Powered by its marketing and trading unit, Houston-based Dynegy Inc. last week reported a 55% increase in its third quarter earnings from a year ago and also saw its net income jump 62%. With a strong finish expected for the year, Dynegy now predicts it will show 45% growth over 2000 — substantially higher than its prediction of 25% growth a year earlier, and remains optimistic of a 20% growth rate for several more years. CEO Chuck Watson attributed the stellar performance to Dynegy’s focus and intellectual capital, and predicted the company would continue to execute its strategies “regardless of market conditions.”

Dynegy reported a 55% increase in its third quarter recurring earnings per share (EPS) to $.85, compared with the third quarter of 2000, when earnings were $.55. Net income jumped 62% to $286 million, up from a year earlier, when income was $177 million. Leading the way in earnings was Dynegy’s backbone, the marketing and trade unit, which is engaged in the physical supply and risk management of wholesale natural gas, power, coal, emission allowances and weather derivatives. Recurring net income for this unit increased 85% to $263 million in the third quarter of 2001, compared to $142 million in the third quarter of 2000.

Despite the downturn in commodity prices and a global recession, Watson said the marketing and trade unit benefited from its existing energy delivery network, incremental earnings from developed and acquired generation assets and “excellent” gas and power marketing operations from increased customer origination and risk management activities across North America. There also were improved results from Dynegy’s Canadian and European operations.

“Marketing and trade clearly led the way for the company,” Watson said. “It is identified as the growth engine of our company,” but added that the company sees “continued strength across all of our businesses. Once again we have shown we can execute strategy regardless of conditions because customers see reliability and financial strength.”

North American gas volumes increased 12% to 11 Bcf/d in the third quarter, up from 9.8 Bcf/d for the third quarter of 2000. Total physical power sold increased 86% to 90.5 million MWh, compared with 48.7 million MWh a year earlier. The higher volumes in both gas and power resulted from improved market liquidity, greater market origination, increased sales volumes on Dynegydirect and incremental gas marketing in Canada, said Watson.

The Dynegydirect platform has reduced the cost of serving customers, while at the same time it has increased the company’s competitive reach and market share, said Watson. With more than 750 products and services online, it now trades hourly power, coal and emission allowances, recording almost $10 billion in notional transactions in the third quarter. Since its startup in November 2000, Dynegydirect has recorded $33 billion in notional transactions.

In the midstream services unit, recurring net income was $12 million in the third quarter, compared with $8 million a year ago, with the unit benefiting from higher price realization and contract restructuring activities. Processing volumes declined 8% to 82.4 thousand bbl/d in the third quarter, compared with 89.3 thousand bbl/d a year earlier. Natural gas liquids sold, however, was up 6% in the third quarter to 550.4 thousand bbl/d, compared to 520.8 thousand bbl/d for the third quarter of 2000.

Dynegy’s regulated transmission and distribution subsidiary, Illinois Power saw its recurring net income total $26 million for the quarter, down slightly from $27 million a year ago. Watson said the decrease resulted from a reduced industrial load that was partially offset by increased volumes in higher weather-driven demand.

The newest unit, Dynegy Global Communications, reflected a $15 million quarterly loss resulting from start-up costs associated with its network development and decreased demand. It did not start up until the fourth quarter of 2000. Despite the losses, Watson said he believed “the industry touched the bottom of the communications market in the third quarter” regarding bandwidth, but he sees the business “picking up sharply in the foreseeable future,” tied to the Sept. 11 terrorist attacks.

Watson, speaking from New York City for the conference call, said that the Sept. 11 attacks impacted the communications business and would continue to do so “for quite some time.” He said he expects Dynegy’s communications unit to be more involved in video conferencing and “much more telephone” with less travel by executives. “I can assure you from Sept. 11 there’s been a strong growth impacted by broadband…and that is permanent.”

CFO Rob Doty said that in the fourth quarter Dynegy will earn 40-41 cents, which would push the full-year earnings higher than analysts’ estimates by one cent. Into next year, the company now expects earnings to be in the $2.15-$2.16 range, despite what he said was a “likely” recession. Doty said 2001 would have a “strong finish” for the company, calling it a “tremendous accomplishment.”

Asked about the effect of the announcement that the American Gas Association (AGA) was dropping its weekly storage reports (see NGI, Oct. 15), COO Steve Bergstrom said the move would mostly affect “Wall Street people and not physical asset people,” so it would have little affect on Dynegy. “We’ve already got a pretty good idea of what’s going into storage…we’ll just have better information than a lot of people” once the announcements stop.

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