The long-awaited results of PJM Interconnection’s forward-capacity auction—the nation’s largest and a key benchmark in establishing the long-term rates among U.S. merchant power suppliers—were unveiled late Tuesday, sparking a sharp climb across a range of Dynegy’s unsecured bonds and rattling a slew of names in the sector.
Dynegy 8% notes due 2025 were among the most active in Wednesday trading, rising 2.5 points, to 96.25, according to MarketAxess, while the Houston-based generator’s 7.625% notes due 2024 and 7.375% notes due 2022 climbed 2.75 points and two points, respectively, to 96.25 and 98.
PJM Interconnection, the Valley Forge, Pa.–headquartered regional transmission organization (RTO), accounted for more than half of Dynegy’s roughly $1.25 billion in first-quarter sales, and made up 52% of the issuer’s 2016 wholesale power generation, according to a February filing with the Securities and Exchange Commission.
Although PJM’s banner numbers broadly missed analyst forecasts—primarily in the setting of a 2010–2011 payout rate to merchant suppliers of $76.5 rate per megawatt-day, down sharply from the roughly $100 rate for the previous period and a consensus range of forecasts of about $90–120—Dynegy was poised to gain in light of its unique position in regional markets, according to a Morgan Stanley report out Wednesday.
One zone in particular was the so-called DEOK zone, of which Dynegy is a majority owner, and which broke out for a positive performance for its first time, Morgan Stanley analysts added, underscoring their selection of Dynegy and NRG Energy as “top picks in merchant power.”
“Expectations were pretty low,” Cowen analyst Amer Tiwana noted of the PJM results in a Wednesday phone interview, noting that many merchant suppliers were benefited merely from the number of forecasters bracing for the worst, especially as the U.S. merchant power industry has been long pressured by an environment of low gas prices and a slate of new projects waiting to come on line.
Dynegy bonds have most recently been in the spotlight amid reports that Vistra Energy could be in the hunt with a takeover offer, with bonds climbing on the heels of a Wall Street Journal report last week that the two issuers have entered into preliminary discussions over a potential tie-up that would create one of the country’s biggest independent power generators.
Morgan Stanley noted in a separate Wednesday report that such a tie-up supports its Overweight thesis for Dynegy, especially in light of the benefits of regional diversity and the likelihood of cash flows significantly improving through expected annual cost savings of about $250–300 million.
“We see the strategic rationale for both companies of such a deal, and if a transaction was announced, we would expect it to be structured as a stock-for-stock basis due to change of control considerations on Dynegy’s debt,” the analysts noted.
Houston-based Dynegy’s corporate and bond ratings are B+/B2 and B+/B3, respectively, with a 3 recovery rating on the unsecured notes by S&P Global Ratings. — James Passeri
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