Fitch Places Dynegy Holdings, Inc.'s Ratings on Rating Watch Evolving

Business Wire, Sept 15, 2006

NEW YORK -- Following Dynegy Inc.'s (Dynegy) announcement today that it plans to merge its power generation portfolio with the power generation portfolio of LS Power Group (LS Power) and acquire a 50% interest in LS Power's power generation development business, Fitch has placed the ratings of Dynegy Holdings, Inc. (Holdings; Issuer Default Rating 'B-' by Fitch) on Rating Watch Evolving. Fitch will resolve the Rating Watch Evolving following the receipt of more detailed information on the cash flows and inter-company ring-fencing arrangements of the individual issuers in the group, as well as financing plans for the proposed development joint venture's green field projects. Rating Watch Evolving signifies that ratings may be affirmed, raised or lowered. Dynegy intends to ensure that cash flow from operations of Holdings will continue to be dedicated to the repayment of Holdings' debt.

To finance the transaction, Dynegy intends to issue 340 million shares ($1.989 billion) of class B shares, $100 million in cash and issue a $275 million 9.5% junior subordinate note to LS Power. Following the closing of the transaction, LS Power will own approximately 40% of the equity of the combined company.

The merged entity would own and/or operate approximately 20,000 megawatts of unregulated electric generation located primarily in the Midwest, West and Northeast regions. In addition, LS Power's generation development business, which consists primarily of coal-fired generation in various regions and stages of development, would become 50% owned by Dynegy. The combined company would benefit from a more diversified generation portfolio in terms of geographic location and dispatch type compared to Dynegy's existing generation portfolio. In addition, LS Power's assets are relatively less sensitive to commodity price movements as a result of hedges in place for 75% of forecasted margin in 2007. Concerns relate to the uncertainty of regulatory approvals, the need to amend existing banking facilities at Holdings to accommodate the merger, and growth capital expenditure plans. The closing of the transaction is subject to customary state and federal regulatory approvals as well as receipt of favorable guidance from the SEC regarding proposed historical financial statement presentation.

Upon completion of our analysis of pro forma financials, further management discussion regarding the combination and resultant business risk profile, and completion of bank facility amendments, Fitch will resolve the Rating Watch status. If no adverse findings result from Fitch's review, then lowering the ratings of Holdings appears unlikely.

Fitch places the following on Rating Watch Evolving:

Dynegy Holdings, Inc.

--Issuer Default Rating (IDR) 'B-';

--Senior secured bank facilities 'BB-/RR1';

--Senior secured notes 'B /RR1';

--Senior unsecured debt 'B-/RR4'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.