UPDATE: Dynegy Posts Smaller 2Q Loss On Reorganization

Dynegy Inc. (DYN) reported a smaller second-quarter loss on increased generation in the Midwest as the company's new executive team and board have been reorganizing the company and its finances.

The company also said that it closed Friday on $1.7 billion of debt financing for its power plant units, as part of a plan to reorganize the company and its finances.

Dynegy Chief Executive Robert Flexon, who has been in his job for about a month, declined to provide full-year profit guidance or details on the company's financial restructuring plans.

Shares of Dynegy were recently trading down nearly 6.7% at about $4.57, as the broader market fell.

The deeply indebted Houston power company recently split its operations into separate units, with a larger unit holding its natural gas-fired power plants, called Dynegy Power, and a second unit holding its coal-fired power plants, called Dynegy Midwest Generation. The company has a third unit, called Dynegy Northeast Generation, for two East Coast power plants that are under lease financing agreements with Public Service Enterprise Group Inc. (PEG).

On Friday, the Delaware Supreme Court rejected a bid by PSEG to hold up Dynegy's $1.7 billion deal over concern that the restructuring would threaten PSEG's ability to collect on $790 million in lease payments.

The decision was a reprieve for Dynegy, which said in March that it might have to file for bankruptcy if it could not find another way to handle nearly $5 billion in debt.

While generation volumes in the Midwest--where most of the company's power plants, fueled by coal, operate--rose by nearly one-third, profit was down due to lower prices and the early termination of a contract, said Dynegy Chief Financial Officer Clint Freeland.

Profit was down in the West due to lower volumes as as above-normal hydropower supply in the Pacific Northwest pushed down prices. Profit in the Northeast was also down, with low natural gas prices that have pressured power prices lower, the company said.

With natural gas prices appearing flat into the next two years, Dynegy has hedged most of the output from its gas-fired power plants for 2011, about half for 2012 and 20% for 2013, said Dynegy Chief Operating Officer Kevin Howell. The company has hedged a smaller amount of output from its coal unit so that it can take advantage of higher prices, he said.

Cash flow in the quarter fell nearly 90% due to the need to post collateral for hedging transactions, make interest payments and pay for litigation and restructuring activities, the company said.

As Dynegy restructures its financing and reduces some of its hedging activities, the company expects to reduce the amount of cash needed for collateral, Flexon said in a conference call with analysts.

Dynegy may sell assets to raise cash, Flexon said, although he declined to provide details.

Last year, the company's two top shareholders, Carl Icahn and Seneca Capital Investments LLC, rejected a $4.50-a-share buyout offer by Blackstone Group L.P. (BX).

In February, shareholders rejected an offer by Icahn to buy all of Dynegy for $5.50 a share, after Seneca opposed the proposal. Shortly after, Dynegy's top two executives resigned and its board agreed to step down.

On Monday, Dynegy reported a loss of $116 million, or 95 cents a share, compared with a year-earlier loss of $191 million, or $1.59 a share. Excluding mark-to-market gains and losses and other items, earnings before interest, taxes, depreciation and amortization, fell to $102 million from $124 million.

Analysts polled by Thomson Reuters most recently forecast a loss of 49 cents.

Revenue rose 36% to $326 million.

-By Cassandra Sweet, Dow Jones Newswires; 415-439-6468; cassandra.sweet@dowjones.com

--Nathalie Tadena contributed to this article.

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