By ANN DE ROUFFIGNAC
Nov. 6, 2000Look for Dynegy Corp.’s income to grow at 25%-30% for 2001 and hold steady at 20% growth for the years that follow, Chuck Watson, chairman and CEO, told analysts Tuesday in Houston. Most of the growth will be fueled by the company’s core energy businesses that provide 75% of the net income.
Dynegy will make more acquisitions in the North American energy business, he said. The company will purchase additional generation assets in the amount of 1,500 Mw/year. Dynegy will continue to pursue its “asset lite” strategy not “overdoing” the capital, he said.
Watson said communications is the next big growth opportunity that Dynegy is quickly moving to capitalize on.
“Energy convergence is now convergence with communications and technology,” he said. “The opportunities of linkage between communication and the power to run the communications will give the company more opportunities.”
He said Dynegy is not too late in this area because valuations of these technology companies have come down by about 75% in the last 2 years. Now is an even better time to make a move. Watson said.
With the acquisition of iaxis Ltd. (cq) of London reported Tuesday, Watson said, Dynegy will have a European communication presence for about $200 million. Dynegy’s global presence in communications and link to broadband trading was achieved for only $600 million-$700 million, he said.
Electricity drives gas business
Steve Bergstrom, president and COO, told analysts that Dynegy will continue to remain a physical fundamental player with its geographically dispersed portfolio of assets directly linked to the trading and marketing side of the organization.
Bergstrom is optimistic about the gas side of the business. He said he foresees strong growth and big opportunities in gas for the first time in years. Electric power gas-fired generation is driving the gas business. The US will have a 30 tcf/ year gas economy much sooner than anticipated.
“With a 3.5% growth in power demand, we could reach the 30 tcf market by the middle of 2005,” he said. “The gas industry will struggle to get there though.”
Avoiding a shortage of gas will come at a price. The days of $1.50-$2/Mcf of gas are gone, Bergstrom said. There must be higher prices sustained over longer periods to get the drilling done, he noted.
This all presents opportunity for Dynegy as a merchant.
“When the supply gets tight we do well because as a physical fundamental player, we control the underlying commodity,” he said.
Bergstrom also said there will be opportunities for Dynegy in gas pipeline capacity. There were pipeline constraints in the Northeast this past summer and that wasn’t even the winter, he said.
Still not overbuilt
Regarding electricity, Bergstrom is not worried about the US market becoming overbuilt any time soon.
“This is a long-term play. It will take a long time for supply to catch up with demand,” he said.
He sees a deficit in power generation of 36,500 Mw in 2002. With demand in electricity growing at about 3.7% a year for 2001-2002, it will be 2007 before any real balance is restored, Bergstrom said.
According to Bergstrom, that is not wishful thinking. Electricity demand growth is better correlated with growth in gross domestic product than with population increases, he said. Utilities have always correlated growth of electricity with population growth.
That approach had drastically underestimated the demand for electricity, helping to contribute to the short supply of generation felt throughout much of the US. The old relationship between population and electricity no longer gives an accurate picture of demand because people’s demand for electricity more closely matches growth in the economy, Bergstrom explained.
Dan Ryser, president, commercial power marketing and trade, said the US will approach a more normal reserve margin of 15% by the year 2007. That’s based on 30,000 Mw of new generation hitting the market each year.
A deterrent to that amount of generation construction is the crunch on finding good sites for power plants. “The investor-owned utilities have a lot of good sites within their territories. But they find a million reasons why you shouldn’t build there,” Ryser said. Reaching the more normal reserve margin of 15% by 2007 depends on everything working perfectly, he said.