Struggling independent power producer (IPP) Dynegy Inc. -- which had transitioned from its early days as the Natural Gas Clearinghouse, one of the first large natural gas marketers -- is being bought out by an affiliate of private equity behemoth The Blackstone Group LP for $4.7 billion ($542.7 million cash and the rest acquired debt).
In a related transaction, NRG Energy said it will buy four Dynegy plants from Blackstone plus another plant from an additional party.
Shareholders of Dynegy are to receive $4.50 in cash for each outstanding Dynegy common share, representing a 62% premium to the closing share price on Aug. 12.
"Dynegy's board of directors believes the proposed transaction with Blackstone provides our stockholders with a significant premium over the current stock price and removes the risks to the existing stockholders associated with volatile commodity prices, challenging capital markets and environmental and regulatory uncertainties," said Dynegy CEO Bruce A. Williamson. "Blackstone is a world-class firm with substantial resources and investment experience in the power generation business, and we believe they are well positioned to lead Dynegy going forward as a private company."
Analysts at Tudor, Pickering, Holt & Co. Securities Inc. (TPH) called the deal a "take money and run" play, noting Dynegy's debt and the fact that Blackstone is betting on power generating assets fired by Powder River Basin coal.
"There's a history of private equity in this industry buying a lot of assets pretty cheap and making a pretty handsome profit," East Shore Partners Gordon Howald said, as reported by The Wall Street Journal.
About five years ago Blackstone led a group that bought Texas Genco LLC and then sold it to NRG Energy less than a year later (see Power Market Today, Feb. 3, 2006) for a hefty profit.
Dynegy shares, which had tumbled nearly 80% over the last 52 weeks, rallied on the news, rocketing 63% to close at $4.53 on the New York Stock Exchange Friday. Blackstone shares closed down about 3.6% at $10.61. NRG shares closed down about 2% at $21.95.
None of the parties apparently held a conference call to discuss the transactions. Blackstone did not respond to a question about its plans for Dynegy.
A special Dynegy shareholder meeting is to be held, probably in the fourth quarter, following the filing of a proxy statement. Dynegy is permitted to shop for better proposals for a 40-day period after the date of the merger agreement. "...[C]an't see anyone else stepping up," the TPH analysts said. Despite the shopping period, at least one law firm, the Kendall Law Group, said it is scrutinizing the deal on behalf of shareholders.
The transaction is expected to close by the end of 2010 and is not subject to any financing conditions; a fund managed by Blackstone has committed to contribute all of the equity necessary.
The deal opens a new chapter for a company whose roots date to 1985 when it started as a natural gas trading firm known as Natural Gas Clearinghouse. Power marketing was added later, and the company's star shone almost as brightly as Enron Corp.'s during the gas and power marketing heyday of the mid-1990s.
Natural Gas Clearinghouse became NGC Corp. It combined its power and gas trading operations in 1998 (see Daily GPI, May 27, 1998). Days later NGC became Dynegy, a $13 billion energy marketing services company (see Daily GPI, June 5, 1998). The company's logo was a tangram, a seven-piece Chinese puzzle.
"Given the changing scope of the company and the breadth of our strategic vision, we felt the time had come to change our name and logo to better reflect who we are today and what we will be tomorrow," then-CEO Chuck Watson said.
Dynegy wasn't the only one playing the gas-power convergence. Top gas marketers in 1993 were Enron, Amoco, Western Gas, Tenneco, and Natural Gas Clearinghouse. In 1998 that ranking was Enron, Dynegy, Engage Energy, El Paso Energy, and Duke. "So we've had a lot of consolidation in this business, but virtually everybody who's a leader today was also a leader five or six years ago," said Kenneth D. Rice, CEO of Enron Capital & Trade Resources, in 1998 (see Daily GPI, June 25, 1998).
In 1999 Dynegy was growing its southeastern U.S. power generation portfolio (see Daily GPI, March 1999). It was also building a large pipeline capacity stake on the El Paso Natural Gas system (see Daily GPI, May 20, 1999).
In 2000 Dynegy and Illinova combined to form a company with more than 14,000 MW of domestic generating capacity, average worldwide gas sales of more than 10 Bcf/d and more than 1.4 million retail customers (see Daily GPI, Feb. 3, 2000). At about the same time Watson predicted that power generator demand for gas would support gas prices. "I believe very firmly that over the next 10 years we're going to be in the $2 to $3 [per Mcf] price range. And if that in fact is where this price in gas is going to vacillate, then I believe that will also speak volumes for the producer community to be able to find natural gas to meet growing demand," he said (see Daily GPI, Feb. 14, 2000).
Dynegy also dabbled in the other convergence predicted by many a decade ago: pipelines/power lines and broadband Internet (see Daily GPI, Aug. 3, 2000); as well as online trading (see Daily GPI, Oct. 17, 2000).
In the spring of 2001 both Dynegy and Enron marked successful first quarter results (see Daily GPI, April 18, 2001), but things would soon turn. The summer brought the resignation of Enron CEO Jeff Skilling, and a slide in the shares of Enron, Dynegy and their peers (see Daily GPI, Aug. 16, 2001). By November Enron and Dynegy were talking a last minute merger in order to save the former from bankruptcy (see Daily GPI, Nov. 9, 2001).
They almost made it (see Daily GPI, Nov. 12, 2001), but not quite (see Daily GPI, Dec. 4, 2001). Litigation followed, as did Dynegy stock price gyrations (see Daily GPI, May 9, 2002) while energy marketers and traders were rocked by allegations of wash trades and false reporting. Watson resigned (see Daily GPI, May 29, 2002) and bankruptcy loomed (see Daily GPI, Aug. 16, 2002).
In the fall of the same year Dynegy dropped its marketing business to focus on power generation, natural gas liquids, regulated energy delivery and communications (see Daily GPI, Oct. 17, 2002). Communications was soon dropped (see Daily GPI, April 1, 2003).
The months and years that followed saw the company unload natural gas assets, notably the nearly $2.5 billion sale of midstream gas assets to Targa Resources Inc. (see Daily GPI, Nov. 1, 2005; Aug. 3, 2005), marking Dynegy's exit from gas to become solely a merchant power generator.
In 2006 Dynegy CEO Bruce Williamson outlined a strategy that pinned Dynegy's growth on rising power prices, not hedging (see Power Market Today, Feb. 10, 2006). At the end of the year Williamson touted his company's $2 billion buyout of LS Power Group as "a transforming event" (see Power Market Today, Dec. 14, 2006).
However, last summer the company was selling generating assets (see Power Market Today, Aug. 11, 2009), leaving it with 13,000 MW of generating capacity in seven states with 43% of the generation portfolio in the Midwest, 32% in the West and 25% in the Northeast.
Dynegy reported losses in 2009 of $1.2 billion. In the second quarter it posted a $191 million loss. Last month Dynegy got a ratings downgrade from Moody's Investors Service and a "negative" outlook (see Power Market Today, July 6, 2010).
Today Dynegy's power generation portfolio consists of approximately 12,200 MW of baseload, intermediate and peaking power plants fueled by a mix of natural gas, coal and fuel oil.
In concert with the Dynegy buyout, Blackstone has agreed to sell to NRG four natural gas-fired assets, representing about 3,884 MW of capacity, currently owned by Dynegy. They are the Casco Bay facility in Maine and the Moss Landing, Morro Bay and Oakland facilities in California. The price for all is about $1.36 billion in cash. The consummation of the merger of Dynegy and Blackstone is contingent upon the concurrent closing of the Blackstone and NRG transaction.
NRG said Friday it has also agreed to acquire the Cottonwood Generating Station, a 1,279 MW natural gas-fueled plant in the Entergy zone of East Texas, from Kelson LP for $525 million, or $410/kilowatt. NRG intends to fund both acquisitions with a combination of cash and other funding sources. Both acquisitions are expected to close by year-end.
The assets strengthen NRG's regional and dispatch diversity by greatly expanding the company's load-following mid-merit generation profile, NRG said. The new asset portfolio totals 5,163 MW, bringing NRG's generation portfolio to 28,608 MW.
"The addition of combined-cycle plants in northern California expands capabilities across the state, advances the company's ability to 'firm' renewable resources with highly efficient gas generation, while lowering the overall carbon intensity of NRG's fleet," NRG said. "NRG currently contracts with Cottonwood, one of the newest and most efficient plants in the region, to support current long-term contracts in Louisiana, Arkansas and East Texas. Owning Cottonwood will allow for future contracting opportunities and will enable NRG to provide additional balancing and ancillary services."
NRG CEO David Crane said the company has sought to fill the gap in its combined-cycle gas portfolio in core markets. "With these acquisitions of ideally located assets, we are filling that gap in three of our four core regions while furthering our long-standing strategy of being a regionally focused, multi-fuel scale generator with the ability to dispatch our assets efficiently across the merit order in each of our core markets."
Moody's Investors Service affirmed the ratings of NRG Energy NRG and changed the rating outlook to "negative" from "stable" to reflect the company's aggressive acquisition and growth strategy exemplified by today's announcement to acquire 5,163 MW of generation assets for nearly $1.9 billion in two separate transactions."
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