Dynegy aims to grow in depressed market
Some say company taking on too much debt to finance acquisitions
NS. power plants, including six in Texas, were up for sale at a bargain price, and Dynegy chief executive Bob Flex on saw the chance to further the merchant power company’ s efforts to diversify its fleet to natural gas from coal. He faced one big problem, though. The seller, Paris-based Engie, formerly GDF Suez, insisted the $3.3 billion deal get done within a few weeks—a minuscule time period in the world of major corporate transactions. So Flex on quickly enlisted a private equity partner, working out a complex financing deal and meeting Engie’s Feb .25 deadline.
“Everybody knew the value was much higher than what we paid ,” Flex on said .“It was whether you could actually arrange the financing in time to pay for it .”
The Engie deal marks another milestone in the turnaround for Dynegy, which, after filing for bankruptcy in 2011, has evolved into the nation’ s second-largest independent power producer by generation capacity—behind another Houston co mp any, NRG Energy. Since Flex on took charge of an unwieldy and cash-poor Dy neg ya nd forced it through a Chapter 11 reorganization, he has relentlessly driven the company to grow, taking on billions of dollars incorporate debt and defying a depressed U.S. power market.
Two years before the pending
“It’s been a dramatic growth story — one that you never really think could happen this quickly.” Bob Flexon, Dynegy CEO
Engie acquisition, Dynegy made two deals, totaling $6.25 billion, to buy 19 power plants in the Midwest and Northeast from Duke Energy of North Carolina and Energy Capital Partners of New Jersey.
“It’s been a dramatic growth story,” Flexon said, “one that you never really think could happen this quickly.”
Despite the flurry of acquisitions, Flexon doesn’t come across as a maverick wheeler-dealer willing to take substantial risks. He’s an accountant by training, measured and analytical. He resembles ESPN baseball analyst Tim Kurkjian, albeit taller.
He drinks beet juice and he’s an avid cyclist. His only complaint about the BP MS 150, a charity bike ride from Houston to Austin, is not that it’s too grueling, but too crowded.
Flexon, 57, got his start in the finance offices of firms like the oil company Arco and the chemical company Hercules. He joined NRG in 2004, working his way up to chief financial officer. He became chief executive at the engineering company Foster Wheeler in 2010, but didn’t make it to the end of the year there, which he blames on a culture clash. Dynegy hired him as interim CEO the next year, and soon after removed the “interim.”
Flexon has followed a two-pronged strategy at Dynegy, driving efficiency in its operations while pursuing growth by acquiring the power plant portfolios of other companies. Even as Dynegy has added more power plants, he notes, the company’s general and administrative expenses have remained the same as four years ago. “There’s a simplicity to the way we work,” Flexon said.
Brewing headwinds
Dynegy still isn’t as simple as many Wall Street investors would prefer, said Andy Bischof, a Morningstar analyst. Dynegy’s acquisitions have burdened it with several billion dollars in debt when the entire power sector is struggling with low wholesale electricity prices, Bischof said. Investors want the company to cut costs,
“They need to focus on debt reduction right now,” Bischof said. “Dynegy has always been very focused on wanting to grow.”
Tudor, Pickering, Holt & Co., a Houston investment bank, dubbed the Engie purchase a decent bargain, but coming at a bad time. Dynegy’s stock, which sold for $33 a share a year ago, has fallen to about $17, although it’s rebounded from a low of $7.20 before the Engie deal.
Much of Flexon’s focus is to shift Dynegy’s portfolio from older, expensive coal plants to those fired by cleaner and cheaper natural gas. More than 90 percent of the power generation in the Engie deal comes from natural gas. After it closes at the endofthe year, Dynegy’s overall fuel mix will be 63 percent gas and 37 percent coal.
Analysts said there’s a strong chance Dynegy will close Coleto Creek, the one Texas coal plant that it’s buying from Engie, as well as some of its Midwest coal fleet. Dynegy is already shuttering its Wood River coal plant in Illinois.
“Once we have the (Engie) acquisition,” Flexon said, “we’ll have the right assets that are in the right places in the right markets.”
For the first time, those assets would be in Texas, with plants added in the Dallas, Houston and Austin regions. Dynegy has long held the odd position of having its headquarters in Houston, but not operating any plants in its homestate.
Still, it’s not exactly a great time to generate and sell power in Texas. Many plants are operating in the red or barely turning a profit. Cheap natural gas prices, which drive the market, have pushed wholesale power prices to 14-year lows. Texas’ large and growing wind power industry also is dumping affordable electricity into the market, further depressing prices.
But Flexon points out that the Texas plants received the biggest discounts in the Engie deal, so the cost of entry here is low. The efficient, gas-fired plants will prove profitable as the market rebounds once older, costly coal plants are shut down, bringing supply and demand back into balance.
A new marriage
Because of Dynegy’s debt from its 2014 deals, Flexon knew he could only make the Engie deal work if he found a financial partner. Lenders were reluctant to back deals in the struggling energy industry, particularly for a company owing billions to other creditors.
After working with Energy Capital Partners in its 2014 deal, Flexon decided to approach the private equity firm about creating a joint venture to buy Engie’s plants. Together, they formed a new company that was able to raise the money to make the acquisition.
Dynegy owns 65 percent of the company, called Atlas Power, and Energy Capital Partners owns the remaining 35 percent. Dynegy will buy out Energy Capital Partners within five years,
Flexon sees it as a fruitful, if temporary marriage, one in which he only had shortterm interest. After all, Flexon didn’t even know where the Atlas name originated. Apparently one of the transaction lawyers chose it. “No one even asked me,” hesaid.