Dynegy to Buy Ameren Power Plants in Illinois for No CashJim Polson
Ameren Corp. agreed to pay Dynegy Inc. more than $200 million to take over five coal-fired power plants in Illinois and associated debt as the company exits the competitive wholesale electricity business.
Dynegy will get 4,119 megawatts of generation and Ameren’s retail and marketing businesses along with $825 million in debt that will be assumed by a newly formed subsidiary and not the parent company, the Houston-based power producer said in a statement today. Ameren will pay $133 million or more for three natural gas-fueled plants it’s buying back, plus $60 million for corporate expenses and $8 million from a land sale.
“We expect that this transaction will reduce business risk and improve the predictability of our future earnings and cash flows, which is expected to strengthen Ameren’s credit profile and support Ameren’s dividend,” Thomas Voss, chairman and chief executive officer of St. Louis-based Ameren, said in a separate statement.
Wholesale power prices have dropped alongside the cost of gas, which reached a 10-year low in New York last year. The decline has cut profit margins for coal power plant owners, forcing some into bankruptcy. Some plants also face new environmental regulations that require additional investment.
Dynegy has been seeking to refinance its debt after exiting bankruptcy protection last year. The debt associated with the Ameren plants doesn’t need to be restructured, Dynegy CEO Robert Flexon said on a conference call with analysts today.
The company expects the transaction, which will double its generating capacity in Illinois, to close in the last three months of the year. Dynegy sees annual savings of $60 million by 2015 from running a larger group of plants.
Dynegy climbed 9 percent to $22 at the close in New York, its biggest gain since exiting bankruptcy protection. Ameren rose 0.6 percent to $34.22.
“We view the transaction positively for both Dynegy and Ameren, as it continues to wring savings out of the business, while achieving stated strategic objectives for both companies,” Julien Dumoulin-Smith, a New York-based analyst for UBS AG, wrote in a note to clients today.
The unit Dynegy is acquiring will have $226 million in cash and $160 million in non-cash working capital, such as coal inventory, at closing, Flexon said.
The cash includes the $133 million payment, which may be increased if the plants appraise higher or Ameren sells them for more within two years. In addition to the $60 million for corporate purposes and $8 million from the land sale, the subsidiary will be transferred with $25 million from existing cash balances, according to Dynegy’s slides.
The sale marks Ameren’s exit from the merchant generation business, in which it sells power at wholesale market rates instead of state-regulated prices. The company announced Dec. 20 it would get rid of the unit to focus on regulated operations in Illinois and Missouri.
Ameren reported a $1.6 billion cost in the fourth quarter from writing down the value of the plants. The company expects to write down an additional about $300 million from this deal.
Ameren Energy Generating Co.’s $300 million of 7 percent notes due April 2018 jumped 13.75 cents on the dollar to 69 cents to yield 16.2 percent at 8:50 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities had tumbled 41.375 cents since the company said it would divest the unit.
Lazard Ltd. advised Dynegy on the transaction. JPMorgan Chase & Co. advised Ameren and provided a fairness opinion. Greenhill & Co. also provided a fairness opinion and Wachtell, Lipton, Rosen & Katz was legal counsel to Ameren.