Record earnings from wholesale power marketing and generationand a 19% increase in operating margin from gas marketinghighlighted Dynegy Inc.’s sterling third quarter results.Continuing difficulties in the company’s liquids division anduncertainty over Nova Corp.’s plan to divest its 26% share in thecompany were more than counterbalanced by a three-fold increase inoperating 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 thepreviously announced sale of Ozark Gas Transmission, which comparesto $0.15 per share for the prior year quarter. Net income for theperiod was $43.6 million, including the gain, compared to $25.0million for the third quarter of 1997.

“I’m actually very pleased at the execution capability of thisDynegy team. It’s finally showed its way down to the bottom line,”Dynegy CEO Chuck Watson said during a conference call. During thethird quarter, Dynegy “realized the financial benefits resultingfrom aggressive pursuit of our energy convergence strategies,” hesaid.

“Although energy convergence is still in its infancy, you haveseen the industry experience some growing pains, but at the end ofthe day we believe this convergence is inevitable and are confidentthat the execution that we displayed in the second and thirdquarter puts us at the leading edge of this convergence that isgoing on.”

Earnings from Dynegy’s wholesale gas and power marketingoperations 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 PasoNatural Gas, which gave Dynegy rights to 1.3 Bcf/d oftransportation capacity to the California border starting inJanuary. Dynegy’s gas volumes sold during the quarter rose morethan 1 Bcf/d to 8.9 Bcf/d from 3Q97.

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

Watson said over the next three years the company plans toinvest $1.8 billion in “strategically placed” generation assets tocomplement its existing power production assets and marketingcapability. He emphasized the need to build or acquire ageographically diverse power generation asset base. “[W]e’relooking at greenfield projects as well as participating in the somethe auctions and acquisitions of power projects.”

Regarding Nova Corp.’s (now TransCanada) plan to divest its 26%interest (38.8 million shares) in Dynegy, Watson noted the otherowners, Britain’s BG plc and Chevron Corp., have a right to matchany offer made for the shares or negotiate their own acquisition.”Chevron has consistently indicated an interest in increasing itsholdings in Dynegy and maintaining a long-term position in thecompany,” Watson said.

Dynegy’s liquids business unit continued to suffer from lowcrude and liquids prices, but the company started a reorganizationand rationalization of mid- and back-office operations during thesecond quarter that is expected to lead to $50 million in annualoperating cost savings by the end of next year. “We are committedto the [liquids business] long-term,” said Watson. “It is acyclical business. About every four to six years, the liquidsbusiness goes through a year or 18-month or two-year trough and inthat six years has a very strong year or two. We expect these sortsof things.”

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