(The following statement was released by the rating agency)
Oct 8 - Fitch Ratings has revised its Ratings Watch listing of Dynegy Power,LLC (GasCo, Issuer Default Rating
'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Fitch has withdrawn its 'D' IDR on Dynegy Inc. (Dynegy).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 frombankruptcy on Oct. 1, 2012. Fitch has also withdrawn the IDR and ratings onDynegy Holdings, LLC (DH) and Dynegy Capital Trust I pursuant to termination ofthe registration of these entities following the conclusion of the bankruptcyproceedings.
The revision in Ratings Watch on GasCo and CoalCo reflects the elimination oflitigation and other associated risks due to the bankruptcy proceedingssurrounding DH and Dynegy. Fitch expects to resolve the Rating Watch afterfurther clarification of management's intent regarding capital and legalstructure and future strategic direction. Fitch considers it likely that the IDRand ratings for GasCo and CoalCo could be upgraded by one to two notches.
On a consolidated basis, Dynegy represent a cleaner corporate structure postemergence from bankruptcy, yet one that remains highly leveraged due todepressed EBITDA and FFO outlook given the current and Fitch's forecastedcommodity environment. Management could likely undertake strategictransformations of the company with respect to both its power portfolio andcapital structure.
GasCo's ratings reflect an improving operating environment spurred bycoal-to-gas switching that is driving significantly increased generation at thecompany's fleet and some improvement in overall margins. GasCo's EBITDA is lesssensitive 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 gasprices, higher volume can largely offset the compressed margins while providingsome operational cost efficiencies. However, GasCo's faces a few headwinds dueto expiration of an above market contract in the northeast in 2014 anduncertainty over resource adequacy payments in California. GasCo also retainscapex exposure to once through water cooling rules in California.
CoalCo's ratings reflect a challenging business environment led by compresseddark spreads, adversely shifting basis differentials due to coal-to-gasswitching impact on power dispatch, and increase in railway transportation costsas current favorable contract expires in 2013. CoalCo is close to concluding itslarge environment capex program that places it in a good position with respectto many of the Environmental Protection Agency (EPA) rules though some exposureremains for coal ash handling. In Fitch's current estimation, CoalCo's creditmetrics will likely remain depressed if natural gas prices remain range boundbetween $3.00 - 4.00/MMBtu.
The individual security ratings at GasCo and CoalCo are notched above or belowthe IDR, as a result of the relative recovery prospects in a hypotheticaldefault scenario. Fitch values the power generation assets that secure the termloans 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 asFitch's own price deck and other assumptions.
Fitch has revised the Rating Watch to Positive from Evolving for the followingratings:
Dynegy Power, LLC--IDR 'CCC';--Secured term loan at 'B/RR1'.Dynegy Midwest Generation, LLC--IDR 'CCC';--Secured term loan 'B/RR1'.Fitch has withdrawn the following ratings:Dynegy, Inc.--IDR 'D'.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 '
'. The ratings abovewere 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 MethodologyRecovery Ratings and Notching Criteria for Non-Financial Corporate IssuersParent and Subsidiary Rating Linkage(New York Ratings Team)