Dynegy Inc. blew away analysts’ forecasts last week when it announced its second quarter earnings, and it reversed a year-ago loss on the strength in its power generation and natural gas liquids (NGL) businesses. The Houston-based company, which had teetered toward bankruptcy two years ago, also improved its full-year outlook by settling four natural gas transportation contracts.

Higher electricity sales volumes and strong prices for power and NGLs pushed reported earnings from continuing operations to 9 cents/share, compared with a loss of 99 cents/share in 2Q2003. Net income in the quarter was $10 million (2 cents/diluted share), compared with a net loss in 2Q2003 of $290 million (minus $1). Revenue was up 35% to $1.44 billion from $1.07 billion for the same period a year ago.

For 2004, Dynegy now expects to earn between 3-8 cents/share, based mostly on the $88 million gain related to its exit from four gas transportation contracts and a $36 million gain from the sale of its interest in the Indian Basin Gas Processing Plant (see NGI, July 19). The new forecast significantly modifies the company’s April numbers, when Dynegy predicted a full-year loss of 12-20 cents/share. Until Wednesday, Thomson First Call analysts had put Dynegy’s full-year estimate at a loss of 11 cents/share.

“Dynegy’s second quarter was again marked by solid operational performances from our business segments, with signs of continued economic and power market recovery,” said CEO Bruce A. Williamson. “This was demonstrated through our power generation volumes, which included a 7% increase nationwide. In addition, our natural gas liquids business continued to benefit from very strong commodity prices and a favorable contract mix.”

Williamson said Dynegy furthered its self-restructuring in the quarter “by divesting our interests in several non-core assets, exiting four long-term gas transportation contracts, reaching a fair and comprehensive settlement with the FERC and California, which is pending approval, and working collaboratively with our bankers to develop a new credit facility with more favorable terms and conditions. Our focus is on continuing our track record of solid performance and positioning the company for further improvements in the U.S. economy and power prices in general, with a goal of participating in future growth opportunities for our unregulated businesses.”

As of June 30, management said Dynegy’s liquidity was $1.4 billion, which consisted of $837 million in cash on hand and $529 million in unused availability under the company’s $700 million revolving bank credit facility.

CreditSights analysts said Dynegy’s equity “could see some upside if commodity prices hold.” The analysts said that “despite the strong quarter, we continue to have concerns over Dynegy’s remaining business mix relative to its debt load once the sale of Illinois Power is completed in 4Q.” They said that “from an equity perspective, high-risk investors that have the time to monitor Dynegy news could see some upside in Dynegy shares.”

The “issues to follow” for investors, said analysts, “will be capital expenditures of these older coal plants and contracting around Dynegy’s other natural gas and oil plants.”

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