Dynegy Inc., brought down in the stock market partially because of its three-week-long proposed merger with Enron Corp. last year, overcame its late-year bad karma and posted a 47% increase in 2001 recurring earnings to $2.10, up from 2000’s earnings of $1.43 per share. Recurring net income increased 58% to $713 million, up from a year earlier when net income was $452 million. For the coming year, the company expects to see 15% long-term growth, which in the near term will be in North America, said CEO Chuck Watson.

By the second quarter of 2002, Dynegy expects to add to its earnings from its newest acquisition, Northern Natural Gas Co. (NNG), an acquisition the company expects to complete this month. NNG is the controversial 16,600 mile pipeline system that Dynegy received from Enron, which remains in legal dispute (see Daily GPI, Jan. 7). In line with analysts’ estimates, Dynegy reiterated its 2002 earnings guidance of $2.26 per diluted share, and established guidance for first quarter earnings of $0.41 per share.

Watson, who clearly articulated his belief that Enron’s failure was not the failure of the energy market, said his company had seen the “bar raised” more than once, adding, “2001 was a year in which Dynegy successfully executed across all business segments in the face of unprecedented industry challenges and market conditions.”

The 2001 reported earnings per share of $1.90 included after-tax non-recurring charges aggregating $67 million from the company’s exposure to Enron’s bankruptcy, costs related to the terminated merger with Enron and a severance charge associated with a subsidiary’s restructuring. The reported earnings also include a $3 million non-recurring dividend associated with preferred stock issued to shareholder ChevronTexaco Corp. in November 2001.

For the fourth quarter, Dynegy saw recurring net income earnings rise 36% to $144 million, or a 28% increase to $0.41 per diluted share, up from $106 million, or $0.32 a year earlier. Reported fourth quarter income of $77 million, or $0.21 per diluted share, included non-recurring charges and special dividend.

The final quarter of last year benefited from Dynegy’s wholesale energy network segment, which, on a recurring net income basis, was up 58% compared to a year earlier. The improvement was led by increased origination in North American and European gas and power. North American gas volumes increased 14% to 11.8 Bcf/d in the fourth quarter, up from 10.4 Bcf/d a year earlier. Total physical power sold increased 150% to 104.5 million MWh in the fourth quarter, compared to 41.8 million MWh in the fourth quarter of 2000. However, liquids and transmission and distribution segments were “negatively impacted” by mild weather and the sluggish economy.

Watson, who said his company had been “mischaracterized” as simply an energy trader, noted that he was “particularly proud” of how the company performed in the final quarter of the year, when “Dynegy and the entire merchant energy industry came under scrutiny following the financial collapse of Enron.”

Now, he said, the Houston-based company had begun to “reassess our financial position, communicated a definitive course of action to enhance our credit strength and began executing on a plan that was designed to restore market confidence and bolster our balance sheet.”

Overall, Watson noted that 70% of the company’s recurring financial contribution came from assets owned by Dynegy. In the wholesale energy network segment, Dynegy’s earnings “benefited from the addition of nearly 3,000 MW of both new and acquired power generation facilities, greater market origination, increased sales to commercial and industrial customers and the expansion of product and service offerings through our online sales and trading portal, Dynegydirect.”

Recurring net income for the wholesale energy network increased 86% to $660 million in 2001, compared to $354 million in 2000. Asset businesses generated 55% of the earnings, up 38% from a year earlier both from developed and acquired assets, including 1,700 MW of generation facilities in New York, almost 1,200 MW of merchant generation in the South, and the newly acquired BG Storage in the United Kingdom.

In the wholesale unit, Dynegydirect recorded nearly $43 billion in notional transactions in 2001, $13 billion in the fourth quarter. Dynegy also has expanded into the UK energy markets, with self-service access to bid and offer pricing for power in the English and Welsh electricity market and UK natural gas at the National Balancing Point.

Even though the natural gas liquids segment was in a “difficult pricing environment,” Watson said the unit is continuing to grow with a strategy of minimizing commodity exposure in the upstream processing activities, and by controlling costs and focusing on specific geographic regions. The Midstream Services unit saw recurring net income increase 7% to $59 million, up from $55 million a year earlier. However, natural gas liquids sold were almost flat in 2001 at 557,000 b/d compared to 565,000 b/d in 2000.

Dynegy’s regulated transmission and distribution segment, which includes Illinois Power — and is expected to include NNG beginning this year — saw recurring net income of $55 million, the same as for 2000. Segment results reflected “lower weather-driven demand offset by reduced operating costs.” In the fourth quarter, IP announced a restructuring program to reduce costs and to improve customer service. It also recognized a $15 million pre-tax severance charge related to the restructuring program.

Meanwhile, the company is reassessing its costs in the global communications segment, which lost $61 million in 2001 because of “extreme weakness in technology and telecommunications markets.” Watson said he expects the unit to have “positive earnings when the market recovers,” and has begun reducing operating expenses and capital expenditures.

To improve its balance sheet into the future, Dynegy announced a $1.25 billion capital restructuring program in mid-December, which is designed to raise $500 million in common equity and to reduce capital spending and asset sales in the combined amount of $750 million. It already has issued $748 million ($543 million in a public offering in December 2001 and $205 million to ChevronTexaco this month) and is reducing its 2002 capital spending budget to $1.2 billion from $1.7 billion.

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