With an upbeat conference call and better-than-expected earnings for the first quarter, Dynegy Inc. swung to a profit for the first time in over a year, and further encouraged investors that it now expects to surpass 2003 guidance. The sector-leading stock soared, with more than 34 million shares exchanging hands, sending Dynegy up 25% to close at $4.70 — its highest level since July 18, 2002, when it closed at $4.50.

The Houston-based company reported net income Tuesday of $147 million (17 cents a share), compared with a net loss of $247 million (minus 91 cents) a year ago. Changes in accounting practices boosted net income $55 million, while it also gained $35 million from operating results in its energy trading and risk-management segment and $7 million from its global communications business. Dynegy is winding down its trading segment and is selling its communications business. Still, excluding those items, Dynegy earned $50 million (13 cents) for the quarter. Revenue also jumped 23% for the period to $1.77 billion, compared with $1.44 billion in 1Q02.

Dynegy has raised its 2003 profit forecast to between 10 cents and 18 cents a share, up from an 8-15 cents forecast announced in January. The increase includes corporate-level expenses, but does not include discontinued operations. Dynegy’s liquidity as of April 21 stood at $1.8 billion, up from $1.67 billion on Jan. 31.

CEO Bruce Williamson, who led the conference call with analysts from New York City Tuesday morning, credited Dynegy’s executive management committee and senior management team for the strong quarterly gains. Williamson and his staff were in New York to meet with the credit ratings agencies, he said.

“This positive direction is marked by significant accomplishments and the financial viability of Dynegy,” Williamson said. He noted that the company had met its first quarter “milestone,” and was continuing to “move forward on restructuring” by working “closely and collaboratively” with the financial community. Dynegy’s banking facility, he said, had been his number one priority when he assumed the CEO position last fall. “Since our self-restructuring efforts began, we have been working diligently to address past issues, while also creating a company with a new business model centered on energy assets and a focus on fiscal discipline.”

Still, Williamson believes that Dynegy remains overleveraged, and vowed to use the company’s free cash to pay down debts and reach a “sustainable capital structure.” Dynegy’s debt-to-capital ratio is about 55%; he told analysts he would be comfortable with a 50% or lower level. In the first quarter, Dynegy paid down about $491 million of debt, but it is still carrying about $7.7 billion.

To date, Dynegy has made “substantial progress” in winding down its trading and marketing unit, and has completely wound down its European business, Williamson said. Also, with its global communications business still to be sold, he noted that Dynegy has otherwise completed the sale of all of its non-core assets.

When asked about the pending sale of its Illinois Power (IP) transmission assets, which are scheduled to be sold for $239 million in July to Trans-Elect Inc., Williamson candidly stated that he did not believe the sale could be completed by the July 7 date. However, he added that when the assets were put up for sale last October Dynegy was in a “much more severe situation than right now” (see Power Market Today, Oct. 10, 2002). Dynegy would retain the ownership of the 38,000 miles of overhead and underground lines and associated substations.

If the sale cannot be completed by July 7 as required, Dynegy “has much greater ability to drop back, look at the assets, continue to work with Trans-Elect…[or] look at other parties who may have an interest in the assets. It can be a ‘can-do’ instead of a ‘must-have’ transaction.”

CreditSights analyst Dot Matthews noted that “much of Dynegy’s good news was due, it is true, to weather and one-time gains or returns of capital, but there was an optimistic note in the air as new CEO Williamson ticked off the gains since he took the helm last year.” She said that Dynegy “still has serious problems, of course. We’re not ready to become believers, but there is a glimmer of hope here where there was nothing but gloom before.”

Matthews said Dynegy’s cash flow figures were positive, although some concerns linger. “Operating cash flow for the quarter, including working capital changes, was about $400 million. Only $180 million, however, was ‘ongoing’ cash flow from the various businesses. The rest came from the roll off of customer risk management, which may continue for a time, but will eventually cease to contribute to cash flow.” She also noted that capital expenditures were only $70 million for the quarter, as Dynegy deferred some maintenance to take advantage of the relatively high power prices.

“Dynegy benefited from a confluence of good circumstances, some of which were of its making, and some of which weren’t,” said Matthews. “Williamson has so far done a good job of turning around investors’ views of Dynegy management. We’re still not sure he can deliver the whole package, but this quarter is a pretty good start. If power prices hold up, Dynegy could have a much better year than forecast, even taking into account the fact that Dynegy upped guidance for the year.”

By segment, Dynegy’s earnings before interest and taxes (EBIT) from the power generation business were $125 million for the quarter, benefiting from higher commodity prices, with a weighted average on-peak power price of approximately $57/MWh, a 58% increase over the company’s forecasted price of approximately $36.

Dynegy’s power business also produced and sold higher volumes of electricity in the quarter, generating nearly 11 MM MWh (net) for the quarter, or a 28% increase over 1Q02. Volumes were higher because of weather-driven demand in the Midwest and Northeast. where the company delayed scheduled maintenance outages at three of its generation facilities to continue to serve customers in these markets.

For its natural gas liquids (NGL) unit, Dynegy earned $49 million in the quarter on higher commodity prices. It had an average natural gas price of $6.30/MMBtu, a 58% increase over the company’s forecasted price of $4; an average crude oil price of $34.43/bbl, or 28% above the forecasted price of $27; and an average propane price of 64 cents/gallon, a 33% increase over the forecasted price of 48 cents.

“Nearly 80% of the production volumes for the natural gas liquids segment are contracted for on a percent of proceeds/percent of liquids basis, which enabled this segment to benefit from the higher commodity prices offered by the market,” the company said.

However, the NGL unit’s results were partially offset by reduced fractionation volumes and lower keep-whole fractionation spreads. The volume of produced NGLs was 83,000 bbl/d for the quarter, a 10% decrease from 1Q02. Percent of proceeds/percent of liquids plants produced volumes as projected, while keep-whole plant volumes were below forecast due to the economic decision to shut-down certain plants or bypass gas due to compressed fractionation spreads.

Within its regulated energy delivery business, Dynegy’s EBIT for the quarter was $59 million. The segment benefited from colder-than-normal weather within IP’s service territory, which was higher than Dynegy’s forecast. The segment delivered total electricity of 4,544 MM kWh in the quarter, compared to 4,503 MM kWh a year ago. Total natural gas delivered for the quarter was 345 million therms, compared to 305 million therms for the first quarter 2002. Heating degree days increased 17% to 2,933 for the first quarter, compared with 2,498 a year ago.

Dynegy’s customer risk management business earned $75 million for the quarter, including results from winding down the business. Dynegy sold off natural gas in storage during the first three months and saw gains in value from the remaining marketing and trading portfolio.

Along with its business segments, Dynegy also had $47 million in expenses for the quarter, which consisted mostly of overhead and administrative expenses. There also was an increase in interest costs because of higher average outstanding borrowings. Discontinued operations included net losses of $3 million. consisting of an after-tax loss of $10 million related to the European customer risk management business and after-tax earnings of $7 million related to the communications businesses.

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