Dynegy reports positive earnings, but stock falls anyway

By the OGJ Online Staff

HOUSTON, July 24 -- On the strength of its wholesale commodity trading and marketing division, Dynegy Inc. reported second quarter income up 60% to $146 million, or 43¢/share, compared to second quarter 2000 income of $91 million, or 29¢/share.

The Houston company beat its own forecast as well as analysts expectations for the quarter by as much as 8¢/share. Dynegy reported revenue of $10.8 billion, up from $5.7 billion for the 2000 quarter.

But that wasn't enough to stop the market from beating up Dynegy shares.

At mid-day, Dynegy shares were trading around $43/share, down $2.75, or 6%. "All energy companies are not the same apples," said Chuck Watson, CEO of Dynegy in a conference call with analysts. "I was surprised as anyone about the stock going down."

He continued to harp on the fact that Dynegy wasn't like its peers.

"We have a diversified energy delivery network across multiple regions and multiple commodities," he said. "Our balanced portfolio of assets allows arbitrage between regions and commodities. We are not just in generation, or just in marketing, or financial services."

Watson said the entire energy group was getting hammered because of falling expectations for future gas and power prices.

But he discounted recent gloomy forecasts. In contrast to analyst reports calling for gas prices to be as low as $2.50/Mcf in the fourth quarter, Watson said he doesn't expect a "glut" of gas to clog the market. He didn't elaborate why held this contrary opinion.

"I'm not as pessimistic about gas or power," he said. The recent slow down in deregulation won't really hurt Dynegy either, he said.

Deregulation of retail sales of electricity and gas may be slowing down, but the slowdown isn't spreading into the wholesale markets where Dynegy participates. "At the wholesale level, the market continues to open up. There is expanded liquidity and the market is not slowing down," he said.

Dynegy like Enron Corp. and others in its peer group with operations in telecommunications reported operating losses for the quarter and expectations of further losses for the rest of the year.

The communications business has "turned down and revenue is harder to come by," Watson said.

But despite a loss of $20 million for the second quarter, or 6¢/share, the company Watson said the company will not be laying off any personnel. Losses for the second half of the year are expected to be roughly the same as the first half.

"We didn't beef up our head count and we will be holding that flat for the future," he said.

Watson said Dynegy's communication network will be completed by the end of 2001 and will generate more revenue next year. By mid 2002, communications earnings before income taxes, depreciation, and amortization should be positive, he said.

Concerning California, Dynegy indicated that the worst was over at least for Dynegy. Sufficient reserves have been set aside to compensate for past due power bills of $320 million should they not be paid in full. But going forward, Dynegy's California generation is under contract to the California Department of Water Resources. Bills are paid on time, he said.

"We have no disputes with them," said Steve Bergstrom, chief operating officer. "It's business as usual in California for us. As usual as business can be in California."

Looking to the future, Watson said that for the year earnings per share should be $1.93-$1.98/share. The company expects to continue growing earnings per share at the rate of 20¢-25¢/year.