Houston-based power company
) has struck two separate deals to acquire several coal and gas
power generation plants from Duke Energy Corp. (
) and private-equity firm Energy Capital Partners to enhance its
foothold in two less regulated eastern U.S. markets. These
transactions, worth a combined $6.25 billion, pushed Dynegy's
shares by 8.75% in Friday's trading session to close at $32.32.
Dynegy will pay $2.8 billion in cash for 11 power plants in the
Midwest and a retail business owned by Duke Energy. These include
Killen, Stuart, Conesville, Miami Fort, Zimmer, Hanging Rock,
Washington, Fayette, Lee and Dicks Creek. The company is also
buying ownership interests in plants in New England, Pennsylvania
and the Midwest from Energy Capital Partners for $3.45 billion in
cash as well as stock.
Holding a market cap of $3.24 billion, Dynegy has plans to issue
about $5 billion in new unsecured bonds and $1.25 billion in equity
and equity-linked securities to fund the acquisitions. The deals
are slated to wrap up by the end of the first quarter of 2015.
The acquired assets will add 12,500 megawatts (MW) of generating
capacity, doubling Dynegy's total output to about 26,000 MW.
The addition of these portfolios will enable Dynegy to have a
significant hold in the PJM (Pennsylvania, New Jersey, Maryland)
and New England markets. Of the new generating capacity, 5,053 MW
will comprise gas-fueled plants, while another 3,793 MW of capacity
will come from environmentally compliant coal generation units.
The deals are expected to boost Dynegy's portfolio in the Northeast
and New England to comprise about 60% of total megawatts versus 18%
Financially, the company expects the deals to triple its adjusted
earnings before interest, taxes, depreciation, and amortization
(EBITDA) in 2015 while lifting its free cash flow to $4 a share per
share in 2015 and beyond. Dynegy also expects the deals to provide
$500 million in tax savings, $200 million in related efficiencies
and cost savings of more than $40 million per year.
The acquisitions will also help Dynegy to reduce its overhead costs
by 34% to $1.10 per MW hour of electricity produced.
Dynegy suffered a major setback in 2011 when the booming shale
drilling created a supply glut of natural gas that depressed prices
and led to losses. In 2012, gas prices deceased to a 10-year low,
below $2 per million British thermal units.
Burdened by costly power plant leases, Dynegy finally came out of
bankruptcy in 2012. Since then the company took the inorganic route
to spur growth, acquiring five coal-fired power plants in Illinois
from Ameren Corp. (
) in December last year.
The proposed buyouts will increase Dynegy's risks associated with
the supply of the industry's major fuel - natural gas. Moreover,
the unregulated electricity operations are exposed to descending
prices as well as demand in the U.S.
That said, in a deregulated electricity business, utility companies
are consolidating and shifting toward more gas-fired power
production given stringent environmental regulations. Global
concerns about the pitfalls of green-house gas emissions supported
by increasing restrictions on fossil-fuel usage have brought a wide
array of fuel sources like gas into the limelight.
Increased demand for gas-fueled generation is helping to push up
gas prices. Hence, the deals are a strategic fit giving a much
needed boost to Dynegy's fuel mix from its predominantly coal-based
Dynegy holds a Zacks Rank #3 (Hold). CMS Energy Corp. (
), holding a Zacks Rank #2 (Buy), offers a better investment
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