The absence of a quorum needed for FERC to grant final approval of Dynegy Inc.'s acquisition of ENGIE's U.S. power portfolio is unlikely to derail the transaction, according to analysts.
Responding to a swell of investor concern over commissioner Norman Bay's resignation effective Feb. 3, analysts predicted that the lack of a FERC quorum should not threaten Atlas Power Finance LLC's, the joint venture between Dynegy and Energy Capital Partners, pending acquisition of a portfolio containing Engie’s U.S. competitive power holdings.
FERC in December 2016 approved the proposed transaction, but on the condition that the applicants address concerns that the deal could allow the companies to exercise market power. A few days later, the companies filed a plan they claimed addresses those concerns and asked the agency to approve that plan by Jan. 30, but the agency has yet to do so.
Terms of the deal allow either party to terminate the transaction by Feb. 24, if FERC has not yet approved it, in which case Dynegy would have to pay ENGIE a $132 million termination fee. But analysts expect that the more likely scenario is that the parties would renegotiate the termination deadline, citing ENGIE's commitment to exit the U.S. wholesale power business.
Dynegy did not indicate if or how it would seek to renegotiate with ENGIE in the event the deal is not approved by Feb. 24, suggesting in a statement it would evaluate other options. "We have requested FERC to respond to the mitigation plan by today. If we do not receive a response from FERC, we will evaluate options," Dynegy said in a statement Jan. 30.
End of the week optimism
FERC might not have acted on the petition by Jan. 30, as requested, because of the presidential transition's impacts on FERC's higher ranks, but a protest filed by union employees of Dynegy's Brayton Point facility on Jan. 19 may have also contributed to the delay.
"We had expected this approval order to emerge relatively close to the Jan. 30 target date, and easily well before Feb. 24," ClearView Energy Partners, a Washington-based energy policy analysis group, said in a Jan. 30 note.
"In light of Bay’s resignation, we give this matter relatively high odds of approval by the end of this week, as it simply may already have been close to completion and/or is simply a narrower order to write," compared to decisions on major natural gas pipelines, ClearView observed.
Analysts at Morgan Stanley Research similarly predicted that the deal will be approved before Bay leaves. "We believe these concerns are overdone," Morgan Stanley said Jan. 30, maintaining its "overweight" rating and target price of $19.
Life after Bay
If the deal does not make it over the finish line before Bay leaves, analysts expect a new commissioner may not be seated for another two to three months, meaning the deal will not impact earnings until late Spring.
"If approval is not received by Feb. 3, the financial implications for Dynegy are still fairly limited under most scenarios," Morgan Stanley said. It suggested that the earning impact from the Engie portfolio on Dynegy's bottom line would be most substantial in the second half of 2017, due to the receipt of capacity revenues from New England assets in June and peak prices typical of Texas' market during the summer.
Overall earnings from the Engie fleet are estimated at roughly $50 million in the first quarter of 2018, and $60 million in the second quarter, Morgan Stanley said.
UBS Securities LLC, which recently downgraded Dynegy on weaker outlook for PJM Interconnection and ISO New England capacity prices, also predicted that the ENGIE assets contribution to Dynegy's EBITDA would have a smaller impact ahead of the second half of 2017.
"Delaying the approval of the Engie acquisition beyond the targeted end of January would not necessarily have a consequential impact as EBITDA contribution is heavily weighted towards the summer, given the large fleet of ERCOT peakers," UBS said. "Indeed, even if the FERC approval is not received until after 1Q17, the loss in EBITDA would amount to only 10% of our 2017 estimate," or around $34 million.
Longer term upside
The shake-up at FERC could yield upside for energy investors, despite the initial uncertainty tied to a blackout period in the absence of a voting quorum into the late spring. Given the possibility that FERC could have three new Republican commissioners some analysts took a bullish view.
"Our ultimate takeaway on the FERC remix from an investor standpoint is to view this policy overhang as long-term upside and short-term downside," Evercore ISI said Jan. 30. "The pain you endure in the short term while the Republican seats are filled should translate to upside in the long-term, both for the specific projects impacted but more importantly, the space in general."
Several candidates are reportedly being considered for an appointment to FERC, including Neil Chatterjee, an energy advisor to Sen. Mitch McConnell, R-Ky.; Travis Kavulla, Montana Public Service Commission vice chairman; Patrick McCormick, Senate Energy Committee senior counsel and advisor to Sen. Lisa Murkowski, R-Alaska; and Robert Powelson, Pennsylvania Public Service Commission.