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
NGC Corporation Capital Trust I -- Trust Securities to B3 from Ca
Roseton and Danskammer -- Pass-Through Certificates to B2
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.
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
- 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
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.
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.
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service