Dynegy (NYSE: DYN) is a holding company that engages primarily in power generation in the Midwest, Northeast and Southwest. The company operated primarily by producing wholesale energy then packaging and selling it to retail utility companies. With approximately 12,300 Megawatts (MW) of energy capacity and operations in six states, Dynegy is a serious industry player.
Over the past few years, Dynegy has undergone serious restructuring, recovering from a series of bad missteps in the early 2000s. Originally known as Natural Gas Clearinghouse, the company took a turn for the worse when it rebranded itself Dynegy in 1998, in the spirit of the much heralded "New Economy." As part of this shift, Dynegy began to rapidly expanding to areas like energy trading and broadband internet, adopting the strategies of its larger rival Enron. Dynegy would almost follow Enron into bankruptcy after an investigation revealed fraudulent accounting practices in 2001.
Fortunately, Dynegy avoided a trip to bankruptcy court by shedding assets and selling off its haphazard array of business ventures. Since announcing its restructuring plan in 2002, the company has significantly reduced operating expenses and recently illustrated a renewed focus on growth and expansion with its acquisition of LS Power, a privately held energy generation company. Analysts have lauded the acquisition as a leap forward to Dynegy because of the improved geographically diversity and cash flow the deal will provide. In all, the combined company will have over 20,000 MW in generation capacity.
Dynegy began in 1984 as Natural Gas Clearinghouse, a marketer of natural gas . The company first entered the business of energy production in 1997, when it acquired Destec Energy Inc, a former subsidiary of Dow Chemical with a strong presence in the Midwest energy production market. In 1998, Natural Gas Clearinghouse rebranded itself Dynegy and pushed to cast itself mold of the "New Economy." As part of this aggressive move Dynegy closely mimicked its older peer Enron, launching several business ventures including energy trading platforms and a broadband internet division. In 2001, the company made an unsuccessful bid for then troubled Enron which soon filed for Chapter 11 Bankruptcy. Dynegy nearly followed Enron into bankruptcy; in 2002 the company became ensnared in an accounting scandal. The company avoided a trip to bankruptcy court only by selling off assets, eventually shedding everything but its core merchant power division. Today, Dynegy remains focused on energy production.
After several unloading unrelated businesses to avoid bankruptcy in 2002, Dynegy continued to strip assets to pay down debt, shedding its natural gas pipeline operations and regulated utility business in 2004 and 2005. Today the company is focused exclusively on generating and selling energy from its 20 plants located throughout the United States which have a production capacity of 11,739 megawatts (MW). The company is organized as a holding company that conducts its business primarily through its subsidiaries. The company focuses its efforts on the generation and sale of energy from its 20 plants which are located throughout the country and can produce 11,739 MW of energy. Dynegy's plants all burn natural gas, coal or oil.
In 2009, DYN earned total revenues of $2.47 billion. This was a substantial decline from its 2008 revenues of $3.55 billion. Unsurprisingly, this had an adverse effect on its net income. Between 2008 and 2009, DYN had its net income decline from $174 million in 2008 to a net loss of $1.26 billion in 2009.
The company organizes its energy production into three regions.
The Midwest region represents the bulk of Dynegy's generation capacity. When examining energy generation portfolios, power plants are usually divided by capacity factor or the typical of percentage of total generation capacity a plant will use during a year. "Baseload" plants constantly produce energy and have high capacity factors whereas "peaking" plants have a low capacity factor because they only approach full generation capacity when baseline plants are strained during high demand periods. In the Midwest, Dynegy maintains a power plant fleet with over 4,200 MW of baseload generation capacity. Importantly, 3000 MW of the total capacity come from plants that use low-cost coal as fuel. Also, because coal dominates Dynegy's production methods in the Midwest, the region benefits when wholesale energy prices increase due to rising oil or natural gas prices. Because of these factors, the Midwest segment contributes the majority of Dynegy's cash flow.
Dynegy also has a small presence in the Northeast energy production market. Its Northeast portfolio currently consists of 2,800 MW of capacity. Two of the company's primary Northeast facilities have dual capacity for both coal and oil prices. Because of this dual capacity, the plants benefit when wholesale energy prices increase due to higher natural gas prices.
Dynegy also has facilities in the Southern region of the United States with just over 1,520 MW of capacity. Recently, Dynegy's Southern assets have been its worst performers, due to an unfavorable operating environment in the wholesale energy market. Barring an improvement in market conditions in the South, Dynegy's current assets in the South may continue to shed dollars for years to come.
Over the past decade the price of natural gas and oil has risen significantly, approximately tripling since the year 2000. These price increases stem from a host of different forces including rising global energy demand, limited refining capacity and geopolitical tensions. These huge price increases translate into much higher operational costs and oil and gas-fired plants. Although there have been dramatic increases in natural gas and oil prices, coal prices have remained relatively stable due to abundant supply in the United States. The rising fossil-fuel prices have made coal, particularly low sulfur coal, the power plant fuel of choice over the past few years. Dynegy's diversified portfolio of gas, oil and coal-fired plants mean that changes in the price of one fuel type i.e. natural gas will have an adverse affect on some operations and a positive effect on others.
Dynegy's profitability is a function of the difference between wholesale market prices for electricity and the cost of production. Most of Dynegy's production capacity is characterized by dispatched market structures where the market price is based on the price required to justify production of the last megawatt needed to balance demand. In this structure market prices are usually determined by natural gas prices because more costly natural gas-fired peaking plants are used to satisfy extra demand. Because of this market structure Dynegy has seen mixed effects from the run-up in oil and natural gas prices. On one hand, Dynegy's large coal-fired baseload facilities in the Midwest have benefited from increased natural gas prices. On the other hand, increased natural gas prices raise operational costs at Dynegy's gas-fired peaking facilities.
Another important factor that determines market prices in any given market is the weather. Typically, summer and winter weather extremes cause increased electricity consumption due to increased use of cooling and heating devices. On the other hand, milder weather during the spring an fall months tend to result in lower demand and lower market prices.
Over the past few years, global warming has moved from the fringes to become one of the single greatest challenges facing the world today. A growing body of scientific evidence ties carbon dioxide emissions to rising global temperatures. As a result of growing popular awareness of the risks of global warming, many large corporations have stepped up their efforts to project greener images. Additionally, and more importantly, the US government has been enacting more stringent legislation limiting carbon emissions. Because all of Dynegy's facilities are carbon-fired, tightened emissions standards will raise the cost of operation across most of its facilities and put pressure on profit margins.
Two fundamental trends bode well for Dynegy: increasing energy demand, and consolidation in the energy industry. Over the past few years, there has been a steady increase in energy demand in Dynegy's major regions of operation. This increase demand is slowly absorbing the excess generation capacity available in regions such as the Midwest, West and Northeast. Concurrently, local, state and federal governments are loosening regulation of the energy industry after decades of tight control. In response to this, there has been rapid consolidation in the energy industry due to benefits of large scale such as increased pricing power, stronger cash flows, and regional diversity. If demand continues to rise and consolidation proceeds unfettered they will both result in a more favorable pricing environment for Dynegy.
The wide variation in their operations makes a direct comparison of utility companies difficult. However, Dynegy has a few objective advantages over its peers. First, for its size Dynegy has impressive regional diversity. Regional diversity protects utility companies from local market fluctuations. Additionally, Dynegy has shed most of its prior business ventures including its regulated retail energy business making it more of a pure play on energy generation. Some of Dynegy's top competitors include Entergy (ETR) and American Electric Power Company (AEP).