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Engie acquisition should help Dynegy exposure to MISO auction results

Lowerprices in the 2016-2017 MidcontinentIndependent System Operator Inc. auction are unlikely to significantlymar the earnings potential of DynegyInc., particularly with the pendingaddition of a fleet of assets from Engie. That was the assessment of Morgan Stanley & Co.LLC analyst Stephen Byrd, who wrote April 13, just ahead of the release of MISOauction results, that Dynegy remains the top pick among merchant generators, regardlessof natural gas prices.

MISOreleased auction resultsApril 14, with Zone 1 clearingat $19.72/MW-day, Zones 2-7 clearing at $72.00/MW-day and Zones 8-10, which includesMISO South, clearing at $2.99/MW-day. That prices in the 2016-2017 auction cleared lower than the previousyear was no surprise.In last year's auction,which covered the 2015-2016 planning year, MISO Zone 4 prices cleared at $150/MW-day,an increase of nearly 800% from the previous year and more than 4,000% higher thaneight neighboring zones, which all cleared below $3.50/MW-day. At $72.00/MW-day,MISO's Zone 4 cleared a higher price than Morgan Stanley's prediction of $10/MW-dayto $40/MW-day.

Dynegysaid April 15 that in addition to megawatts bid to meet existing obligations, thecompany bid 2,197 MW into the MISO 2016-2017 auction, with 870 MW coming from itsIllinois Power Holdings LLC,or IPH, segment. Dynegy said those megawatts were bid at the company's cost, asapproved by MISO's independent market monitor, and none of Dynegy's uncommittedmegawatts cleared the auction.

also had exposure tothe MISO results through its Clintonnuclear plant, which the company said April 15 had cleared in the 2016-2017 MISOcapacity auction, committing the company to operate the 1,078-MW plant through theend of May 2017. But the plant continuesto lose money, Exelon said, and will have to be shut down unless, "marketand energy policy reforms," can be implemented that "level the playingfield," for zero-carbon, reliable resources like nuclear.

"Without urgent action on thepolicy front, we will have no choice but to prepare for a potential early retirementin the face of continued financial losses at our Clinton nuclear plant," ExelonPresident and CEO Chris Crane said in anews release. Exelon also cited an analysis conducted by the state of Illinois foundthat closing Clinton would increase wholesale energy prices in the region by $236million to $341 million annually.

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Morgan Stanley noted that while Dynegy has the largest exposure tolower MISO prices, that situation will be helped by its February deal to acquireFrench utility Engie's net 8,731-MW portfolio of mostly gas-fired plants througha joint venture with Energy CapitalPartners called Atlas Power. Adding the Engie fleet to Dynegy's overallportfolio, Morgan Stanley calculated MISO capacity revenues only account for about3% of forecast EBITDA at Dynegy in 2017, with the capacity auction itself havinga minimum impact on earnings estimates.

Dynegy has approximately 6,100 MW of MISO capacity for sale, accordingto Morgan Stanley, and went into the 2015-2016 auction with roughly 3,500 MW ofcapacity to sell. Despite the high prices of the 2015-2016 auction, Dynegy clearedonly approximately 550 MW. This year, Morgan Stanley noted Dynegy sold more capacityforward and the 2,200 MW unsold it brought to the auction limited its exposure.Morgan Stanley reflected roughly 500 MW in auction sales in its 2016 and 2017 EBITDAestimates for Dynegy, meaning a drop in prices from $150/MW-day to $25/MW-day inMISO would have an earnings impact on Dynegy of approximately $15 million in 2016and $11 million in 2017.

Dynegy remains Morgan Stanley's "top pick," among independentpower producers.

"Historically [Dynegy] has beena coal-heavy merchant generator with significant earnings sensitivity to naturalgas prices," Byrd wrote. "While the company would still benefit from risinggas prices, it has transformed itself through series of acquisitions over the pastyear into a play on efficient natural gas power generation in attractive markets— a base of assets that performs well in a low commodity price environment and ispositioned to benefit from long-term structural changes in merchant power."

Coal generation now accounts for onlyabout 10% to 15% of Dynegy's EBITDA, with the rest coming from natural gas. AndMorgan Stanley, which rates Dynegy "overweight," sees its shares tradingat a discount to current power and gas forward curves even despite the climb inshare price since announcement of the Engie deal. Dynegy shares closed Feb. 24 at$8.32 after the deal was announced, but have been steadily climbing through March,and closed above $15 several days in April so far. Morgan Stanley's price targetfor Dynegy is $36.