Dynegy sees improved broadband performance and continued energy growth

By the OGJ Online Staff

HOUSTON, Oct. 15, 2001 – Chuck Watson, CEO of Dynegy Inc., sees a turnaround in broadband market because that industry has “touched bottom” and demand will pick up from here.

“This quarter I saw the strongest growth in request for broadband than in the last 2 years,” said Watson. “The tragic events of Sept. 11 means more video conferencing than before. There will be a permanent change in the way of doing business after what happened.”

The attacks on the World Trade Center on Sept. 11 impacted business travel drastically as companies reevaluate the risk and expense of moving employees around to conduct business. Watson admitted that Dynegy had made some changes in the wake of the tragedy.

Watson commented on Dynegy’s telecommunications business in a conference call this morning discussing the Houston-based company’s third quarter earnings. Dynegy reported a 62% increase in income to $286 million on $8.5 billion in revenue compared to $177 million on $8.3 billion for the comparable quarter last year.

While the bulk of Dynegy’s earnings were from its energy businesses, Watson noted that telecommunications that had recorded losses through this quarter is set to break even in income on the given asset base next year. By the end of this year, Dynegy will have invested $700 million in its telecommunications network that is now fully operating.

Many energy companies that diversified into telecommunications experienced a drag on earnings from telecommunications near meltdown last year. However, Dynegy expects EBIT or earnings before interest and taxes to be positive for its telecommunications business in the fourth quarter of this year.

Nevertheless, the bulk of Dynegy’s earnings are from its marketing and trading group. It generated income of $263 million compared to $142 million. The segment benefited from its existing energy delivery network and risk management activities.

Dynegy credited increased market liquidity, greater market origination, and more sales on DynegyDirect, the company’s trading platform, for the improved performance. North American volumes of physical power sold increased 86% to 90.5 million Mw-hrs for the third quarter compared to 48.7 million Mw-hrs for the comparable quarter last year. Gas volumes increased 12% to 11bcfd compared to 9.8bcfd. The good performance in its marketing and trading business came despite “falling prices and a recession,” said Watson.

Dynegy officials say supply/demand conditions are very tight. Anything can create imbalance and commodity swings.

Even though commodity prices for power have fallen, the spark spread remains solid, he said. The spark spread is roughly the difference in the delivered electricity price and the cost of natural gas to produce that power. Any kind of outage or weather change can create opportunity in this business, Watson said.

In terms of capital spending, Watson broke down next year’s budget as follows: $350-400 million for maintenance capital; $750 million to complete 1,500 Mw of power plants; $700 – 800 million in unidentified projects.

Watson implied the company would look for opportunities to acquire more power plants next year.

“Consolidation will occur and some failures will happen in IPP’s [independent power producers],” he said. “The acquisition values will come down and there will be opportunities to buy assets if they fit into a strategic location for us.”

Earnings from the other business segments were more modest or actually retreated.

Dynegy Midstream Services consists of Dynegy’s North American midstream liquids, processing and marketing business, and natural gas liquids marketing and transportation operations. Net income was $12 million compared to $8 million for the comparable quarter last year. Officials attributed the increase to higher prices and contract restructuring.

Dynegy’s transmission and distribution business from its utility reported a slight decrease in net income to $26 million from $27 million for third quarter of 2000. Illinois Power, Decatur, Ill., saw industrial load volumes fall because of the new competitive market structure in that state.

Looking forward to next year, Watson said Dynegy overall will continue to expect 20 to 25% growth in income for 2002 unless there is a “protracted recession.”

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