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Rating Action:

MOODY'S CONFIRMS RATINGS FOR DYNEGY INC. AND ITS SUBSIDIARIES; ASSIGNS B2 RATING TO DHI'S SECURED BANK CREDIT FACILITIES AND B3 RATING TO NEW SENIOR SECURED NOTES; ASSIGNS Caa2 RATING TO DYN'S CONV. SUB. DEBENTURES. THE RATINGS OUTLOOK IS DEVELOPING.

05 Aug 2003
MOODY'S CONFIRMS RATINGS FOR DYNEGY INC. AND ITS SUBSIDIARIES; ASSIGNS B2 RATING TO DHI'S SECURED BANK CREDIT FACILITIES AND B3 RATING TO NEW SENIOR SECURED NOTES; ASSIGNS Caa2 RATING TO DYN'S CONV. SUB. DEBENTURES. THE RATINGS OUTLOOK IS DEVELOPING.

Approximately $8.6 Billion in debt affected

New York, August 05, 2003 -- Moody's Investors Service confirmed the ratings for Dynegy Inc. and its subsidiaries and maintained a developing outlook following the company's announced pricing of $1.450 billion of new second priority senior secured notes and $175 million of convertible subordinated debentures. These securities will be privately placed and the offering is expected to close on or about August 11, 2003. The completion of these offerings coupled with the cash tender offer to purchase all of the outstanding Dynegy Holdings Inc. (DHI) Senior Notes due in 2005 and 2006 (totaling $650 million), the repayment of certain secured bank indebtedness and the restructuring of the ChevronTexaco Series B preferred stock are all key elements of the company's previously announced refinancing and restructuring plans. Proceeds from these offerings and a portion of available cash are going to be used to fund the purchase of the DHI's Senior Notes subject to the tender offer (approx. $585 million tendered), repayment of DHI's $200 million secured term loan, repayment of the Black Thunder secured financing ($696 million), a portion of DHI's $360 million secured term loan (approx. $116 million) and the $225 million cash payment to ChevronTexaco.

Following the completion of these transactions and the expected repayment of a $95 million senior note at Illinova (due Feb. 1, 2004), Dynegy will have no significant public debt maturities until July 15, 2008 when DHI's newly issued $225 million second priority senior secured floating rate notes are due, June 15, 2009 when Illinois Power's $250 million 7.5% FMB are due and April 1, 2011 when DHI's $500 million 6.875% Senior Notes are due. The company will, however, still need to refinance or replace its $1.1 billion secured revolving credit facility by February 15, 2005, the $170 million CoGen Lyondell credit facility by August 11, 2005, the remaining outstanding balance on its $360 million term loan by December 15, 2005, and continue to amortize the project Alpha debt (approx. $17 million per quarter) and absorb the negative cash impact of its remaining tolling agreements. These factors, as well as debt levels that remain high, minimal amounts of free cash flow and ongoing litigation, all contributed to Moody's decision to maintain a developing outlook. Moody's will continue to assess Dynegy's success in addressing these issues and will consider a positive ratings outlook or possibly a review for a one-notch upgrade once there is a greater degree of certainty surrounding the company's ability to refinance its remaining maturities in 2005, its ability to maintain adequate liquidity, and its ability to meet or exceed projected operating results over the near to medium term. Furthermore, Moody's notes the prospects for an upgrade of DHI's Caa2 senior unsecured debt ratings remains remote given the amount of secured debt in Dynegy's capital structure.

The B3 rating assigned to the new second priority senior secured notes reflects: (i) Moody's estimate of asset coverage provided by a collateral package consisting of second priority liens on certain real, leased and personal property of DHI and the guarantors (unconditional joint and several guarantees from essentially all of DHI's wholly owned material U.S. subsidiaries that guarantee borrowings under the bank credit agreement); a second priority pledge of 100% of the stock and equity interests of certain of DHI's and the guarantors' current and future domestic subsidiaries and 66% of the stock and equity interests of certain of DHI's and the guarantors' current and future foreign subsidiaries, (ii) restrictions related to the amount of Parity Liens and other Liens securing indebtedness, including a maximum $1.5 billion plus 10% of consolidated net assets of DHI, (iii) restrictions on the amount of permitted Priority Liens, including an absolute cap equivalent to indebtedness currently outstanding under the bank credit agreement (assuming the $1.1 billion revolver was fully funded)or any other credit facility and requirements to prepay certain amounts of indebtedness secured by Priority Liens with the proceeds of future debt offerings, equity offerings, and asset sales proceeds, (iv) certain restrictions on payments, and (v) the lack of support from Illinois Power or any of its subsidiaries, which will not guarantee the Notes. These were the primary factors contributing to Moody's decision to rate the second priority senior secured notes B3 (same as the senior implied rating) while notching the secured bank credit facilities B2, up one notch from the B3 senior implied. The Caa2 rating assigned to the Dynegy Inc. convertible subordinated debentures is primarily driven by the guarantee provided by DHI on a senior unsecured basis, effectively placing this security pari passu with DHI's other senior unsecured debt

While the successful completion of these transactions does provide clarity around a significant portion of the refinancing challenges the company faced in 2004-2006, it doesn't address the significant amount of debt remaining in Dynegy's capital structure. Reducing the $1.5 billion in preferred stock held by ChevronTexaco to $850 million is a positive development, but significant incremental debt reduction is still needed. Moody's estimates Dynegy will have approximately $8.2 billion of debt (incl. outstanding L/C's) once these refinancings are completed. Furthermore, maintenance levels of capital spending and cash interest costs are likely to consume the bulk of the cash flow generated from operations, resulting in limited amounts of free cash flow available for material amounts of debt reduction. Therefore, total leverage will continue to be a key ratings consideration that will likely limit the upside in Dynegy's ratings over the near to medium term.

Ratings confirmed for Dynegy Inc. and its subsidiaries are as follows:

Dynegy Inc. - (P)Ca/(P)C shelf registration

Dynegy Holdings Inc. - B3 senior implied, Caa2 senior unsecured debt, (P)Caa2/(P)Ca/(P)C shelf registration, and Ca sub. trust preferred securities

Illinova Corp - Caa2 senior unsecured debt

Illinois Power Company - B3 sr. secured debt, Caa1 sr. unsecured debt, (P)B3/(P)Caa1/(P)Ca shelf registration, and Ca preferred stock

Roseton-Danskammer Pass through certificates Caa2

New ratings assigned are:

Dynegy Holdings Inc. - Second priority senior secured notes consisting of; $225 million of floating rate notes due July 15, 2008, $525 million of 9.875% notes due July 15, 2010, and $700 million of 10.125% notes due July 15, 2013 all rated B3.

Dynegy Inc. - 4.75% convertible subordinated debentures due August 15, 2023 guaranteed on a senior unsecured basis by Dynegy Holdings Inc. rated Caa2

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

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
John C. Cassidy
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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