HOUSTON, Texas, Oct. 30, 2002 — Dynegy Inc. on Wednesday reported a net loss of $1.8 billion in the third quarter 2002, or $4.92 per diluted share outstanding.
Dynegy’s quarterly results included after-tax charges of $1.75 billion, which consisted of the following:
* $908 million associated with the impairment of goodwill in the Wholesale Energy Network segment;
* $566 million for the loss on the sale of Northern Natural Gas Company (NNG);
* $145 million for reserves in the risk management portfolio due to reduced liquidity in power markets;
* $90 million for the impairment of certain investments in unconsolidated generation projects;
* $19 million for the write-down of Dynegydirect;
* $16 million for the Enron lawsuit settlement; and
* $8 million for the impairment of certain technology investments.
“This was a difficult quarter for Dynegy, as it was for other companies in our sector, but one that was expected as Dynegy executed its capital and liquidity plan, experienced unprecedented industry and market conditions and began its organizational restructuring initiatives,” said Bruce Williamson, the company’s newly named president and chief executive officer.
“Dynegy’s results can be attributed to a number of primarily non-cash charges and the loss on the sale of Northern Natural Gas. These charges did not and will not affect the company’s liquidity position, which remains at a level that is sufficient to operate our businesses and meet our customer commitments,” he said.
“The energy merchant sector continues to experience a downturn characterized by lower liquidity levels, reduced power prices and credit concerns,” said Williamson. “Dynegy’s strategy to manage these challenges is to restructure the company around our generation, natural gas liquids and regulated energy delivery businesses and to exit aspects of the marketing and trading business unrelated to our physical assets. By executing the elements of this restructuring plan, the company will significantly reduce collateral requirements and expenses and, in the process, rebuild itself.”
Wholesale Energy Network
The Wholesale Energy Network segment consists of power generation, storage and customer and risk management activities. Customer and risk management activities are centered on the physical delivery of and risk management activities around wholesale natural gas, power and coal.
As previously announced, the company will exit certain aspects of the marketing and trading business in the United States, Europe and Canada. The generation business will continue to manage commodity price risk associated with fuel procurement and to market and trade around its owned and controlled assets.
As a result of the company’s plans to sell its natural gas storage and gas processing facilities in the United Kingdom, earnings associated with these assets are now reported as discontinued operations.
Reported net loss for this segment was $1.26 billion in the third quarter 2002, which included after-tax charges of $1.18 billion. During the period, this segment recognized a $908 million charge associated with the write-down of goodwill resulting from the reduction in near-term power prices, an increase in the rate of return required for investors to enter the merchant energy sector and the company’s decision to exit the marketing and trading business.
Other after-tax charges recognized during the period included: $145 million for reserves in the risk management portfolio due to reduced market liquidity primarily in the U.S. power markets; $90 million for the impairment of certain investments in unconsolidated generation projects; $19 million for the write-down of Dynegydirect; $11 million for the corporate allocation of the Enron lawsuit settlement; and $7 million for the impairment of certain technology investments.
The Asset Businesses’ (owned generation) reported operating income, after the impact of general and administrative expenses and depreciation and amortization, was $44 million in the third quarter 2002, compared to operating income of $187 million in the third quarter 2001. These results reflect a decrease in generation earnings due to lower power prices.
Customer and Risk Management activities (controlled assets, marketing and trading) reported an operating loss, following the deduction of general and administrative expenses and depreciation and amortization, of $346 million in the third quarter 2002, compared to $125 million of operating income in the third quarter 2001.
Results were impacted by an increase in risk management reserves of $223 million due to reduced liquidity in power markets. Results also reflect a decrease in wholesale origination activities and energy trading related to the company’s credit ratings and industry conditions.
Other factors affecting earnings in the Wholesale Energy Network segment included a decrease in equity earnings from unconsolidated investments due to lower prices and an overall decline in demand, primarily in Dynegy’s West Coast Power joint venture, and an increase in interest expense due to higher debt outstanding.
Revisions were made recently to generally accepted accounting principles requiring all energy trading revenues to be reported on a net basis beginning third quarter 2002 and for all comparative periods. As a result, revenues for the third quarter 2002 and third quarter year-to-date are 82 and 83 percent less, respectively, than what would have been reported on a gross basis prior to this change in accounting principle.
Dynegy Midstream Services
Dynegy Midstream Services consists of Dynegy’s North American natural gas liquids processing, liquids fractionation, distribution and marketing. This segment will continue to manage commodity price risk associated with its operations and market and trade around its network of physical assets to deliver products and services to its customers.
Reported net income from this segment was $4 million in the third quarter 2002, including after-tax charges of $4 million, compared to reported net income of $12 million in the third quarter 2001. Results were impacted by lower realized natural gas liquids prices and market liquidity, moderately offset by an increase in straddle plant processing volumes.
Transmission and Distribution
Dynegy’s transmission and distribution segment includes Illinois Power, a regulated electric and gas energy delivery company. In August 2002, Dynegy sold its interest in NNG, which resulted in an after-tax loss of $566 million recorded in this segment. Earnings from NNG are included in discontinued operations.
Reported net income from continuing operations for this segment totaled $36 million in the third quarter 2002, compared to $26 million in the third quarter 2001. Illinois Power’s performance benefited from seasonal weather, resulting in greater residential and commercial electricity usage. The increase in usage more than offset the five percent May 2002 rate reduction for Illinois residential electric consumers, as provided by the 1997 Electric Customer Choice Law.
Dynegy Global Communications
The company’s communications segment, Dynegy Global Communications, has a high capacity broadband network that reaches more than 75 major cities in the United States.
Reported net loss for this segment was $30 million in the third quarter 2002, compared to a net loss of $15 million in the prior year quarter. The increase in costs was due to the recognition of a charge associated with the accrual of a lease obligation. The loss is being amortized evenly over the remaining lease term, which resulted in an after-tax charge of approximately $14 million for the quarter.
During the year, the communications segment has taken measures to reduce losses by limiting capital spending and reducing operating and administrative costs through the renegotiation of long-term contractual commitments. Dynegy continues to pursue partnership and sale opportunities for this business.
Other factors affecting earnings
Other factors affecting earnings for the third quarter 2002 earnings, as compared to third quarter 2001, included an increase in depreciation expense, a decrease in general and administrative costs, an increase in interest costs and a decrease in the effective tax rate. Depreciation expense increased due to the addition of generation assets and the accrual of the lease obligation in the communications business. These increases were partially offset by the absence of goodwill amortization.
General and administrative expenses decreased in the third quarter 2002 due to lower variable costs partially offset by higher legal and audit fees. Interest costs increased due to a higher average outstanding balance and an increase in fees associated with recent financings, which were partially offset by lower interest rates.
The company experienced a lower effective tax rate of 11 percent in the third quarter 2002, compared to 28 percent in the prior period due in part to the minimal tax benefit recognized for the capital loss on the sale of NNG. In addition, there was no tax benefit recognized on the $908 million write-down of goodwill and the $90 million impairment of unconsolidated generation investments.
Liquidity and capital resources
The company made significant progress on its previously announced capital and liquidity plan during the period, including the sale of NNG for $928 million (before working capital adjustments) and the sale of the Hornsea storage facilities in the United Kingdom for $189 million (net proceeds). Additional milestones included the announced sale of Illinois Power transmission assets for $239 million, which is expected to close in second quarter 2003, subject to regulatory approvals, and the sale of NNG bonds for $96 million.
As of September 30, 2002, the company had approximately $1 billion of cash-on-hand, including $189 million in net proceeds from the Hornsea sale. The company also had $286 million of availability under its bank facilities and approximately $300 million of highly liquid inventory. The proceeds from the Hornsea sale were subsequently used to pay down part of the bridge financing in October. Total posted collateral, including cash and letters of credit as of September 30, 2002, was approximately $1.3 billion.
Earnings guidance and cash flow from operations
Due to industry conditions and pending asset sales, previous earnings and cash flow guidance no longer applies. The company is currently assessing potential fourth quarter charges, which may include, but are not limited to, charges associated with the recently announced reduction in workforce and organizational restructuring, the cumulative effect related to the recently announced change in accounting principle impacting the energy trading business, and charges associated with exiting certain aspects of the marketing and trading business.
Reported net cash flow from operations for the nine months ended 2002 totaled approximately $300 million after working capital use of approximately $400 million. The use of working capital was impacted by an increase in cash collateral and pre-payments of approximately $270 million posted during the period. Previous operating cash flow guidance of $600 to $700 million assumed posting letters of credit for all collateral needs and did not factor cash collateral, which is reported as a use of working capital.
Dynegy-ChevronTexaco commercial agreements
The company is in discussions with ChevronTexaco Corp. to negotiate an early termination of the contracts under which Dynegy Marketing and Trade purchases substantially all of ChevronTexaco’s lower-48 U.S. natural gas and supplies the natural gas requirements of ChevronTexaco refineries and other corporate facilities. These discussions do not involve the natural gas processing and liquids agreements between Dynegy Midstream Services and ChevronTexaco.
Dynegy will continue to meet all its contractual obligations to ChevronTexaco unless and until other arrangements have been agreed upon and made. A key part of the discussions is to ensure that any agreement reached would have no adverse effect on customers.
About Dynegy Inc.
Dynegy Inc. owns operating divisions engaged in power generation, natural gas liquids, regulated energy delivery and communications. Through these business units, the company serves customers by delivering value-added solutions to meet their energy and communications needs. The company’s website is www.dynegy.com