NGI The Weekly Gas Market Report
Dynegy Inc. has taken “all the right steps” in its long-termplanning over the last three to four years and “the future is nowat Dynegy,” Chairman Chuck Watson said in announcing vastlyimproved profits in 1998 over 1997. Overall the company had 1998net income in the plus column of $108.4 million or $0.66 perdiluted share, a figure just slightly larger than the one recordedin the minus column in 1997.
The key figure however, is the 17% increase in Dynegy’s total1998 operating margin and equity earnings from unconsolidatedaffiliates, Watson said, and the chief pay-off has come in itswholesale gas and power segment. That segment, which contributed60% 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 gasmarketing and trading continued to lead with operating margin andequity 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 in1997 to 8.9 Bcf/d last year. U.S. and Canadian volumes went from 8Bcf/d to 8.2 Bcf/d respectively.
Those volume numbers aren’t the ones that count, however. “It’stime that people recognize that financial performance is at leastas important as overall volumes.” While the company has slippedfrom the No. 1 spot in volumes over the last three to four years,”Dynegy’s margins consistently lead the industry and we expect thattrend to continue.” Unit margins on natural gas sales went fromabout three cents in fourth quarter 1997 to nearly five cents/Mcfin 4Q 1998. The margin for all of 1998 was about five centscompared to four cents in 1997.
Margin and earnings for Dynegy’s power generation businessjumped impressively from $31.8 million in 1997 to $119.8 millionlast year while those of wholesale power marketing and tradingincreased seven-fold to $43.3 million from $5 million in 1997.Gross MWh traded went from 95 million to 121 million while the unitmargin went from five cents per MWh in 1997 to $0.35 per MWh lastyear.
All of the above is the result of the leveraging effect ofadding power generation assets over the last few years to the gasand power marketing mix. “Power generation is the critical elementin our energy conversion strategy,” Watson said. He pointed to theacquisition of Destec Energy in July 1997 as the first move inbuilding a platform of physical assets in the power sector. Thoseassets have gone from 2,839 MWh then to 6,832 MWh currently. Andit’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 wouldnot be surprised if we were involved in some acquisition ofgeneration assets in the remainder of the year.” He said acquiringgeneration assets in a region adds to the company’s information andintelligence about the area markets and increases its image as areliable supplier. Dynegy two years ago set a plan to spend $4-$5billion 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 atele-newsconference, said they expected the power market to be”pretty tight this year and next year, with continued demand growthand not enough generation on the ground. The real push will comebetween 2001-2003 ….before you see an increase in power plantsbeing built.” The 2001-3 time period is when there will be thegreatest increase in demand for natural gas to fire the new plants,according to Dynegy Marketing and Trade President StephenBergstrom.
Meanwhile, increased margins on gas and power marketing comefrom leveraging with its generating assets and doing morehigh-margin deals including long-term asset and pipeline capacitymanagement for others. Bergstrom said that while Dynegy’s long-termvolumes account for 60% of its natural gas trade compared to 40%for spot, there is increasingly less difference in the two sincethe long-term deals are most often hooked to spot indices.
Dynegy’s LPG business, operating in competition with low crudeoil prices, was off 26% for the year with operating margin andequity earnings of $208.2 million in 1998 compared to $281.2million the year previous. That margin should improve, however,according to Steve Furbacher, president of Dynegy MidstreamServices L.P., with the integration of its Houston Ship Channelstorage 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 toodistant future.” He noted that both other partners, Chevron andBritish Gas have expressed interest in acquiring more shares andall parties now have agreed on the means of going forward andselecting a buyer. Based on Dynegy’s stock price, Nova’s sharewould be worth nearly $460 million.
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