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20 Sep 2006
Moody's Affirms Dynegy's Ratings
$3.75 billion of debt affected
New York, September 20, 2006 -- Moody's Investors Service affirmed the ratings of Dynegy Holdings Inc.
(DHI), including the B1 Corporate Family Rating and the B2 rating
for its senior unsecured debt. Moody's also affirmed the
ratings of DHI's parent, Dynegy Inc. (DYN), including
the (P)Caa1 rating for its shelf registration for issuance of senior unsecured
debt. The rating outlook for DYN and DHI remains stable.
This affirmation follows the announcement that DYN has agreed to merge
with various affiliated companies jointly referred to as LS Power,
a privately owned independent power project developer and operator.
DYN will exchange 340 million shares of Class B stock (equal to about
40% of total equity), valued at approximately $2 billion;
$275 million in junior subordinated notes; and $100
million in cash for 100% of LS Power's equity interest in
its power generation portfolio and a 50% interest in a generation
development joint-venture. LS Power's $2.4
billion in funded project debt will remain in place, but will be
non-recourse to Dynegy. DHI's credit facilities will
not be available to the projects. As such, the transaction
is being accomplished with a minimal increase in recourse debt.
The merger will increase the size of Dynegy's portfolio of generating
assets by roughly two-thirds, to approximately 20,000
MW, while improving Dynegy's geographic, fuel and dispatch
diversity. In addition, Dynegy will have the opportunity
to participate in LS Power's development pipeline, which includes
another 10,000 MWs of greenfield and repowering projects.
The transaction is expected to increase Dynegy's operating cash
flow, and LS Power's hedges and power sales agreements should
provide a greater degree of stability to the company's revenues,
which are currently largely unhedged and vulnerable to commodity price
volatility. However, the projects are highly leveraged and
Moody's does not anticipate a substantial improvement in Dynegy's
consolidated financial ratios as a direct result of the merger.
Moreover, we note that much of the free cash flow generated by the
LS Power projects will be trapped by cash sweep mechanisms requiring the
prepayment of the project debt.
While the near-term impact of the merger may be limited,
management has disclosed that based solely on the projected net financial
impact of the recent wholesale power auction in Illinois, where
Dynegy's largest coal-fired baseload assets are located,
the company could realize a potential increase of $90-$100
million in operating margin for 2007 as compared to 2006. The auction
will replace a portion of a below-market contract with Ameren that
expires at the end of this year with a multi-year commitment to
provide up to 1,400 MWs of capacity on a load-following basis
at the around the clock price of $65/MWh. Moody's
expects that the combined impact of the merger, the auction,
and other on-going improvements will result in adjusted funds from
operation (FFO) to debt and FFO to interest ratios in excess of 10%
and 2x respectively by the end of 2007, which would be consistent
with the existing B1 Corporate Family Rating.
Dynegy is an independent power producer headquartered in Houston,
TX, with a 12,820 MW portfolio of assets.
Corporate Finance Group
Moody's Investors Service
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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