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Dynegy Doubles Gas, Power Marketing Earnings

November 2, 1998
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Dynegy Doubles Gas, Power Marketing Earnings

Record earnings from wholesale power marketing and generation and a 19% increase in operating margin from gas marketing highlighted Dynegy Inc.'s sterling third quarter results. Continuing difficulties in the company's liquids division and uncertainty over Nova Corp.'s plan to divest its 26% share in the company were more than counterbalanced by a three-fold increase in operating margin from power marketing and trading.

The company reported third quarter 1998 earnings per share of $0.27, including a non-recurring gain of $0.11 per share on the previously announced sale of Ozark Gas Transmission, which compares to $0.15 per share for the prior year quarter. Net income for the period was $43.6 million, including the gain, compared to $25.0 million for the third quarter of 1997.

"I'm actually very pleased at the execution capability of this Dynegy team. It's finally showed its way down to the bottom line," Dynegy CEO Chuck Watson said during a conference call. During the third quarter, Dynegy "realized the financial benefits resulting from aggressive pursuit of our energy convergence strategies," he said.

"Although energy convergence is still in its infancy, you have seen the industry experience some growing pains, but at the end of the day we believe this convergence is inevitable and are confident that the execution that we displayed in the second and third quarter puts us at the leading edge of this convergence that is going on."

Earnings from Dynegy's wholesale gas and power marketing operations doubled to $95.1 million, from $45.9 million in 3Q97. The gas marketing unit reported operating margin of $25.7 million, compared with $21.6 million in 3Q97. Dynegy's Steve Bergstrom said $7.6 million of operating margin came directly from the company's $70 million, two-year gas transportation agreement with El Paso Natural Gas, which gave Dynegy rights to 1.3 Bcf/d of transportation capacity to the California border starting in January. Dynegy's gas volumes sold during the quarter rose more than 1 Bcf/d to 8.9 Bcf/d from 3Q97.

On the power marketing side, operating margin rose to $17.1 million, compared to $4 million in the 1997 quarter, and marketed power volumes jumped to 51.4 million MWh, compared to 39.3 million MWh in 3Q97. The power generation business also made a strong contribution with operating and equity earnings of $48.6 million compared to $16.4 million in 3Q97. The division's 2.6 million MWh net to its interests during the third quarter, compared with 2.2 MM MWh net in 3Q97.

Watson said over the next three years the company plans to invest $1.8 billion in "strategically placed" generation assets to complement its existing power production assets and marketing capability. He emphasized the need to build or acquire a geographically diverse power generation asset base. "[W]e're looking at greenfield projects as well as participating in some of the auctions and acquisitions of [existing] power projects."

Regarding Nova Corp.'s (now Nova Chemicals) plan to divest its 26% interest (38.8 million shares) in Dynegy, Watson noted the other owners, Britain's BG plc and Chevron Corp., have a right to match any offer made for the shares or negotiate their own acquisition. "Chevron has consistently indicated an interest in increasing its holdings in Dynegy and maintaining a long-term position in the company," Watson said.

Dynegy's liquids business unit continued to suffer from low crude and liquids prices, but the company started a reorganization and rationalization of mid- and back-office operations during the second quarter that is expected to lead to $50 million in annual operating cost savings by the end of next year. "We are committed to the [liquids business] long-term," said Watson. "It is a cyclical business. About every four to six years, the liquids business goes through a year or 18-month or two-year trough and in that six years has a very strong year or two. We expect these sorts of things."

Rocco Canonica

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