Dynegy Inc.’s two-year restructuring struggle paid handsome returns in the third quarter, with the Houston-based company reporting profit nearly 16 times above the same period a year ago, and well above analyst forecasts. The company now expects 2004 earnings to range between 20-25 cents — busting an earlier guidance of 3-8 cents.

Dynegy reported income of $78 million (16 cents/share), compared with $5 million ($2.65) in 3Q2003. Dynegy’s 3Q2003 included a dividend gain of $1.2 billion ($2.64/share) related to the restructuring of the company’s Series B preferred stock. The quarterly earnings were well above a Thomson First Call analyst poll, which had forecast Dynegy to earn on average about 7 cents/share in the third quarter.

CEO Bruce Williamson credited significantly higher crude oil, natural gas and natural gas liquids (NGL) prices, an increase in fractionation spreads and volumes, continued strong operational performance resulting from asset availability and a continued emphasis on cost efficiency.

“Over the course of the past two years, I said that if we continued to do the right thing, focusing on the core fundamentals…renewing our commitment to customer service…the right results will follow,” said Williamson, who presided over a conference call. He said that “simple hard work and a commitment to focus” to improve operational performance were key. “Dynegy’s self restructuring was not only successful, it was the right thing to do.”

Williamson joined Dynegy in October 2002 as president and CEO, and was given a mandate to develop and execute a revamped business strategy for a company that was then barely clinging to life (see NGI, Oct. 28, 2002). The former Duke Energy executive, who was elected chairman earlier this year, said two years ago that he wanted to re-establish Dynegy as an energy industry leader through massive restructuring that included asset sales and downsizing the former energy merchant.

“We have accomplished a tremendous amount for our investors in 2004,” said Williamson. He said Dynegy planned to continue its “track record to delivering on what we have promised,” and added, “we have only a handful of items left on our ‘to do’ list.” Dynegy is “not ready to declare ‘mission accomplished'” because “there’s a little more work to do.” However, at a company analyst conference planned for early December, the CEO said Dynegy management would present a clearer picture on where it wants to go in the future.

In the third quarter, Dynegy reduced its total debt by $2.1 billion. The company gained from NGL prices that were up sharply, and despite milder-than-normal weather, the Power Generation unit’s operational results were comparable to a year ago. Dynegy also completed the sale of its regulated utility, Illinois Power, to Ameren on Sept. 30 — ahead of schedule. Its liquidity now stand at $1.5 billion.

“Our performance in the third quarter demonstrates the competitive advantages and upside potential embedded in our energy businesses,” said Williamson. “This strong operational performance enables us to capture upside when it is available in the market at different points in the overall gas and power demand and pricing cycles.”

Dynegy’s NGL business “continued its exceptional performance in the third quarter due to the relationship between liquids prices and crude oil and a contract structure that allows us to capitalize on higher prices, frac spreads and margins.” And in its Power Generation business, ” several of our baseload generation facilities ran at near-record levels, contributing to higher year-to-date volumes for Power Generation compared to the previous period.”

Earnings in the Power Generation business was $220 million, compared with $177 million a year earlier. This segment produced slightly less electricity in the quarter compared with a year ago, primarily because of the company’s declining receipts of Colorado coal at its Havana power generation facility in Illinois, in anticipation of the conversion to lower-cost, lower-emission Powder River Basin coal. The company expects to complete the Havana conversion in early 2005.

Dynegy’s income in its NGL business was $91 million for the quarter, a 90% increase from $48 million in 3Q2003. The average natural gas price was $5.76/MMBtu, while the average crude oil price was $42.22/bbl — a 39% hike over a year earlier. Also, the average NGL price of 75 cents/gallon was 47% higher.

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