Dynegy Flickers

This wasn't quite what I had in mind. I was hoping to set up Dynegy (NYSE: DYN) and NRG Energy (NYSE: NRG) as a compare-and-contrast exercise, highlighting the benefits of both companies' different approaches. Then Dynegy had to go and spoil it all with a disappointing quarterly announcement.

For the fourth quarter, Dynegy reported that revenues rose 90%. However, its operating loss also rose considerably, and the loss from continuing operations was about 73% higher as well.

As with NRG Energy (and many other similar companies in the independent power generation business), earnings can be a little misleading. Unfortunately, EBITDA from continuing operations was nearly twice as bad as last year's numbers, and free cash flow for the year was negative, according to my more straightforward calculation (operating cash flow minus capital expenditures). Then again, if you add back the cash collateral commitment the company had to make, free cash flow would have been positive.

It also didn't help that Dynegy lowered its guidance for both EBITDA and free cash flow. While higher commodity costs may be to blame, when do investors ever really think that lower is better?

That said, I still believe that there are two important longer-term trends starting to play out here. First, overall power pricing seems to be improving (provided that recent declines in natural gas prices don't extend even lower). Second, the company's contracts with Ameren (NYSE: AEE) still expire in 2006, and the opportunity to shift from below-market to market pricing in Illinois could really boost cash flow.

There's also renewed interest in consolidation in the power business. Even Warren Buffett of Berkshire Hathaway (NYSE: BRK-A) commented in the company's annual letter to shareholders that he expected to be active in this market again. So while Dynegy may still be one of the riskier plays in independent power, today's disappointment might be an opportunity for investors with a longer-term focus to add some shares.

Switch on further Foolishness:

• NRG Energy: Worth the Trouble?
• A Spark for Dynegy
• Another Jolt for Calpine

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).