Dynegy on Monday said it would sell eight power plants to LS Power, a private equity firm that is a major stakeholder in the Houston-based generation firm. The transaction, estimated at $1.5 billion in cash and stock, is expected to enhance Dynegy’s "strategic and financial flexibility."

In 2007, Dynegy gave LS Power a 40% stake in the company in return for a portfolio of 10 power plants. The companies had then also launched a joint development venture, but they dissolved it earlier this year. The announced transaction follows Dynegy’s widened second-quarter loss of $345 million, or 41 cents a share, which it said was mainly due to lower power prices.

Under the terms of the transaction, Dynegy will receive $1.025 billion in cash in return for five peaking and three combined-cycle generation plants. The five peaking plants include Riverside and Bluegrass in Kentucky, Rocky Road and Tilton in Illinois, and Renaissance in Michigan. The three combined-cycle facilities are Arlington Valley and Griffith in Arizona and Bridgeport in Connecticut. The transaction will also relinquish Dynegy’s 30% interest in the 900-MW Sandy Creek station under construction in Riesel, Texas, to LS Power.

The transaction is expected to allow Dynegy, an independent power producer, to pay off some of its debt. It will leave the company with about 13,000 MW of generating capacity in seven states, with 59% of the plants fueled by natural gas. The remainder will be fueled by coal and oil.

Per the transaction, LS Power will also return 245 million of Dynegy’s Class B shares, received when the companies formed their venture. The firm’s remaining 95 million Class B shares will become common shares, leaving LS Power with a 15% stake in Dynegy. LS Power will also receive $235 million of Dynegy notes that are due in 2015.

"Today’s strategic agreements accomplish a number of significant objectives for Dynegy. The transaction, which is immediately accretive to Adjusted EBITDA per share, will significantly enhance liquidity and position us to reduce upcoming near-term debt maturities," said Dynegy CEO and President Bruce A. Williamson. "We will also maintain a strong foundation to continue executing our strategy with a diversified asset portfolio that is leveraged to both prices and demand as the U.S. economy and power markets recover."

According to the Houston Chronicle, the company is expected cut about 10% of its 500 Houston-based employees this week as part of a broader program to save $450 million over the next four years.

Sources: Dynegy, POWERnews, Houston Chronicle