Dynegy Misses

Dynegy Inc. (DYN - Analyst Report) reported a third quarter adjusted loss of 21 cents per share lower than the Zacks Consensus estimate of a loss of 19 cents. Also, the company had incurred a loss of 18 cents in the prior-year period. The decline stemmed from lower generation, lower realized prices from spark spreads, and lower revenues from fewer hedging opportunities.

These reductions were partially offset by a decrease in general and administrative expenses as a result of cost savings and productivity initiatives. Including one-time items, Dynegy’s third quarter net loss was 61 cents per share compared with a net loss of 20 cents in third quarter 2010.

Operational Results

In the reported quarter, Dynegy generated revenue of $516 million that missed both the Zacks Consensus Estimate of $762 million and the year-ago figure of $775 million.

Operating income came in at $5 million, compared to operating income of $50 million in the year-ago quarter. Reported quarterly performance however was affected by mark-to-market losses of $13 million, while the year-ago quarterly performance was boosted by mark-to-market gains of $132 million.

Adjusted earnings for the third quarter of 2011 totaled $106 million, a decrease of $53 million compared to the third quarter of 2010. Overall the company's net loss for the quarter widened to $75 million from $24 million in the prior-year period.

Segment Update

Coal

Operating income was $4 million compared to $85 million in the year-ago quarter. In the reported quarter adjusted earnings came in at $50 million compared to $71 million in the year-ago period. Lower hedged prices and a 12% reduction in generation volumes resulted in the lower quarterly results year over year.

Gas

Operating income was $28 million compared to an operating loss of $37 million in the year-ago quarter. However, year-ago numbers were affected by a $134 million asset impairment charge. In the reported quarter adjusted earnings were $52 million compared to $89 million in the year-ago period.

The gas segment's results were driven primarily by lower power prices and spark spreads in the company's key markets which resulted in lower generation volumes and lower energy margin. Additionally, the Gas segment saw lower contributions from commercial activities.

Dynegy Northeast Generation, LLC (DNE)

Operating loss was $27 million compared to operating income of $18 million in the year-ago quarter. The majority of the decrease is due to a net change in mark-to-market results from income of $16 million in the year-ago period versus a loss of $26 million in the reported period. Adjusted loss of $1 million in the reported quarter was flat versus the year-ago period.

Financial Condition

At the end of the reported quarter, Dynegy had a total liquidity of $1.2 billion, comprising about $881 million in cash and cash equivalents, $150 million in letter of credit capacity and $137 million in unused collateral. The company generated $50 million of cash from operations for the nine month period ending September 30, 2011 versus $670 million generated in the year-ago period.

The year-over-year difference is driven by lower operating results in 2011 compared to 2010 and a $379 million net change in collateral associated with broker margins in support of the company's hedging program.

Our Take

Dynegy Inc. has a geographically disparate customer base and diversified power generation portfolio which would lead to an upside in margins. Going 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.

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. Also the ongoing chapter 11 bankruptcy proceedings fuel apprehensions about the company. Thus we retain a short-term Zacks #3 Rank (Hold) on the company. Presently we have a long-term Neutral recommendation on the stock.

Last week, business units of the company Dynegy Holdings, LLC, Dynegy Northeast Generation, Inc., Hudson Power, L.L.C., Dynegy Danskammer, L.L.C. and Dynegy Roseton, L.L.C. filed for voluntary bankruptcy protection under Chapter 11. The next hearing in the case will be on December 2, 2011, in the U.S. Bankruptcy Court for the Southern District of New York.

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. Its diversified nature provides arbitrage opportunities in terms of regional differences in power prices and weather-driven demand.

Read the full analyst report on DYN