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Dynegy Moving 'Expeditiously' to Secure Midstream Buyer; Company Merger Rumored

June 20, 2005
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Dynegy Inc. is "moving forward as expeditiously as possible" to find a buyer for its midstream natural gas business, a company spokesman said last week. However, with the midstream assets nearly sold, Dynegy also is rumored to be looking for a merger opportunity -- the CEO said recently that Dynegy's remaining power assets by themselves would not be a "sustainable business model."

The Houston-based company announced plans to sell its bread and butter midstream assets in May, and CEO Bruce Williamson said then that the company hoped to secure a buyer within six weeks (see NGI, May 16).

John Sousa, vice president of communications, said Thursday he couldn't respond to market rumors about the midstream sale or possible sale of the entire business, and he declined to comment. However, Sousa said Dynegy's goal for the midstream sale is to identify a "potential transaction that will ensure the strongest total value for all of our investors and also be in the best interest of our employees, customers and suppliers."

Dynegy expects to receive between $2.5-3 billion for the midstream assets, which include gas gathering and processing plants in Texas, Louisiana and New Mexico. Once the midstream businesses are sold, Dynegy plans to use the proceeds to pay down debt. However, the sale also would make Dynegy a pure power generator, with generation capacity of between 10,000-15,000 MW.

Williamson said earlier this month that 10,000-15,000 MW of capacity may not be enough to sustain a business model, which mirrors comments he has made in the past year. He told shareholders at the annual meeting in May that by maximizing profits from the midstream sale, Dynegy's power generation business would be "positioned for consolidation and growth opportunities" (see NGI, May 23).

As a merchant power player, Williamson said Dynegy would need to partner with other generators to have at least 40,000 MW of total capacity to compete effectively and expand. He told Reuters earlier this month that Dynegy "can't sit around and wait for power prices to go up. The company will still be here in 2010 even if we do nothing. But the question is, do our shareholders pay us to sit around and just hope?"

Although no specific companies have been mentioned, the midstream assets likely will be sold to a private equity firm or a master limited partnership (MLPs), according to the CEO.

Several midstream players in the United States may be interested in purchasing Dynegy's midstream unit, including Duke Energy Field Services and Williams, which has put more emphasis into its midstream business in the past year. There also are emerging U.S. midstream businesses, including Centrica subsidiary Direct Energy, which said in May that the company was looking for ways to invest in North American regasification and midstream transportation and storage (see NGI, May 23).

The biggest midstream MLP acquisition in the past two years was the mega-merger between Enterprise Products Partners LP and GulfTerra Energy Partners LP in late 2003 (see Daily GPI, Dec. 16, 2003). The merger created the second largest publicly traded energy partnership in the United States, worth about $13 billion, and Enterprise continues to be on the prowl for complementary assets.

Another possible suitor for Dynegy's midstream assets may be Hicks, Muse, Tate & Furst Inc., a mega-investment firm based in Dallas and London. Hicks acquired midstream operator Regency Gas Services LLC late last year, and said it plans to continue looking for midstream businesses (see NGI, Dec. 6, 2004). Regency, formed in June 2003, operates midstream assets in North Louisiana, West Texas and the Midcontinent.

Other private equity firms that may be looking at Dynegy's midstream could be Carlyle/Riverstone Global Energy and Power Fund, which bought out the general partnership interests in Buckeye Partners LP and Magellan Midstream Partners LP, as well as Lehman Brothers, which holds a 36% stake in Pacific Energy Partners LP.

However, even with a sale of its midstream assets, Dynegy still may have liquidity problems. Bank of America securities analyst Anatol Feygin, who covers Dynegy, wrote in a note to clients that Dynegy would remain "significantly leveraged even after the divestiture." Dynegy's liquidity and maturity profile "will undoubtedly benefit" from the asset sale, but "its credit metrics remain challenging."

Feygin added, "we continue to believe the company will struggle operationally to service even the reduced debt obligations, and as the company will have one business unit remaining, it will become driven exclusively by the power markets."

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