Dynegy, INC.
We continue to view Dynegy Inc. as an attractive
turnaround situation.
The recent decline in the price of the shares of Dynegy
Inc. can be traced to the following issues:
- A shareholder lawsuit has been initiated against the
company because they allege the company did not outline
its $850 million loan from Citibank. We are not too concerned
about this lawsuit since such suits have become commonplace
when a stock drops precipitously. Additionally, the company
has said it is not concerned.
- The contemplated sale of the transmission lines in Illinois
for about $240 million will be delayed for a short time.
Despite this delay, S+P and Moody’s both announced
that this short delay would not affect the company’s
credit rating. It appears the market reaction to this news
is more emotional rather than rational.
- The preferred stock ($1.5 billion) that is owned by Chevron
Texaco recently caused concern that Dynegy
may issue a significant amount of common stock. Under terms
of the preferred stock, Dynegy can make the dividend payment
with its common sock. While this could happen, the total
amount of stock would approximate 20 million shares or about
5% of its outstanding stock. This potential has resulted
in some arbitrageurs to sell short stock in view of potential
dilution; however, keep in mind they will also have repurchased
stock to cover their short position. We believe this event,
if it occurs, will be short lived. Additionally, it should
be noted that there are discussions with Chevron to sell
some natural gas assets to them in satisfaction of the preferred
stock.
While we recognize the above issues have had a near-term
impact on the stock, the continuing improvement in the operations
of Dynegy should not be overlooked or dismissed.
