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With $2.475B Midstream Sale, Dynegy to Consider Options for Power Generation Unit

Dynegy Inc. officially stepped out of the natural gas midstream business last week, with the $2.475 billion sale of its gas gathering, processing and liquids operations to Targa Resources Inc., a tightly held Houston-based midstream operator affiliated with private equity investor Warburg Pincus. Dynegy now plans to consider "every opportunity" for its remaining power generation business, the CEO said.

Under the agreement, which has been approved by the boards of both companies, Targa will acquire Dynegy's ownership interests in Dynegy Midstream Services Ltd., which holds Dynegy's gas gathering and processing assets, as well as its natural gas liquids (NGL) fractionation, terminaling, storage, transportation, distribution and marketing assets.

Targa, which is managed by a crew of veteran energy employees -- including a former Dynegy finance executive -- last year bought two integrated gas systems from ConocoPhillips for an undisclosed amount (see NGI, April 5, 2004). Its operations overlap Dynegy's, with midstream operations in West Texas and southwestern Louisiana, more than 2,000 miles of pipeline, and five natural gas plants with 400 MMcf/d of capacity and system throughput of about 370 MMcf/d. Additionally, Targa owns 40% of the Bridgeline pipeline system in southern Louisiana.

Targa will integrate its business with Dynegy's assets, which are located in West Texas, southeastern New Mexico and North Texas and on the Texas and Louisiana Gulf Coast, including 9,300 miles of gas gathering pipeline systems and 11 operated gas plants. Dynegy also has interests in six nonoperated gas plants and three stand-alone fractionation facilities and strategic storage, transportation and terminaling facilities on the Texas and Louisiana Gulf Coast. Also, it owns or controls NGL transportation and logistics assets throughout the United States.

Dynegy, whose predecessor company, Natural Gas Clearinghouse, was the first nationwide wholesale gas marketer, now becomes a pure-power generation business. Tuesday's announcement fueled rumors that the remaining assets will be acquired or merged with another company.

CEO Bruce Williamson said last week that Dynegy would "always look at every opportunity because that's what our fiduciary responsibility is to investors." The midstream sale, he said, will offer the company "opportunities to evaluate new strategic directions for our Power Generation business," and allow the company to "consider organic growth, growth through opportunistic expansion or participation in the anticipated power sector consolidation as we continue our focus on delivering value to our investors." Williamson said in June that Dynegy's power assets by themselves would not be a "sustainable business model" (see NGI, June 20).

Dynegy spokesman David Byford told NGI that he could not speculate on any future plans for the company, but he elaborated on Williamson's statement. "The proceeds from the midstream sale will position us for one of three things," Byford said. "It could provide us with organic growth, like the Powder River Basin conversion," in which Dynegy agreed to spend $500 million to reduce power plant emissions by converting to low-sulfur coal (see NGI, March 14). "There also is the possibility for opportunistic expansion, like the Sithe purchase," said Byford, referring to a transaction announced last year in which Dynegy acquired Sithe Energies, as well as Sithe Independence LP, from Exelon Corp. for $1 billion (see NGI, Nov. 8, 2004).

"And finally, there is the possibility of participating in power sector consolidation through another transaction," said Byford. "But first we have to get this transaction closed."

Dynegy expects to receive $2.475 billion in cash, of which $2.35 billion will be paid at closing. In addition to the amount payable at closing, based on current expectations, Dynegy will realize a return of cash collateral of $125 million and eliminate its responsibility for $75 million in letters of credit for the midstream business, both within 60 days of the transaction closing. The sale is expected to close in the fourth quarter.

The midstream organization, when acquired by Targa, will continue to be headquartered in downtown Houston, and Byford noted that Targa's offices are located in the same building as Dynegy's in Houston. Dynegy's existing midstream workforce of nearly 800 field and corporate employees is expected to join Targa, which is led by CEO Rene Joyce.

"Our agreement to acquire Dynegy's Midstream natural gas business is a significant milestone in our strategy to build a leading midstream energy company...," said Joyce. "The combined company, with a significantly expanded asset base in Texas, Louisiana and New Mexico, will be one of the top service providers across all segments of the NGL value chain and a leading pure-play midstream energy company."

In connection with the transaction, longtime Dynegy executive Stephen A. Furbacher, executive vice president of the midstream business and a member of Dynegy's Executive Management Committee, will retire after more than 30 years with Dynegy and predecessor companies. He will serve as a consultant to Targa during a transition period after the transaction closes.

Dynegy's primary financial adviser was Credit Suisse First Boston, with J.P. Morgan Securities Inc. also serving as financial adviser for the purpose of evaluating the fairness of the transaction. Targa was advised by Merrill Lynch and Co.

Dynegy is set to announce its 2Q2005 earnings and guidance estimates on Monday (Aug. 8). The webcast can be accessed via the company's website at

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