Dynegy calls off California plant sale process, reworks Newton scrubber contract

Dynegy Inc. (NYSE: DYN) said Feb. 24 that it posted strong 2014 earnings as it also works to get bigger in 2015 through planned closings on a series of transactions.

“We achieved our 2014 Adjusted EBITDA guidance and exceeded the top end of our Free Cash Flow guidance range which had been increased this past August. Higher realized power prices and spark spreads during the year more than offset contract expirations at our Moss Landing and Independence plants,” said Dynegy President and Chief Executive Officer Robert C. Flexon. “We are progressing through the regulatory review process of our pending acquisitions and will move quickly to close the Duke Midwest, EquiPower, and Brayton Point transactions following FERC approval. Post-closing, the Company will have a diverse footprint in what we believe are the best power markets in the US. With meaningful asset retirements on the horizon, capacity and energy prices are set to increase over the next few years and will drive significant free cash flow for the benefit of the Company and our stockholders.”

On Feb. 6, Dynegy filed its response to the Federal Energy Regulatory Commission’s (FERC) request for additional information and a settlement agreement with the PJM Interconnection Independent Market Monitor (PJM IMM) that has satisfied all of the PJM IMM’s concerns. It requested FERC approval for Energy Capital Partners and Duke Energy transactions by April 1.

Segment Review of Results Year-over-Year

  • Coal  The full year 2014 operating income was $52 million, compared to an operating loss of $207 million for the full year 2013. Adjusted EBITDA totaled $62 million during 2014 compared to a loss of $4 million in 2013. The $66 million year-over-year increase in Adjusted EBITDA is primarily due to higher realized energy prices and lower operating and maintenance expense that more than offset lower generation volumes and higher delivered fuel costs due to a contracted price increase.
  • Illinois Power Holdings – The full year 2014 operating loss was $2 million, compared to an operating loss of $17 million for the one month of ownership in 2013. Adjusted EBITDA totaled $83 million during 2014 compared to $12 million in 2013. The year-over-year increase in Adjusted EBITDA is primarily due to a full year of ownership in 2014, compared to one month in 2013. This segment is the Coffeen, Joppa, Newton, Duck Creek and E.D. Edwards coal capacity in Illinois.
  • Gas – The full year 2014 operating income was $79 million, compared to $7 million for the full year 2013. Adjusted EBITDA totaled $311 million during 2014 compared to $302 million in 2013. The $9 million year-over-year increase in Adjusted EBITDA is primarily due to improved spark spreads and generation volumes at Independence and Ontelaunee. That and higher capacity revenue at Kendall were partially offset by a decrease in revenues associated with the Moss Landing tolling agreement and the Independence capacity contract expirations.

Segment Review of Results Quarter-over-Quarter

  • Coal  The fourth quarter 2014 operating income was $50 million, compared to an operating loss of $44 million for the same period in 2013. Adjusted EBITDA for the segment was relatively steady, totaling $11 million during the fourth quarter 2014 compared to $10 million during the same period in 2013, due to higher realized prices being largely offset by a decline in generation volumes primarily due to a planned outage at the 1,815-MW (net) Baldwin plant. This segment is the Baldwin, Havana, Wood River and Hennepin coal capacity in Illinois.
  • Illinois Power Holdings – The fourth quarter 2014 operating income was $12 million, compared to an operating loss of $17 million for the one month of ownership in 2013. Adjusted EBITDA totaled $38 million during the fourth quarter 2014 compared to $12 million during the same period in 2013. The quarter-over-quarter increase in Adjusted EBITDA reflects full ownership during the quarter in 2014 versus one month ownership in 2013.
  • Gas – The fourth quarter 2014 operating income was $7 million, compared to an operating loss of $23 million for the same period in 2013. Adjusted EBITDA totaled $51 million during the fourth quarter 2014 compared to $67 million during the same period in 2013. The quarter-over-quarter decrease in Adjusted EBITDA is primarily due to a decrease in revenues associated with the Moss Landing toll agreement and Independence capacity contract expirations.

Other Recent Developments

  • Capacity Contract Sales – Total capacity sales through bilateral wholesale and retail channels are nearly 7,500 MW through planning year 2019/2020 at a weighted average price of over $3.00/kW-month. This represents sales of over 20% of the available capacity. The company sold 1,400 MW of bilateral capacity in MISO during 2014.
  • New England Capacity Auction  The 2018/2019 ISO New England (ISO-NE) capacity auction cleared at $9.55 per kW-month for most resources, a $2.52 per kW-month increase from the prior year’s capacity auction clearing price – a $70 million increase in gross margin for the consolidated company post acquisition closing. The New England capacity price for 2018/2019 is significantly higher than the estimated capacity price used in Dynegy’s acquisition analysis. The company said the ISO-NE supply situation is changing, with the 1,500-MW Brayton Point coal plant due to retire in mid 2017, the 140-MW Mount Tom coal plant retired in 2014 and the 600-MW Vermont Yankee nuclear plant retired at the end of 2014.
  • Baldwin Transmission Projects  In the fourth quarter of 2014 Dynegy signed a construction agreement with Ameren Transmission to implement several transmission projects designed to alleviate network congestion around the Baldwin facility. The first project will be completed in June 2015 with the upgrade of the Baldwin facility’s transformer. Additional transmission line work will be performed through 2017.
  • California Strategic Review – The sales process for the California portfolio has been terminated as the bids received were below Dynegy’s view of the portfolio’s value. The company noted that a once-through cooling settlement at the California Water Resources Board is out for comment until March 24.
  • Newton Scrubber Project  Dynegy has converted the engineering, procurement, and construction contract for the 1,230-MW (net) Newton coal plant scrubber project from a target price agreement to a fixed-price contract. As a result, the forecasted cost to complete has been lowered by $30 million to $224 million. The majority of the capital outlay will occur in 2018-2019.

Dynegy had said on Jan. 19 that the Federal Energy Regulatory Commission had requested additional information to process the applications filed with FERC in September 2014 for approval of Dynegy’s acquisition of the Duke Energy Midwest Generation assets and retail business, and also the EquiPower Resources and Brayton Point Holdings assets. Duke Energy Midwest is a subsidiary of Duke Energy (NYSE: DUK).

The addition of the Duke Energy Midwest, EquiPower and Brayton Point generation assets will bring Dynegy’s existing portfolio to nearly 26,000 MW. Dynegy and Duke Energy had announced in August 2014 that Dynegy will acquire Duke’s non-regulated Midwest Commercial Generation Business for $2.8bn in cash, which includes ownership interests in 11 power plants, many of them coal-fired, and Duke Energy Retail Sales, the company’s competitive retail business in Ohio.

Dynegy in August 2014 also announced that it would buy various assets of Equipower and Brayton Point in a separate transaction from Energy Capital Partners, including these facilities: Milford, Lake Road, Dighton, Masspower, Liberty, Elwood, Richland, Stryker, Kincaid and Brayton Point.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.