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Dynegy (DYN) to Sell Assets Worth $780M to Lower Debt Burden

Zacks Equity Research

Dynegy Inc. DYN, announced the sale of three of its power generating plants for nearly $300 million.

Under the terms of the agreement, Dynegy will receive $180 million in cash by selling its Lee Energy Facility, IL, a gas-fueled peaking 625 megawatt (MW) asset to Rockland Capital’s affiliate and $119 million from the sale of Dighton and Milford Energy Facilities, MA to Starwood Energy Group Global.

The remaining part of $480 million sale funding will be garnered from the sale of the company’s Armstrong and Troy Energy Facilities, to LS Power.

The company intends to utilize the entire sales proceed of $780 million, toward debt reduction purposes.

Efforts toward Debt Reduction

Dynegy has been working on its strategy to strengthen balance sheet and monetize non-core assets, while using the proceeds to fund growth projects and also utilize the excess to lower debt burden. In Nov 2016, the company sold its 50% equity interest in Elwood Energy, LLC which generated nearly $173 million and the proceeds were utilized to lower debts.

Earlier this year in Feb 2017, the company completed The Illinois Power Holdings (Genco) financial restructuring program and repaid debts worth $640 million.

This current initiative to sell assets and lower debt level is in tandem with the initiatives taken by the company to strengthen balance sheet and lower the cost of servicing its debt capital.

Our View

The company exited first-quarter 2017 with total long-term debt of $9.2 billion compared with nearly $8.8 billion at the end of 2016. Even with the debt reduction earlier this year, the debt-to-capital ratio of the company is presently 79.16%, much higher than the S&P 500 level of 41.80%.

Given the ongoing increase in interest rate, the rising debt levels can adversely impact the performance of the company. We believe Dynegy needs to continue with debt restructuring initiatives to improve capital structure and create long-term value for shareholders.

Price Movement

In the last 12 months, Dynegy has underperformed the Zacks categorized Utility - Electric Power industry. The company’s shares lost 59.2% against the industry’s gain of 0.2%.

The power industry is a capital intensive, cyclical commodity business with significant commodity price volatility. The price underperformance can be attributed to the earnings volatility that Dynegy has been facing for quite some time now, due to volatility in supply, fuel price volatility, interest rates, and other seasonal factors.

Stocks to Consider

Dynegy currently carries a Zacks Rank #3 (Hold).

Better-ranked players from the Utility - Electric Power space include the likes of Algonquin Power & Utilities Corp. AQN, NextEra Energy, Inc. NEE and NorthWestern Corporation NWE. All these three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Algonquin Power delivered an average surprise of 55.89% in the trailing four quarters. Its 2017 estimates have risen by 14% to 49 cents per share in the last 60 days.

NextEra delivered an average surprise of 4.28% in the trailing four quarters. Its 2017 estimates have risen by 0.3% to $6.67 per share in the last 60 days.

NorthWestern delivered an average surprise of 1.71% in the trailing four quarters. Its 2017 estimates have risen by 0.3% to $3.41 per share in the last 60 days.

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