American Electric Power Wants Out of Telecom

Channel Partners

November 8, 2002

6 Min Read
American Electric Power Wants Out of Telecom

Energy companies, which are known for a history of conservative growth, continue to suffer losses in the wholesale telecom business. And some want out.

American Electric Power, owner of C3 Networks and a majority stakeholder in AFN Communications Inc., posted a $7 million loss in the third quarter related to its communications investments, down from a $13 million loss in the third quarter of 2001.

But AEP is soliciting buyers for C3 Networks and working with AFN’s other stakeholders to determine available options, AEP spokesman Pat Hemlepp said. C3 sells private line services to carriers in Arkansas, Louisiana, Oklahoma and Texas.

“We’ve dramatically reduced operations of our communications business, but it continues to show losses,” said E. Linn Draper Jr., chairman, president and CEO of AEP, in a third-quarter earnings statement. “Even in today’s market environment where communications assets have few buyers we are evaluating options for exiting this business.”

C3, based in Austin, is continuing to provide its customers service and is working with AEP to find a buyer, said Jeff Vondeylen, C3’s vice president of corporate development. C3 has sent a number of companies information and is scheduling meetings to discuss the sales opportunity, he said. C3 made an undisclosed number of job cuts in October, Vondeylen said.

AFN, based in Tulsa, Okla., has been quiet since its former chief executive, Gordon Martin, left the company last year to take a job at Qwest Communications International Inc. But AFN, a regional wholesale carrier, continues to serve seven of the eight largest carriers in the country, three of the six largest wireless providers and three of the six largest cable companies, according to Mike Friloux, vice president of marketing and network planning. And the company is operating in markets where it can demand prices five to ten times higher than in Tier 1 cities, he said.

“A lot of people still think this is a very positive asset to have,” Friloux said. “We are very close even today . to getting to breakeven point. It’s not like we have four years left in our model to get to breakeven and we are burning a lot of” cash.

FirstEnergy Corp., a former stakeholder in AFN, sold its 31 percent interest to Allegheny Energy in July. Allegheny Energy, the owner of regional wholesale carrier Allegheny Communications Connect and a majority stakeholder in AFN, is grappling with its own liquidity crisis. The company, which defaulted under its bank covenants, announced Monday receiving waivers from its creditors extending through Nov. 29.

A spokesperson declined to talk specifically about AFN.

“We are experiencing some short-term liquidity issues. As a result of this we have been certainly reviewing all of our business lines and focusing on our core businesses but at this point we have not made any type of determination about where we are going with any particular business line at this point,” spokeswoman Debbie Beck said. “We are still in the review phase on trying to refocus our company on our core businesses.”

AEP is not the only energy company aiming to stem losses in telecom. Dynegy Inc., the beleaguered energy giant, posted a $30 million third-quarter loss in its communications unit Dynegy Global Communications, compared to a $15 million net loss in the third quarter of 2001.

“During the year, the communications segment has taken measures to reduce losses by limiting capital spending and reducing operating and administrative costs through the renegotiation of long-term contractual commitments. Dynegy continues to pursue partnership and sale opportunities for this business," the company said in its third-quarter earnings release.

A Dynegy spokesman declined further comment.

In September FPL Group Inc. announced a plan to restructure its telecom and energy businesses. Florida wholesale carrier FPL FiberNet has deferred its planned build-out of metro fiber rings in certain cities and “reduced its expectations for future revenue growth due to continued deterioration in the market,” FPL Group said in a statement.

As a result, FPL FiberNet expects to record $50 million to $60 million in after-tax charges. The company also announced a separate $30 million charge associated with MCI fiber leases that are now in default.

FPL Energy has no plans to sell its telecom unit, spokeswoman Pat Davis said.

FPL FiberNet contributed 9 cents per share to FPL Group in 2001 – the latest number available to the public. FPL FiberNet owns a backbone network throughout Florida and metro rings in Boca Raton, Jacksonville Miami, Orlando and West Palm Beach.

  “We are not going to be doing the extensive buildouts that were once planned. Our buildout is essentially complete,” Davis said. “Mainly we are just being prudent about how we do business.” FPL FiberNet made an undisclosed number of job cuts in the third quarter within its construction unit, Davis said.

While not all the energy companies are completely scaling back their telecom subsidiaries, they are not immune to the storm. In the third quarter, Progress Energy recorded a one-time charge of $224.8 million, or $1.04 per share, due to the write down of its telecom investments in Progress Telecom, CaroNet and Interpath. Progress Telecom, including CaroNet’s operations, recorded $1.7 million in third-quarter net income, excluding the write-down, compared with a net loss of $2.4 million for the same period last year.

The company has let go 100 employees since January, reducing its workforce to 190 people No further job cuts are planned, spokesman Keith Poston said. Progress Telecom is funding its own operations going forward and has posted $3 million in earnings before interest, taxes, depreciation and amortization (EBITDA) year to date, Poston said.  “It’s been a difficult couple of years,” Poston said, but Progress Energy is not actively seeking to sell the telecom subsidiary.

However, much like any holding company aiming to strengthen its balance sheet, Progress Energy is “always willing to entertain opportunities,” he said.

Energy companies typically have built fiber-optic networks in less densely populated regions and metropolitan areas where there are fewer carriers and less of a bandwidth glut than in the largest cities. Their exit from smaller markets could leave the Baby Bells mostly alone, said Seth Libby, a Yankee Group analyst covering the wholesale market.

“I think it could seriously impact competition,” Libby said. “It’s a concern absolutely.”

Technology analysts covering the wholesale market are divided on how difficult it will be for energy firms to sell their fiber-optic networks.

“I would be surprised if anybody makes a move on either network right now (C3 and AFN) just because a lot of these companies that might be in a position to do this I don’t think they want to spend the money right now,” said Rod Woodward, an analyst with Frost and Sullivan. If a carrier cannot easily integrate its own infrastructure with a new network and operations system, “I don’t think anyone wants to be responsible for those costs,” Woodward added.

But Libby said a variety of telecom providers are likely to show interest in the regional networks of C3 and AFN because they extend to smaller cities where there is less competition. Possible suitors could include the Baby Bells, AT&T Corp., Sprint Corp. and long-haul carriers, Level 3 Communications Inc. and Global Crossing Ltd., he said.

“The key . would be price they would have to pay for the assets,” the analyst said. “Yah pennies on the dollar I would think.”

Taher Bouzayen, vice president of Atlantic-ACM, said it is plausible a buyer would be more interested in acquiring the customer base rather than the network.

“It’s very, very capital intensive to just maintain those networks,” he said.

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