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29 Mar 2006
MOODY'S ASSIGNS B2 TO SENIOR NOTES OF DYNEGY HOLDINGS INC. AND AFFIRMS OTHER RATINGS; SGL LOWERED TO SGL-3
Approximately $5.45 Billion of Debt Securities Affected
New York, March 29, 2006 -- Moody's Investors Service assigned a B2 rating to Dynegy Holdings Inc.'s
(DHI) proposed issuance of $750 million of senior unsecured notes
due 2016. In addition, Moody's has affirmed the existing
long term ratings on the $4.7 billon of outstanding recourse
debt of DHI and its parent, Dynegy Inc., and lowered
the company's Speculative Grade Liquidity rating to SGL-3
from SGL-2. The rating outlook is stable.
Ratings affirmed include:
Dynegy Holdings Inc. --
Corporate Family Rating, B1
Senior Secured Revolving Credit Facility, rated Ba3, $400
Second Priority Senior Secured Notes, rated B1, $1.75
Senior Notes, rated B2 (unsecured), $1.37 billon
Shelf (Senior Unsecured/Subordinated/Preferred), rated (P)B2/(P)B3/(P)Caa1
NGC Corporation Capital Trust I -- Trust Securities, rated
B3 (DHI subordinated debentures), $200 million outstanding
Dynegy Roseton, L.L.C. and Dynegy Danskammer,
L.L.C. -- Pass-Through Certificates,
rated B2 (senior unsecured guarantee of DHI), $800 million
Dynegy Inc. --
Convertible Subordinated Debentures, rated B2 (senior unsecured
guarantee of DHI), $225 million outstanding
Shelf (Senior Unsecured/Subordinated/Preferred), rated (P)Caa1/(P)Caa2/(P)Caa3
Dynegy Capital Trust II -- Shelf rated (P)B3
Dynegy Capital Trust III -- Shelf rated (P)Caa1
DHI's B1 corporate family rating is constrained by the company's
business concentration risk, its dependence on improving power markets,
a hedging strategy that leaves it exposed to volatility in those markets,
and leverage that remains high relative to earnings despite the overall
debt reduction expected to result from its tender offer for all outstanding
second priority notes. The rating is supported by the company's
diversified electrical generation asset base that should benefit from
an expected recovery in the power market, management's demonstrated
discipline through several years of restructuring the company that has
considered the needs of debt holders, and the increased flexibility
offered by the company's expected debt structure with no near term
maturities. The B2 rating on the senior unsecured bonds reflects
their effective subordination to two tranches of secured debt offset by
a strong likelihood of par recovery.
The lower SGL rating reflects adequate liquidity. While the company's
current debt restructuring and deleveraging provide the company with a
longer term benefit, in the short term its financial flexibility
will be limited by the corresponding reduction in cash on hand.
Following completion of the current restructuring, Dynegy should
have cash on hand of approximately $350 million, which is
expected to drop to $200 million by year end. Additional
liquidity is provided by the $400 million revolving credit facility,
which helps fulfill the company's $300 million to $350
million collateral requirements. Collateral requirements are minimized
by the company's strategy of remaining unhedged. Moody's
notes that a further significant reduction of liquidity could result in
a downgrade of the company's long term ratings.
Dynegy intends to use the proceeds of the notes together with up to $1.2
billion of cash on hand, including the remaining proceeds from its
sale of Dynegy Midstream Services, its natural gas liquids segment,
to retire its $1.75 billion Second Priority Notes pursuant
to a recent tender offer. Dynegy has also initiated an offer to
convert its $225 million of convertible subordinated debentures
to equity. In order to induce the note tender and the conversion,
Dynegy is offering a combined premium of approximately $275 million.
If all the holders of the Second Priority Notes and the Convertible Subordinated
Debentures accept the tender offer, nearly 90% of the company's
total funded recourse obligations will be senior unsecured. The
net impact of the restructuring will be a $1.25 billion
reduction in debt, which will lower total recourse debt to $3.5
billion, including the Roseton and Danskammer leases and the revolving
credit facility, which is currently undrawn. This figure
excludes the $400 million of ChevronTexaco convertible preferred
stock and the $900 million non-recourse debt at Sithe Energies.
Following this transaction, Dynegy will have reduced recourse debt
by $3.5 billion, or nearly 60%, over
three years while adjusted debt to capitalization will have declined from
77% to a projected 62%.
The reduction in debt notwithstanding, Moody's estimates funds
from operations (FFO) to debt to remain modest at approximately 3%
and FFO to interest to be 1.4 times on a pro-forma basis
based on the 2005 financial performance of Dynegy's generation segment,
which will constitute the core of the business going forward. While
these ratios are low for a B1 rated company with Dynegy's fundamental
risk profile, with the current restructuring the company will have
reduced its leverage significantly. This will leave it well positioned
to capture upside potential when the markets in which Dynegy operates
improve, which Moody's expects is reasonably likely in the
medium term. If the company is able to achieve its projected growth
of approximately $150 million in its power generation (GEN) segment
earnings, pro-forma FFO to debt would improve to 9%
and FFO to interest to 2.2 times. Although this represents
nearly a 30% increase in net earnings, Moody's notes
that it could be achieved with as little as 6.5% growth
in revenues assuming the company's cost structure remains constant.
Moody's notes that the ratings are also supported by Dynegy's expected
capital structure with limited debt maturities until 2011, which
should provide additional time for power market recovery.
Following an extensive restructuring of its business, Dynegy is
now focused on merchant generation with a 12,769 MW portfolio of
assets that is diversified by dispatch type, fuel source and geographic
region. The company's revenues were correspondingly diversified
in 2005, though its net earnings were much less so. Nearly
90% of its GEN segment EBITDA was generated by its coal-fired
baseload generating units in Illinois, which represent just one
quarter of its generating capacity. More than half of that capacity
is provided by the Baldwin facility, leaving the company's
revenues at risk in the event of an extended unscheduled outage.
Although the gas-fired peaking units are largely located in markets
with substantial excess capacity and, as a result, do not
currently contribute much to the company's profitability,
they provide upside exposure to an expected market recovery. The
company has chosen not to enter any new long-term power sales agreements
or hedges in order to maximize its potential upside and to avoid collateral
calls that would result if its contracts were out of the money.
While Dynegy's baseload and intermediate plants are expected to
continue to provide a source of consistent cash flow, Moody's
notes that the company's strategy leaves it highly exposed to an
overbuilt power generation market and gas price volatility, with
its long term viability and recovery dependent on stronger power demand,
higher electricity prices and improved spark spreads. In a liquidation
scenario, Moody's conservatively estimates the value of the
company's assets would comfortably exceed the amount of its debt.
Dynegy's exposure to fluctuations in gas prices was demonstrated
by the recent $120 million downward revision of its earnings forecasts
for 2006. Because gas prices largely determine the marginal price
of power, and therefore the spread Dynegy's baseload coal
units can achieve by selling into the market, the company estimates
that a $1/mmBtu change in gas prices results in a $50 million
shift in its bottom line. Despite the downward revision,
the company's current forecast of 2006 EBITDA for its power generation
business of $480 to $585 million still represents an increase
of more than 60% from 2005 levels.
Excluding cash outflows related to the termination of the uneconomic Sterlington
Tollone of Dynegy's last remaining uneconomic tolling agreements
, the current debt restructuring, and an inflow from the pending
swap of its 50% share of West Coast Power for NRG's interest
in Rocky Road, Moody's estimates the company could generate
sufficient cash from operations to meet ongoing capital spending requirements
in 2006 if it is able to achieve its EBITDA target. While this
would be a significant improvement, Dynegy needs to demonstrate
it can deliver this level of operating and financial performance consistently.
Moody's notes that based on current market prices the company is
also positioned to command an additional $30 million to $40
million in revenues once its below-market power sales agreement
with Ameren expires at the end of the year.
Moody's also notes that Dynegy reported a material weakness relating to
income taxes in both its 2005 and 2004 10-K. While Moody's
believes that such material weaknesses generally relate to isolated problems,
the fact that these control issues were not remediated is considered a
credit negative. Moody's will continue to monitor Dynegy's progress
in remediating this material weakness.
The stable rating outlook reflects Moody's expectation of Dynegy's continued
operating performance improvement as the power markets recover.
Dynegy's ratings could improve through a combination of improving operational
performance, consistent positive free cash flow, and cash
flow coverage (FFO/debt) above 10%. The ratings could drop
as a result of further deterioration in operating or financial performance
relative to plan, a leveraging acquisition, or further reduction
Headquartered in Houston, Texas, Dynegy Inc. is the
parent of Dynegy Holdings Inc. Dynegy's primary business is power
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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