Looks like I better buy a back up generator, looks like the NE is next for shortfalls.
Dynegy: Power Lack, Not Deregulation, Caused Calif. Woes
Dow Jones Newswires
By Christina Cheddar
Of DOW JONES NEWSWIRES
NEW YORK -- Dynegy Inc. (DYN) expects 2001 earnings to be between $1.80 and $1.85 a share, with first quarter earnings between 30 cents and 32 cents a share, the company said during a conference call Tuesday.
After the first quarter, the company expects second quarter earnings around 35 cents a share; third quarter earnings between 75 cents and 85 cents a share; and fourth quarter earnings around 40 cents a share.
The estimated range for 2001 is slightly ahead of Wall Street's expectations. According to First Call/Thomson Financial, a survey of 16 analysts produced a consensus estimate of $1.79 a share for this year.
Earlier Tuesday, Dynegy reported fourth-quarter recurring earnings of $105.9 million, or 32 cents a diluted share, on revenue of $10.01 billion. The results, which excluded several items, were 3 cents above First Call estimates of 29 cents a share.
Dynegy's fourth quarter results also reflect a reserve taken for unpaid power sales in California that are at risk for possible credit default. Similiar reserves have been taken by other power generators and wholesalers in the state.
Dynegy did not disclose the amount of the reserves. However, during the conference call, Dynegy said the reserve amounts to "pennies, not nickels."
Although the company took the reserves, it expects it will eventually collect the money it is owed.
"We believe it is prudent to reserve for it at this time," said President and Chief Operating Officer Steve Bergstrom.
Overall, Dynegy said earnings from its West Coast generation operations were "not material" to its earnings.
In 1999, Dynegy posted recurring net income of $45 million, or 19 cents a diluted share, on revenue of $4.64 billion.
While Dynegy posted fourth-quarter results that greatly outpaced Wall Street's estimates, many participating in the company's earnings conference call remained focused on the ongoing power crisis in California.
Dynegy's Bergstrom said California's troubles have not been caused by deregulation. Instead, the state failed to keep up with rising demand, he said. Other Dynegy officials added that weather conditions also exacerbated the problem.
"There is a true fundamental shortage of generation," Bergstrom said.
Dynegy Chairman and Chief Executive Chuck Watson concurred. He said California failed to address its energy problems until it was faced with a financial crisis.
Watson said that when the white papers are written about the California power crisis, many will see it was a California problem and not a problem with deregulation.
The executive expects a close examination of the situation will prevent California's troubles from permanently slowing deregulation in the U.S.
Although Watson expects the transition to deregulated electricity markets will cause dislocation, he said the process must be accelerated, not slowed, in order to bring the power markets into balance.
As in other markets, electricity deregulation will ultimately lead to lower prices for consumers, Watson said.
Dynegy officials support a multitiered approach to fixing California's broken power market.
President Bergstrom said a plan must include credit assurances for future power purchases, securitization of the debt owed by Edison International's (EIX) and PG&E Corp.'s (PCG) utilities for past power purchases, bilateral power purchase contracts, and the ability to pass power costs to customers.
California also needs to "curb the roadblocks" that have prevented some generation from being built in the state, Bergstrom said. This will help support new power plants, and allow California to meet the growing demand for power.
Passing along costs to customers would mean a rate increase for California consumers, and would likely lead to power conservation, Bergstrom said.
The executive said he is encouraged by California Governor Gray Davis's recent move to set aside state funds for power purchases. He said it was a plan that Dynegy officials laid out 10 days to two weeks ago, and "a good sign that things are starting to improve."
In 2000, Dynegy's marketing and trading operations earned 15% of its $355 million in net income in California, Bergstrom said. Marketing and trading account for 80% of Dynegy's overall results.
In 1999, marketing and trading earned $101 million.
The strong performance at the unit was helped by the expansion of its North American natural gas and power operations; strong marketing, trading and risk management activities; and a return to normal weather, the company said.
Going forward, Dynegy's power generation assets in California will make up 10% of its total generation assets Bergstrom said.
In addition, the company said it will not make any new capital investments in the state until it believes the state has resolved its power problems.
"We see other opportunities throughout the country ... with a higher return for lower risk," said CEO Watson. Also, the company is striving for geographic diversification, he said.
Like many other industry watchers, Dynegy officials believe California's troubles won't be experienced by other deregulating states because many contributing factors are unique to the state.
However, there are areas of the country that could see increased power price volatility, Dynegy officials said.
Dynegy's Bergstrom believes the northeastern U.S. is in for "a tough year" if summer temperatures return to normal levels.
If the mercury climbs, growing demand and tight supplies will lead to volatile power prices in the region, he said.
Still, Bergstrom doesn't expect to see a California-style financial crisis at Northeastern utilities in deregulated markets because there are mechanisms to pass higher costs to consumers.
Dynegy's Watson expects power price volatility in the West will lead energy companies throughout the U.S. to purchase a greater percentage of power through long-term contracts.
That could be good news for Dynegy.
Watson said Dynegy often receives higher margins on long-term power contracts than its does on a utility's spot market purchases. If more utilities switch to long-term contracts, "margins will be good or better than what we have seen in the spot market," he said.
Also, servicing a client's energy needs through long-term contracts often leads to other risk-management business with the client, he said.
Dynegy officials also stressed that at least some component of the higher power prices is a reflection of higher natural gas prices, which they, in turn, blame on a lack of a national energy policy.
Many in the industry saw the demand for natural gas rising, but there wasn't any encouragement to drill for more gas, the company said. As a result, natural gas supplies are tight, and prices climbed to record highs last year. Natural gas price currently remain three-times higher than historic averages.
-By Christina Cheddar, Dow Jones Newswires; 201-938-5166 |
