Concerns about the amount of cash that Dynegy Inc. and its subsidiaries will be able to generate, and the continuing worries about the energy merchant’s ability to refinance debt obligations not due until next year, led Moody’s Investors Service to downgrade the Houston-based company’s credit ratings on Thursday. Those included in the latest cuts were parent corporation Dynegy Inc., Dynegy Holdings Inc., the primary operating subsidiary, and that of Illinois Power, its largest utility.
Four issues are contributing to Dynegy’s “negative” outlook, including the following: 1) execution risk of the restructuring plan, including the “ultimate structure and viability of its marketing and trading business;” 2) the ongoing lack of investor and counterparty confidence, which has limited its access to public debt markets and negatively impacted the company’s marketing and trading business; 3) uncertainty surrounding the Federal Energy Regulatory Commission and Security and Exchange Commission (SEC) investigations; and 4) uncertainty relating to the re-audits and reviews of the financial statements from 1999 through June 30, 2002. Because of the re-audits, Dynegy has not provided the newly required CEO or CFO certifications under SEC requirements.
With approximately $5 billion of debt securities affected, Dynegy Holdings is carrying “increased amounts of secured debt ” and an “expectation that future renewals of existing bank debt will likely be done on a secured basis, effectively subordinating the senior unsecured bonds.” The ratings downgrade also “reflects concerns surrounding the sufficiency of future cash flow levels from Dynegy’s non-trading and marketing businesses relative to its total debt of $8 billion.”
Except for Illinois Power, which Moody’s noted had “exhibited a relatively stable cash flow profile,” Dynegy’s cash flow from its remaining businesses, even with its working capital changes, “is insufficient to cover debt maturities for 2002 and 2003,” which will leave it “highly dependent upon asset sale proceeds and refinancing of the $1.6 billion of DHI and IP bank debt,” as well as the $1.5 billion of ChevronTexaco preferred securities. Because of its lack of operating cash flow, what Dynegy gets from additional asset sales is not expected to reduce its material debt either, which would lead to debt protection measures “likely to remain very weak.”
The current liquidity profile appears to be enough to deal with 2002 debt maturities, said Moody’s, but “continuously increasing collateral calls make additional drains on liquidity likely and difficult to predict and significant questions remain for 2003.” The company has debt maturities totaling $3.9 billion that will be due in 2003, with the largest, $1.6 billion, due in April and May. The $1.5 billion to ChevronTexaco comes due 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.
Â©Copyright 2002 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.
© 2023 Natural Gas Intelligence. All rights reserved.
ISSN © 1532-1231 | ISSN © 2577-9877 |