Dynegy Inc.’s ability to market natural gas creatively will help ChevronTexaco Corp. grow its gas presence in U.S. markets, as the major turns its long-term plan toward producing and delivering its substantial reserves, executives said Wednesday. As a 26.5% stakeholder in the Houston-based energy merchant, ChevronTexaco management, including Chairman Dave O’Reilly, made clear that Dynegy is its strategic marketing partner now and into the future.

During an analysts’ presentation in New York on Wednesday, ChevronTexaco’s management team took several opportunities to speak positively about its exclusive, long-term gas marketing relationship with Dynegy. Although its support was shown when Glenn Tilton, a ChevronTexaco vice chairman, was named interim chairman last month, management has said little one way or another when asked about Dynegy in recent months — until Wednesday.

“In the case of North America, Dynegy markets our gas, and clearly, they are an asset,” O’Reilly said when asked a direct question about their relationship. “The North American market is a maturer market…it’s a good market for LNG (liquefied natural gas) regas[ification] facilities. We want to add maximum value at the point of leverage, at the point of opportunity,” he said. He also reminded analysts that more than 80% of Dynegy’s business was unrelated to energy trading, and was asset heavy, with power plants and natural gas pipelines.

O’Reilly said Dynegy had “enough liquidity” in its plants and pipelines to ensure its viability. However, he added that while Dynegy’s alliance was “huge” with ChevronTexaco, it was not the major’s only alliance. “And that’s all I’m going to say about it,” O’Reilly said.

Dynegy has a long-term exclusive agreement to market all of ChevronTexaco’s natural gas production in the United States, and management outlined an ambitious program to grow its substantial natural gas reserves. Several executives noted that the company’s relationship with Dynegy was important to allow it to build its U.S. market (see related story).

“The press has been full of speculation about what ChevronTexaco will do with respect to Dynegy, and I don’t really intend to say anything about that, other than to say we watch it closely and will watch it for ChevronTexaco shareholders,” said Darry Callahan, ChevronTexaco executive vice president for power, chemicals and technology. He said the company’s power, gasification and advanced technology businesses “present us with opportunities to realize benefits across the entire energy value chain,” and noted that the company supported “Dynegy’s management team in their efforts to restore investor confidence in that company.”

Callahan understated that “it has been a trying time for Dynegy and the entire sector.” As analysts waited for Callahan or someone to comment further on the two companies’ future, Callahan may have disappointed. “I want to preset your expectations,” he said. “We are speaking as a shareholder. I’m not in a position to talk about matters that are best left to Dynegy themselves.” He said Dynegy had been ChevronTexaco’s “vehicle to compete in the convergence sector,” and said the company’s total capital employed in Dynegy was about $13 a share.

“In addition to direct shareholding, we invested a billion and a half dollars into Dynegy some time ago,” Callahan said, referring to the cash infusion it gave for Dynegy last November to complete its one-time merger agreement with Enron Corp. “We have an option to convert that at $31 a share; alternatively we can redeem in 2003. Virtually all of our natural gas liquids and production is sold to Dynegy. We’re their biggest supplier and they are our biggest customer.” But he refused to comment further.

“We have a very large resource base, and a multitude of options in the U.S. market, not only through ChevronTexaco but through Dynegy,” said ChevronTexaco’s Peter Robertson, who oversees upstream operations. “Dynegy has given us a strong ability to understand and market gas very creatively in the U.S. There is a huge demand and our strategy connects up.” He said the company’s “key ability with Dynegy is in strategy. We will use the relationships we have…to build relationships that will build the gas market.”

According to Credit Suisse First Boston analysts Curt Launer and Philip Salles, the recent “relative quiet” at Dynegy “masks intense activity in the development of a financial plan that will receive support from ChevronTexaco,” Dynegy’s 26.5% shareholder. The analysts said recent comments by Standard & Poors that Dynegy does not have to issue equity in the near-term, and ChevronTexaco appearing to be supportive “indicate that Dynegy does not face an immediate downgrade to below investment grade.”

“We expect Dynegy to adopt a plan with similarities to those of others in the industry sector with asset sales, reduced size and working capital in the merchant business and additional capital, ultimately via equity. Possibilities of sales or joint ventures in utility or pipeline assets could raise in excess of $2 billion for Dynegy, in our view,” said the CSFB analysts.

Launer and Salles also reduced their second quarter earnings per share estimate for Dynegy to break even, down from 35 cents “because of the drastic limitations on merchant activity that Dynegy is experiencing currently.” Estimates for the entire year also were reduced to $1.00 from $1.60, and to $1.40 in 2003 from $1.75 because of expected lower merchant earnings. Cash flow estimates were reduced to $1.75 from $2.50 this year, and to $2.30 from $2.65 in 2003.

Dynegy will simulcast a conference call to discuss its restructuring plan via the Internet on Monday (June 24) at 2 p.m. EST. The web cast may be accessed via www.dynegy.com.

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