Dynegy Inc. will be focused on physical sales of electricity from company-owned generation assets following an agreement announced in late December to eliminate its final long-term wholesale power tolling contract with Louisiana-based Quachita Power LLC. The agreement will result in a 4Q2005 pre-tax charge of $360 million ($235 million after-tax), and will allow Dynegy to completely exit its once highly touted Customer Risk Management business.
The 835 MW power plant is located near Sterlington, in Quachita Parish, LA, and is interconnected with Entergy's transmission system. Under a contract entered into in 2000, Quachita sold the power it produced at the natural gas-fired generator to Dynegy.
Under the agreement, Dynegy will use cash-on-hand to pay Quachita, a joint venture of GE Energy Financial Services and Cogentrix Energy Inc., $370 million to terminate all of its obligations related to the tolling contract. The deal will eliminate $455 million in capacity payment obligations through 2012 and $300 million in additional capacity payment obligations that would arise if Quachita exercised its option to extend the contract through 2017. The termination is expected to be effective early in 1Q2006.
"The termination of the Sterlington toll completes our effort launched in 2002 to eliminate power tolling obligations entered into during the company's former energy merchant era," said Dynegy CEO Bruce A. Williamson. "During the course of the last three years, we have cancelled or otherwise eliminated in whole or in part the financial statement impact of all of our long-term tolling agreements, with related obligations of approximately $3.2 billion."
Williamson called the elimination of the Sterlington toll a "significant accomplishment in terms of extinguishing this off balance sheet obligation at a very favorable rate of return. The company is now wholly focused on the sale of electricity generated by company-owned power assets to serve our markets and customers with reliable delivery of electricity. In addition, our commercial focus is on selling this power through limited hedging or forward sales transactions in order to maximize value for our shareholders while serving the marketplace."
The accounting charge related to the termination will negatively impact Dynegy's previously estimated 2005 financial results, the company said. However, going forward, the elimination of the tolling payments will positively impact the company's Customer Risk Management earnings and cash flows, offset in 2006 by the associated cash termination payment.
Dynegy expects to update its 2006 earnings and cash flow guidance to reflect the impact of this transaction in connection with its 4Q2005 and year-end earnings report in 1Q2006.
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