Dynegy Inc. (DYN) recently reported that to date it has spent $600 million to cut emissions of pollutants at its power plants in Illinois. Dynegy expects total investment to be approximately $1 billion.
Work has been completed at Dynegy’s five out of eight coal-fired units in Illinois. Work on Dynegy’s biggest plant, the Baldwin Energy Complex in southwest Illinois, is expected to conclude by 2013. Combined with the company’s switch to low-sulfur coal, Dynegy coal-fired plants in Illinois are expected to cut emissions of nitrogen oxides, sulfur dioxide and mercury by about 90%.
Dynegy’s low-cost, well-operated power generation portfolio spreads across seven U.S. states is a diverse mix of coal, oil and natural gas. Its generating capacity is also located across seven U.S. states with 43% of the company’s portfolio located in the Midwest, 32% in the West and 25% in the Northeast.
The breakdown of Dynegy’s generating capacity is as follows: 34% is natural gas-fired combined-cycle capacity, 25% is natural gas-fired peaking capacity, 31% is baseload coal/oil capacity and 10% is dual fuel capacity. Diversified generation assets help the company to minimize the impact of volatile commodity prices on its cost structure.
Our continued positive view of Dynegy shares reflects the level of progress that management has made in rationalizing the business portfolio and strengthening the company’s financial health. Dynegy has recorded a subdued performance in recent times owing to higher mark-to-market losses on account of rising forward power prices.
Nevertheless, we expect this trend to reverse over the longer term as higher forward prices incurred will invariably lead to higher margins, while sales volumes will improve in the electricity market. With its focus on electricity operations and diversified power-generation fleet, Dynegy is well prepared to take full advantage of the situation.
Dynegy’s geographically-disparate customer base and diversified power generation portfolio, strong balance sheet, successful completion of the LS Power transaction and its rationalized and consolidated asset portfolio have improved visibility of its underlying earnings strength. However, a tepid economy, lower demand for electricity, risks in the merchant power space and a non-dividend yield continue to restrain valuation for the company. Thus, we reiterate our Neutral recommendation on the Zacks #3 Rank stock.
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