Dynegy’s Betting Big on a Power Market Where Prices are Plunging

  • Dynegy will have boosted stake in PJM market to almost half
  • Power generator “remains very bullish” on the market: CEO

Prices are plunging in America’s largest power market, collapsing under the weight of cheap natural gas and weak demand. 

It’s the same market Dynegy Inc. just doubled down on.

The Houston-based power producer said Wednesday it’s buying out Energy Capital Partners LLC’s stake in a joint venture four months after the two teamed up to purchase U.S. power plants from Engie SA for $3.3 billion. As a result, Dynegy will boost its stake in the power market run by PJM Interconnection LLC to almost half from 43 percent. The once predominant coal generator will also rely on gas for 70 percent of its fleet.

Capacity payments, which generators rely on to cover costs, dropped 39 percent in a May auction at PJM because of lower demand projections and a surge in bids from new gas-fired plants. Wholesale electricity prices are already trading at or near the lowest seasonal levels so far this year. That hasn’t stopped Dynegy from stepping up its bet on competitive power markets.

“Dynegy remains very bullish on the PJM market even as auction results go up and down year to year,” Chief Executive Officer Robert Flexon said Thursday in an e-mailed response to questions. “PJM is the best designed competitive power market in the U.S.” and the auction results “are unrelated to this transaction.”

Capital Markets

Market conditions have changed since the ECP partnership was announced in February. On a call with analysts on Wednesday, Flexon said the company now has better access to capital markets and cited a rebound in the company’s stock. Dynegy’s shares tripled since February to a high of $21.51 on June 7, as they tracked a rally in gas prices.

Given the stock has since fallen back, the timing of the buyout was a “surprise,” though strategically in the right direction, Praful Mehta, lead analyst for power and utilities at Citigroup Inc. in New York, said in a telephone interview Thursday.  

Eliminating the joint venture will also lower interest costs, create a more efficient structure and make more cash available, Flexon said. The company will have 78 units in PJM that can operate at very low gas prices while its coal units in the region “will have outsized returns in a rising gas market,” he said. PJM serves 61 million people in the mid-Atlantic to the Midwest.

“Higher natural gas prices lead to higher power prices so we would benefit from this,” he said.

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