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Rating Action:

MOODY'S UPGRADES DYNEGY'S LONG TERM DEBT RATINGS; UPGRADES DYNEGY HOLDINGS CORPORATE FAMILY RATING TO B1; OUTLOOK IS STABLE

21 Dec 2005
MOODY'S UPGRADES DYNEGY'S LONG TERM DEBT RATINGS; UPGRADES DYNEGY HOLDINGS CORPORATE FAMILY RATING TO B1; OUTLOOK IS STABLE

Approximately $5 Billion of Debt Securities Affected

New York, December 21, 2005 -- Moody's Investors Service upgraded the long term debt ratings of Dynegy Inc. (Dynegy, NYSE: DYN) and its subsidiaries. The Dynegy Holdings Inc. (DHI) Corporate Family Rating (CFR) was raised to B1 from B3. These rating upgrades reflect completion of Dynegy's restructuring over the past several years that has resulted in a more focused merchant power generation company with less debt. This action concludes the rating review announced on May 9 following the company's announcement that it intended to sell its midstream natural gas liquids business (DMS). In addition, DHI's Speculative Grade Liquidity Rating was affirmed at SGL-2, reflecting our expectation for good liquidity for the 12 months ending December 31, 2006. The outlook is stable.

DHI's B1 corporate family 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 considers the needs of debt holders, and its significant cash balances with no near term maturities. Dynegy's rating is restrained by the company being in a single line of business that is dependent on improving power markets, its high absolute leverage and ongoing liquidity requirements related to hedging and customer risk management.

The following long term ratings were affected:

Dynegy Holdings Inc. -- Senior Secured Revolving Credit Facility to Ba3 from B2, Second Priority Senior Secured Global Notes to B1 from B3, Senior Unsecured to B2 from Caa2 and Shelf (Senior Unsecured/Subordinated/Preferred) to (P)B2/(P)B3/(P)Caa1 from (P)Caa2/(P)Ca/(P)C

Dynegy Inc. -- Convertible Subordinated Debentures to B2 from Caa2 and Shelf (Senior Unsecured/Subordinated/Preferred) to (P)Caa1/(P)Caa2/(P)Caa3 from (P)Ca/(P)C/(P)C

NGC Corporation Capital Trust I -- Trust Securities to B3 from Ca

Roseton and Danskammer -- Pass-Through Certificates to B2 from Caa2

Dynegy Capital Trust II -- Shelf to (P)B3 from (P)Ca

Dynegy Capital Trust III -- Shelf to (P)Caa1 from (P)C

Merchant Power Generator Post Restructuring

Dynegy has effectively completed the restructuring it began in 2002 following Enron's bankruptcy and the subsequent collapse of the merchant energy sector. Dynegy sold non-core assets, repaid debt, improved liquidity, restructured tolling agreements and settled litigation. Dynegy has emerged from this restructuring as a company with a single line of business focused on merchant electric power generation. Dynegy currently owns a 12,769 MW portfolio of generation assets that is diversified by type of generation dispatch, fuel source and geographic region. Dynegy's portfolio provides a mix of consistent cash flow from its baseload and intermediate plants, while its gas-fired peaking units provide upside exposure to an expected recovery in the power markets. Notwithstanding Dynegy's portfolio diversification, the company is totally exposed to an overbuilt power generation market and the company's long term viability and recovery depends on stronger power demand, higher electricity prices and improved spark spreads.

Dynegy expects its power generation business to generate EBITDA of $725 to $825 million in 2006. After factoring in corporate overhead and interest expense, Moody's expects the company's funds from operations to be less than half this level. Assuming capex of around $200 million, Dynegy should be free cash flow positive in 2006. While this would be a significant improvement, Dynegy needs to demonstrate it can deliver this level of operating and financial performance consistently. In addition, the company needs power prices to continue improving in 2006. Moody's B1 corporate family rating reflects our expectation for some improvement in this market.

Leverage and Debt Repayment

At the end of 2005, we expect Dynegy will have about $4 billion of balance sheet debt, which includes the ChevronTexaco convertible preferred but does not include the $900 million non-recourse debt at Sithe Energies. Adding other liabilities using Moody's standard adjustments, principally the Roseton and Danskammer leases, raises adjusted debt to about $5 billion. This would imply that FFO/debt, assuming $350 million of run-rate FFO, is currently about 7%.

Dynegy sold DMS on October 31 for $2.4 billion and used about $800 million of the proceeds to repay debt. We estimate that at year-end 2005 Dynegy will have about $1.3 billion cash on hand. Dynegy expects to use this excess cash to repay debt but it reserves the right to use the funds to acquire assets. If Dynegy used $0.5-1 billion of its cash to repay debt, its FFO/debt would increase to the 8-9% range. Again, we would emphasize that Dynegy has not committed to repay debt with its excess cash and may use it to invest in other assets. In addition, the company's cash flow projections assume improvement in power market fundamentals. However, the B1 corporate family rating is based on a reasonable expectation of slowly improving operating and financial performance and some degree of debt reduction. The B1 rating is also supported by Dynegy's capital structure with limited debt maturities over the next several years, which should provide additional time for power market recovery.

Asset Valuation

We analyzed the asset value of Dynegy's generation fleet, using a range of values for its three types of plants: coal-fired baseload, mixed fuel and natural gas intermediates, and gas-fired peaking plants. We excluded the Independence (Sithe Energies) plant as it is capitalized separately with secured non-recourse project finance debt. The remaining facilities are conservatively estimated to be worth between $5 billion and $7.5 billion, which, even at the low end, would cover all of Dynegy's debt. Additional debt repayment would provide even greater asset coverage of the remaining debt.

Structural Issues and Notching

Dynegy's B1 corporate family rating reflects the size and scale of its overall asset mix, its operating performance, leverage and cash flow coverage metrics compared to other merchant generating companies. Starting from the CFR, we notched the individual debt instruments as follows:

- DHI senior secured bank debt notched up one level to Ba3 reflecting its security and control by the banks

- DHI senior secured second priority notes rated the same as the B1 CFR reflecting priority ahead of unsecured debt and that they represent about 45% of balance sheet debt

- DHI senior unsecured notched down one level to B2. These notes had previously been notched two levels to the CFR reflecting a lower likelihood of recovery, but the asset valuation indicates strong chance of par recovery so the revised rating is a more typical single notch difference from the CFR.

- DHI shelf (subordinated/preferred) notched two and three notches, respectively, reflecting the effective subordination of the senior unsecured notes and the lower likelihood of recovery

- Dynegy, Inc. convertible subordinated debentures and Roseton and Danskammer pass through certificates rated B2, same as DHI senior unsecured.

- Dynegy, Inc. shelf is rated behind DHI reflecting structural subordination and a lower likelihood of recovery at this entity

- NGC Corporation Capital Trust I trust securities are rated B3, the same as DHI subordinated debt

- Dynegy Capital Trust II and Dynegy Capital Trust III rated the same as DHI's subordinated and preferred ratings, respectively

Liquidity

Dynegy's SGL-2 rating reflects Moody's expectation of good liquidity for the 12 months ending December 31, 2006. Dynegy has a very good ability to meet its funding needs with internal sources, including well over $1 billion in cash; however its current bank credit facilities do not provide incremental liquidity as they require cash collateral for borrowings and letters of credit. The facilities are also secured by substantially all of the company's assets, including the stock in its subsidiaries. Moody's expects that over the next four quarters, operating cash flow alone may not be able to fund all of Dynegy's cash needs, including capex. However, it is expected that the company's forecasted December 31, 2005 cash balances of $1.3 billion will more than cover any further cash needs.

At September 30, 2005, Dynegy had $1.3 billion in credit facilities, consisting of a $700 million revolving credit and a $600 million term loan ($593 million outstanding that was repaid with DMS proceeds). On October 31, Dynegy amended and restated its credit facilities into $1 billion facilities, consisting of a $400 million letter of credit facility and a $600 million revolving credit facility. Both facilities are required to be collateralized with cash equal to 103% of outstanding letters of credit or borrowings. The revolving credit facility matures at the end of December and Dynegy expects to replace it with a new facility during the first quarter 2006; however, until it does Dynegy's liquidity will be limited to its cash balances.

Outlook

The stable outlook reflects Moody's expectation of Dynegy's continued operating performance improvement as the power markets recover, continued debt reduction and improving leverage, while maintaining at least $600 million liquidity. The stable outlook also recognizes the possibility that Dynegy will use some of the proceeds from the DMS sale to purchase assets; however we expect that management will exercise discipline to achieve at least credit neutral metrics. Dynegy's rating could improve through a combination of improving operational performance, consistent positive free cash flow and cash flow coverage (FFO/debt) that is expected to be above 10%. Dynegy's rating could drop as a result of deteriorating operating or financial performance relative to its plan, a leveraging acquisition, or liquidity materially below $500 million.

Headquartered in Houston, Texas, Dynegy Inc. is the parent of Dynegy Holdings Inc. Dynegy's primary business is power generation.

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

New York
Steven Wood
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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