By Ted Caddell

Dynegy, which emerged from bankruptcy just two years ago, announced Friday it will nearly double its capacity with the purchase of about 12,400 MW of generation from Duke Energy and private equity firm Energy Capital Partners.

If approved by regulators, the deal would rank Dynegy just behind Calpine, the third-largest competitive generator in the U.S.

Dynegy would gain about 9,000 MW in PJM, boosting it to more than 10,700 MW and eighth in generation share in the RTO.

The $2.8 billion Duke agreement includes 11 generating units in the Midwest and Duke Energy Retail, Duke’s competitive retail energy business in Ohio, Pennsylvania and Michigan — adding to Dynegy’s existing retail business in Illinois. The $3.45 billion deal with Energy Capital Partners is for 10 units in the Midwest and New England.

Growth in New England

In addition to making it a major player in PJM, the transaction will give Dynegy a larger foothold in ISO-NE.

Dynegy could briefly dislodge Exelon from the top of the New England generation market share rankings as a result of its ECP acquisition and Calpine’s announcement yesterday that it will buy Exelon’s Fore River Generating Station, an 809-MW combined-cycle plant near Boston, for $530 million. (See related story, Dynegy Becomes New England Player Overnight.)

Dynegy would drop to fifth after the scheduled 2017 retirement of ECP’s 1,510-MW Brayton Point coal generator.

“The addition of these portfolios transforms Dynegy by adding considerable scale in the PJM and New England markets,” Dynegy President and CEO Robert Flexon said. Dynegy said it expects the deals to close by the end of the first quarter of 2015.

Investors reacted favorably, with Dynegy’s shares jumping 18% on the news before settling at $32.58 Monday, an 8% gain.

Merchant Generation, Retail Sales 

Dynegy currently has about 13,200 MW of generation: 7,042 in MISO; almost 2,700 in CAISO; 1,780 in PJM; 1,064 in NYISO; and 540 in ISO-NE.

Dynegy is betting on two sectors — merchant generation and retail sales — that other players have been exiting or de-emphasizing.

Duke signaled its intention to pull out of the merchant generation business in February, days after the Public Utilities Commission of Ohio refused the company’s request to bill regulated customers $729 million to make up for a shortfall between its plant operating costs and plunging wholesale power prices.

PPL announced in June it would spin off its generation unit in a deal with Riverstone Holdings, leaving it with a pure rate-regulated business model.

Exelon agreed in May to buy Pepco Holdings Inc. for $6.83 billion, seeking to increase its regulated rate base.

Duke is not alone in souring on the competitive retail business. Dominion Resources agreed in March to sell its business serving 600,000 retail customers to NRG Energy. FirstEnergy Solutions said this month it will stop pursuing sales to residential and small and mid-size commercial customers.

Dynegy, however, sees retail sales as a “natural hedge for our generation,” spokeswoman Katie Sullivan said.

Back from Bankruptcy

Founded in 1984 as a gas trading company, Dynegy has had a turbulent history. It survived several Enron-era scandals, near-bankruptcy in 2002 and attempted takeovers in 2010.

In its high-flying days, it owned plants in a dozen states and six foreign countries. When it emerged from bankruptcy in October 2012, it was down to 16 power plants in six states.

The company began to rebuild its merchant fleet last year, buying St. Louis-based Ameren Corp.’s five coal-fired plants in Illinois.

Dynegy is betting on economies of scale with the Duke and ECP acquisition. It expects to realize fuel cost and maintenance savings of $40 million and operational management savings of $200 million. It says these deals will drop its overhead cost 35%, from $1.67/MWh to $1.10/MWh.

The deal will also allow it to take advantage of a $3.2 billion net-operating-loss carry-forward that it says will yield $480 million in tax savings on future earnings.

Its free cash flow yield on the new assets will be 36%, the company said, refilling its coffers for perhaps more acquisitions in the future.

The company will finance the acquisitions with $5 billion in unsecured notes and $1.25 billion in equity and equity-linked securities, including $200 million in common stock issued to ECP.

Bullish on PJM, New England

Dynegy said it is bullish on both the PJM and ISO-NE markets. Plant retirements will translate into tighter reserve margins and higher energy and capacity prices, it says, particularly in New England.

“New England is not getting any new builds,” Flexon said in a conference call with stock analysts Friday. Retiring Brayton, as the current owners had planned, “puts pressure on that marketplace also.”

Capacity payments represent 11% of Dynegy’s current gross margins. With the new acquisitions, capacity payments will represent 25%, as it more than quintuples its generation in PJM and ISO-NE.

MISO’s share of Dynegy’s total generation will fall to 29% from 53% as a result of the expansion in PJM and New England. But Flexon was also optimistic about the company’s prospects in the Midwest, saying 2015 through 2017 “should be a really peak time for the MISO marketplace” due to plant retirements.

Fuel Diversity

Once Brayton Point is closed, Dynegy will have reduced the share of coal-fired generation in its fleet to 45% from 53%. The company said the 3,800 MW of coal-fired plants it is acquiring, excluding Brayton Point, are all “environmentally compliant.”

About 7,000 MW of the acquisition are natural gas-fired plants, including 5,000 MW of modern, low-heat-rate, high-capacity-factor combined-cycle plants.

Julien Dumoulin-Smith, a utility analyst at UBS Securities, said the deals are positive for Dynegy’s long-term growth and will provide protection from a takeover by another company.

“The transaction propels Dynegy to among the largest IPPs in the industry, likely no longer a take-out target,” he said. “Strategically, the deal adds substantial diversification to a portfolio both overly levered to the MISO market, as well as some further diversification from coal.”

Dumoulin-Smith didn’t see much problem getting regulatory approval for the deals. “As for execution of the transaction, we do not anticipate any significant hurdles, with only very limited market overlap across any of the contemplated portfolios.”

William Opalka contributed to this article.