HOUSTON, Jan. 29, 2004 — Dynegy Inc. on Thursday announced a net loss of $364 million for 2003, which includes a net loss of $226 million for the fourth quarter 2003.
After eliminating the impact of the company’s customer risk management business, its discontinued operations and the impact of adopting new accounting principles, which totaled $207 million for the year and $48 million for the fourth quarter 2003, net losses were $157 million for the year and $178 million for the fourth quarter.
These results reflect the company’s power generation, natural gas liquids and regulated energy delivery businesses, combined with corporate-level expenses.
Included in the fourth quarter loss of $178 million were the following after-tax charges and benefits:
— $153 million impairment of goodwill associated with Illinois Power;
— $16 million impairment of certain qualifying facilities (QFs);
— $13 million charge for West Coast Power, representing the company’s 50 percent share of a goodwill impairment;
— $8 million impairment of the company’s minority investment in a fractionator located in the Texas Gulf Coast region;
— $37 million benefit associated with the release of a deferred tax capital gains valuation allowance; and
— $10 million benefit associated with a development milestone payment received related to the previous sale of the Hackberry LNG project.
Fourth quarter results for the company’s customer risk management business were impacted by a $22 million after-tax charge associated with the previously announced termination of the Batesville tolling arrangement. The company also recorded a $15 million after-tax charge in the fourth quarter associated with the adoption of a new accounting principle.
“Our overall objective of the past year was to restructure Dynegy to be a financially sound, operationally focused company,” said Bruce A. Williamson, president and chief executive officer of Dynegy Inc. “The progress we made in reducing our debt and other obligations, decreasing our collateral postings, maintaining a strong liquidity position and operating our assets safely and reliably will serve as a foundation for further self-restructuring efforts. It will also provide us a platform for earnings and growth opportunities as recoveries in the U.S. economy and power markets occur.”
Year-end Business Segment Results
For purposes of this news release, the commodity pricing forecasts referred to below represent the assumptions provided by the company on Jan. 7, 2003. Year-end results for the company’s business segments are as follows:
Earnings before interest and taxes (EBIT) from the power generation business was $350 million for the year ended 2003. This segment benefited from strong operational performance in a commodity price environment that, while better than planned, was still relatively weak given the general overcapacity in the markets served by Dynegy. Results were partially offset by $46 million in impairments of certain QFs and the company’s 50 percent share of West Coast Power goodwill.
The average realized on-peak power price was $45.64 versus the company’s forecasted price of $36.75. Dynegy Midwest Generation set an all-time production record in 2003, generating 21 million net megawatt-hours of electricity with a capacity factor of 68 percent from the company’s major coal-fired units.
For the year ended 2003, cash flow from operations was approximately $425 million, while capital expenditures were approximately $155 million. After including proceeds from asset sales of approximately $50 million, free cash flow for the power generation segment was $320 million.
Natural Gas Liquids
EBIT from the natural gas liquids business was $149 million for the year ended 2003. This segment’s performance benefited from higher commodity prices, with an average monthly Henry Hub natural gas price of $5.38 per MMBtu versus the company’s forecasted price of $4.11; an average crude oil price of $31.01 per barrel versus the company’s forecasted price of $27; and an average natural gas liquids price of $0.55 per gallon versus the company’s forecasted price of $0.47.
The $25 million gain on the sale of the Hackberry LNG project more than offset a $12 million impairment associated with the investment in a fractionator located in the Texas Gulf Coast region. During 2003, this segment continued its aggressive efforts to shift its contract structure toward fee-based arrangements. As a result, the natural gas liquids segment has 97 percent of its contracted volumes structured as percentage-of-proceeds, percentage-of-liquids or fee-based, versus 85 percent at the start of the year.
For the year ended 2003, cash flow from operations was approximately $185 million, while capital expenditures were approximately $50 million. After including proceeds from asset sales of approximately $30 million, free cash flow for the natural gas liquids segment was $165 million.
Regulated Energy Delivery
EBIT from the regulated energy delivery business was $43 million for the year ended 2003. Dynegy’s third quarter 2003 Form 10-Q disclosed the company’s intent to take a goodwill impairment to reflect the fair value of its regulated energy delivery business. This impairment, taken in the fourth quarter, was $153 million. The segment’s results also reflected unseasonably cool summer weather resulting in lower electricity sales and the full annual impact of the residential rate reduction that began on May 1, 2002.
The segment delivered total electricity of 18,601 million kilowatt-hours in 2003 versus 19,144 million kilowatt-hours in 2002. Total natural gas delivered for the year was 778 million therms, compared to 773 million therms in 2002. For the year ended 2003, cash flow from operations was approximately $70 million, excluding intercompany payments to and from Dynegy, with capital expenditures of approximately $125 million.
As previously announced, Dynegy is engaged in exclusive discussions with Ameren Corp. related to a possible sale of Illinois Power.
Customer Risk Management
The loss before interest and taxes for the customer risk management business totaled $343 million for the year ended 2003. This largely resulted from capacity payments in excess of realized margins on the company’s power tolling arrangements, a $121 million pre-tax mark-to-market loss on contracts associated with the Sithe power tolling arrangement and power tolling and other contract settlements that include the following losses:
— $133 million pre-tax loss on the Southern tolling settlement;
— $34 million pre-tax loss on the Batesville tolling settlement; and
— $30 million pre-tax loss on the Kroger contract settlement.
Offsetting these charges were a $43 million benefit associated with the adoption of new accounting principles and a $61 million benefit included in operating income associated with the sale of natural gas from storage.
The company’s customer risk management business, including obligations associated with its four remaining power tolling arrangements and related gas transport arrangements, will continue to negatively affect its consolidated results of operations and cash flows until the related obligations have been satisfied or restructured. At year-end 2003, collateral related to customer risk management was approximately $120 million, down from $806 million at year-end 2002.
Corporate and Other
In corporate and other, which includes general and administrative expenses, interest expenses, income taxes and depreciation and amortization, the company recorded a $237 million loss before interest and taxes for the year ended 2003. This loss included a $50 million pre-tax charge for a legal reserve recorded in the second quarter 2003.
The interest expense of $509 million included the acceleration of $24 million of deferred financing costs and the settlement value of the associated interest rate hedging instruments relating to the April and August debt refinancings, as well as the October follow-on debt offering. The tax benefit from continuing operations for the period was $198 million. Taxes for the period included a $33 million benefit primarily associated with the release of a deferred tax capital gains valuation allowance.
At year-end 2003, Dynegy’s liquidity was approximately $1.4 billion. This consisted of $477 million in cash and $1.1 billion in revolving bank credit, reduced by $188 million in letters of credit posted against that line of credit. There were no drawn amounts under the company’s revolving credit facility. Total collateral posted at year end, including cash and letters of credit, was approximately $480 million, down from $612 million on Sept. 30, 2003.
Operating cash flow, including working capital changes, for the year ended 2003 was approximately $875 million. This consisted of approximately $680 million from the power generation, natural gas liquids and regulated energy delivery businesses, and approximately $195 million from the customer risk management business, net of corporate-level expenses and cash outflows from the company’s former communications business.
Operating cash flow was favorably impacted by the results of the company’s operating segments, the wind-down of the customer risk management business, including the return of collateral and prepayments, and the receipt of a $110 million federal income tax refund associated with the carryback of 2002 losses against prior year earnings.
Additionally, the company is substituting more cash as collateral with certain high-credit quality counterparties than letters of credit from its revolving credit facility. As a result, the company is reducing letter of credit fees relative to cash interest income.
Investing cash flow uses for 2003 totaled approximately $265 million. This consisted of approximately $335 million in capital expenditures in the company’s operating businesses offset by approximately $70 million in proceeds from asset sales.
2004 Guidance Estimate
For 2004, Dynegy is estimating a reported net loss of $140 to $110 million, or ($0.37) to ($0.29) per share. Unlike 2003, when the company’s earnings guidance focused only on its ongoing asset-based energy businesses, the 2004 guidance estimate is provided as a guide for forecasted 2004 consolidated financial results on an as-reported GAAP basis and compares to the $364 million net loss reported for 2003.
This estimate assumes commodity prices and volumes similar to 2003 and includes the following estimates by segment for earnings before interest, taxes, depreciation and amortization (EBITDA):
— $460 to $470 million from power generation;
— $260 to $270 million from natural gas liquids;
— $310 to $320 million from regulated energy delivery;
— a loss of $140 to $130 million from customer risk management; and
— a loss of $130 to $120 million from corporate and other.
The EBITDA estimate for the power generation segment reflects an anticipated non-cash impairment of the company’s investment in West Coast Power, which results primarily from the scheduled expiration of West Coast Power’s sales contract with the California Department of Water Resources at year-end 2004. Additionally, the EBITDA estimates for the power generation and natural gas liquids segments include the previously announced sales of minority interests in domestic and international generation projects, as well as sales of selected natural gas liquids investments.
Other key components of the company’s 2004 earnings estimate include:
— approximately $435 million of depreciation expense;
— approximately $545 million of interest expense; and
— a 37 percent tax rate.
The company also estimates its 2004 cash flows as follows:
— $180 to $215 million in operating cash flows, including $840 to $865 million from the operating segments and a use of $660 to $650 million from the customer risk management and corporate and other segments;
— approximately $375 million of capital expenditures;
— $255 to $270 million of anticipated asset sale proceeds; and
— $60 to $110 million of free cash flow.
While the company has made substantial progress in its self-restructuring efforts, Dynegy anticipates continued restructuring in 2004, although not at last year’s level. Any charges that may result from this continued restructuring activity, including charges relating to potential litigation or toll settlements or the impact of a potential sale of Illinois Power, are not reflected in the company’s 2004 earnings estimates.
Access the webcast and the related presentation materials on the “News & Financials” section of www.dynegy.com.
About Dynegy Inc.
Dynegy Inc. provides electricity, natural gas and natural gas liquids to wholesale customers in the United States and to retail customers in the state of Illinois. The company owns and operates a diverse portfolio of energy assets, including power plants totaling approximately 13,000 megawatts of net generating capacity, gas processing plants that process more than 2 billion cubic feet of natural gas per day and approximately 40,000 miles of electric transmission and distribution lines.