Dynegy Inc. (DYN) reported second quarter adjusted loss of 31 cents per share ($38 million) lower than the Zacks Consensus loss estimate of 47 cents. However, the company had incurred a loss of only 24 cents ($29 million) in the prior-year period.

Including one-time items, Dynegy’s second quarter net loss was $116 million or 95 cents per share compared with a net loss of $191 million or $1.59 per share in second quarter of 2010.

Operational Results

In the second quarter, Dynegy generated revenue of $326 million that missed the Zacks Consensus Estimate of $413 million. However, it comfortably surpassed the year-ago figure of $239 million.

Adjusted earnings before interest, tax and depreciation and amortization (EBITDA) for the second quarter was $102 million, down 18% year over year. The results reflect higher generation volumes in its Midwest region and lower operating expenses in its Midwest and West regions.

However, these positives were dampened by lower realized prices across all regions, and lower generation volumes in the Northeast and West regions.

Segment Update

Midwest: Adjusted EBITDA for the region was up 21% year over year to $98 million. The results were driven by increase in total generation volumes, and higher market power prices. However, this was partially offset by decline in hedges, fewer outage days and the shutdown of the Vermilion facility.

West: The segment generated adjusted EBITDA of $22 million, down 31% year over year. The results reflect decline in total generation production volumes, lower revenues due to retirement of the South Bay facility and absence of contract termination payments that were received in the prior-year period. However, this was partially offset by decrease in operating expenses.

Northeast: Segment adjusted EBITDA was $9 million, down 76% from $37 million in the second quarter of 2010. The downside reflects decrease in total generation production volumes, lower dark spreads, lower realized prices and reduction in capacity revenues.

Other: This segment primarily consists of corporate general and administrative expenses, partially offset by interest income. Adjusted EBITDA for the segment was negative $27 million compared with negative $26 million in the prior-year period. General and administrative expenses (G&A) were $25 million and interest income was less than $1 million for the quarter.

Financial Condition

At the end of reported quarter, Dynegy had a total liquidity of $924 million, comprising about $505 million in cash on hand and short-term investments and $419 million of unused funds under the company’s credit facility. Dynegy’s net debt and other obligations were approximately $4.3 billion during the same period.

Capital expenditures during the quarter were $62 million, consisting of $21 million as maintenance capital expenditures and $41 million as environmental capital expenditures.

The company expects capital expenditures in fiscal 2011 to include $100 million in maintenance capital and $150 million related to environmental capital.

Restructuring

Along with its earnings results, Dynegy Inc. has completed an internal restructuring in order to create separate coal-fueled power generation and gas-fueled power generation units named as “CoalCo” and “GasCo.” As a result, the company has now reorganized its operations into three segments: Gas, Coal and Other.

Dynegy Power, LLC owns and operates the Gas segment with a portfolio of eight primarily natural gas-fired intermediate and combustion and steam turbines diversified across the West, Midwest and Northeast regions of the United States with a total generating capacity of 6,771 MW.

Dynegy Midwest Generation, LLC owns and operates the Coal segment with a portfolio of six primarily coal-fired baseload power generation facilities located in the Midwest, and has a generation capacity of 3,132 MW. Dynegy’s remaining assets that include leasehold interests in the Danskammer and Roseton facilities constitute the company’s third business segment.

These new segments closed on new senior secured credit facilities of $1.7 billion. The new credit facilities consist of a $1.1 billion, 5-year senior secured term loan facility available to GasCo and a $600 million, 5-year senior secured term loan facility available to CoalCo.

The proceeds of the borrowings under the new credit facilities will be used to repay certain outstanding indebtedness under Dynegy Holding Inc.’s senior secured credit agreement, cash collateralize letters of credit and provide cash collateral for existing and future collateral requirements, at the option of Dynegy Power, LLC; repay certain debt related to subsidiaries of Sithe Energies, Inc.; make up to an aggregate of $400 million of distributions to parent holding companies; pay related transaction fees and expenses and fund general working capital and liquidity requirements.

The company expects to report its results in these new segments commencing with its third quarter 2011 release.

At the Peer

Recently, one of the company’s competitors Duke Energy Corporation (DUK) with a Zacks #3 Rank (Hold) rating, announced its second-quarter 2011 operating earnings of 33 cents per share, beating the Zacks Consensus Estimate by 3 cents. However, the results were marginally lower than the year-ago earnings of 34 cents per share.

Our Take

Dynegy Inc. has a geographically disparate customer base and diversified power generation portfolio which would result in an upside to margins. Looking forward, the performance of the company will improve only through increases in power prices, drops in reserve-capacity margins and improvement in wholesale electricity demand. Additionally, the completion of internal restructuring and the successful closing of the new separate credit facilities will facilitate and give operational and financial flexibility to the company.

However, the tepid pace of the U.S. economic recovery keeps us on the sidelines about whether the company will be able to generate the requisite cash flow for its needs. The company presently retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.

Houston-based Dynegy Inc., through its subsidiaries provides wholesale power, capacity and ancillary services to various groups of customers in six states in the Midwest, the Northeast and the West Coast. It diversified nature puts it in an advantageous position to capitalize on regional differences in power prices and weather-driven demand.
 
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