On June 25, 2002, Standard & Poor's lowered its long-term corporate credit ratings of Houston, Texas??ased Dynegy (DYN) and its subsidiaries to 'BBB-'. The ratings remain on CreditWatch with negative implications.
The ratings action reflects Standard & Poor's analysis of the company's new capital plan and the related impact to credit. The plan could bolster Dynegy's liquidity position, but implementation will likely weaken Dynegy's capital structure and business profile. Specifically, consolidated credit protection measures are more in line with a 'BBB-' rating.
Dynegy's plan entails enhancing liquidity by $2 billion and includes removing $301 million in ratings triggers, a partial sale or joint venture of Northern Natural Gas Pipeline and the U.K. gas storage processing facilities that were acquired at the end of 2001. The plan also includes the initial public offering of the recently formed Dynegy Energy Partners L.P., a $100 million reduction in capital expenditures, $50 million in expense cuts, a 50% reduction in the common stock dividend, $250 million interim financing, and $400 million in senior secured debt at Illinois Power Co.
In addition, removing the ratings triggers linked to the Black Thunder transaction eliminates the potential for a run on collateral, reclassifying the associated minority interest could create higher leverage. The associated debt will have senior secured status at a wholly owned subsidiary of Dynegy Holdings Inc., but will not disadvantage its senior unsecured debtholders due to the value of tangible assets on Dynegy Holdings' balance sheet.
In addition, the proposed sale of a percentage of the Northern Natural Gas Pipeline could raise additional capital; the downside is that it would reduce the firm's mix of regulated businesses. This is the segment that helps to strengthen Dynegy's business profile.
Dynegy claims that the ongoing SEC investigations present no barriers to executing the initial public offering of Dynegy Energy Partners L.P. However, given the general lack of capital market confidence towards the industry, it could be difficult to achieve the expected level of proceeds.
The reduction in capital expenditures, cost savings, and the reduction in the common dividend payout should help to strengthen the firm's financial profile. Still, this is somewhat offset by the restructuring of the Black Thunder transaction.
Dynegy's largest shareholder, ChevronTexaco Corp., has an aligned business interest as Dynegy markets all of Chevron Texaco's North American gas production (4 billion cubic feet per day). Standard & Poor's continues to factor this relationship into current ratings. Any perceived deterioration in support from ChevronTexaco would adversely affect Dynegy's ratings.
The CreditWatch with negative implications reflects concerns regarding the firms' ability to generate sustainable cash flow at a level that supports the current rating, as well as a number of events such as the formal SEC investigation into the firm's Alpha transaction and dislocation in the capital and energy markets. Standard & Poor's intends to resolve the CreditWatch by the third quarter of 2002. From Standard & Poor's CreditWire