April 30, 2002 — Dynegy Inc. posted a first-quarter net loss of $140 million but said it expects to secure a $900 million credit facility.
The energy company Tuesday reported first quarter 2002 recurring earnings per diluted share of $0.41.
The company reported recurring net income of $173 million, an increase of $36 million, or 26 percent, over first quarter 2001. Recurring results compared to $0.41 recurring earnings per diluted share, or $137 million recurring net income, in the first quarter of 2001.
Reported loss per share of $0.41, or $140 million reported net loss in the first quarter 2002, compared to $0.41 reported earnings per diluted share, or $139 million reported net income, in the first quarter 2001.
Reported 2002 results included total after-tax non-recurring charges of $313 million, which consisted of after-tax non-recurring charges of $300 million in Dynegy Global Communications (DGC).
Substantially all of these charges were non-cash. In addition, the company incurred an after-tax non-recurring charge of approximately $13 million in Northern Natural Gas Company (NNG).
Net income available to shareholders was reduced by approximately $8 million for the amortization of a special dividend associated with the issuance discount on the $1.5 billion ChevronTexaco convertible preferred securities issued late last year, or $0.02 per diluted share.
Effective Jan. 1, 2002, the company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“Statement No. 142”), which discontinues the amortization of goodwill. Dynegy’s first quarter 2002 recurring earnings per diluted share would have been $0.37 per share if goodwill had been amortized in this period.
“While our company was faced with some issues and challenges in the first quarter, we did not lose focus on performance in our core energy business,” said Chuck Watson, chairman and chief executive officer of Dynegy Inc. “For 17 years we have employed a business model that utilizes marketing, origination, risk management and delivery logistics capabilities around a network of physical energy assets. It has been, and will continue to be, a proven platform that generates sustainable and repeatable earnings and cash flow for our company.
“For the quarter, earnings in our Wholesale Energy Network segment benefited from solid earnings from our asset base and greater wholesale origination and increased sales to commercial and industrial customers. The addition of Northern Natural Gas, a 16,600-mile pipeline, and Dynegy Storage, natural gas storage and gas processing facilities in the United Kingdom, also served as sources of solid, stable earnings and cash flow during the quarter,” he said.
Watson added, “The expected lower results in our natural gas liquids segment were primarily due to the decline in realized commodity prices period over period. Continued weakness in technology and telecommunications markets and the slow start of our network operations due to issues with equipment vendors resulted in a disappointing performance in our Global Communications segment. We have committed to maximizing the value of our communications investment, as well as the elimination of losses from this segment beyond 2002.”
Wholesale Energy Network
Dynegy’s Wholesale Energy Network segment is focused on optimizing the company’s and its customers’ energy networks consisting of assets, capacity and contracts, as well as direct commercial and industrial sales and retail marketing alliances. It is engaged in a broad array of energy businesses, including the physical supply of, and risk management activities around, wholesale natural gas, power and coal assets.
Recurring net income for this segment increased 33 percent to $133 million in the first quarter 2002, representing 77 percent of Dynegy’s consolidated recurring net income, compared to $100 million in the first quarter 2001.
The Asset Businesses (owned generation and storage) in this segment had a financial contribution of $161 million in the first quarter 2002. This is essentially even with prior year results, reflecting slightly lower earnings from generation assets, offset by the addition of new facilities including power generation and UK gas storage.
Customer and Risk Management activities (controlled assets, marketing and trading) financial contribution increased 13 percent to $169 million in the first quarter 2002, compared to $149 million in the first quarter 2001. These results reflected increased wholesale and commercial and industrial origination and greater gas and power sales volumes, offset by reduced opportunities from milder weather and weaker energy and economic fundamentals.
Global gas volumes increased 33 percent to 15.2 billion cubic feet per day (Bcf/d) in the first quarter 2002, up from 11.4 Bcf/d in the first quarter 2001. The increase was a result of incremental ChevronTexaco gas volumes associated with former Texaco’s equity production, improved European volumes reflecting an expanded physical presence in the United Kingdom, and greater Canadian volumes.
Total power produced and sold increased 128 percent to 118.7 million megawatt hours (MM MWh) in the first quarter 2002, compared to 52 MM MWh in the first quarter 2001. The increase was due to greater domestic origination and merchant sales opportunities captured throughout Dynegy’s energy delivery network, as well as the conversion of UK volumes to physical volumes in the post-NETA market.
The last half of the year and beyond will benefit from approximately 1,500 MW of new natural gas-fired generation facilities in Kentucky and Michigan. The three new peaking facilities are currently being tested and will begin commercial operation before June 1 of this year.
Dynegy Midstream Services
Dynegy Midstream Services consists of Dynegy’s North American midstream liquids processing and marketing business and worldwide natural gas liquids marketing and transportation operations.
Recurring net income from this segment was $17 million in the first quarter 2002, compared to recurring net income of $23 million in the first quarter 2001. Segment results reflected the impact of lower natural gas liquids prices resulting in lower processing plant margins, partially offset by improved natural gas liquids marketing results and increased utilization of straddle plants resulting from more favorable processing economics.
Processing volumes increased 18 percent to 92.1 thousand barrels per day (MBbls/d) in the first quarter 2002, compared to 78.1 MBbls/d in the first quarter 2001. This increase was primarily due to increased straddle plant volumes resulting from more favorable processing economics. Natural gas liquids sold decreased 5 percent in the first quarter 2002 to 609.5 MBbls/d, down from 640.7 MBbls/d in the first quarter 2001.
Transmission and Distribution
Dynegy’s regulated transmission and distribution segment includes Illinois Power (IP) and, as of Feb. 1, 2002, NNG.
Dynegy exercised its rights to acquire the common equity of NNG’s parent after termination of its merger agreement with Enron Corp., through which Dynegy invested $1.5 billion to acquire preferred stock and other rights in an Enron subsidiary that owns NNG. Enron maintains the option to repurchase the preferred stock and other rights from Dynegy until June 30, 2002.
Recurring net income for the transmission and distribution segment totaled $49 million in the first quarter 2002, compared to $26 million in the first quarter 2001. Segment performance benefited from the integration of NNG’s operations and IP’s reduced cost of operations, partially offset by a lack of weather-driven demand in IP’s service territory during the period. Reported results included an $18 million pre-tax non-recurring charge ($13 million after-tax) associated with gas delivery commitments assumed in the NNG acquisition.
Dynegy Global Communications
Dynegy’s communication segment, Dynegy Global Communications, was launched during the fourth quarter 2000. Dynegy’s optically switched mesh network spans more than 16,000 route miles and reaches 44 of the largest cities in the United States.
Segment results reflected a $26 million recurring quarterly loss due to higher costs incurred from start-up network difficulties and lower than anticipated revenues resulting from continued weakness and significant events in technology and telecommunications markets.
Dynegy reported a non-recurring after-tax charge of approximately $300 million related to impairment of assets in its communications segment. The majority of this charge was non-cash and resulted from the adoption of Statement No. 142, which necessitated a reduction of the carrying value of goodwill associated with the segment’s operations. The remaining portion of the charge reflected the impairment of certain telecommunication assets, including investments in unconsolidated affiliates, equipment and other charges.
Other Factors Affecting Earnings
Dynegy’s increase in recurring net income in the first quarter 2002 was attributable primarily to higher operating margin, which was offset partially by increased general and administrative expenses due to continued expansion of the company’s operations. Interest expense increased due to higher outstanding indebtedness and increased realized interest rates.
In conjunction with the company’s previously announced $1.25 billion capital restructuring program, which included the issuance of approximately $540 million of common equity in a public offering in December 2001, ChevronTexaco exercised its pre-emptive, pro-rata rights by purchasing $205 million, or 10.4 million shares, of Dynegy common equity in January 2002. Dynegy continues to seek improvements to its balance sheet and is in the process of identifying certain assets for potential sale or partnership.
Dynegy Holdings Inc. closed today a new $900 million revolving credit facility. With this facility, as of today, Dynegy has available liquidity resources, including cash on hand and availability under recently renewed borrowing arrangements, of approximately $1.4 billion. Dynegy believes that this level of liquidity is sufficient to operate its business under any conceivable circumstance.
Dynegy manages its liquidity and capital resources through a combination of cash on hand, operating cash flow, borrowing arrangements and access to debt and equity markets.
Revised 2002 Earnings Guidance
As part of Dynegy’s pre-first quarter earnings announcement on April 25, 2002, management revised the company’s 2002 recurring earnings per share guidance to a range of $2.00 to $2.05 from the previous guidance of $2.26. The new guidance is based primarily on expectations of continued weakness in the telecommunications and technology markets, a one-time differential in seasonal earnings resulting from the delayed timing of the NNG acquisition and incremental interest expense. Dynegy’s wholesale energy businesses are still expected to meet expectations for the year.
Dynegy Inc. is an energy merchant. Through its global energy delivery network and marketing, logistics and risk management capabilities, Dynegy provides energy solutions to customers in North America, the United Kingdom and Continental Europe. The company’s web site is www.dynegy.com.