy merchant business is when you are in trouble."
On California:
We are a generator in California and we produced everything we could. We ran power facilities for six months straight that were only supposed to be operating 40-50 days a year. I flew out to California and checked out these 30 to 40-year-old plants and said to the head guy, if you ever get to the point where we shouldn't run for safety reasons, shut 'em down, but other than that, keep going.
I'm not responsible for what others have done. But we have been investigated exhaustively by California, by [the Federal Energy Regulatory Commission] and by the Department of Energy and none of them has found that Dynegy has done anything wrong. Enron was playing outside the bounds -- it was in the culture. The [controversial trading practices] were created by an artificial ceiling. One of the vital lessons of California is unintended consequences. "
On Enron:
"Enron was widely viewed as the best and the brightest. They were the envy of the rest of us. I was surprised by their culture. I didn't think it was that different. I'm proud of what we've done and where we are today. Enron went from being better to being worse and we never changed."
--Interview conducted by Jonathan Friedland, Chip Cummins, Mitchel Benson, Jathon Sapsford and John R. Emshwiller.
Updated May 29, 2002 |
