Dynegy Inc. said Tuesday recurring third-quarter net income was up 83% to $176.5 million, or 55�/share, reflecting the performance of its wholesale energy marketing and trading operations which profited from volatile US natural gas and power markets.
Dynegy said Oct. 2 it expected to report recurring earnings of 55�/share, or 5� above the First Call/Thomson Financial consensus estimate at that time. Senior executives forecast fourth-quarter earnings of 22�-25�/share, meeting or just below current Wall Street estimates during a conference call.
Results for the third quarter, which compare on a pro forma basis with recurring net income of $96.5 million, or 32�/share, in the year-earlier period, include Illinova, a utility holding company that Dynegy acquired in April.
Dynegy shares were down 2 3/8 to 48 1/4 in mid-day trading. Analysts said the decline reflects disappointment the fourth quarter could come in below earnings expectations of 25�/share.
"We are confident that this quarter's earnings level is sustainable next year and the company is positioned for continued growth," Chairman Chuck Watson said.
He said third quarter results were achieved despite one of the coolest summers ever in the Midwest and Northeast, resulting in below-forecast sales of electricity. During a question and answer period, Watson said it was "directionally" correct the company's results were hurt more by weak sales in the Midwest and Northeast than caps on electricity prices in California.
Recurring net income from marketing and trading segment rose more than four-fold to $141.9 million, representing 80% of Dynegy's consolidated net income, compared to $26.8 million in the third quarter 1999. Pres. Steve Bergstrom attributed marketing and trading's strong performance to expanded North American generation capabilities, coupled with strong marketing, structured origination activity, and term sales.
Total power produced and sold nearly doubled to 48.7 million Mw-hr in the third quarter 2000, compared to 27.1 million Mw-hr in the third quarter 1999. Volumes also rose as a result of the assets acquired in the Illinova merger and 1,055 Mw of new generation placed in service during 2000.
North American gas volumes increased 15% to 9.8 bcf/day in the third quarter 2000, up from 8.5 bcf/day in the third quarter 1999, the result of increased demand from natural gas-fired generation and growing supply provided to the company's retail alliances.
Watson said with both gas and power supplies expected to be tight in 2001, Dynegy is anticipating a "flight to quality. We deliver rather than just depend on financial trading. Customers are willing to pay a premium for reliability."
Despite cool temperatures in the Midwest and Northeast this summer, prices in the forward markets in those regions have already begun to reflect the expectation that generation could be tight next summer, Bergstrom said.
Reflecting the blurring of the lines between gas and power, Watson said the company will begin reporting financial results of gas and power as a single unit. The company is managing for "energy optimization, not gas and power buckets," he said.
"Having both come from big companies where we spent too much time negotiating internal transfer prices, we both think it is a complete waste of time," Bergstrom explained. "We don't want operating units competing with each other."
Watson said European operations were hurt by volatile power and gas prices combined with reduced liquidity in the UK commodity markets, the deferment of the New Electricity Trading Arrangements (NETA) in the UK and start-up costs.
Recurring net income midstream liquids and natural gas liquids marketing and transportation segment decreased to $7.8 million during the third quarter 2000, compared to net income of $23.9 million in the third quarter 1999.
Watson said Dynegy is reducing liquids commodity pricing exposure through hedging and forward sales and to lower costs through efficiency programs. Transmission and distribution contributed $26.8 million for the third quarter 2000, benefiting from cost reductions and operational efficiencies, which mitigated lower-than-expected power and gas demand.
Watson also said he expects Dynegy to benefit from the proposed merger between Chevron Corp. and Texaco Inc. Chevron owns a 26% stake in Dynegy, which markets Chevron's gas and gas liquids. Watson said he is "terribly excited" about the proposed merger and anticipates winning Texaco's business as well.