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Dynegy (DYN) to Acquire Duke Energy's (DUK) Midwest Generation Assets in $6.25B Deal

August 22, 2014 7:05 AM EDT

Dynegy (NYSE: DYN) has signed two separate definitive sets of agreements to acquire the ownership interests in certain Midwest generation assets from Duke Energy (NYSE: DUK) and EquiPower Resources Corp and Brayton Point Holdings, LLC from ECP. The Duke portfolio includes its retail business and ownership interests in the following plants: Killen, Stuart, Conesville, Miami Fort, Zimmer, Hanging Rock, Washington, Fayette, Lee and Dicks Creek. The ECP assets include these generating facilities: Milford, Lake Road, Dighton, Masspower, Liberty, Elwood, Richland, Stryker, Kincaid and Brayton Point. Upon closing both transactions, Dynegy will own nearly 26,000 megawatts (MW) of generating capacity nationally and provide retail electricity to residents and businesses in Illinois, Ohio, Pennsylvania and Michigan.

“The two acquisitions announced today are both exceptionally high quality portfolios that have been well managed and run by Duke and ECP employees. The addition of these portfolios transforms Dynegy by adding considerable scale in the PJM and New England markets. The Duke and ECP employees are committed, hard-working men and women and we look forward to engaging their expertise and talent in the combined business. In addition, we intend to honor the terms of the collective bargaining agreements in both generating fleets,” said Dynegy President and Chief Executive Officer Robert C. Flexon. “The addition of these portfolios is forecasted to significantly improve our financial outlook by tripling our 2015 Adjusted EBITDA and being massively accretive to Adjusted EBITDA and Free Cash Flow per share in 2015 and beyond.”

Transaction Benefits

The addition of the ECP assets and the Duke generation portfolio and retail marketing business complements Dynegy’s existing assets and retail business by adding significant scale and fuel diversification in markets the Company currently participates in but otherwise lacks scale. Of the 12,500 MW being acquired, 5,053 MW are modern combined cycle natural gas plants and 3,793 MW are environmentally compliant coal generation plants. Additional benefits from these transactions include:

  • PJM and ISO-NE capacity payments will represent 25% of the combined company’s gross margin compared to 11% today as a result of quadrupling the size of the PJM fleet and increasing the size of the New England fleet seven-fold.
  • Adjusted EBITDA and Free Cash Flow accretion per share in 2015 of approximately 125% and 220%, respectively.
  • Dynegy’s $3.2 billion net operating loss position will be available to offset taxable income of the combined company, providing nearly $500 million in present value cash tax savings.
  • In addition to the $40 million in targeted annual cost savings, Dynegy’s existing infrastructure and general and administrative costs will be leveraged across a much larger asset base, reducing the general and administrative cost per MWh from $1.67 to $1.10. As part of the integration, Dynegy will expand its highly successful PRIDE (Producing Results through Innovation by Dynegy Employees) program to both businesses to generate balance sheet and operational efficiencies beyond those identified to date.
  • Duke Energy Retail will expand Dynegy’s retail business into three new competitive retail markets (Ohio, Pennsylvania and Michigan). The EquiPower and Duke Ohio generation assets will provide load following generation to support the retail businesses.

Transaction Structure

Dynegy has committed financing in place for both the liquidity facilities and the transaction purchase prices and expects to access the capital markets in advance of closing to raise the permanent financing for the transactions.

Dynegy Inc. intends to issue approximately $5 billion in new unsecured bonds and $1.25 billion in equity and equity-linked securities. Included in the equity figure is $200 million of Dynegy common stock that will be issued to ECP as part of the transaction consideration at closing. To support the collateral and liquidity needs of the combined enterprise, the Company has secured two incremental corporate-level revolving credit facilities totaling $950 million, bringing total revolver capacity at Dynegy Inc. to $1.425 billion. Additionally, approximately $300 million in working capital and cash collateral postings will be transferred to Dynegy with the acquired portfolios at closing.

“The target capital structure of the combined company has been designed to ensure the continued strength and flexibility of our balance sheet and maintain significant secured capacity for both hedging and liquidity requirements going forward. We appreciate the support of the company’s relationship banks which have provided committed financing to ensure both sufficient funds for closing as well as revolver capacity to manage the liquidity requirements of the combined company,” said Dynegy Executive Vice President and Chief Financial Officer Clint Freeland.

The transaction’s financing structure is consistent with the Company’s focus on balance sheet management, value-creating capital allocation, and sufficient liquidity to weather changes in commodity markets. The new assets will be incorporated into Dynegy’s existing first lien structure to support the Company’s hedging and collateral management programs.

Combined Portfolio Profile

To provide investors with a view of the combined company’s earnings power, Dynegy has provided estimated full year 2015 Adjusted EBITDA and Free Cash Flow guidance of $1.2-$1.4 billion and $480 - $680 million, respectively. This assumes that closing of both transactions occurs on December 31, 2014 and that Dynegy owns both portfolios for the full year of 2015.

Dynegy continues to support environmentally compliant coal and gas-fired generation as a responsible way to support America’s future energy needs. Dynegy remains committed to working with local communities, state and federal regulators, and legislators to ensure that affordable, reliable, responsible and environmentally compliant electricity is provided to the communities that the Company serves.

In addition, Dynegy intends to honor the agreement ECP reached to retire the Brayton Point facility on May 31, 2017 and complete the decommissioning following retirement.

Approvals and Time to Close

Both transactions are expected to close by the end of the first quarter 2015. The transactions are subject to customary closing conditions, including approval from the Federal Energy Regulatory Commission and expiration of Hart-Scott-Rodino waiting periods.

Advisors

Lazard and Credit Suisse acted as financial advisors on both transactions. Morgan Stanley acted as lead financial advisor on the ECP transaction and Goldman Sachs acted as financial advisor on the Duke transaction.



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