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Dynegy Lowers '05 Earnings Estimate, Reports 4Q Loss

February 28, 2005
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Dynegy Inc. managed to trim its losses in 2004 compared to the previous year, but the company's share price slid Thursday after it announced it will lose more in 2005 than it forecast two months ago. The Houston-based company also reported a 4Q2004 net loss of $171 million (minus 47 cents/share) -- about $50 million more than Wall Street had forecast -- compared with a loss of $554 million (minus $1.49) for 4Q2003.

Speaking to analysts during a conference call Thursday, CEO Bruce Williamson said management is revising its 2005 earnings estimates of a net loss of $171-155 million, which was first issued in early December (see NGI, Dec. 13, 2004). Dynegy now expects to lose between $199-183 million in 2005 because of the elimination of "capital-raising events" and liability issues. Dynegy also expects to take a one-time, pre-tax charge of $220 million because of its acquisition of Sithe Energies (see NGI, Jan. 24).

The company lowered its operating cash flow estimates for 2005 to a range of $200-215 million, compared with the previous range of $225-240 million, primarily because of an increase in interest costs. Other revisions relate to a $16 million decrease in the expected payment to exit some natural gas transportation agreements.

For year-end 2004, Dynegy reported a net loss of $37 million (minus 10 cents/share). Net income in 2003 was $321 million (78 cents), which included a $1 billion gain on preferred stock dividends related to the restructuring of the company's Series B preferred stock.

Williamson told analysts in a conference call that 2004 results would have been in line with guidance estimates had the company not accrued an additional after-tax fourth quarter charge of $36 million related to pending resolution of legacy litigation.

Year-end and fourth quarter 2004 results benefited from a strong operational performance from the company's natural gas liquids and power generation businesses, Dynegy said. The in-market availability of its gas liquids assets allowed it to capture the benefits of high commodity prices, as well as profitable fractionation spreads during the last six months of 2004.

Dynegy's other business, power generation, produced "core volumes consistent with those reported in 2003." However, offsetting the operational results were charges related to the sale of Illinois Power, the restructuring of legacy power tolling arrangements, as well as capacity payments related to former and existing tolling and gas transport arrangements, and legal and settlement charges.

Williamson said 2004 "was a significant year in terms of the company's strong operational performance and our continued progress in our comprehensive self-restructuring initiative, which began more than two years ago and is nearing completion." He noted that Dynegy had made progress in resolving its financial problems, which nearly drove it to bankruptcy in 2002 by divesting non-strategic assets and undertaking "measured, fiscally responsible growth, including the acquisition of Sithe Energies."

Earnings before interest, taxes and depreciation and amortization (EBITDA) from the power generation business was $547 million for 2004, compared with $538 million in 2003. Results for 2004 included $90 million of gains on the sales of the company's interests in the Joppa and Oyster Creek power generation facilities, partially offset by impairment charges totaling $85 million related to Dynegy's investment in West Coast Power.

Overall, core electricity production of 32.7 million MW in 2004 was unchanged from 2003, Dynegy said. The year was marked by "operational milestones," including the 1,761 MW Baldwin Energy Complex in Illinois, which set an all-time production record by generating 13.2 million MWh of electricity. Dynegy's Midwest plants, including Baldwin, benefited from a long-term coal transportation contract that went into effect in January 2004. In addition, Dynegy's 1,210 MW Roseton plant in New York generated 20% more electricity year-over-year as a result of the cost benefits of fuel oil-fired generation in the first half of 2004.

"Offsetting these operational results were higher coal and fuel oil costs in the Northeast and lower volumes generated by the Havana generation facility in Illinois as a result of the company's decision to moderate its supply of Colorado-sourced coal inventory during the plant's conversion to Powder River Basin coal," Dynegy said.

In its natural gas liquids business, EBITDA was up 58% to $364 million for 2004, compared with $230 million for 2003. Additionally, 2004 earnings included $69 million of gains on asset sales, compared to gains of $25 million on asset sales in 2003.

Overall earnings from the regulated energy delivery business totaled $152 million, primarily related to operations through Sept. 30, 2004, compared with a loss of $212 million for the full year 2003. The loss from the customer risk management business totaled $101 million during 2004, compared with a $343 million loss in 2003. The 2004 loss included a previously announced $88 million gain related to the company's exit from gas transportation contracts, offset by a $115 million charge related to the financial mitigation of the Kendall power tolling arrangement.

Dynegy said its customer risk management business, its former high-flying energy trading unit, "will continue to have a negative effect on its consolidated results of operations and cash flows until the remaining obligations have been satisfied or restructured. The company continues to pursue opportunities to terminate or restructure its remaining obligations related to this business."

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