DYN - Dynegy

[lathinker]

This one is for bottom fishermen...

 

Dynegy operates power generating facilities in the Northeast,Mid-Atlantic, Midwest an Texas which can produce >30 GW of electricity.

DYN's facilities are exclusively coal- and gas-fired. The stock caught my attention after it tanked from about  34 USD to 6.50 USD in the last two years. The company is highly levered with a 6.8x Debt/EBITDA as of Dec 2016. They have however outlined a plan to achieve a 4.5x ratio by end of 2018.

 

There is a lot of restructuring going on including asset sales, purchase of other assets and a prepackaged bankruptcy of DYN's affiliate IPH and management are committed to reduce DYN'a debt load... at least they say so. Their next major maturity is 2.1 bn in 2019 and they have just stressed they can repaid that amount from internal sources (inluding asset sales).

 

DYN generated an EBITDA of 1 bn in 2016 and is expecting 1.2-1.4bn in 2017 while the market cap stands at about 860mm.

 

If the company is worth 6x EV/EBITDA at the end of 2018, they manage to execute their deleveraging plan and EBITDA is 1.2bn, you might get a double.

 

That said, I just bought a tiny position to track the stock thus far, since I am still looking to understand the regulatory framework for the company better. Any comments on that side are much appreciated.

 

 

[winjitsu]

All IPPs are trading at depressed levels (Calpine, Atlantic Power etc...).

 

I'm invested in Atlantic Power and Vistra Energy, but I am becoming increasingly bearish on the sector the more research I do. Here's why:

 

• Assets are fixed life and depreciating, so unlike other operating businesses, EBITDA will shrink. Basically, economic depreciation is a real cost and it is larger than maintenance expenses and capex. Moreover, technology gets better over time, so older plants are less competitive. 
  
• Dynegy owns mostly coal plants, which are out of favor and less competitive than natural gas plants. As a result, they are retiring them at a pretty fast clip. Several theses on this sector depend on natural gas prices rising
  
• There's a huge government component. For example, Dynegy is threatening to leave Illinois (aka shut down their plants) after Exelon received some generous subsidies for their nuclear power plants. Calpine is also lobbying Texas to implement a capacity market. There are other shenanigans like http://www.latimes.com/projects/la-fi-electricity-capacity/
  
• But the biggest of all is the number of irrational players in the wind and solar space due to tax incentives. For example, Discovery Communications is building a solar farm for tax benefits. On the latest Berkshire Hathaway report, Mid American is building additional renewable energy assets for tax benefits for the rest of the org as well. I don't know how incumbents in this space can compete with players that are seeking tax benefits rather than economic return
  

 

I think shale gas and solar/wind subsidies are leading a secular shift in the industry. There may be pockets of value (Long term PPAs? Owning a retailer?), but Dynegy has it worst as a merchant coal producer. Its hard for me to see how thing will revert to the mean.

[solobz]

Agree with all of winjitsu's points. supply/demand dynamics in industry are awful and are only poised to get less favorable for nonrenewable players. demand outlook is basically zero and renewable supply is relentless and will continue to get more and more economical. though management insists the 2019 maturity is taken care of, I'm not totally convinced - may need some secured for a partial refi on it. then the focus goes to the 2022, 2023, 2024...and so on. it's going to be a slog - and that's assuming normal credit markets. tighter credit will make it more difficult. personally I don't think the brain damage is worth it.

[Aqul]

All IPPs are trading at depressed levels (Calpine, Atlantic Power etc...).

 

I'm invested in Atlantic Power and Vistra Energy, but I am becoming increasingly bearish on the sector the more research I do. Here's why:

 

• Assets are fixed life and depreciating, so unlike other operating businesses, EBITDA will shrink. Basically, economic depreciation is a real cost and it is larger than maintenance expenses and capex. Moreover, technology gets better over time, so older plants are less competitive. 
  
• Dynegy owns mostly coal plants, which are out of favor and less competitive than natural gas plants. As a result, they are retiring them at a pretty fast clip. Several theses on this sector depend on natural gas prices rising
  
• There's a huge government component. For example, Dynegy is threatening to leave Illinois (aka shut down their plants) after Exelon received some generous subsidies for their nuclear power plants. Calpine is also lobbying Texas to implement a capacity market. There are other shenanigans like http://www.latimes.com/projects/la-fi-electricity-capacity/
  
• But the biggest of all is the number of irrational players in the wind and solar space due to tax incentives. For example, Discovery Communications is building a solar farm for tax benefits. On the latest Berkshire Hathaway report, Mid American is building additional renewable energy assets for tax benefits for the rest of the org as well. I don't know how incumbents in this space can compete with players that are seeking tax benefits rather than economic return
  

 

I think shale gas and solar/wind subsidies are leading a secular shift in the industry. There may be pockets of value (Long term PPAs? Owning a retailer?), but Dynegy has it worst as a merchant coal producer. Its hard for me to see how thing will revert to the mean.

 

What are your thoughts on VSTE? It suffers from some of the same issues, but has a much better balance sheet, and is cheaper (at least on unlevered metrics) than the other comps.

[winjitsu]

What are your thoughts on VSTE? It suffers from some of the same issues, but has a much better balance sheet, and is cheaper (at least on unlevered metrics) than the other comps.

 

Purely event-driven, short-term reversion to the mean in terms of multiples once they list on NYSE later this week.

[Aqul]

WSJ reports that VSTE is in talks with DYN, although there is no confirmation that a deal will take place. The idea that these two would merge has been raised before-never thought that things would progress so quickly.