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Energy and Optics: Dynamic Duo

Light Reading
News Analysis
Light Reading
10/20/2000

Recent announcements from Dynegy Inc. (NYSE: DYN) and Enron Broadband Services Inc., a subsidiary of Enron Corp. (NYSE: ENE), signal growing momentum behind energy companies' breaking into wholesale broadband services.

The news indicates that energy companies looking to play in the broadband arena are hip to the key issues and opportunities, including those of optical networking. This week, Enron announced a three-year agreement (value undislosed) to supply bandwidth to i2 Technologies Inc. (Nasdaq: ITWO), an ecommerce service provider. The agreement shows Enron's picking choice spots in building a stable of wholesale customers for its fiber optic services. In July, for instance, it signed a 20-year agreement with Blockbuster Inc. (NYSE: BBI). That deal, potentially worth billions, is slated to deliver bandwidth for streaming video services in RBOC networks.

Enron also announced this week its participation in backing Trellis Photonics (see Round 4 for Trellis: $25M), which is building a new kind of optical component (see Trellis Gets $25M For Holographic Switch). That investment is just one of several for Enron, which also holds stakes in Amber Networks Inc., Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7), Hyperchip Inc., and Telseon.

Incidentally, Enron's invested heavily in optical technology for its own networking purposes -- the company's being supplied by Sycamore Networks Inc. (Nasdaq: SCMR) and reportedly has a relationship with Avici as well (see Avici IPO Heats Up).

For its part, Dynegy announced this week its most successful quarter yet, with 83 percent growth on recurring net income of $176.5 million. These figures don't yet reflect any input from Dynegy Global Communications Inc., a new division formed when Dynegy bought wholesale service provider Extant Inc. last month. ("We finalized the Extant deal on the last day of the third quarter," a spokesperson says.) But it shows that Dynegy is operating from a strong base in what CEO Chuck Watson calls "our long-term goal to become a leader in the broadband marketing and trading arena."

Do these positive signs indicate a "go" for investors? Perhaps. On the plus side, analysts say energy companies like Dynegy and Enron bring relevant experience -- trading gas and oil connections -- to the wholesale bandwidth market. "It's just another kind of pipeline. I don't see why the model that's worked for them till now won't do the same with broadband," says Justin D.P. Craib-Cox, stock analyst with Morningstar.com, an online equity research company.

Craib-Cox says the common thread of trading wholesale commodities also gives energy companies a boost over other kinds of conglomerate businesses. "Investors don't have to look at how the companies are tying together a bunch of disparate businesses," he says. Instead, there are synergies that apply: Rights of way in gas or oil pipelines can be used to build cabling ducts, for instance.

Still, there are caveats. Neither Enron nor Dynegy is yet showing revenues from their broadband businesses, so it's too soon to tell how well they're performing in that space. What's more, it's hard to gauge how these companies will be able to compete with the likes of other emerging broadband wholesalers, such as Global Crossing Ltd. (Nasdaq: GBLX) and Williams Communications Group (NYSE: WCG).

"Both [Dynegy and Enron stocks] are a little over fair value, I think," Craib-Cox says. And even though the broadband story seems strong, it's still speculative, as far as he's concerned.

Enron was trading at $80.50 today, and its stock price has climbed steadily for several months. Dynegy was trading at $47.31.

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com

Editor's Note: An earlier version of this article incorrectly identified Enron's optical networking supplier. The company is currently being supplied equipment by Sycamore Networks Inc. (Nasdaq: SCMR).

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