New York, June 27, 2003 — Moody’s Investors Service assigned a speculative grade liquidity rating of SGL-1 to Dynegy. Dynegy’s senior implied rating is B3.
The liquidity rating primarily reflects Dynegy’s substantial cash balances and available committed credit capacity relative to modest uses of cash over the coming four quarters.
The company’s current liquidity is strong due largely to the successful refinancing, on a secured basis, of its bank credit facilities in April which extended the maturity to 2005 and the lack of any material public debt maturities until March and December 2005. Operating cash flow combined with unencumbered cash on hand and available credit is expected to be more than sufficient to cover scheduled maturities and amortization, preferred dividends and budgeted capital spending over the next 12 months.
However, Moody’s notes the company has several challenges beyond the 12-month time horizon considered in the SGL rating that could have a negative impact on liquidity if they are not dealt with during the balance of 2003.
First, Dynegy’s $1.1 billion revolving credit facility and $200 million term loan mature on February 15, 2005 and its $360 million term loan matures December 15, 2005.
These maturities coupled with $300 million of Senior Notes due March 15, 2005 and $150 million of Senior Notes due December 15, 2005 can not be met through cash flow and current cash balances, therefore, a significant portion of these obligations must be successfully refinanced.
Second, Dynegy continues to negotiate with ChevronTexaco to restructure $1.5 billion of convertible preferred securities that mature on November 13, 2003. While Moody’s doesn’t expect these securities to negatively impact near term liquidity, largely due to restrictions on payments contained in the revolving credit facility, the timing and amount of expected amortization in 2005 and beyond is subject to negotiation and is currently unknown.
The other items potentially impacting liquidity and cash flow that Moody’s will continue to monitor include the cash impact of terminating the company’s five remaining tolling agreements and cash payments (refunds) related to pending FERC actions associated with alleged manipulation of Western power markets in 2000 and 2001.
Dynegy’s current cash flow has benefited from the company’s decision to exit the trading and marketing business and sell existing natural gas in storage, strong commodity prices, increased volumes resulting from weather-driven demand, and savings from the company’s restructuring efforts.
As a result, Dynegy should generate adequate cash flow from operations to service its debt, cover working capital needs and capital expenditures during the next twelve months. Furthermore, Dynegy currently has cash balances and available committed borrowing capacity of approximately $1.6 billion, which should provide more than adequate back-up liquidity in the near term.
This back-up liquidity is a key SGL ratings consideration given that Dynegy’s asset sale program is largely complete and essentially all remaining assets are pledged as collateral supporting the company’s credit facilities. Dynegy’s remaining assets, with the possible exception of Illinois Power’s transmission system, are part of the company’s remaining core businesses and aren’t likely to be sold. If Dynegy were to experience a significant deterioration in liquidity going forward, the lack of alternative liquidity sources would be viewed as a negative factor in the company’s SGL rating.
As previously mentioned, Dynegy successfully restructured its bank credit facilities in April 2003. The previous $900 million and $400 million unsecured revolving credit facilities were replaced by a $1.1 billion secured revolving credit facility and a $200 million non-amortizing secured term loan and an existing $360 million communications lease was replaced by a $360 million non-amortizing secured term loan.
There are currently no borrowings under the revolver, but outstanding letters of credit total approximately $300 million, thereby reducing availability to borrow under the facility to about $800 million.
While the renegotiation of the credit facilities was a significant step in the company’s restructuring efforts, Moody’s notes that the credit agreements have mandatory prepayment provisions and restrictions on payments, including capital spending.
Prepayments are required if Dynegy sells any assets (100%), issues senior debt (100%) or subordinated debt (50%), or issues equity (50%). In addition, the terms limit the amount of cash that Dynegy can pay to ChevronTexaco to redeem the outstanding preferred securities totaling $1.5 billion.
Dynegy can only pay ChevronTexaco a maximum of $50 million during the term of the facility, from existing cash, and must permanently reduce the commitment amount under the credit facility by three times the amount of preferred securities repurchased.
The bank credit agreement also includes; a minimum liquidity requirement, a maximum allowed secured debt-to-EBITDA ratio, and a maximum amount of allowed capital expenditures. None of these covenants are calculated until the third quarter of 2003 at the earliest and they are calculated in a manner that excludes 2002 financial results.
In addition, the maximum capital expenditure covenant allows Dynegy to carry forward any excess room under the covenant from previous quarters as well as spend against future limits. While these covenants may limit Dynegy’s flexibility to a certain extent in the near term, Moody’s believes the company will remain comfortably within these financial covenants during the next twelve months.
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.