Dynegy Pays $6.3B for Power Plants
Written by: Claire Poole
Tickers in this article: AES DUK DYN
Dynegy is paying $2.8 billion for Duke's assets and $3.45 billion for ECP's.
The Duke portfolio includes its retail business and ownership interests in the Killen, Stuart, Conesville, Miami Fort, Zimmer, Hanging Rock, Washington, Fayette, Lee and Dicks Creek power plants.
The ECP assets that make up the sale of EquiPower Resources Corp. and Brayton Point Holdings LLC include the Milford, Lake Road, Dighton, Masspower, Liberty, Elwood, Richland, Stryker, Kincaid and Brayton Point power plants.
The deal will allow Dynegy to provide retail electricity to residents and businesses in Ohio, Pennsylvania and Michigan, along with Illinois, with the ECP and Duke Ohio generation assets providing the generation to support the businesses.
Dynegy CEO and president Robert Flexon said in a statement the plants transform Dynegy by adding considerable scale in the PJM Interconnection LLC and New England markets.
"The addition of these portfolios is forecasted to significantly improve our financial outlook by tripling our 2015 adjusted Ebitda and being massively accretive to adjusted Ebitda and free cash flow per share in 2015 and beyond," he said.
Flexon added that Dynegy intends to honor the terms of the collective bargaining agreements in both generating fleets. The company also intends to honor ECP's agreement to retire the Brayton Point coal plant on May 31, 2017 and complete the decommissioning after retirement.
Marc Manly, president of Duke's commercial business, said the transaction is an important milestone in its strategy to exit the merchant generation business.
In the third quarter Duke expects to book a $500 million pre-tax reversal of the $1.4 billion impairment previously recognized in 2014. It said use of the proceeds "is being evaluated" but it expects the transaction to be accretive to shareholders by 2016.
Tudor, Pickering, Holt & Co. Securities Inc. said the deal metrics look "very good' at 5 times next year's enterprise value to Ebitda, especially considering that Dynegy is looking to capture $500 million in cash tax savings through the use of its large net operating loss position and sees $40 million in annual synergies. The firm added that it will be interesting to see where the pricing falls on the $5 billion in new notes Dynegy will issue to finance the deals.
Industry observers had expressed concern about Duke's auction process when Arlington, Va.-based AES
But sources told The Deal in early August that Duke was on track to complete a sale, which industry bankers estimated would fetch $2 billion to $2.3 billion. The Deal had previously expected Dynegy to be one of the bidders for Duke's assets, along with the Blackstone Group LP, Riverstone Holdings LLC, Energy Investors Funds and ECP.
Paul Patterson, a longtime utility and power analyst at Glenrock Associates LLC, said the deal wasn't all that surprising. "The more of these deals take place, you have to wonder how much will remain to be done," he said. "A key factor could be the desire on the part of hybrid utilities to shed their non-regulated businesses."
Dynegy said the addition of ECP's and Duke's assets complement Dynegy's existing assets and retail business by adding significant scale and fuel diversification in markets in which the company participates but lacks scale.
Of the 12,500 megawatts being acquired, Dynegy said 5,053 megwatts are "modern" combined cycle natural gas plants and 3,793 megawatts are "environmentally compliant" coal generation plants.
Dynegy said the deals will quadruple the size of its PJM fleet and boost its New England fleet seven-fold and will be 125% Ebitda accretive and 220% free cash flow accretive next year.
Dynegy expects the combined enterprise to generate $1.2 billion to $1.4 billion in Ebitda and $480 million to $680 million in free cash flow, assuming both deals close by the end of the year.
Dynegy also said its $3.2 billion net operating loss position will be available to offset taxable income of the combined company, providing nearly $500 million in present value cash tax savings.