The energy marketplace, investors and credit analysts appear to have little faith in Dynegy Inc.’s ability to turn its deteriorating financial picture around, because Thursday the three credit ratings agencies carved another slice from Dynegy Inc. and its affiliates’ ratings. Standard & Poor’s Rating Services, in concert with Moody’s Investors Service and Fitch Ratings, noted that the energy marketer’s liquidity is quickly disappearing and its ability to bring in cash is weakening.

At market’s close, Dynegy’s share price stood at a mere 51 cents after losing almost half of its less-than-$1 value. Almost 35 million shares traded hands Thursday, a 337% increase from the average volume traded, and even higher than Tuesday, when volume approached 27 million. By day’s end, Dynegy had offered no public statements; onlookers were left wondering whether the stock could take another hit on Friday, or whether the company is ready to make an announcement that could boost its financial outlook.

On at least one front, however, Dynegy’s ratings among a core group of 16 equity energy analysts remain positive, with 14 still recommending “hold,” one “strong buy,” and one “underperform.” There were no “sell” recommendations from the 16, which include A.G. Edwards & Sons Inc., Banc of America Securities LLC, CIBC World Markets Corp., Credit Suisse First Boston Corp., JP Morgan, Lehman Brothers, Merrill Lynch, Prudential Securities, Salomon Smith Barney Inc. and UBS Warburg.

Zacks Investment Research on Thursday, however, added Dynegy to a list of four other stocks that it recommended should be “sold or avoided for the next one to three months.” Dynegy, said the analyst, “continues to face questions concerning its liquidity. In fact, the company admitted that it may need help from a financially sound partner. Analysts haven’t wasted any time in showing their disdain for the company’s current situation. Estimates have been plunging sharply since the beginning of the year with Dynegy barely meeting estimates in the last two quarters. With no relief in sight, Dynegy looks like a company riding on the wrong track at this time.”

The Houston-based energy marketer’s cash flow deterioration “continues unabated,” noted S&P, with the core merchant energy business now expected to decline even further “because it is likely industry counterparties are engaging in only low-margin spot gas transactions, a trend that is expected to continue.” S&P analyst John Kennedy said, “Given counterparty unwillingness to transact in little more than spot gas trades, Dynegy’s cash flow potential has weakened.”

In addition, he said, “Dynegy has been unable to execute on asset divestitures, including the expected partial monetization of Northern Natural Gas, which further exacerbates credit difficulties. The rating action at Northern Natural reflects Standard & Poor’s view that the sale is uncertain and therefore Northern Natural’s creditworthiness is commensurate with the consolidated credit rating of Dynegy.”

Some cash collateral calls have been demanded, according to S&P, and Dynegy’s available sources of liquidity have diminished slightly. “As evidenced by its inability to quickly sell assets or access capital markets, Dynegy’s liquidity position is tenuous. Importantly, Standard & Poor’s estimates that the firm’s liquidity position has eroded from the $800 million that Dynegy disclosed earlier this week. The sources of these funds are cash on hand, unused bank facilities, and commodity (natural gas) in storage.”

Several near-term obligations are “on the horizon,” said the analyst, with about $750 million in debt and bank facilities ($300 million at Dynegy and $450 million at Northern Natural) due to mature or expire by Nov. 2002, and a $1.5 billion preferred stock right being held by Dynegy’s largest shareholder, ChevronTexaco Corp., which is redeemable in November 2003. “In addition, Dynegy’s plan to solidify its balance sheet faces significant execution risk in several areas, including its launch of a master limited partnership, Dynegy Energy Partners, expected to provide $200 million in additional capital. The ability to execute this transaction is highly questionable under current market conditions.”

S&P also has “lingering concerns regarding the firms’ ability to access capital markets and/or execute asset sales necessary to preserve an adequate liquidity position to meet its obligations over the next 18 months. A demonstrated ability to achieve these goals could result in ratings stability.”

Fitch cut Dynegy Inc. and its subsidiaries as well, noting that its current analysis reflected a “continued weakening in the company’s credit profile…Based on available information, Fitch is unable at this time to have a high level of confidence in estimates of sustainable cash from operations, other than from the regulated electric and gas pipeline operations.” Dynegy’s “capital market conditions continue to worsen and the negative over-hang from the Security and Exchange Commission’s investigation of accounting and trading issues, ongoing FERC inquiries, and potential litigation exposure have not abated. Therefore, Dynegy’s ability to successfully execute its restructuring plan has become less assured.”

To allow for execution risk, Fitch’s stress case analysis around the Dynegy restructuring plan assumed no new equity financing at Dynegy Inc. or its planned master limited partnership (MLP), and additional near-term cash uses of $300-400 million relating to collateral postings. “However, the inability to complete the IP [Illinois Power] secured bond financing is an adverse change from Fitch’s prior stress case.” IP canceled the bond offering on Monday. Fitch also said that Dynegy’s “inability to execute timely planned asset sales could lead to further downgrades.”

Unlike S&P, which was concerned about debt maturing later this year, Fitch concluded, “there are no material debt maturities or anticipated extraordinary cash drains other than potential collateral postings until November 2002 when a $300 million revolver at Dynegy and a $450 million secured loan at Northern Natural Gas Co. come due. By that time Dynegy plans to have sold assets and issued units at its MLP, but Fitch notes that there is heightened execution risk.”

Moody’s, which lowered Dynegy’s rating on Wednesday, said its “ratings downgrade reflects a current liquidity profile that remains significantly below levels seen earlier this year and below levels projected as recently as June. The steps taken by Dynegy to enhance liquidity thus far have largely addressed immediate liquidity needs, and…have fallen short of addressing needs looming in early 2003.” Dynegy also may face an additional challenge in meeting its revised 2002 earnings projections, it said.

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