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14 Jun 1999
MOODY'S CONFIRMS DYNEGY INC. AT Baa2 (SR. UNSEC.), ILLINOVA CORPORATION AT Baa3 (SR. UNSEC.), AND ILLINOIS POWER AT Baa1 (SR. SEC.), RATING OUTLOOK IS NEGATIVE
Moody's Investors Service confirmed the ratings of Dynegy Inc. (Dynegy) and Illinova Corporation (Illinova) following today's announcement that the companies have executed a merger agreement. Moody's also confirmed the ratings of Illinois Power Company (Illinois Power), a wholly-owned subsidiary of Illinova. The ratings outlook is negative for Dynegy, Illinova and Illinois Power.
Under the terms of the merger agreement, a newly established holding company will acquire all of the shares of Dynegy for approximately $1.06 billion in cash and $1.6 billion in stock. The new company, which will be named Dynegy Inc., will acquire the shares of Illinova in a 100% stock for stock exchange totaling about $1.8 billion. Moody's has not assigned a rating to the new parent company. The transaction will be accounted for as a purchase of Illinova by Dynegy, and the existing debt obligations of Dynegy, Illinova, and Illinois Power will remain as direct obligations of the issuer, without assumption or guarantee by the new holding company. Concurrent with the merger, there will be a restructuring of the strategic shareholdings in Dynegy. The company will repurchase a portion of the share holdings of Nova Chemicals and BG plc, with the remainder to be exchanged for convertible preferred securities. Chevron Corporation, which currently owns about 29% of Dynegy, will increase its investment by at least $200 million, resulting in about the same ownership percentage following the completion of the merger.
Dynegy Rating Assessment:
Dynegy's negative outlook reflects the substantial increase in debt in connection with its acquisition of Illinova and the repurchase of shares from Nova and BG plc, the uncertainty that the full amount of expected merger synergies will be realized, and the risk that market conditions could impede the issuance of equity which is planned to take place as much as 12 months after the conclusion of the merger. Immediately after the merger, the consolidated entity will have total debt of approximately $3.9 billion, which is about $900 million greater than the pro-forma combined debt of Dynegy and Illinova. As a result, initial debt coverage measures are weak for the rating category, with limited flexibility to pursue the significant expansionary investment needed to execute Dynegy's continued growth strategy. The markets in energy trading are still evolving, and it is uncertain how successful Dynegy will be in leveraging its commodity marketing and risk management skills to generate additional value from Illinova's assets and market position. Earnings and cash flow from Dynegy's business units, particularly its natural gas liquids (NGL) business, tend to be volatile due to the company's sensitivity to movements in the prices of natural gas, power, crude oil, and NGLs. While there is some flexibility in the company's sizable capital budget, capital expenditures and acquisitions have tended to exceed internally generated cash flow, and Moody's believes that Dynegy will continue to pursue acquisitions. Dynegy's management has indicated that it plans to issue $400 million to 500 million of common equity by the end of the year 2000, in order to strengthen the balance sheet. In addition, Nova and BG will hold about $300 million of convertible preferred which would be converted to common equity if Dynegy's stock realizes sufficient appreciation over time. However, Moody's views these securities as more akin to debt than equity. The company's rating and outlook will depend upon its ability to deliver expected improvements in earnings and cash flow, and to issue significant common equity within a prudent time period.
The merger is subject to various regulatory approvals, and to a vote by the shareholders of both companies. In addition, one of the conditions of the agreement is that Illinova must dispose of its interest in the Clinton nuclear power station and fully transfer the decommissioning risk. In the event that the Illinova transaction is not concluded as expected, Dynegy's rating would reflect the uncertainty of continuing ownership by Nova and BG, each of which has an approximately 24% ownership share. Both companies have clearly signaled a willingness to divest their holdings as part of the proposed merger and recapitalization transaction. The repurchase of shares from Nova and BG is contingent upon meeting all conditions precedent necessary to conclude the Illinova merger. In the event that the Illinova transaction is terminated, Moody's would reassess the strategic interests of Dynegy's major owners and the company's willingness to consider any repurchase of shares.
Illinova and Illinois Power Rating Assessment:
Illinova and Illinois Power's negative outlook reflects the still unsettled nature of the final Clinton sales agreement, including among other things, the final terms of purchase power agreement between AmerGen and Illinois Power, the numerous regulatory hurdles that will be required for transfer to occur, including a favorable IRS tax ruling, and the increased cash flow requirements at both entities to service the $900 million of additional acquisition debt.
The rating confirmation of Illinois Power at Baa1 reflects the increased probability that the Clinton sale to AmerGen will occur as planned and the expected reduced business profile due to Illinois Power's regulatory filing to transfer the remaining generating assets to an affiliated subsidiary, after which Illinois Power will remain a transmission and distribution company. Moody's also views the terms of the purchase power agreement between AmerGen and Illinois Power as being a key factor to the direction of Illinova's and Illinois Power's rating since obtaining a cost effective replacement power solution still remains an important element to future stranded cost recovery. As such , Illinova and Illinois Power ratings could be further pressured if the current agreement to sell Clinton is not consummated and a decision is made to permanently shut down the unit.
Illinova's rating confirmation at Baa3 reflects the current holding company's dependence on Illinois Power's cash flow as its principal near-term source of cash. After the merger, Illinova's outstanding securities are expected to be assumed by or refinanced at the newly formed parent company (Dynegy Inc.). Initially, Illinova's cash flows will be largely dependent upon predictable cash flows from its stable regulated business. Over time, however, Illinois Power's contribution will shrink to under 50%, causing Illinova's cash flow to become dependent on the more volatile non-regulated businesses. Notwithstanding the increased business risk associated with some of these businesses, Moody's believes that the merger offers value and strategic direction to Illinova since it provides access to certain skill sets, particularly trading and marketing, that should enable the combined entity to better utilize many of Illinova's physical assets.
Moody's ratings also recognize continuing strengths of Dynegy and Illinova, and the benefits which are likely to derive from the merger. The merger combines Illinova's strategically positioned generating facilities in the Midwest with Dynegy's greater national presence in marketing energy products and services. Illinova will provide Dynegy with a stronger platform for growth in the converging energy markets, and greater access to Illinova's customer base for marketing of other services. This should provide opportunities to create additional value through such activities as trading, risk management, and arbitrage of different markets. The company believes that it can achieve pretax revenue enhancements and cost savings in excess of $125 million annually as a result of the merger. The stability of Dynegy's cash flows will benefit from diversification, as well as from the more stable cash flows of Illinois Power's regulated electric business. The company also benefits from a continuing strategic relationship with Chevron, which will increase the amount of its equity investment. Chevron does not directly support Dynegy's debt, but Moody's believes that Dynegy is of significant importance to Chevron as its investment vehicle in the convergence of North American energy markets, particularly natural gas and electric power. The strategic commercial alliance with Chevron includes a 10 year agreement under which Dynegy markets all of Chevron's U.S. natural gas production. This linkage provides significant support to Dynegy's energy marketing activities.
The following ratings are confirmed:
Dynegy's senior unsecured notes, debentures, and bank revolving credit facilities rated Baa2, shelf registration for senior unsecured debt rated (P)Baa2, junior subordinated debentures rated Baa3, and Prime-2 rating for commercial paper. Also confirmed are the NGC Corporation Capital Trust I capital securities rated "baa3" and the Dynegy Capital Trust II capital securities rated "baa3".
Also confirmed are Illinova's senior unsecured notes at Baa3, Illinois Power's first mortgage bonds and secured pollution control bonds rated Baa1, issuer rating and senior unsecured notes rated Baa2, preferred stock rated "baa2", shelf registrations to issue senior secured debt rated (P)Baa1, senior unsecured debt rated (P)Baa2, preferred stock rated (P)"baa2", and Prime-2 commercial paper rating. Also confirmed are the preferred stock of Illinois Power Financing I and Illinois Power Capital L.P. rated "baa2", and Illinois Power Fuel Company's Prime-2 commercial paper rating.
Dynegy Inc. is one of the largest independent North American marketers of natural gas, natural gas liquids, coal, and electric power. Dynegy also engages in natural gas gathering, processing, and transportation. Nova Chemicals and BG plc each have about a 24% ownership share in Dynegy, and Chevron Corporation has a holding of about 29%. Dynegy's head offices are located in Houston, Texas.
Headquartered in Decatur, Illinois, Illinova is a diversified energy company, whose principal electric and gas utility subsidiary is Illinois Power. Through a number of subsidiaries, Illinova has interests in the domestic and international power generation business, the energy services business, and the energy trading business.
No Related Data.
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