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Dynegy Getting It Right; Earnings, Margins Up

February 8, 1999
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Dynegy Getting It Right; Earnings, Margins Up

Dynegy Inc. has taken "all the right steps" in its long-term planning over the last three to four years and "the future is now at Dynegy," Chairman Chuck Watson said in announcing vastly improved profits in 1998 over 1997. Overall the company had 1998 net income in the plus column of $108.4 million or $0.66 per diluted share, a figure just slightly larger than the one recorded in the minus column in 1997.

The key figure however, is the 17% increase in Dynegy's total 1998 operating margin and equity earnings from unconsolidated affiliates, Watson said, and the chief pay-off has come in its wholesale gas and power segment. That segment, which contributed 60% of the consolidated operating margin in 1998, jumped 91% to $311.5 million compared to $163 million in 1997.

Within the wholesale gas and power segment, natural gas marketing and trading continued to lead with operating margin and equity earnings of $148.4 million, an 18% increase over 1997. Physical trades predominate in Dynegy's gas business, Watson said, and total gas volumes sold worldwide increased from 8.2 Bcf/d in 1997 to 8.9 Bcf/d last year. U.S. and Canadian volumes went from 8 Bcf/d to 8.2 Bcf/d respectively.

Those volume numbers aren't the ones that count, however. "It's time that people recognize that financial performance is at least as important as overall volumes." While the company has slipped from the No. 1 spot in volumes over the last three to four years, "Dynegy's margins consistently lead the industry and we expect that trend to continue." Unit margins on natural gas sales went from about three cents in fourth quarter 1997 to nearly five cents/Mcf in 4Q 1998. The margin for all of 1998 was about five cents compared to four cents in 1997.

Margin and earnings for Dynegy's power generation business jumped impressively from $31.8 million in 1997 to $119.8 million last year while those of wholesale power marketing and trading increased seven-fold to $43.3 million from $5 million in 1997. Gross MWh traded went from 95 million to 121 million while the unit margin went from five cents per MWh in 1997 to $0.35 per MWh last year.

All of the above is the result of the leveraging effect of adding power generation assets over the last few years to the gas and power marketing mix. "Power generation is the critical element in our energy conversion strategy," Watson said. He pointed to the acquisition of Destec Energy in July 1997 as the first move in building a platform of physical assets in the power sector. Those assets have gone from 2,839 MWh then to 6,832 MWh currently. And it's not over yet.

Dynegy is still on the power generation asset acquisition trail. "We're looking at every one being offered," Watson said. "I would not be surprised if we were involved in some acquisition of generation assets in the remainder of the year." He said acquiring generation assets in a region adds to the company's information and intelligence about the area markets and increases its image as a reliable supplier. Dynegy two years ago set a plan to spend $4-$5 billion on generation acquisitions. With between $1.5 billion and $1.9 billion invested "we're already well on our way."

Dynegy executives responding to questions in a tele-newsconference, said they expected the power market to be "pretty tight this year and next year, with continued demand growth and not enough generation on the ground. The real push will come between 2001-2003 ....before you see an increase in power plants being built." The 2001-3 time period is when there will be the greatest increase in demand for natural gas to fire the new plants, according to Dynegy Marketing and Trade President Stephen Bergstrom.

Meanwhile, increased margins on gas and power marketing come from leveraging with its generating assets and doing more high-margin deals including long-term asset and pipeline capacity management for others. Bergstrom said that while Dynegy's long-term volumes account for 60% of its natural gas trade compared to 40% for spot, there is increasingly less difference in the two since the long-term deals are most often hooked to spot indices.

Dynegy's LPG business, operating in competition with low crude oil prices, was off 26% for the year with operating margin and equity earnings of $208.2 million in 1998 compared to $281.2 million the year previous. That margin should improve, however, according to Steve Furbacher, president of Dynegy Midstream Services L.P., with the integration of its Houston Ship Channel storage and global trading into its domestic operations.

As to the sale of Nova Corp.'s 26% ownership interest in Dynegy, Watson said he expected to see a deal completed in the "not too distant future." He noted that both other partners, Chevron and British Gas have expressed interest in acquiring more shares and all parties now have agreed on the means of going forward and selecting a buyer. Based on Dynegy's stock price, Nova's share would be worth nearly $460 million.

Ellen Beswick

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ISSN © 2577-9877 | ISSN © 1532-1266
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