Hedging proved to be a good bet in the third quarter for Texas-based utilities TXU Corp. and Atmos Energy Corp., which both boasted of higher profits. Two other Texas-based utilities, Reliant Energy Corp. and independent power producer Dynegy Inc., reported quarterly losses, with Reliant struggling because of its hedging losses and Dynegy slammed by a large charge against one of its peaking power units.

Dallas-based TXU Corp., Texas’ largest retail provider, reported a 78% rise in profit, benefiting from a its hedging bets, warm summer weather and improved margins on its electricity sales. Houston-based Reliant Energy Inc.’s revenue increased, but the utility took the wrong bet on hedging its natural gas prices, which led to quarterly earnings losses.

TXU’s net income in 3Q2006 rose to $1 billion ($2.15/share), almost double the $565 million ($1.16) reported for the same period of 2005. Revenue jumped to $3.42 billion. Results improved on gains of $120 million (26 cents/share) from its market hedging program and increased air conditioning demand during Texas’ hot summer. Excluding special items, operational earnings rose to $977 million ($2.10/share) from $574 million ($1.17) in 3Q2005. Wall Street had pegged earnings on average of $1.95/share.

“Our results for the quarter were solid overall, though mixed in some areas relative to expectations, particularly in our competitive businesses.” said TXU CEO C. John Wilder. “Operationally, I am very pleased with the continued benefits of the TXU Operating System, as evidenced by another quarter of record lignite and nuclear power generation. Those productivity improvements position us well in the base business and in preparation for operating the new generation we’re building that Texas so desperately needs.” Wilder was referring to TXU’s plan to build about 9.1 GW of new coal generation in the state (see related story).

The CEO noted that TXU was “beginning to see increased competitive offers and pricing options” from other utilities, which he said were “signs of a well-functioning, competitive market.” Wilder acknowledged the net retail margins of 5-10% is “low compared to many other retailers and commodity businesses given the volatility of electric power, but sustainable.”

TXU’s cross-state retail rival Reliant Energy reported net losses of $155 million (minus 50 cents/share), but down from losses of $270 million (minus 89 cents) in 3Q2005. The results include a net loss of $355 million from energy hedging, compared with hedging losses of $354 million a year earlier. Reliant also recorded a $35 million charge from its settlement with states in the western United States related to claims it manipulated markets during the power crisis in 2000 and 2001. The company took a charge of $351 million in 3Q2005 concerning the western states’ settlement.

Revenue climbed to $3.31 billion from $2.96 billion.

“Our businesses delivered strong third quarter results, and we have completed or are on track to meet or exceed our priorities for 2006,” said Reliant CEO Joel Staff. “Notably, our 2007 and 2008 outlook for the wholesale business has improved slightly. Improvements in heat rate, a decline in coal prices, a new capacity contract for one of our power plants and progress on the development of a capacity market in PJM have more than offset a decline in forward power prices.”

Speaking on a conference call with analysts, Staff said Reliant is readying for its transition to full competition in Texas’ retail market in 2007. “Here, we are ahead. We will hit our 500,000 [customer] goal for 2006 before the end of November” on its discount program offers.

Following a strategic review, Staff said Reliant also has made a commitment to keep its retail and wholesale businesses together — company executives had disclosed in May that Reliant was considering a sale or spin-off of its retail unit (see Power Market Today, May 11).

“Specifically at this time, we believe a sale or spin-off of the retail segment would be value destroying,” Staff said. “To meet the demands of the current environment, we are evaluating our strategic levers. We’ve identified several clear imperatives: we intend to pay down and restructure our debt. We believe it is important to have that strategic level available to us. We want to maintain our commitment to efficiency. We are keeping the business together for now, and we will continue to evaluate every reasonable business transaction.”

TXU wants to build a new fleet of power plants. Reliant, said Staff, does not plan to follow that path. Instead of building new, he said TXU will be looking for some “cheap” assets to build its generation fleet. “We believe there is the opportunity to acquire assets.”

Dallas-based Atmos Energy Corp. reported fiscal 2006 earnings climbed dramatically on the back of its nonutility operations, which contributed more than half of the year’s profit.

Net income for fiscal 2006 reached $147.7 million ($1.82/share), compared with $135.8 million ($1.72) in fiscal 2005. Utility operations contributed $53 million (65 cents/share). The segment’s profit, which was budgeted to reflect 30-year normal weather, was adversely affected by $49.2 million primarily from weather that was 13% warmer than normal, as well as an $8 million reduction due to the impact of Hurricane Katrina.

Nonutility businesses contributed $94.7 million ($1.17/share) in fiscal 2006. Profits from natural gas marketing added unrealized mark-to-market gains of $17.2 million, compared with unrealized losses of $26 million in fiscal 2005. Excluding the impact of a nonrecurring, noncash after-tax charge of $14.6 million (18 cents/share) for the impairment of irrigation properties in the West Texas Utility Division, Atmos’ fiscal 2006 net income was $162.3 million ($2/share).

“Our complementary business strategy has paid off nicely again this year,” said CEO Robert W. Best. “While weather had a negative impact on our utility operations, the unprecedented contribution from our nonutility marketing business allowed us to deliver on our 2006 earnings goal.” Best said, “significant rate design changes in our two largest utility divisions should insulate over 90% of our utility margins from warm weather going forward, providing a stable platform to deliver core earnings growth at the utility.” He said Atmos is “well positioned” to deliver earnings growth of 4-6% going forward.

Consolidated utility throughput decreased from 411 Bcf in fiscal 2005 to 394 Bcf in fiscal 2006. The weather, as adjusted for jurisdictions with weather-normalized rates, was 2% warmer in 2006 than a year ago, which resulted in a $22.9 million decrease in utility gross profit and related throughput, primarily in the Mid-Tex Division where weather was 11% warmer than the prior year.

Atmos expects fiscal 2007 earnings to range between $1.90-2.00/share. Capital expenditures for fiscal 2007 are expected to be in the range of $425-440 million.

Houston-based Dynegy Inc., which plans to grow its power generation business in selected markets, said last week it was slammed with nearly $98 million in charges in 3Q2006.

The net loss for the quarter totaled $69 million (minus 14 cents/share), compared with a profit of $29 million (6 cents) in 3Q2005. Thomson First Call analysts had expected Dynegy to turn a profit of about 10 cents/share. Revenue totaled $581 million, down from $770 million a year earlier. Results included a $61 million asset impairment charge related to the company’s Bluegrass, KY, peaking facility, a $23 million charge associated with the Sithe subordinated debt exchange and a $14 million litigation settlement charge. For 2006, Dynegy now expect to lose between $305-325 million, rather than the $215-260 million it had previously expected.

CEO Bruce A. Williamson, speaking to financial analysts about the quarter, highlighted the positive news. “Our third quarter 2006 operating results included higher realized prices in the Midwest region, which were achieved through our near-term commercial sales strategy and our operational focus on in-market availability,” he said. “We also continued our progress in terms of improving our financial profile, with reductions of debt and other obligations of an additional $200 million during the quarter and more than $2.3 billion since the beginning of 2006.”

Williamson touted Dynegy’s growth prospects, citing the company’s proposed merger with privately held LS Power, which nearly doubles the company’s 11,920 MW generation portfolio and includes a development joint venture (see Power Market Today, Sept. 18). The combined company, which will focus on three geographic areas, will have more than 20,000 MW in generation, composed of 31 power plants in 15 states. The deal moves the company up three spaces in the ranking of generators by megawatts. The combined company would rank just behind a combined Constellation Energy-FPL Group (if their merger had not been canceled) and just ahead of TXU. Dynegy’s new portfolio will have 5,232 MW in the West, 8,976 MW in the Midwest and 4,373 MW in the Northeast.

Dynegy on Friday also completed the sale of its Rockingham Power Generation Facility, a peaking plant in North Carolina, to Duke Energy subsidiary Duke Energy Carolinas LLC for $195 million in cash.

In the quarter, earnings before interest, taxes and depreciation and amortization (EBITDA) from the power generation business were $92 million, compared with $177 million a year earlier. The results were drained by the pre-tax asset impairment on the 576 MW Bluegrass, KY, peaking facility because of “recent changes in the market that placed economic constraints on the facility.” Overall, Dynegy’s power generation business was affected by lower volumes and market prices, offset by stronger realized prices in the Midwest as a result of the company’s near-term commercial sales strategy.

At the end of the quarter, Dynegy’s liquidity was approximately $864 million, consisting of $388 million in cash on hand and $476 million in unused availability under the company’s revolving bank credit facility and term letter of credit facility.

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