continues to dismantle the house that Chuck built.
That empire, constructed by Dynegy founder Chuck Watson, turned into a virtual house of cards after Enron spiraled into bankruptcy and left the industry in shambles nearly two years ago. So Bruce Williamson, Watson's conservative replacement, keeps reducing the company in an effort to find the core foundation necessary to construct a smaller, but stronger, Dynegy.
On Monday, that strategy meant sacrificing a big regulated asset that once solidified Dynegy as a major diversified energy player. Dynegy is selling Illinois Power to
in a $2.25 billion transaction that will bring some new cash in the door but will primarily chip away at the company's giant debt load. Dynegy, which paid $2 billion for the utility's parent four years ago, now stands to collect $425 million in cash and promissory notes -- and wipe out $1.8 billion in debt -- by parting with the asset.
"Restoring the balance sheets of both Dynegy and Illinois Power and creating financially stronger companies are the right things to do," Williamson said in a prepared statement on Monday. "The improvements we achieved in our financial position over the last year have enabled us to pursue a new strategic direction for Dynegy, and we decided that Illinois Power will be better placed with a proven leader in the regulated utility industry."
Illinois Power is a Midwestern utility with significant regulated delivery assets. By shedding the division, Dynegy has detoured from the industry's general recovery plan of selling unregulated assets and keeping safer regulated ones instead. To be sure, Dynegy is following the herd out of the risky energy trading business that once served as its core. But it continues to bank on the sale of power, natural gas and natural gas liquids for its ultimate recovery.
"Illinois Power is the smallest of our three business units," Williamson explained in a telephone interview with
on Monday. "If you look at Illinois Power ... the competitors are companies that are many, many multiples
its size. That's different from our generation and midstream businesses, where we have good scale."
The market instantly cheered the transaction. Shares of Dynegy -- which soared last week after an upbeat report from the company -- jumped another 7.7% to hit $4.32 on Monday.
Goldman Sachs analyst David Maccarrone described the Illinois Power sale as a positive development that will, among other things, accelerate Dynegy's debt reduction and narrow the company's focus.
"We continue to view Dynegy as our favorite energy merchant based on our estimated mid-cycle value of $5 to $7, a value we believe Dynegy will trend toward as debt reduction accelerates and power markets recover," Maccarrone wrote.
Still, Maccarrone stops short of recommending Dynegy shares -- offering an in line rating instead -- due to the company's "still significant leverage and limited visibility to an upturn in power markets."
RBC Capital analyst Mark Easterbrook, who has a sector perform rating on the speculative stock, had actually predicted that Dynegy might clear more on the Illinois Power sale. In a research note on Friday, Easterbrook estimated that Dynegy would collect between $2.18 billion and $2.79 billion for the asset. Still, the price tag was clearly in line with both his and Maccarrone's expectations.
And Easterbrook correctly predicted that Dynegy shares would jump after the sale was announced.
"We believe the Dynegy shares represent a solid trading opportunity at this juncture," he wrote on Friday. "We look for the next catalyst on the Dynegy shares
to be an announcement on the sale of the Illinois Power subsidiary."
Easterbrook did acknowledge that Dynegy missed his third-quarter earnings projections last week. He, therefore, revised his full-year estimate -- originally calling for a 1-cent profit -- to a loss of 3 cents a share. He also predicted that Dynegy would muster only modest profits for at least the next two years.
"The debt burden is still high," he noted as well. "Although the company gets high marks for
its debt restructuring, we believe the debt agencies boosting Dynegy's debt rating may be some quarters down the road."
Still, Easterbrook sees long-term opportunities for risk-tolerant investors.
"We believe that Dynegy is getting closer to becom
ing a free cash flow story," he wrote. And "we could see the debt/capitalization percentage
currently around 74% achieve management's goal of 50% within three years."
Nevertheless, some have speculated that Dynegy will never regain its former might. But Williamson, for one, isn't necessarily in that camp.
"Forever's a long time," he told
on Monday. "If we do the right thing ... there will be good growth opportunities down the road."