Red Ink Returns at Dynegy - TheStreet

Red Ink Returns at Dynegy

Shutting down a troubled trading operation will punish 2003 numbers, the company admits.
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dark past continues to color current results.

After showing recent signs of recovery -- capped by a surprise first-quarter profit -- Dynegy is operating in the red again. The Houston energy merchant, struggling to reinvent itself in the wake of


demise, blamed most of its current setback on a once-powerful energy trading division that has weakened the entire company.

Dynegy said Friday that it expects to deliver on second-quarter guidance -- excluding a series of trading-related losses -- but probably will fall short of meeting full-year targets. The company, already expected by analysts to report a 5-cent loss for the quarter, is clearly bracing for worse. Specifically, it has warned that trading and litigation costs will slash more than $200 million from second-quarter results.

The company pointed to an $85 million mark-to-market loss, along with $105 million in charges related to previously announced power contract settlements, as drags on its merchant business. It also weathered an unexpected rise in corporate expenses, including $30 million worth of legal reserves.

Dynegy faces a slew of litigation related to the trading division it's in the process of dismantling.

"As a result of these items ... the company will report a net loss for the quarter," Dynegy said in a prepared statement Friday. And "the higher-than-expected corporate-level expenses will negatively impact 2003 results."

Analysts polled by Thomson First Call were expecting Dynegy to end the year in the black, with a profit of 17 cents a share. News of the darkened outlook sent Dynegy shares spiraling below $4 for the first time in three months. The stock was down 7%, or 29 cents, to $3.88 in late-morning trading.


Dynegy spokesman David Byford described the second quarter as a "shoulder period" between high-demand seasons -- a stretch that's typically weak for the company anyway. And Dynegy itself directed investors to its "strong" liquidity and current refinancing plans as reasons for optimism.

Moody's on Thursday pointed to those refinancing plans as crucial to Dynegy's future.

"At this point, Moody's believes there is a fairly high probability that the banks will agree to ... allow these transactions to occur," Moody's said, when upgrading Dynegy's credit outlook from negative to developing. "If Dynegy is able to successfully complete these transactions, it will improve the company's debt maturity profile for the next several years."

Moody's said it may actually upgrade Dynegy's junk-rated credit a notch if the company pulls off the deal. But it also pointed out that the package isn't yet sealed. And it cautioned that new financing can't really solve Dynegy's long-term problems.

"The problem the contemplated transactions don't address is the significant amount of debt remaining in Dynegy's capital structure," Moody's wrote Thursday. "Furthermore, the maintenance levels of capital spending and cash interest are likely to consume the bulk of cash flow generated from operations, resulting in limited amounts of free cash flow available for material amounts of debt reduction."

Dynegy itself flagged these anticipated hikes in financing costs as contributors to a probable full-year earnings miss. The company expects to share its complete second-quarter results next Friday and update its 2003 guidance "as soon as practicable."