$3.3 Billion Dynegy Model for Buying Unloved Power Plants

  • Partnership with Energy Capital provides for lower leverage
  • Joint ventures offer way forward for debt-laden producers

Dynegy Inc. may have found the perfect model for debt-laden power producers looking to buy unwanted generating plants: a joint venture.

Dynegy and private equity firm Energy Capital Partners LLC teamed up to purchase U.S. plants on Thursday from Engie SA for $3.3 billion. The generators will be bought mostly with debt, backed by assets and cash flow from the venture.

Power producers like Dynegy, Talen Energy Corp. and NRG Energy Inc. are potential buyers of billions of dollars worth of generators up for sale after profit margins vanished on account of cheap and abundant natural gas. With heavy debt loads and battered share prices, joint ventures are offering them a way forward.

“A joint venture may be the only way these guys are going to be able to fund these things,” Jaimin Patel, a credit analyst at Bloomberg Intelligence, said by phone Thursday.

Energy Capital jump-started the financing with a $400 million bridge loan and a share purchase that will take its stake in Dynegy to 15 percent. 

“This deal is very surprising given Dynegy’s weak stock performance and already heavy debt burden,” Stacy Nemeroff, a Bloomberg Intelligence analyst, said Thursday in an e-mail. 

Dynegy, based in Houston, will own 65 percent of the Atlas Power venture and control day-to-day operations of plants in the U.S. East, Midwest and Texas that can produce 8,731 megawatts, the partners said Thursday in a statement. That’s enough to power about 7 million average U.S. homes.

‘Needed Creativity’

“We like it!” Praful Mehta, an analyst at Citigroup Inc., wrote in a research note Thursday, reiterating a buy rating on the shares. “Doing a transaction of this size without an equity issuance needed creativity and Dynegy achieved that.”

Dynegy rose 0.8 percent to $9.57 at 9:43 a.m. on Friday, following a 14 percent gain the day before. The shares are down 29 percent this year.

“They are tying up cash in this acquisition rather than buying back stock and paying down debt,” Greg Gordon, an analyst at Evercore ISI, wrote in a research note on Friday, reiterating a buy rating and $20 share-price target. “The benefits of this deal are worth it.”

Fortis Inc., Canada’s largest utility owner, also is looking for an investor to help with the $6.9 billion purchase of ITC Holdings Corp., the U.S. high-voltage power line owner. It’s shopping a 19.9 percent stake in ITC to reduce the amount of money it will need to borrow or stock it would need to sell.

“Anytime you look at a transaction, you have to come up with the most efficient way of financing it,” Fortis Chief Executive Officer Barry Perry said Feb. 11.

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