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
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
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.