Operating cash flow, combined with cash on hand and available credit, is expected to be more than enough to cover Dynegy Inc.’s scheduled spending over the next 12 months, and with that knowledge, Moody’s Investors Service on Thursday assigned the company a speculative grade liquidity rating of SGL-1. Moody’s SGL is a short-term rating system for speculative grade issuers that are, by definition, “not prime,” and are assigned on a scale from SGL-1 (very good) to SGL-4 (weak).

Moody’s analysts said the liquidity rating primarily reflects Dynegy’s “substantial cash balances and available committed credit capacity relative to modest uses of cash over the coming four quarters.”

Still, Moody’s noted that Dynegy has “challenges beyond the 12-month time horizon” that could negatively impact liquidity and should be taken care of by the end of this year. “First, Dynegy’s $1.1 billion revolving credit facility and $200 million term loan mature on Feb. 15, 2005 and its $360 million term loan matures Dec. 15, 2005. These maturities, coupled with $300 million of Senior Notes due March 15, 2005 and $150 million of Senior Notes due Dec. 15, 2005 cannot be met through cash flow and current cash balances, therefore, a significant portion of these obligations must be successfully refinanced.”

Dynegy also is negotiating with ChevronTexaco Corp. to restructure $1.5 billion of convertible preferred securities that mature on Nov. 13, 2003. “While Moody’s doesn’t expect these securities to negatively impact near term liquidity, largely due to restrictions on payments contained in the revolving credit facility, the timing and amount of expected amortization in 2005 and beyond is subject to negotiation and is currently unknown.”

Items that also could potentially impact liquidity include the cash impact of terminating the company’s five remaining tolling agreements and cash payments (refunds) for the pending Federal Energy Regulatory Commission actions associated with alleged manipulation of western power markets two years ago.

“Dynegy’s current cash flow has benefited from the company’s decision to exit the trading and marketing business and sell existing natural gas in storage, strong commodity prices, increased volumes resulting from weather-driven demand and savings from the company’s restructuring efforts,” said Moody’s. “As a result, Dynegy should generate adequate cash flow from operations to service its debt, cover working capital needs and capital expenditures during the next twelve months.”

Dynegy’s current cash balances and available committed borrowing capacity is approximately $1.6 billion, “which should provide more than adequate back-up liquidity in the near term. This back-up liquidity is a key 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.” The remaining assets, “with the possible exception of Illinois Power’s transmission system,” aren’t likely to be sold.

“While the renegotiation of the credit facilities was a significant step in the company’s restructuring efforts, Moody’s notes that the credit agreements have mandatory prepayment provisions and restrictions on payments, including capital spending.” Prepayments are required if Dynegy sells any assets (100%), issues senior debt (100%) or subordinated debt (50%) or issues equity (50%). The terms also limit the amount of cash that Dynegy can pay to ChevronTexaco to redeem the outstanding preferred securities totaling $1.5 billion.

While its credit facilities “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.”

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