Whatever mistakes independent power producer Dynegy (NYSE:DYN) made in the past, the current management team cannot be accused of laziness in its efforts to repair the damage.
Not only has Dynegy moved to get out of the regulated power business, it's also been relatively aggressive in selling assets in its efforts to restructure the balance sheet. And it's clear that management isn't through yet, with the company now considering disposing of the midstream business, which includes gathering, processing, fractionating and transporting petrochemicals.
First-quarter results were fairly promising. While revenue was down 10% versus the prior year, the number still beat the median estimate by a good margin. So too with net income -- although the reported loss of $267 million, or $0.70 per share, looks ugly at first glance, $265 million in charges were included in that number.
There was a year-over-year EBITDA (earnings before interest, taxes, depreciation, and amortization) decline in power generation; net volume declined 9% due to maintenance shutdowns, and there were lower earnings from West Coast Power after a contract expired. On the plus side, Dynegy is seeing good market pricing and continues to convert more of its facilities to the cleaner-burning Powder River Basin type of coal.
The midstream business will definitely draw more attention. EBITDA climbed from last year's result if you exclude a gain on sale in 2004, and both volumes and spreads are strong.
The big news is Dynegy's announcement that it's evaluating options for the midstream business -- in other words, contemplating a sale. There is no doubt that midstream businesses are hot these days, and limited partnerships and private equity groups are both actively trying to buy more assets in the industry.
Of course, it's impossible to say what sort of offers Dynegy will receive, but many midstream businesses are trading at multiples of EBITDA in the low teens. If Dynegy's estimate of 2005 EBITDA for the midstream business is accurate and that valuation holds up, the company could possibly see more than $3 billion in proceeds from a sale.
While midstream ops is a very good business to be in, it doesn't really fit into what Dynegy's management wants the company to be -- that is, an independent electricity generator. So to that extent, I've got to applaud management for avoiding the "magpie complex" that leads some managements to continuously collect assets and refuse to sell them -- whether they fit in together or not.
No doubt the independent power business has taken some hard knocks over the past few years, and peers like Calpine (NYSE:CPN), AES (NYSE:AES) and Reliant Energy (NYSE:RRI) are all still trading well below their peak valuations. The power market seems to be improving, though, and as the strong recent stock performance of AES would suggest, investors are still willing to bid up power stocks if they like what they see at the bottom line.
We've got more on both electricity producers and midstream operators:
- Profits in Enterprise's Pipeline
- Duke Powers Up Another Quarter
- Can Calpine Generate More Cash?
- PVR's Lovely Lump of Coal
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
