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Moody's: Dynegy Shows 'Substantial' Liquidity, but Weak Cash Outlook

Moody's: Dynegy Shows 'Substantial' Liquidity, but Weak Cash Outlook

Dynegy Inc.'s speculative grade liquidity rating was raised a notch this week by Moody's Investors Service, which noted that the company has "substantial" liquidity back up, but possibly weaker operating cash flow for the next 12-24 months.

The higher rating, to SGL-2, "continues to reflect Dynegy's substantial, albeit lower, cash balances and available committed credit capacity relative to expected uses of cash over the coming four quarters," said John Diaz, Moody's managing director of Corporate Finance. "The company's current liquidity remains strong due largely to the successful refinancing, on a secured basis, of its bank credit facilities last April which extended the maturity to Feb. 15, 2005, coupled with the restructuring and refinancing transactions last August and September."

Last year's transactions essentially eliminated all of Dynegy's material public debt maturities until July 2008, except for a $95 million senior note at Illinova due Feb. 1, 2004 and a $70 million note at Illinois Power due March 15, 2005. However, Moody's noted "several issues" in the next 24 months that could impact liquidity -- either positively or negatively.

Dynegy benefited in the past year by its decision to exit energy trading and to sell its existing natural gas in storage, Diaz noted. "Furthermore, strong commodity prices, increased volumes resulting from weather-driven demand, and savings from the company's restructuring efforts all combined to result in operating cash flow that was sufficient to cover capital expenditures."

However, without the past year's one-time benefits, Dynegy's "operating cash flow alone in 2004 is expected to be insufficient to cover scheduled debt maturities, debt amortization and capital expenditures. Therefore, Dynegy is expected to apply asset sale proceeds and use a portion of its available liquidity to fund any shortfall."

According to Moody's, Dynegy currently has cash balances and available committed borrowing capacity of approximately $1.4 billion, which should provide "substantial" back-up liquidity over the next 12 months. " This back-up liquidity is an important SGL ratings consideration given that Dynegy's asset sale program is largely complete and essentially all remaining assets are pledged as collateral supporting the company's credit facilities and public bonds." Moody's also does not expect the company to experience any significant liquidity deterioration going forward.

Although some of its bank convenants "may limit Dynegy's flexibility to a certain extent in the near term, Moody's believes the company will remain comfortably within these financial covenants during the next 12 months. As of Sept. 30, 2003 Dynegy was in compliance with all of its financial covenants."

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