Dynegy Inc. (DYN) in the first quarter of 2012 reported an adjusted loss of 71 cents per share beating the Zacks Consensus Estimate of a loss of 91 cents. The upside came from high capacity generation which offset a sharp decline in revenues. Earlier, the company had incurred a loss of 59 cents in the prior-year period. Including one-time items, Dynegy’s first quarter net loss was 47 cents per share compared with a net loss of 64 cents in first quarter 2011.
Operational Results
In the reported quarter, Dynegy generated revenue of $177 million that missed both the Zacks Consensus Estimate of $426 million and the year-ago figure of $505 million.
Dynegy digested an operating loss of $21 million compared with an operating loss of $49 million for the same period in 2011. These results included pre-tax, unrealized, net mark-to-market gains of $30 million and $3 million during the quarters ending March 31, 2012 and 2011, respectively.
In the reported quarter adjusted earnings were $24 million compared with $87 million for the same period in 2011. The steep year-over-year decline was due to lower energy margin and capacity revenues, influenced by lower market prices and gas and power basis premium differentials. This was partially offset by lower operating and general and administrative expenses.
Overall, in the reported period, net loss totaled $58 million compared with a net loss of $77 million for the first quarter 2011.
Segment Update
Coal
Operating loss was $7 million compared with a loss of $32 million in the year-ago quarter. In the reported quarter, adjusted earnings came in at $13 million compared with $65 million during the same period in 2011. A 22% decline in average realized prices reflecting declining natural gas prices, coupled with an 8% weather-driven decrease in generation volumes, perpetrated the decrease in adjusted earnings.
Gas
Operating income was $19 million compared with first quarter 2011 operating income of $13 million. Adjusted earnings totaled $25 million during the first quarter 2012 compared with $27 million during the same period in 2011. In the reported period generation volumes more than doubled compared to the year-ago period. The increase in adjusted earnings was due to favorable spark spreads. This was partially offset by lower gas and power basis premium differentials associated with weak demand in the Northeast. In the reported quarter, operating expenses fell by $7 million compared to last year as expenses associated with a two-month outage at Casco Bay during 2011 did not recur in 2012.
DynegyNortheast Generation, LLC (:DNE)
Operating loss of $15 million was in line with the loss incurred in the year-ago quarter. Adjusted loss totaled $15 million during the first quarter 2012 compared with loss of $5 million during the same period in 2011. A 42% decline in average New York Zone power prices resulted in DNE plants to be uneconomical for a significant portion of the quarter, leading to an 82% decline in generation volumes and a 95% decrease in gross margin. An additional $3 million of the quarter-over-quarter decrease in adjusted earnings is attributable to lower capacity revenues.
Financial Condition
As of May 4, 2012, Dynegy had total liquidity of $983 million, comprising $726 million in unrestricted cash and cash equivalents, $17 million in letter of credit availability and $240 million in restricted cash available for collateral posting purposes.
In the reported quarter cash used in operations was $20 million, as compared to cash flow from operations for the first quarter of 2011 of $83 million. The decrease is primarily due to deconsolidation, lower margins at the Coal segment due to an approximate 22% decrease in realized prices, and higher cash outflows related to restructuring efforts.
During the first quarter of 2012, capital expenditures totaled $23 million, including $3 million in maintenance capital expenditures and $20 million in environmental capital expenditures. During the first quarter of 2011, capital expenditures totaled $66 million, with $25 million in maintenance capital expenditures and $41 million in environmental capital expenditures.
Our Take
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.
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.
Earlier, in November 2011, Dynegy filed for bankruptcy protection. In December, the company filed a proposed Plan of restructuring for the unit with the U.S. Bankruptcy Court for the Southern District of New York. Later, on May 1, 2012, the company and certain creditors of the company entered into a Settlement Agreement and a Plan Support Agreement. The Settlement Agreement was filed with and is subject to bankruptcy court approval. The Plan Support Agreement envisions a significantly stronger balance sheet for the company upon completion of the restructuring. The company will have reduced debt and lease obligations by over $4 billion and expects net debt at completion of the restructuring to be approximately $600 million. A hearing on the Settlement Agreement has been scheduled for June 1, 2012. The Plan Support Agreement contemplates the filing of a revised Plan and Disclosure Statement by May 30, 2012 and the completion of the restructuring by September 28, 2012.
Separately Dynegy also initiated a cost and performance improvement initiative known as PRIDE (Producing Results through Innovation by Dynegy Employees) during 2011. During the first quarter 2012, Dynegy recovered $8 million in incremental operating margin and cost improvements and $64 million in incremental liquidity from balance sheet improvements due to PRIDE initiatives. Total PRIDE related contributions for 2012 are expected to include margin and cost improvements of $39 million and balance sheet improvements of $100 million which will result in a total of $109 million in margin and cost improvements and $476 million in balance sheet improvements since the PRIDE program inception. Dynegy will continue to use the PRIDE initiative to improve operating performance, cost structure and balance sheet and to drive recurring cash flow benefits.
Currently, we retain a short-term Zacks #3 Rank (Hold) on the company. Presently we have a long-term Neutral recommendation on the stock. In the near term we would advise investors to focus on its Zacks #2 Rank (Buy) peers like National Grid Plc (NGG), and OGE Energy Corporation (OGE).
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