Article
Friday, August 22, 2014 1:07 PM ET
Tax savings serve as major driver in Dynegy's acquisition
of Duke, ECP plants
By Andrew Engblom
Dynegy Inc. President and CEO Robert Flexon said that tax savings driven by past net operating losses are a key driver in the company's proposed $6.25
billion acquisition of generation assets from Duke Energy Corp. and Energy Capital Partners.
Dynegy would nearly double its existing portfolio with the two transactions, adding roughly 12,500 MW of capacity in the Midwest, Mid-Atlantic and
Northeast where the company sees improving prices. But the ability to monetize its accrued net operating losses would provide the biggest synergy from
the deal, the company said.
The net operating loss carry-forwards allow Dynegy to preserve roughly $480 million in net present value by offsetting substantial cash taxes for which
Duke and Energy Capital Partners would otherwise be responsible, Flexon said on a call with analysts. He added that the net operating losses were
"unlikely to be utilized without these transactions."
Dynegy estimates that the Duke fleet would yield $130 million in net present value as a result of its net operating losses and that the Energy Capital
Partners plants — held by EquiPower Resources Corp. and Brayton Point Holdings LLC — would yield another $350 million.
Net those savings, the $2.8 billion purchase price of the Duke assets drops to $2.67 billion and the $3.45 billion purchase price of the Energy Capital
Partners assets drops to $3.10 billion. Flexon said the company is confident that its financial plan is structured to prevent the net operating losses from
being limited by change in ownership restrictions. "The combined company is positioned to generate superior absolute and risk adjusted returns," he said.
Other synergies to the deals include $200 million in balance sheet improvements due to better collateral management and $40 million in improvements
resulting from improved fuel supply, maintenance and optimization.
Asked about the relatively small $40 million in operational synergies by an analyst, Flexon said overhead costs for the assets being acquired from Duke
are not known by Dynegy because they are managed at the corporate level. The Energy Capital Partners assets, the executive added, were run very
well and very lean. "[EquiPower CEO Curtis Morgan] doesn't let a lot of fat grow around an organization," he said.
Dynegy projects the deal is 125% accretive to 2015 adjusted EBITDA per share and 220% accretive to 2015 free cash flow per share, according to a
presentation.
The company estimates a 6.4x ratio of enterprise value to EBITDA for the combined transactions once the value of the net operating losses and its
projected 2015 adjusted EBITDA are incorporated. That figure compares favorably to peers such as Dynegy, which has a 9.1x ratio, Calpine Corp.,
which has a 10.1x ratio, and NRG Energy Inc., which has a 9.2x ratio, Dynegy said.
The enterprise-value-to-EBITDA-ratio for the deal would increase slightly excluding the Brayton Point power plant, which remains on schedule to retire by
June 2017 but would still compare favorably to peers.
Beyond the synergies, Flexon said the additional 9 GW of capacity in PJM Interconnection LLC and 3.4 GW of capacity in ISO New England Inc. should
provide more predictable cash flows and higher capacity prices. Duke's retail electricity business in Ohio is also included in the deal.
Specifically, Dynegy said the combined company would see 25% of its gross margins from PJM and New England capacity derived from capacity
revenues, up from 11% of the current Dynegy. The company's geographic diversity would also change substantially, shifting a company with 18% of its
capacity in PJM and New England to one with 60% of its capacity in PJM and New England
Dynegy Executive Vice President and CFO Clint Freeland said the deals "roughly double exposure to improving market fundamentals."
The company projects that a $1/MMBtu increase in natural gas prices, net of heat rate contraction, would boost Dynegy's EBITDA by roughly $180 million
under its current structure, but by $360 million under the combined company. Similarly, an increase in around-the-clock power clearing prices by $4/MWh
would boost Dynegy's EBITDA by roughly $250 million under its current structure, but by $450 million once the additional portfolios are integrated.
Even with the greater presence in PJM and New England, Flexon noted the company continues to believe in the Midcontinent Independent System
Operator Inc. market. "The current Dynegy/MISO investment thesis remains fully intact," he said.
Dynegy said the company's long-term financing plan for the deal includes the issuance of about $5 billion in new unsecured notes, $1.25 billion in equity
and equity linked securities — including $200 million in common stock issued to Energy Capital Partners — and $950 million in incremental revolving credit
facilities.
On a credit basis, executives said that although the new debt will increase the net debt-per-kWh and net debt-to-EBITDA ratios, the earnings profile of
the company should be "credit accretive" due to the more predictable cash flows, access to additional liquidity, and the fact the debt will be unsecured.
Done with M&A for now
With the integration two major power plant portfolios — boosting Dynegy from the eighth-largest owner of merchant generation to one tied for third with
Source: SNL Financial | Page 1 of 2
Article
Calpine — an executive on the call said the company will taking a break from further M&A for at least the next year or so.
"This comes directly from the board. All we are focusing on right now is integration of these two portfolios. It is paramount we get this right," the
executive said. "We are not going to be wondering around looking at things in the market at this point."
Source: SNL Financial | Page 2 of 2