Dynegy CEO Chuck Watson attributed his company’s improved secondquarter performance to stronger margins in the wholesale gas andelectric businesses despite weaker margins in the company’s liquidsbusiness.

“The company’s strategy of developing not only power marketingand trading expertise but also of owning generation capacity isserving us well during the volatile power markets being experiencedin parts of the U.S. this summer,” said Watson, who added tightcredit controls that confirmed the integrity of contracts throughpower market volatility was a factor as well. Watson said Dynegy isresponding to lower gas liquids and crude prices by cutting coststhrough asset consolidations and personnel reductions, as well asdisposing of non-strategic assets, such as the sale of a 56%interest in the 85 MMcf/d Roberts Ranch gas processing plant inMidland County, TX, to Duke Energy last week (please see relatedstory p.X).

Dynegy reported net income for the second quarter of $23.4million, or $0.14 per share, compared with $17.5 million, or $0.10per 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 $14.6million, or $0.09 per share. This year’s second quarter had noone-time charges or gains. Dynegy’s second quarter consolidatedoperating margin totaled $107.9 million, compared with $97.8million reported in the second quarter of 1997. Excludingadjustments, operating margins for last year’s quarter were $75.3million.

North American wholesale gas and electric businesses contributed$65.4 million of operating margin, a 50% increase over the $43.5million reported last year, which included the benefit of priorperiod adjustments. North American gas and power marketingcontributed an operating margin of $54.1 million. Excludingadjustments, gas marketing reported operating margin of $28.1million, compared to $18.2 million for 1997, due primarily tohigher unit margins. Gas volumes sold in North America were 7.6Bcf/d compared with 7.8 Bcf/d for last year’s second quarter. Lowervolumes resulted from elimination of certain marginally profitablesales from the sales portfolio. Average unit sales margins in NorthAmerica were about $0.041/Mcf for the quarter compared with anaverage of $0.026/Mcf (normalized) for the second quarter of 1997.Canadian gas sales volumes were 2.3 Bcf/d in the second quarter of1998, up from 1.6 Bcf/d in 1997.

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

Power generation contributed $11.3 million to operating marginand an additional $7 million, pretax, in equity in earnings fromunconsolidated affiliates due to acquisitions of certain generationassets 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 $32.3million, compared with $48.6 million for the second quarter of1997. The second quarter of 1997 included a charge of $4.2 million,$2.7 million after tax, related to prior period adjustments. Thedecrease in operating margin was primarily the result of lowerprices for gas liquids and lower volumes. Processing volumesdecreased to 117,200 Bbls/d in the second quarter from 130,700Bbls/d in the second quarter last year, principally resulting fromstraddle plant shutdowns due to unfavorable economics created bylower spreads between gas and gas liquids prices.

Joe Fisher, Houston

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