We are reaffirming our fair value estimate for Dynegy DYN after the company reported adjusted earnings before interest, taxes, depreciation, and amortization of $388 million for the third quarter and provided 2010 adjusted EBITDA guidance of $425 million-$550 million, which reflects its relatively weak asset footprint and fails to fully dispel covenant concerns heading into 2010. Adjusted EBITDA excludes the impact of mark-to-market accounting and noncash charges. Independent power producers like Dynegy have had a tough 2009 as a result of poor power pricing and weak demand due to cool weather and economic factors. We expected weak results for Dynegy, but we are far more concerned about 2010, as continued poor performance would bring the company perilously close to breaking a critical covenant. The company must maintain trailing-12-month adjusted EBITDA of at least 1.7 times net interest through the first quarter of 2010, 1.6 times through the second quarter, and 1.3 times through the fourth quarter. Assuming the midpoint of guidance, which is far from certain, Dynegy would be worryingly close to breaking the covenant as it stands. If the company's marginal coal plants suffer the same fate next year as they did this year, when it frequently was uneconomic to operate them, even increased run times at its combined-cycle facilities, which have helped boost results in 2009, may not be enough.Even after the asset sale to LS Power, Dynegy is not in a position to expand its footprint and will almost certainly have to focus on deleveraging before rationally considering expansion. A rapid turnaround in power markets would go a long way to making this problem disappear, but we are not holding our breath.
Get our full take on
Dynegy, Inc.
See our complete company report and outlook--including fair value estimate, consider buying and selling prices, risk rating, bull and bear arguments,
and star rating--with a free two-week Morningstar.com Premium Membership trial.
You will also get complete access to all 2,000 Stock Analyst Reports, 2,000 Mutual Fund Analyst Reports, and Morningstar's award-winning Portfolio Management and Screening tools.
Start my free trial
Learn more about Premium Membership
View Sample Analyst Report
More Analyst Research
Dynegy, Inc. Full Analyst Report
Analyst Notes
08-10-09 | 1:38PM Dynegy to Exit Partnership
| 
