Dynegy’s merchant power “leveraging” strategy, utilizinggeneration plants added over the last year, produced a whopper of afirst quarter. The company posted a 127% increase in net incomeafter special items to $28.1 million, or $0.17/share, from $12.3million, or $0.07/share in 1Q98. Recurring net income increased 20%to $22.3 million.
While gas marketing results remained flat, producing anoperating margin of $32.6 million compared to $32.2 in 1Q98, growthin the company’s power marketing and generation operations soared.Operating margin from power marketing and generation jumped to$37.4 million in 1Q99 from only $7.1 million in 1Q98 despite a near50% drop in power marketing volumes to 13.1 million MWh from 25million MWh. Gas marketing volumes increased to 10.9 Bcf/d led byU.K. business. The company sold 9.3 Bcf/d of gas in North Americain 1Q99 compared with 8.6 Bcf/d in 1Q98.
“We are pleased with our first quarter results and anticipateeven stronger performance throughout the year as new powergeneration assets are placed in service and the crude oil andnatural gas liquids pricing environment continues its recovery,”said CEO Chuck Watson.
“Power generation is dramatically changing the make-up ofDynegy’s earnings,” Watson added. “Our power marketing andgeneration businesses have been combined to maximize earningscapabilities and capitalize on the synergies that exist between thetwo-Dynegy’s ‘merchant leverage effect.'”
Since 1Q98, Dynegy has added ownership in three power plants andincreased owned gross megawatts in operation by 54%. “Our powergeneration franchise will be strengthened by the addition of 1,468MW in the second quarter with projects in California and Illinoisin operation for the peak summer season,” said Watson. By the endof the second quarter, Dynegy will have more than 6,800 MW owned,pending acquisition or under construction at 31 facilities in 9states.
The strong status report from the company drew high praise fromWall Street. Merrill Lynch raised its rating on Dynegy to anear-term accumulate from neutral and reiterated a long-term buyrating. “We see 17% to 31% return potential over the next 12 to 18months given our price objectives of $17.85 to $20, which are basedon a P/E multiple of 17x.
“Dynegy is uniquely positioned to capitalize on the potentialsummer volatility in the California and Midwest power markets,which should also enhance and accentuate its trading and marketingoperations and could make our estimates conservative,” MerrillLynch said.
“Management has aggressively cut costs in its NGL operations andNGL prices are beginning to improve,” the investment firm added.Potential improvements in the liquids markets should help growDynegy’s lagging liquids operations. Normalized earnings beforeinterest and taxes for the liquids division, including equityearnings, fell to $10.8 million in the first quarter from $24.8 in1Q98. The company reported a 20% decline in average gas liquidsprices. Processing volumes decreased to 117 thousand b/d from 128Mb/d in the 1998 quarter.
One other area that will have a significant impact on Dynegythis year is the sale of Nova Corp.’s 25% stake in the company,which is expected to take place during the second quarter.
Watson said during a conference call last week the company doesnot expect a change in strategy as a result of the sale. “Dynegywill continue to execute its strategic plan indifferent to itsownership, and any transaction would have to be consistent with andenhance Dynegy’s existing strategic plan. Secondly, any transactionwould have to add value to all of Dynegy’s shareholders. In anytransaction, we will endeavor to increase the liquidity in Dynegy’sstock.”
Several analysts have commented that they would prefer to seemore of Dynegy’s stock in the public’s hands, and Watson agreedmore “float” would be an improvement. Currently only 20% ofDynegy’s stock is owned by the public. “I would certainly like tosee that well into the 30s and 40s, and it wouldn’t hurt myfeelings at all if it was greater than 50%. I think this companyneeds to increase its float. It’s something I’ve committed to do inthe last year and we hope to accomplish that in this [Nova]transaction.”
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