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28 Jun 2002
MOODY'S DOWNGRADES RATINGS OF DYNEGY INC., DYNEGY HOLDINGS (SR. UNSECURED TO Ba1), ILLINOVA AND ILLINOIS POWER. RATINGS OUTLOOK IS NEGATIVE
Approximately $5.0 Billion of Debt Securities Affected.
New York, June 28, 2002 -- Moody's Investors Service downgraded the ratings of Dynegy Inc.
and its subsidiaries due to concerns related to the company's current
liquidity position and operating cashflow that is expected to be weak
relative to existing debt levels. The senior unsecured ratings
of Dynegy Holdings Inc. (DHI) the primary operating subsidiary,
was lowered to Ba1 from Baa3 and the commercial paper rating was lowered
to Not Prime from Prime-3. Moody's also assigned a senior
implied rating of Ba1 to DHI. The senior secured rating of Illinois
Power (IP) was lowered to Baa3 from Baa2, the senior unsecured rating
was lowered to Ba1 from Baa3 and the commercial paper rating was lowered
to Not Prime from Prime-3. The ratings outlook is negative
primarily due to execution risk associated with the recently announced
restructuring plan, a continuing lack of investor and counterparty
confidence that has limited access to public debt markets and negatively
impacted the company's marketing and trading businesses, the increased
likelihood of effective subordination due to higher levels of secured
debt, and uncertainty surrounding FERC and SEC investigations as
well as legal challenges from Enron related to the termination of the
Ratings downgraded include:
Shelf registration to (P)Ba2/(P)Ba3/(P)B1 from (P)Ba1/(P)Ba2/(P)Ba3
Dynegy Holdings Inc.
Senior unsecured debt rating to Ba1 from Baa3, shelf registration
to (P)Ba1/(P)Ba2/(P)Ba3 from (P)Baa3/(P)Ba1/(P)Ba2
Assigned senior implied rating of Ba1
Preferred Stock to Ba2 from Ba1
Commercial paper rating to Not Prime from Prime-3
Senior unsecured debt rating to Ba2 from Ba1
Illinois Power Company
Senior secured rating to Baa3 from Baa2 and senior unsecured debt ratings
to Ba1 from Baa3, shelf registration to (P)Baa3/(P)Ba1/(P)Ba3 from
Preferred Stock to Ba3 from Ba2
Commercial paper rating to Not Prime from Prime-3
Roseton-Danskammer pass through certificates to Ba1 from Baa3.
The ratings downgrade reflects a current liquidity profile that is considerably
weaker than it has been historically. Dynegy currently has approximately
$370 million available under its committed bank facilities and
$325 million of cash on hand, with $350 million of
debt maturities (including amortization) in July and other expected uses
of cash that will further reduce liquidity. As a result,
the company recently announced a restructuring plan aimed at increasing
liquidity to $2.0 billion by year-end 2002.
However, the plan is also largely dependent on proceeds from asset
sales, with the largest component being a 50% share of Northern
Natural Gas (NNG), an asset purchased with cash provided by ChevronTexaco.
While a sale of NNG would enhance short-term liquidity, it
remains unclear how much of the proceeds will ultimately go to ChevronTexaco
to deal with the $1.5 billion in preferred securities potentially
coming due in November 2003.
In addition, the company has a $300 million revolver that
matures in November 2002 and $1.6 billion of credit facilities
maturing in April and May 2003. Given that DHI renewed its old
$1.2 billion 364-day facility at a level of $900
million with no term-out option and chose to exercise the term-out
option in the $300 million IP facility, Moody's believes
future renewals are likely to be done at lower commitment levels under
more restrictive terms and conditions. Therefore, refinancing
risk has increased and Moody's will evaluate any potential impact on ratings
when those facilities are renewed. Furthermore, by restructuring
and securing the minority interest transaction (Catlin), Dynegy
has increased the amount of secured debt in its capital structure by $800
million, thereby increasing the potential for notching due to effective
subordination. Additional secured indebtedness will likely result
in a downgrade of the senior secured and unsecured ratings or further
notching of the senior unsecured debt of Dynegy Inc. and its subsidiaries.
The downgrade further considers Dynegy's reduced operating cashflow expectations
for 2002 coupled with high financial leverage, and the likelihood
that operating cashflow in 2003 may not be materially better. Previous
operating cashflow estimates of $1.2 to $1.3
billion have been cut to approximately $1.0 billion,
driven by a combination of weak power markets, reduced marketing
and trading activity and asset sales. Management's expectations
also assume working capital will be flat for the balance of 2002 and the
risk management activities adjustment will be around $75 million
(e.g. $75 million of reported earnings will not convert
to cash by year-end 2002). Since Dynegy had large working
capital uses in 2001 and a sizable negative risk management adjustment,
and needs a relatively strong third quarter from its power generation
and distribution assets, Moody's believes there is a reasonable
chance Dynegy's operating cashflow could fall short of the $1.0
billion expected. Additional negative cashflow pressure could also
come from the company's telecom business, which continues to consume
cash. Moody's does recognize that a portion of Dynegy's cashflow
is derived from physical assets, long-term contracts and
regulated or fee based businesses, but some of these activities
are still subject to volatility in volumes, which does impact cashflow.
Furthermore, the level of operating cashflow accounted for by these
activities is not consistent with an investment grade rating given Dynegy's
current debt levels.
Dynegy's current debt obligations include; $6.2 billion
on balance sheet (incl. Catlin & Alpha), $2.2
billion off balance sheet (operating leases, synthetic leases,
non-recourse), and $200 million preferred stock.
Moody's believes the nearly $8.6 billion in obligations
detailed above, which excludes the $1.5 billion in
preferred securities held by ChevronTexaco, is high relative to
cashflow. While Moody's continues to expect ChevronTexaco and Dynegy
to work to renegotiate the terms of the preferred securities in a manner
that will not be detrimental to Dynegy's liquidity, it remains an
obligation that must be dealt with. Furthermore, Moody's
believes there is a good possibility that at least a portion of the proceeds
from the planned sale of 50% of NNG will ultimately go to ChevronTexaco.
Finally, Moody's continues to consider ChevronTexaco's ownership
interest, commercial relationships, and Board representation
critical to Dynegy's ratings. If those relationships weaken,
additional negative ratings pressure will result.
Headquartered in Houston, Texas, Dynegy Inc. is the
parent of Dynegy Holdings and Illinova Corp. Dynegy Holdings is
a leading independent marketer of energy products and services to customers
located primarily in North America. Dynegy's primary businesses
are wholesale natural gas and power marketing and trading, power
generation, and natural gas liquids. Illinova Corp.'s
principal subsidiary is Illinois Power Company, an electric and
gas transmission and distribution company.
Moody's Investors Service
John C. Cassidy
Vice President - Senior Analyst
Moody's Investors Service
No Related Data.
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