Moody’s Investors Service again downgraded the ratings of Dynegy Inc. and cut Williams Cos. to “junk” status Wednesday. It also warned Nicor Inc. that its credit rating was under review for a possible downgrade. Only Duke Energy received positive news; Moody’s affirmed its ratings.

Dynegy Inc. and its subsidiaries were downgraded, said Moody’s, following “continuing concerns related to the company’s liquidity and operating cash flow that continues to decline and fall short of management’s projections.”

The ratings outlook remains “negative” because Dynegy still faces an execution risk associated with company’s restructuring plan, which is heavily reliant on asset sales; 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 businesses; uncertainty surrounding the Federal Energy Regulatory Commission and Securities and Exchange Commission investigations; and continuing legal challenges from Enron Corp. related to the termination of the merger agreement last year.

“The ratings downgrade reflects a current liquidity profile that remains significantly below levels seen earlier this year and below levels projected as recently as June,” Moody’s said. “The steps taken by Dynegy to enhance liquidity thus far have largely addressed immediate liquidity needs, and in Moody’s view have fallen short of addressing needs looming in early 2003.

“Furthermore, near-term improvement in the company’s liquidity position is almost exclusively dependent on proceeds from asset sales, including Northern Natural Gas (NNG).” Also, the chances that the Houston-based company would be able to issue new debt at Illinois Power and raise master limited partnership equity have also diminished, and the “firm’s refinancing risk remains challenging.” Dynegy has a $300 million revolver that matures in November 2002 and $1.6 billion of credit facilities maturing in April and May 2003.

“Management’s current estimate also assumes working capital will be flat for the balance of 2002, which has not been the case in prior years, and Moody’s believes this may be an additional challenge for the company in meeting its revised projections.”

Williams Cos. (WMB) was downgraded to “junk” status to reflect Moody’s “concerns about the sufficiency of…operating cash flow in relation to its debt as well as the adequacy of the company’s liquidity in the coming quarters.”

The “weaker-than-expected operating cash flows and looming debt repayments have put a strain on the company’s liquidity resources. To address these concerns, WMB is seeking to renew its bank credit facilities and Moody’s expects that these facilities will likely be recast on a secured basis rather than on an unsecured basis as was previously planned.”

Williams, it noted, “has a good base of unencumbered assets, which can serve as collateral for the credit facilities and the potential, through its non-trading businesses, to produce a stable level of cash flow, although that level is currently insufficient relative to the company’s debt.”

A further downgrade may be considered if 1) WMB is unable to renew its bank facility in a timely manner and of an appropriate size to comfortably accommodate short- and intermediate-term needs; 2) WMB does not make sufficient progress on its $3 billion debt reduction program from asset sales; and 3) cash flow from operations fails to improve.

The ratings of Naperville, IL-based Nicor Inc. and Northern Illinois Gas Co., which does business as Nicor Gas. are on review over “concerns about various allegations and government investigations under way, including the risk of an earnings restatement. The review will also encompass a reassessment of the company’s relative fundamental credit profile.”

In its review, Moody’s will assess the potential impact from the Illinois Commerce Commission’s (ICC) investigation into alleged improprieties related to the utility’s performance-based rates (PBR) program and the potential impact of accounting irregularities and weak operating performance at Nicor Energy LLC, a 50/50 marketing joint venture with Dynegy. The two are partners in the retail energy alliance, which disclosed accounting irregularities last week (see Daily GPI, July 22).

“Significant material earnings statements or liability arising from these various investigations may result in a rating action,” said Moody’s. “Nicor Energy, where the accounting irregularities were discovered, has its own management. The joint venture is also experiencing weak operating results due to high-cost gas contracts that have reduced margins. Moody’s will evaluate this as well as Nicor’s other unregulated subsidiaries in the course of the review.”

Meanwhile, Duke Energy’s and Duke Capital’s ratings were affirmed following a review of the company’s revised strategic plan, which includes issuing $1 billion in equity and reducing capital expenses. The actions will allow the company to improve its cash flow and reduce debt, which the agency said were necessary to maintain its current ratings.

However, Duke Energy’s ratings remain “negative” because of the company’s recent disclosures about round-trip trading and ongoing investigations., which “reflect the potential for further discoveries in the investigations or for negative ramifications from them such as fines, penalties or reduced capital market access, which could become material. The negative outlooks also reflect the potential for a downgrade should this year’s equity issue not occur and should the level of cash flow relative to debt not improve over the next several quarters.”

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