New York, July 18, 2003 — Moody’s Investors Service changed the ratings outlook for Dynegy Inc. and its subsidiaries to developing from negative in response to the company’s contemplated refinancing and restructuring plans.
The developing outlook reflects: (i) the contemplated transactions all being dependent upon amending the existing bank credit facility, which has not yet been completed, (ii) uncertainty related to the size and tenor of the proposed debt offerings, and (iii) the ongoing need to reduce the amount of total debt in Dynegy’s capital structure.
If Dynegy is successful in obtaining the needed amendments and consents from its banks and successfully executes the proposed transactions, Moody’s will likely consider changing the outlook to positive or possibly reviewing the ratings for a one-notch upgrade.
At this point Moody’s believes there is a fairly high probability that the banks will agree to amend the existing credit agreement to allow these transactions to occur since it will reduce most banks aggregate exposure to Dynegy while also improving collateral coverage given the new secured debt will have second priority liens and the banks have first priority liens.
However, if Dynegy is unsuccessful negative ratings pressure will remain due primarily to the significant refinancing risk the company will face in 2005.
Dynegy’s refinancing and restructuring plans include: (i) launching a tender offer for $450 million of senior unsecured public notes due in 2005 and $200 million of senior unsecured notes due in 2006, (ii) an agreement in principle with ChevronTexaco to restructure and exchange $1.5 billion of Series B preferred stock maturing in November 2003 for $225 million in cash, $225 million of new junior unsecured subordinated notes due in 2016 and $400 million of new convertible preferred stock, and (iii) plans to launch a private placement of $1.2 billion of second priority senior secured notes and $300 million of convertible debentures.
Proceeds from the new privately placed secured debt will be used to pay down secured bank debt (existing term loans), a secured financing related to its Midwest generation assets (Black Thunder), and fund the repurchase of $650 million of Dynegy’s public notes due in 2005.
If Dynegy is able to successfully complete these transactions it will improve the company’s debt maturity profile for the next several years. Debt obligations in 2004 will decrease modestly and will include: a $100 million senior note at Illinova, an $81 million lease payment and $86 million of TFN (transitional funding notes) payments at Illinois Power, and $80 million of amortization related to Project Alpha.
Black Thunder debt will also require amortization if it is not prepaid with proceeds from the proposed new debt offerings. Debt maturities in 2005 would be significantly reduced as $560 million of term loan debt, approximately $600 million of Black Thunder debt and $450 million of Dynegy senior unsecured notes would potentially be replaced with secured notes not expected to mature until 2013/2015.
Moody’s notes, however, Dynegy’s $1.1 billion revolving credit facility still matures in February 2005. Letters of credit issued under this facility currently total slightly less than $300 million and there are no borrowings. Dynegy will likely need to refinance or replace this credit facility in 2005 to ensure adequate liquidity. This will become increasingly important if the company uses a significant portion of the $850 million in cash it currently has available to fund the transactions being considered.
The problem the contemplated transactions don’t address is the significant amount of debt remaining in Dynegy’s capital structure. Reducing the $1.5 billion in preferred stock held by ChevronTexaco to $850 million is a positive, but significant incremental debt reduction is still needed.
Moody’s estimates Dynegy will have approximately $8.2 billion of debt (incl. outstanding L/C’s) once these refinancings are completed. Furthermore, maintenance levels of capital spending and cash interest costs are likely to consume the bulk of the cash flow generated from operations, resulting in limited amounts of free cash flow available for material amounts of debt reduction. Therefore, total leverage will continue to be a key ratings consideration that will likely limit the upside in Dynegy’s ratings over the near to medium term.
Moody’s current ratings for Dynegy Inc. and its subsidiaries are as follows:
Dynegy Inc. – (P)Ca/(P)C shelf registration
Dynegy Holdings Inc. – Caa2 senior unsecured debt, (P)Caa2/(P)Ca/(P)C shelf registration, and Ca sub. trust preferred securities
Illinova Corp – Caa2 senior unsecured debt
Illinois Power Company – B3 sr. secured debt, Caa1 sr. unsecured debt, (P)B3/(P)Caa1/(P)Ca shelf registration, and Ca preferred stock
Roseton-Danskammer Pass through certificates Caa2
Headquartered in Houston, Texas, Dynegy Inc. is the parent of Dynegy Holdings and Illinova Corp. Dynegy’s primary businesses are power generation and natural gas liquids. Illinova Corp.’s principal subsidiary is Illinois Power Company, an electric and gas transmission and distribution company