New York, September 05, 2002 — Moody’s Investors Service downgraded the ratings of Dynegy Inc. and its subsidiaries due to concerns about the adequacy of cashflow that the restructured company will be able to generate relative to its high financial leverage and continuing concerns related to the company’s ability to refinance debt obligations coming due in 2003.
Dynegy’s senior implied rating was lowered to B2 from Ba3 and the senior unsecured rating of Dynegy Holdings Inc. (DHI) the primary operating subsidiary, was lowered to B3 from B1. The senior secured rating of Illinois Power (IP) was lowered to B1 from Ba2 and the senior unsecured rating was lowered to B2 from Ba3.
DHI’s senior unsecured ratings continue to be notched down from the senior implied rating due to increased amounts of secured debt and the expectation that future renewals of existing bank debt will likely be done on a secured basis, effectively subordinating the senior unsecured bonds.
The ratings outlook remains negative primarily due to (i) execution risk associated with company’s restructuring plan, including the ultimate structure and viability of its marketing and trading business; (ii) 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 business; (iii) uncertainty surrounding the FERC and SEC investigations and; (iv) uncertainty relating to ongoing re-audits and reviews of the company’s financial statements from 1999 through June 30, 2002. Dynegy has been unable to provide the required CEO or CFO representations in line with SEC requirements.
Ratings downgraded include:
Dynegy Inc. – Shelf registration to (P)Caa2/(P)Ca/(P)C from (P)B3/(P)Caa2/(P)Caa3
Dynegy Holdings Inc. – Senior unsecured debt rating to B3 from B1, shelf registration to (P)B3/(P)Caa2/(P)Caa3 from (P)B1/(P)B3/(P)Caa1, Preferred Stock to Caa3 from Caa1
Illinova Corp – Senior unsecured debt rating to B3 from B1
Illinois Power Company – Senior secured rating to B1 from Ba2 and senior unsecured debt ratings to B2 from Ba3, shelf registration to (P)B1/(P)B2/(P)Caa2 from (P)Ba2/(P)Ba3/(P)B3, Preferred Stock to Caa2 from B3
Roseton-Danskammer – Pass through certificates to B3 from B1
The ratings downgrade reflects concerns surrounding the sufficiency of future cashflow levels from Dynegy’s non trading and marketing businesses relative to its total debt of $8 billion. Excluding Illinois Power, which has exhibited a relatively stable cash flow profile, cashflow from the company’s remaining businesses after considering working capital changes, is insufficient to cover debt maturities for 2002 and 2003 leaving the company highly dependent upon asset sale proceeds and refinancing of the $1.6 billion of DHI and IP bank debt and $1.5 billion of CVX preferred securities in order to meet all obligations and reinvest in the business.
Due to the insufficient level of operating cashflow, proceeds from additional asset sales are not expected to lead to material debt reduction, therefore, debt protection measures are likely to remain very weak.
The rating downgrades also reflect a current liquidity profile that appears adequate to deal with 2002 debt maturities, but continuously increasing collateral calls make additional drains on liquidity likely and difficult to predict and significant questions remain for 2003.
Dynegy has debt maturities totaling $3.9 billion coming due next year, the most significant of which are $1.6 billion of bank credit facilities in April and May 2003 and $1.5 billion of ChevronTexaco preferred securities in November 2003. The company is currently working on restructuring its trading and marketing business in order to reduce capital requirements and improve returns, but Moody’s has seen little evidence to suggest that a solution is imminent. Given the debt maturity profile, Moody’s stated the company needs to find a solution very soon.
Uncertainty related to the future structure and profitability of the marketing and trading business coupled with the lack of clarity on the current status of negotiations between Dynegy and ChevronTexaco related to the $1.5 billion in preferred securities due late next year may create an environment that makes refinancing the bank credit facilities extremely challenging.
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.
