New York, December 10, 2002 — Moody’s Investors Service downgraded the ratings of Dynegy Inc. and its subsidiaries.
The ratings service issued the downgrade due to ongoing concerns about the level of cashflow that the restructured company will be able to generate relative to its high financial leverage, which will likely result in minimal amounts of free cashflow available for further debt reduction, and continuing uncertainty related to the ultimate resolution of the company’s debt obligations coming due over the next several years, including $1.6 billion of bank credit facilities in the second quarter of 2003.
Dynegy’s senior implied rating was lowered to B3 from B2 and the senior unsecured rating of Dynegy Holdings Inc. (DHI) the primary operating subsidiary, was lowered to Caa2 from B3. The senior secured rating of Illinois Power (IP) was lowered to B3 from B1.
DHI’s senior unsecured ratings continue to be notched down from the senior implied rating due to the amount of current secured debt coupled with the expectation that future renewals of existing bank debt will be done on a secured basis, effectively subordinating the senior unsecured bonds.
The ratings outlook remains negative primarily due to (i) a continuing lack of investor and counterparty confidence that has limited access to public debt markets and negatively impacted the company’s remaining businesses; (ii) uncertainty surrounding the FERC and SEC investigations and; (iii) uncertainty relating to ongoing re-audits and reviews of the company’s financial statements from 1999 through 2001.
Ratings downgraded include:
Dynegy Inc. – Shelf registration to (P)Ca/(P)C from (P)Caa2/(P)Ca
Dynegy Holdings Inc. – Senior unsecured debt rating to Caa2 from B3, shelf registration to (P)Caa2/(P)Ca/(P)C from (P)B3/(P)Caa2/(P)Caa3, Subordinated Trust Preferred Securities to Ca from Caa2.
Illinova Corp – Senior unsecured debt rating to Caa2 from B3
Illinois Power Company – Senior secured rating to B3 from B1 and senior unsecured debt ratings to Caa1 from B2, shelf registration to (P)B3/(P)Caa1/(P)Ca from (P)B1/(P)B2/(P)Caa2, Preferred Stock to Ca from Caa2
Roseton-Danskammer – Pass through certificates to Caa2 from B3
The ratings downgrade reflects ongoing concerns surrounding the level of future cashflow from Dynegy’s non-trading and marketing businesses relative to its total debt of $9.3 billion. Despite some positive attributes associated with a portion of the cashflow expected from the company’s power generation, natural gas liquids, and Illinois Power (regulated distribution) businesses, such as relatively stable cashflows supported by a combination of long-term contracts, key customer relationships in strategic locations, and regulation, the primary concern continues to be the amount of debt these businesses need to support.
Moody’s stated that one of Dynegy’s more significant challenges in the near to medium term will be achieving a permanent capital structure that is more appropriate given the level of cashflow that can be reasonably expected from these businesses as well as the inherent risks associated with them.
Furthermore, Dynegy has not yet completed its contemplated sale or shut-down of the communications business, and it remains unclear how successful the company will be in restructuring its tolling agreements, and both continue to consume cash.
Dynegy’s total on and off balance sheet debt currently stands at $9.3 billion and consists of; $6.2 billion at Dynegy Holdings Inc. (including outstanding L/C’s), $100 million at Illinova, $2.0 billion at Illinois Power (including $540 million of transition funding notes), $360 million of DGC leases, and approximately $600 million of unconsolidated subsidiary debt.
These amounts do not include $1.5 billion of CVX preferred securities that are scheduled to mature in November 2003 and it remains unclear how this maturity will be dealt with. Given the insufficient level of operating cashflow and the lack of significant additional assets available for sale, debt protection measures are likely to remain very weak.
The rating downgrades also reflect a current liquidity profile that appears adequate to deal with all known financial obligations up to April/May of 2003 when DHI’s $1.3 billion in bank facilities and Illinois Power’s $300 million bank facility comes due. The most significant maturity prior to the bank credit facilities is a $200 million secured facility that matures in January 2003. None of the bank credit facilities can be extended via a term out option.
Dynegy currently has approximately $940 million of cash and $120 million of additional borrowing capacity, for total liquidity of $1.06 billion, which is insufficient to retire the bank facilities absent additional cashflow from operations.
Dynegy is currently in the process of negotiating with its banks to replace these facilities with a secured facility. In addition, if the company violates the EBITDA-to-interest covenant contained in these agreements, which is possible, the Lender’s have the ability to accelerate the outstanding obligations under these facilities, which could also trigger cross-acceleration provisions in a significant portion of Dynegy’s other outstanding debt. If Dynegy does violate this covenant, it will seek a waiver from the Lenders, however there is no assurance the company would be granted such a waiver, if needed.
At present, how successful Dynegy will be in its efforts to put a new facility in place, and the key terms of that facility, are unknown. Clearly, Dynegy must successfully refinance these facilities before it can move forward with the rest of its restructuring plans. Provided the company is able to refinance its existing bank lines, another $190 million of Mortgage Bonds at Illinois Power matures in August and September of 2003.
A combination of asset sale proceeds ($239 million from the sale IP’s electric transmission system) and proceeds from a planned issuance of new Mortgage Bonds at Illinois Power are intended to provide the cash to retire these obligations. Finally, Moody’s notes Dynegy’s current weak credit profile makes executing such plans extremely challenging.
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.