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Dynegy Grew Margins in 2Q

Dynegy Grew Margins in 2Q

Dynegy CEO Chuck Watson attributed his company's improved second quarter performance to stronger margins in the wholesale gas and electric businesses despite weaker margins in the company's liquids business.

"The company's strategy of developing not only power marketing and trading expertise but also of owning generation capacity is serving us well during the volatile power markets being experienced in parts of the U.S. this summer," said Watson, who added tight credit controls that confirmed the integrity of contracts through power market volatility was a factor as well. Watson said Dynegy is responding to lower gas liquids and crude prices by cutting costs through asset consolidations and personnel reductions, as well as disposing of non-strategic assets, such as the sale of a 56% interest in the 85 MMcf/d Roberts Ranch gas processing plant in Midland County, TX, to Duke Energy last week (please see related story p.X).

Dynegy reported net income for the second quarter of $23.4 million, or $0.14 per share, compared with $17.5 million, or $0.10 per share, on a normalized basis in the second quarter of 1997. Results for the 1997 period were $32.1 million, or $0.19 per share, which included certain prior period adjustments totaling $14.6 million, or $0.09 per share. This year's second quarter had no one-time charges or gains. Dynegy's second quarter consolidated operating margin totaled $107.9 million, compared with $97.8 million reported in the second quarter of 1997. Excluding adjustments, operating margins for last year's quarter were $75.3 million.

North American wholesale gas and electric businesses contributed $65.4 million of operating margin, a 50% increase over the $43.5 million reported last year, which included the benefit of prior period adjustments. North American gas and power marketing contributed an operating margin of $54.1 million. Excluding adjustments, gas marketing reported operating margin of $28.1 million, compared to $18.2 million for 1997, due primarily to higher unit margins. Gas volumes sold in North America were 7.6 Bcf/d compared with 7.8 Bcf/d for last year's second quarter. Lower volumes resulted from elimination of certain marginally profitable sales from the sales portfolio. Average unit sales margins in North America were about $0.041/Mcf for the quarter compared with an average of $0.026/Mcf (normalized) for the second quarter of 1997. Canadian gas sales volumes were 2.3 Bcf/d in the second quarter of 1998, up from 1.6 Bcf/d in 1997.

Power marketing and trading reported operating margin of $26.0 million in the second quarter, compared to $2.8 million in the 1997 quarter due to higher volumes and substantially higher per unit margins. The company sold 26.6 million MWh during the quarter compared with 16.6 million MWh for the same quarter of 1997. Power marketing and trading benefited substantially from extreme market volatility experienced in certain U.S. markets, particularly the Midwest. Dynegy recorded reserves at quarter-end in anticipation of continuing market volatility for the rest of the summer, counter-party credit risks and market bias.

Power generation contributed $11.3 million to operating margin and an additional $7 million, pretax, in equity in earnings from unconsolidated affiliates due to acquisitions of certain generation assets since June 30, 1997. The company generated 2.3 million MWh, net to its interests, during the quarter.

The gas liquids business reported operating margin of $32.3 million, compared with $48.6 million for the second quarter of 1997. The second quarter of 1997 included a charge of $4.2 million, $2.7 million after tax, related to prior period adjustments. The decrease in operating margin was primarily the result of lower prices for gas liquids and lower volumes. Processing volumes decreased to 117,200 Bbls/d in the second quarter from 130,700 Bbls/d in the second quarter last year, principally resulting from straddle plant shutdowns due to unfavorable economics created by lower spreads between gas and gas liquids prices.

Joe Fisher, Houston

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