File under: Creative Financing.

Metropolitan service provider Telseon and the Houston-based energy company Dynegy Inc. (NYSE: DYN) today announced a deal in which Dynegy's subsidiary, Dynegy Global Communications, will provide equipment in exchange for the use of bandwidth on Telseon's new metropolitan networks (see Telseon Launches Metro Wave Service and Dynegy, Telseon to Team Up).

In an interview with Light Reading, Telseon CEO John Kane says that no money or stock changed hands between the two firms to make the deal happen. Dynegy, he says, "is going to buy some gear, hand it to us on a loading dock, and we'll install the gear in our network and give them capacity it produces in return."

The optical networking equipment includes some 85 metro DWDM (dense wavelength-division multiplexing) boxes that Dynegy will buy for installation in 85 points of presence (POPs) scattered throughout 18 major U.S. cities. Kane says that so far ONI Systems Inc. (Nasdaq: ONIS) is "the leading contender" in the Dynegy purchase, but he adds that the purchasing agreement hasn't been signed and he's not 100 percent sure it will be a one-vendor deal.

At first glance, this deal has winners on all sides. Thanks to the new DWDM gear that it doesn't have to buy, Telseon will enjoy some added capacity to its own networks, which it uses to provide gigabit Ethernet service in its metropolitan footprint. The deal comes at a time when traditional financing is tight and many experts have questioned the ability of metropolitan service providers to raise enough cash to build their own networks.

Dynegy, too, is getting a bargain because it will now be able to sell metro access in big cities to augment the long-haul bandwidth it already owns. And the whole deal gets them into new markets much faster and for much less money than they'd be spending if they were to lease and light their own dark fiber from a company such as Level 3 Communications Inc. (Nasdaq: LVLT), Metromedia Fiber Network Inc. (MFN) (Nasdaq: MFNX), or others, as Telseon already does.

The capital invested from Dynegy's side will be for the initial equipment purchases. On Telseon's side, the expenses will come in whatever operational costs are involved in testing and installing the new DWDM gear.

The markets scheduled for immediate deployment include Atlanta, Chicago, Dallas, Denver, Los Angeles, Miami, New York, San Francisco, Seattle, and Washington. Additional metro networks are scheduled for completion by the fall of 2001, the companies say.

Telseon, whose investors include Enron Corp. (NYSE: ENE), a Dynegy competitor, just closed its latest financing round of $175 million earlier this year (see Telseon Scores $175M in Funding).

-- Phil Harvey, Senior Editor, Light Reading http://www.lightreading.com