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Restructuring Costs Dynegy in '03; More Losses Expected This Year
Restructuring efforts blasted Dynegy Inc.'s bottom line last year, with the company reporting a net loss of $364 million, including a loss of $226 million in the fourth quarter. The losses, while smaller, are expected to continue through this year as rebuilding continues, the CEO said Thursday.
In the fourth quarter, the Houston-based company lost 62 cents/share, compared with a loss of 98 cents/share, or $278 million, in 4Q2002. Continuing operations in the final quarter lost 54 cents/share, which was larger than the 14 cents/share loss forecast by analysts with Thomson First Call.
The elimination of its energy merchant business, discontinued operations and the impact of adopting new accounting principles totaled $207 million for the year and $48 million in the fourth quarter. Without those special items, net losses were $157 million for the year and $178 million for the fourth quarter.
"It was a good year when measured by the progress we made," said CEO Bruce A. Williamson during a conference call with analysts. "It was a good year on meeting our objectives, and the financial markets agreed it was a good year." But, he said, "we are not satisfied by where we are. We realize more work remains," and added, "We will attack 2004 with the same determination and drive to succeed" as the management team had in 2003.
Included in the fourth quarter losses were several after-tax charges and benefits, including a $153 million impairment associated with Illinois Power, which the company is in the process of selling to Ameren. It also took a $16 million loss on some of its utility qualifying facilities as well as a $13 million charge for West Coast Power. Another $8 million was attributed to an impairment for a minority interest in a Texas Gulf Coast fractionator, a $37 million benefit was associated with a deferred tax gain and $10 million was associated with a payment on its sale of the Hackberry, LA liquefied natural gas project.
"Our overall objective of the past year was to restructure Dynegy to be a financially sound, operationally focused company," said Williamson. During his conference call, Williamson was upbeat and called last year a good first step in the restructuring efforts. But he acknowledged there was much more work to do.
By segment, Dynegy's earnings before interest and taxes (EBIT) from the power generation business were $350 million last year. Management noted that the power segment had benefited from the strong commodity prices last year, but that "while better than planned, was still relatively weak given the general overcapacity in the markets served by Dynegy." Among other things, Dynegy Midwest Generation set an all-time production record in 2003, generating 21 million net MWh of electricity with a capacity factor of 68% from the company's major coal-fired units.
Another positive for the cash-strapped company came from its midstream, which markets natural gas liquids. EBIT was $149 million last year, and the segment's performance also benefited from higher commodity prices, with an average monthly Henry Hub natural gas price of $5.38/MMBtu versus the company's forecasted price of $4.11; an average crude oil price of $31.01/bbl versus the company's forecasted price of $27; and an average natural gas liquids price of $0.55/gallon versus the company's forecasted price of $0.47.
"We like the midstream now, especially in light of the contributions we've been getting," Williamson said.
During 2003, midstream continued an aggressive effort to shift its contract structure toward fee-based arrangements. As a result, the natural gas liquids segment currently has 97% of its contracted volumes structured as percentage-of-proceeds, percentage-of-liquids or fee-based, versus 85% at the end of 2002.
EBIT from Illinois Power, Dynegy's regulated business segment, was $43 million last year, which included an impairment of $153 million. Management said that the segment's results also "reflected unseasonably cool summer weather resulting in lower electricity sales and the full annual impact of the residential rate reduction that began on May 1, 2002." The regulated unit delivered total electricity of 18,601 million kWh in 2003 versus 19,144 million kWh in 2002. Total natural gas delivered for the year was 778 million therms, compared with 773 million therms in 2002.
Pulling out of its once prosperous energy trading and customer risk management business hit the bottom line as well. The business, including obligations associated with its four remaining power tolling arrangements and related gas transport arrangements, "will continue to negatively affect its consolidated results of operations and cash flows until the related obligations have been satisfied or restructured." At year-end 2003, collateral related to customer risk management was approximately $120 million, which was down from $806 million at year-end 2002.
At year-end 2003, Dynegy's liquidity stood at approximately $1.4 billion, which consisted of $477 million in cash and $1.1 billion in revolving bank credit, reduced by $188 million in letters of credit posted against the credit line. There were no drawn amounts under the company's revolving credit facility. Total collateral posted at year end, including cash and letters of credit, was approximately $480 million, down from $612 million on Sept. 30, 2003.
Going forward, Dynegy estimates that net losses in 2004 will be $110-140 million, or 29-37 cents/share. The estimate assumes that prices and volumes will be "similar" to those last year. By segment, Dynegy expects to earn $460-470 million from power generation; $260-270 million from natural gas liquids; and $310-320 million from regulated energy delivery. It expects to see a loss of $140-130 million from energy trading and customer risk management and a loss of $120-130 million from corporate and other.
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