Dynegy's UK Acquisition Improves Global Reach

Far from abandoning its future North American natural gas focus, Dynegy Inc.'s CEO Chuck Watson affirmed last week that the company's purchase of UK-based BG Group PLC's natural gas storage facilities and assets is only replicating the Houston-based marketer's successful model, saying it will be the "cornerstone" of its European energy network, providing a "springboard for faster growth" globally.

Watson, speaking with investors during a conference call, spent some time on the $590 million European acquisition, but just as much time discussing the continuing events in California, as well as the recent announcement that the company would construct a liquefied natural gas (LNG) facility in Hackberry, LA that would begin operations in 2003 (see NGI, July 16). CFO Robert Doty confirmed that the UK acquisition may squelch plans for "one or two" U.S. power plants, but Watson said Dynegy's North American strategy continues on track.

"We are still bullish on gas," Watson said. "There's a lot of talk about generation capacity coming on line in the next couple of years. We have a five-year forecast. There may be some blips in supply and demand...you can expect that, but our fundamentals haven't changed. We focus on that."

The BG Storage deal is a major step for Dynegy, which includes the acquisition of 30 wells with five offshore platforms, nine salt caverns, approximately 18 miles (32 kilometers) of pipelines and an onshore natural gas processing terminal. Hornsea, an onshore salt cavity installation, has a deliverability rate of 620 MMcf/d, and two facilities are capable of storing 111 Bcf. The Easington terminal adds Rough, an offshore depleted natural gas field, with a deliverability rate of 1.5 Bcf/d, as well as BG's plans to develop the Aldbrough storage facility, a salt cavern with an expected storage capability of 6 Bcf and deliverability rate of 600 MMcf/d. Under terms of the agreement, which is expected to be completed by the third quarter, BG and its 260 employees will become part of Dynegy Europe Ltd.

"This is the right move at the right time in the right place," Watson said. "It's a pretty good deal for Dynegy." Watson said the BG facilities are a "key provider, used by virtually half of all UK shippers," adding that it was a "tremendous opportunity for us...to unleash significant value."

CFO Robert Doty said the UK acquisition should add between 7-9 cents a share to 2002 earnings, and said that Dynegy now projects 2002 earnings of $2.50-$2.60 a share, up from analysts' predictions of $2.40 a share. The cash deal will be handled with cash on hand, part of the company's existing capital expenditure plan. Ownership is expected to be accretive to earnings in 2002 "and beyond," and will contribute to Dynegy's previously announced growth rate of 20-25% a year.

The UK acquisition comes on the heels of Dynegy's news that it would enter the LNG business, using its liquefied petroleum gas facility in Hackberry, LA to construct a facility.

"The cost savings we're realizing from using the existing LPG (facility) gives us a competitive advantage over greenfield projects, and will make us competitive for years to come," Watson said. Answering a question about the lowering natural gas prices, and whether the announced facility would still be a go if gas falls to $3/Mcf, Watson said "it works very well at those numbers and below. Because of our infrastructure and building in Louisiana, we are confident that it will clearly be the most competitive LNG to come on." He said the LNG facility will cost about $250 million to build.

Watson said he disagreed with those who believe LNG is not competitive at less than $4/Mcf. "As far as the competitive nature of LNG, the fundamental assumption is what you think it should cost. We will have a 50 cent advantage in costs over a greenfield project. I'm not buying the $4 number, and I think LNG done right, can make it much lower than that." He said a lot has to do with how the facility is constructed, and pointed to new technology, including liquefaction processes that will bring the cost down.

When asked if Dynegy might consider a lawsuit over any possible slanderous statements made by California politicians that Texas marketers, including Dynegy, had gouged California consumers, Watson was polite. "I'll leave that up to the lawyers. The only thing we can do as corporate citizens is wait it out." He said the "destruction" done by mistaken political statements was about "more than just money. Now we hear other countries, not just the states, talking about what is happening. That is more unfortunate," because he said what has happened in California has "damaged the reputation of the United States as a leader in the free markets."

Watson said, "how we hold politicians accountable is up to the voters at the end of the day. That's the process we have in the United States. Accountability is what happens in the next two or three years in California. All of those things are happening and that's the positive news. Let's focus on that, and the rest of it will take care of itself."

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