New York, June 28, 2002 — Moody’s Investors Service downgraded the ratings of Dynegy Inc. and its subsidiaries due to concerns related to the company’s current liquidity position and operating cashflow that is expected to be weak relative to existing debt levels.
The senior unsecured ratings of Dynegy Holdings Inc. (DHI) the primary operating subsidiary, was lowered to Ba1 from Baa3 and the commercial paper rating was lowered to Not Prime from Prime-3. Moody’s also assigned a senior implied rating of Ba1 to DHI.
The senior secured rating of Illinois Power (IP) was lowered to Baa3 from Baa2, the senior unsecured rating was lowered to Ba1 from Baa3 and the commercial paper rating was lowered to Not Prime from Prime-3.
The ratings outlook is negative primarily due to execution risk associated with the recently announced restructuring plan, a continuing lack of investor and counterparty confidence that has limited access to public debt markets and negatively impacted the company’s marketing and trading businesses, the increased likelihood of effective subordination due to higher levels of secured debt, and uncertainty surrounding FERC and SEC investigations as well as legal challenges from Enron related to the termination of the merger agreement.
Ratings downgraded include: Dynegy Inc. Shelf registration to (P)Ba2/(P)Ba3/(P)B1 from (P)Ba1/(P)Ba2/(P)Ba3
Dynegy Holdings Inc. Senior unsecured debt rating to Ba1 from Baa3, shelf registration to (P)Ba1/(P)Ba2/(P)Ba3 from (P)Baa3/(P)Ba1/(P)Ba2 Assigned senior implied rating of Ba1 Preferred Stock to Ba2 from Ba1 Commercial paper rating to Not Prime from Prime-3 Illinova Corp Senior unsecured debt rating to Ba2 from Ba1 Illinois Power Company
Senior secured rating to Baa3 from Baa2 and senior unsecured debt ratings to Ba1 from Baa3, shelf registration to (P)Baa3/(P)Ba1/(P)Ba3 from (P)Baa2/(P)Baa3/(P)Ba2 Preferred Stock to Ba3 from Ba2 Commercial paper rating to Not Prime from Prime-3 Roseton-Danskammer pass through certificates to Ba1 from Baa3.
The ratings downgrade reflects a current liquidity profile that is considerably weaker than it has been historically. Dynegy currently has approximately $370 million available under its committed bank facilities and $325 million of cash on hand, with $350 million of debt maturities (including amortization) in July and other expected uses of cash that will further reduce liquidity. As a result, the company recently announced a restructuring plan aimed at increasing liquidity to $2.0 billion by year-end 2002.
However, the plan is also largely dependent on proceeds from asset sales, with the largest component being a 50% share of Northern Natural Gas (NNG), an asset purchased with cash provided by ChevronTexaco.
While a sale of NNG would enhance short-term liquidity, it remains unclear how much of the proceeds will ultimately go to ChevronTexaco to deal with the $1.5 billion in preferred securities potentially coming due in November 2003. In addition, the company has a $300 million revolver that matures in November 2002 and $1.6 billion of credit facilities maturing in April and May 2003.
Given that DHI renewed its old $1.2 billion 364-day facility at a level of $900 million with no term-out option and chose to exercise the term-out option in the $300 million IP facility, Moody’s believes future renewals are likely to be done at lower commitment levels under more restrictive terms and conditions.
Therefore, refinancing risk has increased and Moody’s will evaluate any potential impact on ratings when those facilities are renewed. Furthermore, by restructuring and securing the minority interest transaction (Catlin), Dynegy has increased the amount of secured debt in its capital structure by $800 million, thereby increasing the potential for notching due to effective subordination.
Additional secured indebtedness will likely result in a downgrade of the senior secured and unsecured ratings or further notching of the senior unsecured debt of Dynegy Inc. and its subsidiaries. The downgrade further considers Dynegy’s reduced operating cashflow expectations for 2002 coupled with high financial leverage, and the likelihood that operating cashflow in 2003 may not be materially better. Previous operating cashflow estimates of $1.2 to $1.3 billion have been cut to approximately $1.0 billion, driven by a combination of weak power markets, reduced marketing and trading activity and asset sales.
Management’s expectations also assume working capital will be flat for the balance of 2002 and the risk management activities adjustment will be around $75 million (e.g. $75 million of reported earnings will not convert to cash by year-end 2002). Since Dynegy had large working capital uses in 2001 and a sizable negative risk management adjustment, and needs a relatively strong third quarter from its power generation and distribution assets, Moody’s believes there is a reasonable chance Dynegy’s operating cashflow could fall short of the $1.0 billion expected.
Additional negative cashflow pressure could also come from the company’s telecom business, which continues to consume cash. Moody’s does recognize that a portion of Dynegy’s cashflow is derived from physical assets, long-term contracts and regulated or fee based businesses, but some of these activities are still subject to volatility in volumes, which does impact cashflow.
Furthermore, the level of operating cashflow accounted for by these activities is not consistent with an investment grade rating given Dynegy’s current debt levels. Dynegy’s current debt obligations include; $6.2 billion on balance sheet (incl. Catlin & Alpha), $2.2 billion off balance sheet (operating leases, synthetic leases, non-recourse), and $200 million preferred stock. Moody’s believes the nearly $8.6 billion in obligations detailed above, which excludes the $1.5 billion in preferred securities held by ChevronTexaco, is high relative to cashflow.
While Moody’s continues to expect ChevronTexaco and Dynegy to work to renegotiate the terms of the preferred securities in a manner that will not be detrimental to Dynegy’s liquidity, it remains an obligation that must be dealt with.
Furthermore, Moody’s believes there is a good possibility that at least a portion of the proceeds from the planned sale of 50% of NNG will ultimately go to ChevronTexaco.
Finally, Moody’s continues to consider ChevronTexaco’s ownership interest, commercial relationships, and Board representation critical to Dynegy’s ratings. If those relationships weaken, additional negative ratings pressure will result.
Headquartered in Houston, Texas, Dynegy Inc. is the parent of Dynegy Holdings and Illinova Corp.
Dynegy Holdings is a leading independent marketer of energy products and services to customers located primarily in North America. Dynegy’s primary businesses are wholesale natural gas and power marketing and trading, power generation, and natural gas liquids. Illinova Corp.’s principal subsidiary is Illinois Power Company, an electric and gas transmission and distribution company.