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Today's IssueAlert Sponsors:=20 <http://secure.scientech.com/rci/wsimages/customer-carebanner.jpg< SCIENTECH is currently interviewing 1,500 utilities on CIS/CRM and customer care in the United States and Canada to determine:=20 The leading software providers=20 Drivers of utility technology decisions=20 Analysis of license sales versus ASP sales=20 New market opportunities=20 Growing/shrinking software markets=20 Download a sample prospectus for an introduction to this new survey at: <ht= tp://secure.scientech.com/specialpages/Multi_Client.asp< and=20 contact Jon Brock at 505-244-7607 for more details. The Center for Public Utilities and The National Association of Regulatory Utility Commissioners present: THE BASICS:=20 <http://cpu.nmsu.edu/<; Hands-on framework that shows the interrelationships of the topics and how = they fit together and provides a set of analytical skills required to understand= the issues.=20 October 14-19, 2001 in Albuquerque, NM.=20 Contact Jeanette Walter at jeawalte@nmsu.edu <mailto:jeawalte@nmsu.edu< for= more information. <http://secure.scientech.com/rci/wsimages/scientech_logo_small.jpg< <http://secure.scientech.com/rci/wsimages/IssueAlert_Logo_188.jpg< October 16, 2001=20 Dynegy Remains on a Roll as Earnings Soar=20 By Will McNamara Director, Electric Industry Analysis=20 <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg< [News item from Reuters] Power marketer and trader Dynegy Inc. (NYSE: DYN) = announced that its third-quarter earnings hit the upper end of Wall Street = expectations as its backbone wholesale energy business delivered strong ret= urns. The company said earnings rose to $286 million, or 85 cents per dilut= ed share, from $177 million, or 55 cents per diluted share, for the same pe= riod in 2000. Analysts polled by Thomson Financial / First Call had expecte= d earnings in a range of 77 cents to 85 per share, with a mean expectation = of 82 cents.=20 Analysis: Dynegy has scored an impressive feat in beating its stellar finan= cial performance over the course of 2000. Given the restrictions placed on = power generators in California, general market upheaval and impact on the e= conomy that has resulted from the events of Sept. 11, one might have expect= ed Dynegy to see its earnings dip slightly compared to its 2000 performance= . Quite to the contrary, Dynegy has emerged once again as a bright star in = a rather bleak financial galaxy, demonstrating that its core focus on marke= ting and trading, along with a cautious approach into international markets= and uncertain businesses such as telecom, is a winning strategy. Even in a= weakened economy in which its own stock has fallen some 24 percent over th= e course of 2001, due in large part to market turmoil, Dynegy still stands = out as a leader in the energy field, and almost single-handedly has kept en= ergy stocks high on the radar screen of Wall Street.=20 Dynegy's numbers command attention. In addition to its impressive 3Q report= , during the first nine months of 2001 Dynegy has earned $571 million, or $= 1.69 a share, compared with $395 million, or $1.17, for the first nine mont= hs of 2000. Dynegy also has raised its earnings estimate for year-end 2001 = to a range of $2.09 to $2.10 per diluted share from the $2.07 target set on= Oct. 1. For 4Q and year 2002, Dynegy remains comfortable with its previous= ly established target of 40 to 41 cents a share and $2.50 to $2.60 a share,= respectively. The revised figures represent an increase of well over 30 pe= rcent for Dynegy's projections for 2000. Further, the company said that it = remains confident that its projected earnings per share (EPS) growth rate o= ver the next three years (through 2003) will average 20 percent to 25 perce= nt.=20 Without question, the vast majority of earnings increase at Dynegy is being= derived from the company's Marketing and Trade unit, which Dynegy said acc= ounted for more than 90 percent of the 3Q profits. In fact, out of the $286= million that Dynegy reported in the 3Q 2001 earnings, $263 million came fr= om the marketing and trading division, representing an increase of 85 perce= nt from 3Q 2000. Dynegy Marketing and Trade is engaged in a broad array of = energy businesses, including the physical supply of and risk management act= ivities around wholesale natural gas, power, coal, emission allowances, and= weather derivatives.=20 On the basis of the marketing and trade subsidiary, Dynegy is currently ran= ked as the fifth largest gas marketer in the country, and its ongoing succe= ss has resulted from a dual focus on natural-gas trading and power generati= on. For year-end 2000, Dynegy Marketing and Trade reported a 252-percent in= crease in recurring net income to $355 million, representing nearly 80 perc= ent of Dynegy Inc.'s overall results. The segment's performance benefited f= rom Dynegy's expanded North American natural-gas and power operations, incl= uding the integration of Illinova's unregulated generation assets, strong m= arketing, trading and risk management activities and a return to normal wea= ther patterns.=20 Clearly, this particular unit is the primary earnings driver for the entire= company. In the third quarter, Dynegy Marketing and Trade's North American= natural-gas volumes grew 12 percent to 11.0 billion cubic feet per day (Bc= f/d), an increase from 9.8 Bcf/d during 3Q 2000. Also under the same unit, = total power sales increased 86 percent to 90.5 million MWh in 3Q 2001, comp= ared to 48.7 million MWh in 3Q 2000. This 86-percent jump in total physical= power sales led to an 85 percent year-over-year increase in recurring inco= me for the marketing and trade division. According to Dynegy, the higher vo= lumes in both gas and power were the result of improved market liquidity, g= reater market origination, increased sales volumes on Dynegydirect, and inc= remental gas marketing in Canada.=20 Part of the expansion of this business will be an ongoing penetration of th= e European trading market. However, Dynegy maintains that, unlike its direc= t competitor Enron, its European expansion is methodical and cautious. Dyne= gy recently expanded its Dynegydirect trading portal into the United Kingdo= m, but its penetration of this market has been much slower than Enron, whic= h, according to Dynegy, tried to expand into the European market "in a hurr= y." Another Dynegy rival is Reliant Energy, which also expanded into Europe= in advance of other companies and is now reportedly considering a sale of = its electricity generation business in the Netherlands.=20 The comparison that Dynegy has made between itself and Enron may be intenti= onal. Along with being long-time Houston-based rivals, Dynegy must find its= current success even sweeter considering the turmoil that has taken place = at Enron over the last year. Of course, Enron lost its CEO Jeffrey Skilling= just over a month ago when he resigned amid the company's diminished stock= value and huge losses in the telecom sector. Enron released its own 3Q ear= nings report on Oct. 16. Enron's core wholesale trading and marketing divis= ion met targets and drove up profits by 35 percent. The company's earnings = also rose to $393 million, or 43 cents a share, from $292 million, or 34 ce= nts a share, in 3Q 2000. However, Enron posted a 3Q net loss as it faced $1= .01 billion in charges, which included a $287 million write-down on its Azu= rix venture, $180 million from the restructuring of its broadband unit and = $544 million in investment losses related to The New Power Company. What we= know presently is that Enron's stock has dropped about 57 percent over the= course of 2001, due to its troubled broadband sector, losses associated wi= th its Dabhol subsidiary in India and overall downward market trends.=20 If there is something that could be considered a blemish on Dynegy's curren= t record, it may be its telecom business, known as Dynegy Global Communicat= ions, in which the company reported a $15 million loss for the third quarte= r. Dynegy Global Communications seeks to capitalize on the growing converge= nce between energy and communications sectors by building a broadband marke= ting and trading system. Dynegy has said that the loss is due to costs asso= ciated with developing its 16,000-mile bandwidth network, which reaches 44 = U.S. cities and is expected to be completed in the four quarter. Unlike oth= er power companies that are trying to exit the telecom sector (Reliant, for= example), Dynegy still projects that it will find long-term success in thi= s area, in part because it is taking a cautious approach toward expansion. = Also, as another means of comparison with Enron, Dynegy's telecom business = lost $15 million in the third quarter while Enron's broadband unit took a l= oss of $80 million. Another unit taking losses is Illinois Power, Dynegy's = regulated transmission and distribution subsidiary, which reported a $15-mi= llion loss in 3Q 2001. Dynegy attributed this loss to a reduced industrial = load.=20 Perhaps the other area that may give pause to investors is Dynegy's engagem= ents in the California market, which still remains unresolved. Dynegy is re= portedly still owed about $320 to $325 million for power that was sold to t= he California utilities before the state government took over as the primar= y power purchaser. Despite Dynegy's best efforts to obtain the outstanding = balance, and its confidence that it will ultimately be paid, the financiall= y unstable condition of Pacific Gas & Electric Co. and Southern California = Edison makes the timetable for any such payment quite uncertain. Also impac= ting Dynegy's California involvement are reports that California lawmakers = want to renegotiate long-term agreements that the Department of Water Resou= rces signed with various power suppliers, including Dynegy, earlier in the = year. Wholesale prices have dropped considerably since the state of Califor= nia signed the long-term contracts, and thus the state wants to renegotiate= a better price for the power. Dynegy claims, however, that the contract it= signed with the state contains legal protection for Dynegy's interests.=20 Overall, however, Dynegy's 3Q financial report represents what is one of th= e few unqualified success stories in the energy industry. Stacked up agains= t other companies that have struggled against the volatility of the nation'= s economy, Dynegy is clearly flourishing. Like other companies with heavy a= ssets in generation, the fact that Dynegy's marketing and trading division = is the primary profit driver for the company is not a revelation. What is p= erhaps more important is the diligent way in which Dynegy has methodically = accumulated an arsenal of generation assets and expanded into new business = lines with a very cautious approach.=20 An archive list of previous IssueAlerts is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<. Advertising opportunities are also available on o= ur Website.=20 Our staff is comprised of leading energy experts with diverse backgrounds i= n utility generation, transmission & distribution, retail markets, new tech= nologies, I/T, renewable energy, regulatory affairs, community relations an= d international issues. Contact consulting@scientech.com <http://consulting= @scientech.com< or call Nancy Spring at 1-505-244-7613.=20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. If you would like to refer a colleague to receive our fr= ee, daily IssueAlerts, please reply to this e-mail and include their full n= ame and e-mail address or register directly on our site.=20 If you no longer wish to receive this daily e-mail, and you are currently a= registered subscriber to IssueAlert via SCIENTECH's website, please visit = <http://secure.scientech.com/account/<; to unsubscribe. Otherwise, please se= nd an e-mail to to IssueAlert <mailto:IssueAlert@scientech.com<, with "Dele= te IA Subscription" in the subject line.=20 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis = of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts= are not intended to predict financial performance of companies discussed, = or to be the basis for investment decisions of any kind. SCIENTECH's sole p= urpose in publishing its IssueAlerts is to offer an independent perspective= regarding the key events occurring in the energy industry, based on its lo= ng-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=3D10/16/2001<;
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