Dynegy warns it may have to file for bankruptcy

AP News
|
Posted: Mar 09, 2011 4:25 PM
Dynegy warns it may have to file for bankruptcy

Dynegy Inc. said it may have to seek bankruptcy protection if it can't meet certain earnings requirements by its creditors this year.

The power producer also announced Wednesday that it has elected four board members, two of whom were nominated by billionaire investor Carl Icahn's company and one by Seneca Capital _ one of Dynegy's biggest shareholders.

Both groups have wrestled for more control over the company. A $665 million takeover offer from Icahn, which was opposed by Seneca, expired last month after it failed to get enough support from shareholders.

Dynegy has been hurt by lower power prices over the last two years.

The company owns power plants that burn natural gas, coal and oil. It sells electric energy and related services to grids and utilities in the Midwest, the Northeast and the West. As businesses shuttered and consumers turned off the lights during the recession to save money, prices for commodities to produce it plunged. Low demand meant utilities weren't able to raise prices to recoup losses.

The weak energy prices led to a diminished credit rating, which has made Dynegy's efforts to establish and maintain credit more difficult. As a result, the company said in a Securities and Exchange Commission filing late Tuesday that it won't likely meet its threshold for earnings before taxes, debt and amortization, particularly in the third and fourth quarters of this year.

On Wednesday, Fitch Ratings downgraded Dynegy's credit rating by one more notch, to "CC," and said its ratings outlook is negative, meaning more downgrades are possible.

Dynegy's finances would improve if power prices and demand rise, Fitch wrote. The ratings agency believes those factors "will improve over time, albeit too slowly for Dynegy to generate sufficient cash flow for its capital and operating needs."

As of March 3, the company had cash on hand of about $365 million and $1.84 billion in available liquidity. It had $4.77 billion in notes payable and long-term debt at the end of last year.

When Dynegy's board was seeking shareholder support for Icahn's acquisition proposal, it cited slumping natural gas prices and debt problems as major reasons for why the deal needed to go through. It argued that acceptance of Icahn's offer was the best outcome for Dynegy.

After the Icahn deal fell apart last month, Dynegy's chairman and CEO agreed to step down and the company said its directors would be replaced. In announcing its plan, Dynegy said Seneca and Icahn's group would each be offered one seat on the new board. But last week, Icahn said his representatives were in discussions with the company for the appointment of two directors instead of just one.

The company said the new directors will pick the rest of the new Dynegy board and a permanent CEO. Shareholders will vote in June on the new slate of directors.

The four directors are E. Hunter Harrison, the former president and CEO of Canadian National Railway Co., who was nominated by Seneca; Vincent J. Intrieri and Samuel Merksamer, who work for Icahn's investment company; and Thomas W. Elward, the president and COO of CMS Enterprises.

"Today's director elections demonstrate the board's commitment to an expeditious and orderly transfer of leadership at Dynegy," said Patricia A. Hammick, who became Dynegy's chairman after Bruce Williamson stepped down. "The board has recognized the desire of our stockholders to pursue a different path for the company."

The Houston company has been an acquisition target for months. An offer of $5 per share by private equity firm The Blackstone Group was rejected in November. Icahn then offered $5.50 per share. But Seneca, in opposing that offer, said Dynegy is worth $6 to $7 a share and believes its value could rise to $16 to $18 a share as the economy recovers.

For the fourth quarter, the company announced Tuesday that it had a loss of $164 million, or $1.36 per share, compared with a loss of $355 million, or $2.33 per share, in the fourth quarter of 2009. Revenue rose slightly to $451 million from $441 million.

For all of 2010, the company posted a loss of $234 million, or $1.95 per share. That compares with a loss of $1.25 billion, or $7.60 per share in 2009.

Dynegy shares fell 17 cents, or 2.9 percent, to close at $5.62 on Wednesday.