Dynegy Crosses Another Hurdle - Analyst Blog

Dynegy Inc. (DYN) has received regulatory approval from the New York Public Service Commission (NYPSC), for its proposed transaction with an affiliate of Icahn Enterprises L.P. (IEP). Per the transaction, Icahn Enterprises will acquire Dynegy for $5.50 per share in cash, or approximately $665 million.

Under the terms of the agreement, Dynegy stockholders will receive $5.50 in cash for each outstanding share of Dynegy common stock they own, which is $0.50 per share and represents a 10% premium to Dynegy's average closing stock price over the last 30 trading days. Icahn Enterprises the largest stakeholder in the company already has an approximately 9.9% stake.

The Icahn deal will go through if shareholders tender at least half of Dynegy stock and the company doesn't receive any better offers by the January 25, 2011, deadline that Dynegy has set. If Dynegy accepts Icahn's offer, the company expects to close the purchase in the first quarter of 2011.

Dynegy supplies wholesale electric power to utilities, cooperatives, municipalities and other energy companies in the Midwest, the Northeast and the West Coast -- providing a relatively stable and growing earnings stream.

Geographic disparity in the target markets of Dynegy has helped shape a portfolio that is well-positioned for capitalizing on arbitrage opportunities arising from regional differences in power prices and weather-driven demand.

Dynegy's low-cost, well-operated power generation portfolio, which spreads across six U.S. states, is a diverse mix of coal, oil and natural gas. Diversified generation assets given the company's cost structure act as a natural hedge against commodity price volatility.

Dynegy's prudent financial management has helped minimize generation dispatch costs. To cater to its coal-based generation assets, the company has contracted substantially all its coal requirements until 2012. Also, in a smart move, it has inserted a non-fuel price escalator until 2013 for its coal transportation contract by rail.

In the near-term, the Zacks #3 Rank (Hold) Dynegy stock is expected to digest losses due to weak forward natural gas prices and tepid forward Midwest power prices. The company expects a net loss in the range of $180–$200 million in fiscal 2010.