Dynegy Bankruptcy examiner to be appointed

The motion for an examiner was made by U.S. Bank NA, as indenture trustee for the Roseton and Danskammer SLOB bonds. In response, Judge Cecila G. Morris, the bankruptcy judge for the Dynegy case has ordered the appointment of an independent examiner for the bankruptcy of Dynegy Holdings. The examiner will study a series of transactions including a restructuring that took place a few months before the bankruptcy filing. As a result of this restructuring, the valuable coal and natural gas assets were re-organized into bankruptcy remote entities while the HoldCo and Dynegy Northeast were forced to file for bankruptcy.
Bankruptcy examiners are appointed to study allegations of fraud, dishonesty and mismanagement. In this particular case, the charge of fraudulent conveyance is the most pertinent in my opinion. In fact, there is a precedent regarding fraudulent conveyance: in mid-2010, the Tribune Company’s exit from bankruptcy collapsed after a bankruptcy examiner identified fraudulent conveyance in the LBO of Tribune Company. However, this case is not as straight forward: Would Dynegy Holdings have survived without the restructuring and have market conditions worsened since the restructuring? Please email me if you are interested in discussing further.
Discalimer: I have no position in Dynegy and do not plan to initiate one in the next 48 hours.


Dynegy update

Dynegy, PSEG reached a settlement for $117.5 mm regarding the rejection of the Roseton-Danskammer leases. As per the terms of the settlement, Dynegy will provide an unsecured claim of $110 million and cash of $7.5 mm to a special entity designated by PSEG, Resources Capital Management Corporation, to satisfy certain tax liabilities. In return, PSEG has agreed to a number of stipulations, including support for the bankruptcy plan. Please see the link below for the actual court document. Please email me if you are interested in discussing how this settlement impacts recovery values.
DYN lease rejection bk court 227

Great Plains Energy, a regulated utility with upside

Great Plains Energy is a 100% regulated utility in Missouri and Kansas.  The combined ratebase of the regulated operating utilities is approximately $6 billion and the equity ratio  and allowed ROE are approximately 47.5% and 10%, respectively.  Moreover, the company plans to add approximately $1.6 billion to ratebase through 2015 due to environmental retrofits, transmission upgrades and RPS mandates.  This results in an earnings potential of $1.83 in 2012 and $2.32 in 2015.  However, the company is not expected to achieve its earnings potential in the near-term, for example, the consensus 2012 estimate is $1.49, or 81% of allowed ROE.

My price target is $26, which is predicated on the following assumptions: a) the company achieves 95% of its 2015 earnings potential; b) a 13.0x multiple; and c) discounted to 2013.  This implies a total return potential of 30%.

Cons: The company expects to file ratecases in 1q2012, and regulated utility stocks typically under-perform during the early stages of the ratecase filing; Historical discount due to regulatory lag and inability to earn allowed ROE of 10%, however the company has an action plan to address this issue; moderate equity financing needs of $100 mm to 150 mm over the next four years.

Catalysts: filing of ratecases in early 2012 should bring investor interest in the story.

Disclaimer: I am long GXP stock but do not intend to trade over the next 48 hours.

Perhaps inaction in Durban is not such a bad thing? and the declining price of carbon credits

The FT recently reported that 2011 is set to be the 10th hottest year on record (going back 160 years) and in fact, it is the hottest year in which there is a cooling La Nina weather pattern. This is based on the latest report by the Intergovernmental Panel on Climate Change, The UN body for reviewing research on climate change.

The Intergovernmental Panel on Climate Change has published a series of reports on the eve of the UN climate conference in Durban, showing that the human actions and green house gasses are responsible for rising temperatures.  However, there are many skeptics,  including the Global Warming Policy Foundation and the writers of freakonomics.

In the meantime, the price of carbon credits continues to fall, down from approximately 10 Euros in August 2011 to less than 7 Euros in November 2011.  By way of comparison, most analysts estimate the price of carbon needs to be>$40 by 2020 to result in a meaningful decline in carbon emissions.   Are these low prices for carbon a sign of a dis-functional market?

Perhaps once the science regarding GHG and global warming is sorted out, we need to make some structural changes to cap and trade or use another mechanism, like a carbon tax.

Some useful links:




Time to buy CMS equity?

CMS stock has under-performed since the Michigan Public Service Commission Staff provided its testimony on November 15. While the company’s demand and Staff’s recommendation are far apart (staff proposed 20% of ask, but not on a comparable basis), I believe the settlement will be fair and the allowed ROE will be between 10.25% and 10.5%. Most important, this allowed ROE will sustain earnings growth of 5-7% over the next five years and enable the company to trade at a premium to its peers.
As a reminder, in a rate-case earlier this year, Consumers Energy requested a revenue increase of $196 mm, premised on a rate-base of $7.538 Bln, a 42.07% equity and an allowed ROE of 10.7%. The Michigan Public Service Staff recommended a revenue increase of $39 mm, premised on a rate-base of $7.309 Bln, 42.07% equity and an allowed ROE of 9.95%.

I also like the holdCo bonds, which trade wider than BBB holdCo peers (approx 300 bp for the 2014).

Please email me for details.

Disclaimer: I do not have a position in CMS and do not plan to initiate a position in the next 48 hours

Which part of the Dynegy capital structure to play in, post filing

As per my recovery estimates below, I believe the senior unsecureds offer the best risk/ return reward at this time.  The unsecureds are trading below my worse case valuation and offer significant upside from these levels.

The main variables to these recovery estimates are: a)Natural gas prices; b) Bankruptcy Judge’s interpretation of the use of Bankruptcy Code 502(b)(6) to limit the claims arising from the rejection of the Roseton and Danskammer leases; and c) How long the bankruptcy process takes.

dyn recovery

Time to short Indonesian coal miners?

My favorite short ideas are Adaro (ADRO.JK) and Bumi (BUMI.JK)–Adaro due to the low calorific value of its coal and rich valuation.  And Bumi due high leverage and rich valuation.

Fundamentals for thermal Indonesian coal are weak but Indonesian coal stocks have outperformed the broader markets over the past two months, setting up a short opportunity. Fundamentals are deteriorating due to softening in the major import markets such as China and India and a supply glut at a competitor for coal exports, South Africa. Most important, coal supply is slated to increase in 2012-13 due to post-floods normalization of exports in Australia and Columbia and greater port capacity in Indonesia.

Coal prices in China, the largest importer of thermal coal, are softening due to high inventory levels at the independent power producers and tight credit conditions, which constricts traders.
Coal demand is moderating in India due to the high price of imported coal–please see link to article regarding imported coal sitting at ports despite shortages due to high costs.  Imported coal is >50% more expensive than domestic coal and even blending 10% imported coal can price out these power producers.  Moreover, the recent depreciation of the Rupee versus the Dollar only exacerbates the problem.


Disclaimer: I have no positions in these companies and do not plan to initiate any positions in the next 48 hours.