HOUSTON (The Deal) -- Houston power producer Dynegy (DYN) said Friday it agreed to buy power plants and retail electricity businesses from Duke Energy (DUK) and private equity firm Energy Capital Partners, or ECP, for $6.25 billion, doubling its generating capacity to 26,000 megawatts and giving it retail operations in three new states.
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 (AES) pulled back on selling the power plants and retail electricity businesses that made up DPL Inc., deciding instead to separate out the businesses as required by regulators. Industry experts had expected the business to fetch as much as $2.6 billion in an auction led by Barclays.
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.
Dynegy said along with $40 million in targeted annual cost savings savings, the company's infrastructure and general and administrative costs will be leveraged across a much larger asset base, reducing the general and administrative cost per megawatt hour to $1.10 from $1.67.
As part of the integration, Dynegy will expand its PRIDE, or "Producing Results through Innovation by Dynegy Employees," program to both businesses to generate balance sheet and operational efficiencies beyond the $40 million.
Dynegy said it has committed financing for the liquidity facilities and the transaction purchase prices and expects to tap the capital markets before closing to raise permanent financing.
Dynegy expects to issue about $5 billion in new unsecured bonds and $1.25 billion in equity and equity-linked securities, including $200 million of Dynegy stock that will be issued to ECP as part of the transaction consideration at closing.
To support the collateral and liquidity of the combination, Dynegy has secured two incremental corporate-level revolving credit facilities totaling $950 million, bringing total revolver capacity at Dynegy Inc. to $1.425 billion. About $300 million in working capital and cash collateral postings will be transferred to Dynegy with the ECP and Duke at closing.
"The target capital structure of the combined company has been designed to ensure the continued strength and flexibility of our balance sheet and maintain significant secured capacity for both hedging and liquidity requirements going forward," Dynegy CFO Clint Freeland said in a statement.
Dynegy said the new assets will be incorporated into its existing first lien structure to support its hedging and collateral management programs.
Dynegy expects to close the transactions by the end of the first quarter. They require Hart-Scott-Rodino clearance and approval from the Federal Energy Regulatory Commission.
Dynegy has been expanding through acquisitions since coming out of bankruptcy in 2012. In December 2013 it bought Ameren Corp.'s merchant business, Ameren Energy Resources Co. LLC, for no cash but $825 million in existing debt.
Lazard's George Bilicic and Jonathan Mir and Credit Suisse's Pierre Bosse, Ahmad Masud, Chris Radtke and Max Lipkind advised Dynegy on both transctions. Morgan Stanley also advised Dynegy on the ECP deal, including Jeffrey Holzschuh, David Nastro and Todd Giardenelli, and Goldman Sach's Brian Bolster advised Dynegy on Duke deal. Morgan Stanley was the lead arranger for more than $7 billion of financing.
Skadden, Arps, Slate, Meagher & Flom LLP's Michael Rogan provided Dynegy with legal counsel and White & Case LLP represented Dynegy on the Duke portion of the deal.
Barclays' Gary Rygh and Goldman Sachs' Matt Gibson and Jeff Pollard assisted Short Hills, N.J.-based ECP on the power plant sale to Dynegy. Latham & Watkins LLP's David Kurzweil, Paul Kukich and Jeff Greenberg provided ECP with legal counsel.
Citi's Todd Guenther and Jack Paris and Morgan Stanley's Ray Spitzley and Scott Beicke advised Charlotte, N.C.-based Duke on the asset sale to Dynegy. Bracewell Giuliani LLP's John Klauberg provided Duke with legal counsel.