Dynegy Inc.’s new-and-improved business plan is not enough cash-flow wise to fully offset the massive amount of debt leveraging that carried over from its former business strategy, according to an analyst with Standard & Poor’s Ratings Services (S&P). The ratings agency on Tuesday cut the company and its subsidiaries another notch, to “B” from “B+”.

Analyst John Kennedy said Dynegy’s ratings remain on “CreditWatch with negative implications” based on its current financial condition and available liquidity to meet near-term obligations.

“Dynegy has taken concerted steps to bolster its financial liquidity and reduce the burden of debt leverage by divesting assets throughout 2002,” said Kennedy, but “the new plan does not provide a sizable amount of discretionary funds, as net cash flow after maintenance capital expenditures for 2003 is about $100 million.”

Noting that the sales of Northern Natural Gas Pipeline, its UK gas storage and the Illinois Power Co. transmission assets had improved Dynegy’s liquidity, Kennedy said the company is “still challenged by substantial refinancing risk related to debt obligations coming due in 2003. In addition, the sale of these assets diminishes the firm’s ability to generate stable cash flow and increases their business risk”

In the near-term, Dynegy’s obligations include about $74 million in debt and bank facilities that will mature or expire by the end of this year; $1.8 billion due through the second quarter of 2003; $300 million due in the third and fourth quarters of 2003; and the $1.5 billion preferred stock held by Dynegy’s largest shareholder, ChevronTexaco Corp., which is redeemable in November 2003.

Kennedy estimated that Dynegy’s current cash and bank-line capacity is about $700 million, “mostly stemming from the August 2002 sale of Northern Natural Gas Pipeline,” and “the UK gas storage sale provides another $500 million in cash proceeds. Also, Dynegy has announced the sale of Illinois Power’s transmission assets for $239 million, which is targeted to repay obligations at Illinois Power.” Even if the company is able to meet all of its near-term obligations, Kennedy estimated its remaining liquidity would be “threadbare at the end of second quarter 2003,” and “may not be sufficient to support other ongoing operations.”

He added that the CreditWatch listing “reflects the challenges the firm faces in regard to its ability to access capital markets for debt refinancing to preserve an adequate liquidity position to meet obligations over the next 12 months. Dynegy’s ability to meet these obligations could be impaired by unexpected adverse business and financial conditions.”

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