Dynegy Inc. (DYN) announced that it will repurchase its senior unsecured notes worth $830 million. The notes consist of equally between its 6.875% senior unsecured notes due 2011 and its outstanding 8.75% senior unsecured notes due 2012. This will remove 83% of the senior unsecured notes due in 2011 – 2012 from Dynegy’s balance sheet. Dynegy expects to complete the transaction by Dec 31, 2009.
Dynegy estimates that it would have to shell out approximately $875 million for the notes repurchase, which includes consent fees. During the first half of this month, the company boosted its liquidity to about $3 billion by the sale of its five peaking and three combined-cycle generation assets, as well as its remaining interest in a project under construction in Texas to New York-based private equity firm LS Power.
Our continued positive view of Dynegy shares reflects the level of progress that management has made in rationalizing the business portfolio and strengthening the company’s financial health. Dynegy has recorded a subdued performance in recent times owing to higher mark-to-market losses on account of rising forward power prices.
Nevertheless, we expect this trend to reverse over the longer term as higher forward prices incurred will invariably lead to higher margins, while sales volumes will also improve in the electricity market. With its focus on electricity operations and diversified power-generation fleet, Dynegy is well prepared to take full advantage of the situation.
The company is in a better position, particularly following the LS Power transaction, to play its role in the merchant power space, whose long-term prospects also appear to be improving. Dynegy’s rationalized and consolidated asset portfolio has helped improve the visibility of its underlying earnings power.
Dynegy Inc. produces and sells electricity and ancillary services in key U.S. markets. The power generation portfolio consists of approximately 13,000 megawatts of base load, intermediate and peaking power plants fueled by a mix of natural gas, coal and fuel oil.
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