In reporting record third quarter improvements, including an 88%increase in earnings per share and a 16% increase in net income,Dynegy CEO Chuck Watson yesterday highlighted an aggressive powergeneration plan that will become the “engine for the growth of ourearnings for the future.”

The first step in this plan is the completion of the merger withIllinova, which is expected early in the first quarter of 2000.That will give Dynegy 14,000 MW of power generation and a morediverse portfolio than it had in the past. The plants will be 70%gas-fired and 30% coal-fired, enabling it to become morecompetitive in baseload generation. But Dynegy expects to multiplythe unregulated generation under its supervision or ownership fivetimes in the next five years.

“In order to accomplish this objective, we plan to own aninterest in approximately 25,000 MW of capacity with the remainderof the total to be achieved through the management of third-partyassets,” said Watson.

“The Illinova deal really was predicated on the fact that theyhad successfully taken their generation assets and moved them intothe unregulated environment and that they were geographicallylocated in the Midwest, which was a prime center for trading forus..,” he noted. “While we continue to look for acquisitions and wecontinue to look at building new generation capacity throughout thecountry and in geographically dispersed areas, we’re notspecifically looking for other utilities per se, but possibly otherutility assets.”

Power generation and marketing has produced nearly $130 millionin operating margin for the company so far this year, compared toonly $80 million last year, a 63% increase. And the marginimprovement came at a time when power sales and generation declinedto 60 million MWh from 109 million MWh in the first nine months of1998.

Meanwhile, gas marketing margins have been about flat, risingslightly in the third quarter to $32 million. Gas sales havereached an average of 9.8 Bcf/d so far in 1999 up from 8.7 Bcf/dover the same period last year.

After a very tough year for Dynegy in the liquids business in1998, which included some divestitures of underperforming assets,plant consolidations and a reengineering of the organization, thecompany has reduced operating expenses by $50 million/year. Muchhigher gas liquids prices also have helped. Prices during the thirdquarter nearly doubled to $0.40/gallon. Total liquids businessmargin grew to $188 million in the first nine months this yearcompared to $141 million last year. Normalized earning from thedivision stand at $71.5 million compared to only $35 million lastyear after the first three quarters.

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