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Dynegy to Reorganize, Separate Gas and Coal

Houston-based Dynegy Inc. said it is beginning discussions to line up more than $1.7 billion in financing as part of a new organizational structure separating its natural gas- and coal-fired electric generation assets. Separately, Moody's Investors Service lowered the ratings on the Dynegy holding company unit that owns the gas-fired assets.

New financing and the restructured ownership within the independent power generator in combination are intended to "improve Dynegy's financial condition and more efficiently align the operation and management of the company's assets," said Robert Flexon, a former independent board member who was named CEO in June. This action is hoped to be a major step in re-establishing the company "as an energy industry leader," Flexon said.

Flexon acknowledged that the new organizational structure is aimed at addressing some financial challenges for Dynegy that have been exacerbated by low commodity prices. Along with Flexon, 52, Dynegy in the past few weeks has named new executive officers.

In the new organization, one subsidiary (GasCo) would own a portfolio of eight primarily gas-fired intermediate (combined-cycle) and peaking (combustion and steam turbines) power generation facilities located in the West, Midwest and Northeast. The gas plants represent 6,771 MW of the company's more than 11,600 MW fleet.

A second new subsidiary (CoalCo) would own a portfolio of six primarily coal-fired baseload generation plant located in the Midwest, with a collective capacity of 3,132 MW. Dynegy's remaining assets -- the Danskammer and Roseton facilities -- could not be part of either GasCo or CoalCo, a company spokesperson said.

Flexon said that by the end of July Dynegy hopes to line up new secured credit facilities, and it launched its discussions Monday with prospective lenders, seeking up to $1.3 billion with a six-year senior secured term loan facility available to GasCo and a $400 million, six-year senior secured term loan facility available to the coal plant unit. Credit Suisse and Goldman Sachs are joint lead arrangers and Barclays Capital is a co-manager for the new credit facilities, Dynegy said.

Moody's said the downgrade of Dynegy Holdings Inc. (DHI) in its probability of default rating (PDR) "increased the likelihood of a distressed debt exchange transaction occurring within the next several months following today's announcement of a corporate reorganization." The PDR is now "Ca," a drop from "Caa3," Moody's said.

Moody's said it expected the new GasCo unit, with stand-alone credit quality unlike DHI, to provide "a high percentage of gross margin and cash flow," coming from what it called various contractual arrangements in place with creditworthy counterparties during the next several years. The rating agency's assessment of the CoalCo $400 million in a secured term loan is viewed differently than GasCo's prospects.

"While collateral coverage appears strong, [the rating agency] anticipates the credit metrics for CoalCo to be more volatile than those at GasCo over the next few years because of the sole reliance on a more challenged, unregulated power market in the Midwest for earnings and cash flow, the lack of formal capacity in MISO [Midwest Independent Transmission System Operator], as well as the required capital investment program being completed for environmental expenditures,"said Moody's A. J. Sabatelle, senior vice president.

As such, Moody's anticipates the cash flow from the coal units to be more modest and volatile than the gas-fired plants' contributions.

Moody's has concluded that one of the goals of the reorganization is to create separate organizations from a legal standpoint, but nevertheless it still sees Dynegy as being "run largely as a consolidated concern."

The assessment by Moody's referred to DHI as a "financially distressed company" that is too dependent for cash flow on both natural gas and power commodity prices. Moody's said those prices are "expected to remain low over the next several years."

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