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Dynegy to restructure IPH unit, could shutter additional 500 MW

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Dynegy to restructure IPH unit, could shutter additional 500 MW

Onthe heels of announcing plans to shut down three coal-fired plants in southernIllinois, Dynegy Inc.is considering mothballing an additional 500 MW and looking to restructure theportfolio of Illinois assets it acquired from Ameren Corp. in 2013, executives said May 4.

Dynegysaid May 3 that it will shutdown 1,835 MW of capacity, citing flaws in the wholesale market runby the Midcontinent IndependentSystem Operator Inc. Units 1 and 3 at the Energy Complex and unit 2at the Newtonfacility did not clear the recent MISO capacity auction because the clearingprice was below unit cost, Dynegy President and CEO Robert Flexon said May 4during the company'searnings call.

As aresult, he said, Dynegy is "self-correcting the cash-flow deficiency byshutting down that capacity in excess of our retail and wholesale sales volumeto substantially eliminate our reliance on the annual MISO capacity auction." Dynegy previouslyannounced, in November2015, plans to retire the approximately 465-MW plant on June 1,also citing flaws in the MISO market.

Shutteringthe capacity from the Baldwin and Newton units will save Dynegy $200 million infree cash flow over the next five years, Flexon said, and potentially anadditional $200 million or more if the scrubber required for the remainingNewton unit is not finished. Retiring Wood River should save an additional $100million in free cash flow over the next five years.

"Aswe reposition our MISO portfolio, now is the appropriate time to address[IPH LLC]'s Gencosubsidiary," Flexon said, attributing the decision to weak energy prices,unsold capacity, maintenance and required environmental upgrades, as well as a$300 million debt maturity in 2018.

Dynegy intends to begin negotiating with the debt holdersand reach a solution this year that would likely either result in what Flexoncalled a "more sustainable business model" or in the debt holderstaking ownership of the three Illinois Power Generating Co. plants: the 1,230-MWNewton, the 915-MW Coffeen and its 1,023-MW stake in the facility.

In a note by CreditSights following Dynegy's call, bondanalyst Andy DeVries posited that the company aims to either slash debt at IPHand bring the plants on to its balance sheet, from which the subsidiary iscurrently ring-fenced and which has $825 million in debt, or jettison theplants to holders of the debt.

"Our read of the situation is [Dynegy] ultimately wantsto own the plants and clearly has the upper hand over bondholders,"DeVries wrote, noting the potential upside for Dynegy in owning the plants ifgas prices rise. Additionally, distressed asset investors and private equityfirms probably do not wish to own coal assets, California requires divestmentof businesses earning more than 30% of revenues from coal and the scrubber atNewton required byIllinois are additional reasons, DeVries added, why Dynegy willlikely be able to reduce debt and retain ownership of the IPH Genco assets.

Flexon said a key goal in negotiating with the IPH debtholders would be to eliminate the ring-fence and what he described as the costand inefficiency that go with that. "Ideally, you can eliminate thatthrough this process, so the question's going to be, if you can't get the rightcapital structure, then the assets go to the debtholders," Flexon said."And on the other hand, if you can't work through an agreement with them,it'd be great to just eliminate that inefficiency that we've created that wasdesigned to protect Dynegy from this debt becoming recourse to the balancesheet."

As for the additional 500 MW that Dynegy is looking toshutter, Flexon said some IPH units have commitments in , which, ifthose commitments cannot be moved to other assets, would rule out shutteringthose units. Newton's unit 1, with its planned scrubber, is the highest-costunit in Southern Illinois, but it does have PJM commitments, Flexon said,"So that may require us to look elsewhere."

Asked why Dynegy is moving ahead with coal-fired assetclosures without waiting to see if MISO capacity market reform discussions slatedfor later this year bring about any improvements, Flexon repeatedly describedDynegy being "outnumbered, outgunned," by utilities that benefit fromthe current market structure. "Every year, it's something else with theway this capacity auction works and you just can't keep getting zero," hesaid. "So it is one where we decided take matters into our own hands.Let's just right-size the portfolio."

He also noted that mothballing the plants gives Dynegy aboutthree years in which interconnection rates are preserved. But with Illinoislawmakers grappling with budget issues, Flexon suggested that he does notexpect decisions around electric supply to rise to the fore of political issuesin the near term.

"These units are mothballed so suddenly if the constructlooks like it has real appeal to it, then we can make a different decision. Butthe way it looks now, it's not going to happen, it's not going to happenanytime soon," Flexon said.

"Really, the only thing that can make a difference isthe state of Illinois to wake up, which for two years they haven't, and I knowthat is a source of frustration on our part and other generators' parts, but wejust can't wait around for it."