While bankruptcy is almost always the end of the line for common-equity shareholders, sometimes the companies themselves re-emerge with a new lease on life. Although airlines seem to habitually dip in and out of bankruptcy, other companies in fields such as telecommunications, retail, and power generation have made something of themselves on the other side of Chapter 11.
On which side of the fence will independent power producer Mirant (NYSE:MIR) find itself? Having spent nearly three years in bankruptcy, the company emerged 70 days ago with a cleaner balance sheet and, hopefully, a better operating plan.
Because Mirant has been operating in bankruptcy, year-over-year financial comparisons aren't quite as helpful. Nevertheless, it's worth noting that the company produced $779 million in adjusted earnings before interest, taxes, depreciation, and amortization, with nearly half of that amount coming from the company's operations in the Philippines. Provided you add back some cash consumption related to expenses in exiting bankruptcy, Mirant would have been free cash flow-positive for 2005.
Certainly, though, the issue for investors now is what the future holds. For now, it seems that the power-generation market is heading into a cyclical upswing. Mirant's management seems to be taking a middle road with hedging, and the company should see some upside if or when the spark spreads start expanding.
I also like it that today's management talks a good game when it comes to serving shareholders. Company execs have cut down trading activities (energy trading is part of what got them into trouble), and I like to hear comments such as "we are not a bank" with respect to how they foresee using future excess cash flows.
There are plenty of ways to value these companies -- multiples of EBITDA, market capitalization/enterprise value per MW of capacity, discounted free cash flow, and so on. But Mirant looks pretty interesting across the board. Of course, NRG Energy (NYSE:NRG), Dynegy (NYSE:DYN), and AES (NYSE:AES) have their charms as well. If managers really have learned from the failures of the past, this could be a sector well worth some advanced due diligence, particularly if chatter about industry consolidation proves true.
Power up with further Foolishness:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
