By Ted Caddell
Dynegy and private equity firm Energy Capital Partners announced Thursday they are buying the U.S. fossil fuel generation portfolio of French utility ENGIE, a total of 8,731 MW in PJM, ISO-NE and — in a first for Dynegy — ERCOT.
The deal is valued at $3.3 billion. The joint venture, called Atlas Power, is 65% owned by Dynegy and 35% by Energy Capital. Dynegy will operate the fleet, 90% of which is natural gas-fired.
Although it is based in Houston, Dynegy owns no generation in the Lone Star State. Atlas Power will gain 4,564 MW of generation in ERCOT, in addition to 2,775 MW in PJM (Illinois, Ohio, Pennsylvania, Virginia, West Virginia and New Jersey) and 1,392 MW in ISO-NE (Massachusetts).
With the addition of the ENGIE assets, Dynegy will control 35 GW of generation: 43% in PJM, 18% in MISO, 15% in ISO-NE, 13% in ERCOT, 3% in NYISO and 8% in CAISO.
“Today’s acquisition continues Dynegy’s transformation that began in 2011, to build a long-term sustainable portfolio in key competitive markets,” Dynegy CEO Robert C. Flexon said. “This transaction is a compelling value for our shareholders as it is the right assets, in the right markets, at the right price and unlocks considerable synergy value by utilizing our proven integration model and corporate platform.”
Wall Street seemed to like the deal, with shares closing Friday at $9.77, a 17% jump from their open Thursday morning.
Flexon said joining with Energy Capital made sense, and, in fact, was the only way the deal would have come about. “Partnering with Energy Capital … allowed us to bring our strengths together to accomplish this acquisition that otherwise could not have been achieved by either party individually,” he said.
The partnership is a good fit for Energy Capital, too, according to company officials. “We feel this transaction represents an extremely attractive valuation point for Energy Capital to reenter the PJM, New England and ERCOT markets, which we have a long history of successfully investing in,” said Tyler Reeder, a partner at Energy Capital. “The joint venture will benefit tremendously from Dynegy’s strong operating capabilities, commercial risk management and focus on environmental compliance and safety.”
Dynegy said the joint venture borrowed $2.25 billion and put up about $1.185 billion in equity — $770 million by Dynegy and $415 million from Energy Capital — to finance the acquisition. Dynegy said it expects to close the purchase by the end of the year.
Energy Capital is taking a 15% stake in Dynegy. According to the terms of the acquisition, Energy Capital can exit the joint venture four years after closing, either by selling its interest to Dynegy or by engineering the sale of the entire joint venture.
Dynegy said it expects to realize about $90 million in savings per year by combining operations and maintenance functions and cutting corporate overhead.
It is just the latest in large-scale generation acquisitions by Dynegy. Since emerging from bankruptcy in 2011, it has more than tripled its generation portfolio. It doubled from 13 GW to 26 GW in its $6.25 billion purchase of plants from Duke Energy and Energy Capital, a deal approved by FERC last March.
Since 2014, it has boosted its gas generation to 63% of its portfolio, up from 46%, while reducing its coal share from 54% to 37%.
It also has changed its geographic mix, reducing its CAISO and MISO assets to a combined 26% from 65% in 2013.
ENGIE, previously GDF SUEZ, also sold 1.4 GW of pumped storage and conventional hydro assets in Massachusetts and Connecticut to the Public Sector Pension Investment Board, a Canadian pension fund, for $1.2 billion while acquiring OpTerra Energy Services.
ENGIE said the deals will reduce its debt by 5.5 billion euros and help it “reposition” the company in North America.
“With the announcement of this sale, ENGIE is heavily reducing its merchant generation activities and exiting coal-fired generation in the U.S. In North America, ENGIE will retain activities related to power generation (mainly contracted), energy efficiency services (through Cofely, Ecova and now OpTerra), retail electricity, small scale LNG and LNG infrastructures, including participation in the Cameron LNG liquefaction project currently under construction.”