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Sale of Midstream Gas Business Boosts Dynegy to Net Profit

Although it is no longer in the natural gas business, power producer Dynegy Inc.'s 2005 earnings benefited greatly from the midstream enterprise it previously owned. Specifically, proceeds from its midstream asset sale turned what would have been a net income loss to a net gain.

Last year's results were boosted by a $1.1 billion pre-tax gain on the sale of the company's midstream business to Targa Resources Inc. (see NGI, Nov. 7, 2005) as well as $102 million in tax benefits associated with the sale.

Dynegy reported net income of $110 million for 2005, but that was on the back of proceeds from the midstream and other asset sales. The company's loss before taxes from continuing operations more than tripled to nearly $1.2 billion, and Dynegy downgraded its expectations for 2006 performance. Net income applicable to common stockholders was $88 million in 2005, compared to a loss of $37 million in 2004.

In 2005 Dynegy took pre-tax changes totaling $533 million related to termination of its Sterlington power tolling obligation and the purchase of its Independence Facility. Also last year, Dynegy took a pre-tax charge of $287 million, mainly related to settlement of shareholder litigation, and other charges totaling $67 million.

Earnings before interest, taxes, depreciation, and amortization (EBITDA) from the power generation business in 2005 was $404 million, compared to $547 million in 2004. Results for 2004 benefited from $90 million in pre-tax gains related to asset sales as well as earnings of $165 million from West Coast Power, which is being sold. For calendar 2005, cash flow from operations was $472 million.

"2005 was a pivotal year for Dynegy in terms of completing key self-restructuring initiatives and shifting our approach from the resolution of legacy issues to the future where running and growing our business is the primary focus," said CEO Bruce Williamson.

Dynegy provided 2006 cash flow and earnings estimates Nov. 8 based on forward commodity price curves as of Oct. 4. The company updated estimates Wednesday to reflect forward price curves as of Feb. 7. The new estimates also reflect revised assumptions for sales volumes, fuel costs and other operational matters, as well as termination of the company's Sterlington obligation and the pending sale of its interest in West Coast Power.

While the estimated cash inflow for 2006 now stands at $85 million to $195 million, compared to the previous estimate of $20 million to $130 million, the net loss is estimated to be $65 million to $130 million, compared to the previous estimate of $5 million to $75 million. Estimated EBITDA for the power generation business is now $565 million to $660 million, compared to the previous estimate of $725 million to $825 million.

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