NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has revised its Ratings Watch listing of Dynegy Power, LLC (GasCo, Issuer Default Rating [IDR] 'CCC') and Dynegy Midwest Generation, LLC (CoalCo, IDR 'CCC') to Positive from Evolving.
Fitch has withdrawn its 'D' IDR on Dynegy Inc. (Dynegy). Dynegy emerged from bankruptcy on Oct. 1, 2012. Fitch has also withdrawn the IDR and ratings on Dynegy Holdings, LLC (DH) and Dynegy Capital Trust I pursuant to termination of the registration of these entities following the conclusion of the bankruptcy proceedings.
The revision in Ratings Watch on GasCo and CoalCo reflects the elimination of litigation and other associated risks due to the bankruptcy proceedings surrounding DH and Dynegy. Fitch expects to resolve the Rating Watch after further clarification of management's intent regarding capital and legal structure and future strategic direction. Fitch considers it likely that the IDR and ratings for GasCo and CoalCo could be upgraded by one to two notches.
On a consolidated basis, Dynegy represent a cleaner corporate structure post emergence from bankruptcy, yet one that remains highly leveraged due to depressed EBITDA and FFO outlook given the current and Fitch's forecasted commodity environment. Management could likely undertake strategic transformations of the company with respect to both its power portfolio and capital structure.
GasCo's ratings reflect an improving operating environment spurred by coal-to-gas switching that is driving significantly increased generation at the company's fleet and some improvement in overall margins. GasCo's EBITDA is less sensitive to changes in natural gas prices due to a large component of capacity/ tolling revenues in the overall mix. In addition, at low levels of natural gas prices, higher volume can largely offset the compressed margins while providing some operational cost efficiencies. However, GasCo's faces a few headwinds due to expiration of an above market contract in the northeast in 2014 and uncertainty over resource adequacy payments in California. GasCo also retains capex exposure to once through water cooling rules in California.
CoalCo's ratings reflect a challenging business environment led by compressed dark spreads, adversely shifting basis differentials due to coal-to-gas switching impact on power dispatch, and increase in railway transportation costs as current favorable contract expires in 2013. CoalCo is close to concluding its large environment capex program that places it in a good position with respect to many of the Environmental Protection Agency (EPA) rules though some exposure remains for coal ash handling. In Fitch's current estimation, CoalCo's credit metrics will likely remain depressed if natural gas prices remain range bound between $3.00 - 4.00/MMBtu.
The individual security ratings at GasCo and CoalCo are notched above or below the IDR, as a result of the relative recovery prospects in a hypothetical default scenario. Fitch values the power generation assets that secure the term loans at GasCo and Coalco using a net present value (NPV) analysis. For the NPV, Fitch uses plant values provided by Wood Mackenzie as an input as well as Fitch's own price deck and other assumptions.
Fitch has revised the Rating Watch to Positive from Evolving for the following ratings:
Dynegy Power, LLC
--Secured term loan at 'B/RR1'.
Dynegy Midwest Generation, LLC
--Secured term loan 'B/RR1'.
Fitch has withdrawn the following ratings:
Dynegy Holdings, LLC
--IDR at 'D';
--Senior unsecured notes at 'CC/RR3'.
Dynegy Capital Trust I
--Trust preferred at 'C/RR5'.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Aug.14, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Parent and Subsidiary Rating Linkage
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Brian Bertsch, +1-212-908-0549 (New York)
Source: Fitch Ratings