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Power Generation, Marketing Boost Dynegy Earnings

Power Generation, Marketing Boost Dynegy Earnings

Dynegy had a whopper of a first quarter, posting a 66% increase in operating income from wholesale gas and power marketing operations and a 20% jump to $22.3 million in net income from all operations, excluding special items.

Marketing brought in $82.7 million in operating income led by 300% growth in earnings from power marketing and generation, which jumped to $46.2 million from $14.2 million in 1Q98 despite a drop in wholesale power marketing volumes.

"Power generation is dramatically changing the make-up of Dynegy's earnings," said CEO Chuck Watson. "Our power marketing and generation businesses have been combined to maximize earnings capabilities and capitalize on the synergies that exist between the two-Dynegy's 'merchant leverage effect.'"

Power marketing volumes fell during the quarter to 13.1 million MWh, compared to 25 MM MWh in 1Q98, because of unseasonably warm weather and a lack of attractive trading opportunities, Dynegy said. But since the first quarter 1998, the company has increased its ownership in three power plants and increased owned gross megawatts in operation by 54%.

"Our power generation franchise will be strengthened by the addition of 1,468 MW in the second quarter with projects in California and Illinois in operation for the peak summer season," said Watson. By the end of the second quarter, Dynegy will have more than 6,800 MW owned, pending acquisition or under construction at 31 facilities in 9 states.

Dynegy reported first quarter net income from all operations of $28.1 million, or $0.17 per diluted share, including a one-time net gain on an investment sale of $5.8 million, or $0.03 per diluted share. This compares to first quarter 1998 reported net income of $12.3 million, or $0.07 per diluted share, including a 1998 severance charge of $6.3 million, or $0.04 per diluted share.

"We are pleased with our first quarter results and anticipate even stronger performance throughout the year as new power generation assets are placed in service and the crude oil and natural gas liquids pricing environment continues its recovery," said Watson.

Gas marketing contributed an operating margin of $32.7 million for the quarter compared to $32.1 million in 1998. Global gas marketing volumes increased 17% to 10.9 Bcf/d led primarily by U.K. operations. The company sold 9.3 Bcf/d in North America compared with 8.6 Bcf/d in 1Q98.

Liquids operations, however, continued to struggle. Operating income from the division fell to $52.4 million from $62.9 million in 1Q98, primarily because of a 20% decline in average gas liquids prices. Processing volumes decreased to 117 thousand b/d from 128 Mb/d in the 1998 quarter.

During the second quarter, Nova Corp., formerly Nova Chemicals, is expected to complete its previously announced sale of its 25% stake in Dynegy. Watson said during a conference call the company does not expect a change in strategy as a result of the sale. "Dynegy will continue to execute its strategic plan indifferent to its ownership, and any transaction would have to be consistent with and enhance Dynegy's existing strategic plan. Secondly, any transaction would have to add value to all of Dynegy's shareholders. In any transaction, we will endeavor to increase the liquidity in Dynegy's stock."

Several analysts have commented that they would prefer to see more of Dynegy's stock in the public's hands, and Watson agreed more "float" would be an improvement. Currently only 20% of Dynegy's stock is owned by the public. "I would certainly like to see that well into the 30s and 40s, and it wouldn't hurt my feelings at all if it was greater than 50%. I think this company needs to increase its float. It's something I've committed to do in the last year and we hope to accomplish that in this [Nova] transaction."

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