Dynegy's (NYSE: DYN) teleconference Wednesday brought to mind the old joke about an optimistic little boy. Given a pile of horse manure, he eagerly digs through it, insisting, "There's got to be a pony in here somewhere!"
But optimists didn't have to dig long. Dynegy said that it expects EBITDA to grow by an annual average of 15% over the next five years. In 2008, EBITDA should come in at $1.1 billion to $1.2 billion, according to management. Free cash flow, excluding adjustments not related to core operations, is expected to come in at $200 million to $300 million, versus an expected $215 million to $265 million in 2007.
The company estimates that net income will amount to $140 million to $200 million in 2008, or between $0.17 and $0.24 per share. Assuming projections hold, it will mark the second consecutive year of positive earnings. That'd be a welcome change from Dynegy's $333 million loss in 2006.
So the optimists might be right. The company has been making progress in paying down debt, and its recent purchase of LS Power gives it greater scale, which could reduce some overhead. It has also converted some of its coal-burning plants to the cleaner-burning Powder River Basin variety, creating fewer emissions and requiring less maintenance.
Other power generators have enjoyed recent rebounds, too. Fitch Ratings announced Tuesday that it has upped its credit outlook to "positive" for NRG Energy (NYSE: NRG), Mirant (NYSE: MIR), and Reliant (NYSE: RRI), in addition to Dynegy. But they all remain below investment-grade, in the "junk" bond range.
But if you're looking for a long-term investment in the power-generation industry, I'm not sure Dynegy is the best choice. Most of the company's plants are fired by natural gas, which is more expensive than coal, so it has a potentially significant competitive disadvantage. If more coal-fed power plants are canceled, or if nuclear is stymied by political opposition, Dynegy's gas-fired plants will look more appealing.
But for a long-term bet, I'd look elsewhere -- though not necessarily in the nearest pile of manure.
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