Dynegy sees lower growth for 2002, improves balance sheet

Ann de Rouffignac
OGJ Online

HOUSTON, Dec. 17 -- Dynegy Inc. has reinforced its capital structure, slashed its expected growth rate for 2002, and taken a $125 million charge for the fourth quarter.

It said a new corporate capital structure and a continued slowing economy would reduce growth for 2002 to 10-12% vs. the usual 20-25%. The earnings outlook was reduced to $2.30-2.35/share from $2.50-2.60/share.

"The growth rate will be about half of what was expected before. But it is growth nonetheless," said Dynegy CEO Chuck Watson on a conference call Monday. "Things have changed as a result of Enron [Corp.'s bankruptcy]. But this is no time to panic. There is no panic at Dynegy."

For the current quarter, Dynegy said it will take a $125 million charge attributed to exposure from Enron and its bankruptcy, costs associated with the terminated merger with Enron, and restructuring of Illinois Power, its merchant power company. Dynegy expects to earn 41¢/share for the quarter.

Moody's Investors Service downgraded Dynegy's credit ratings late Friday (OGJ Online, Dec. 16, 2001).

In response to the downgrade, Dynegy announced Monday a $1.25 billion revision of its capital structure to shore up its balance sheet. All three rating agencies still list Dynegy as investment grade, but Moody's has the company under review for possible further downgrades.

Watson said, "The balance sheet to execute the merchant energy business needs to be improved. I think this is a permanent move for companies in this sector."

Dynegy executives said the company is aiming for 45% debt-to-capital ratio, down from the current 50%. The changes Dynegy aims to accomplish include issuing $500 million of common equity within 6-9 months, a $375 million reduction in capital spending, and the sale of another $375 million in assets by the end of 2002.

"We are confident that we can get the cash in the door by yearend," Watson said.

Analysts questioned if the equity offering would come soon enough to strengthen the balance sheet, especially since the asset sales would take some time. Watson replied that he would examine the possibility of issuing equity as soon as February.

Enron filed for bankruptcy protection in November after an attempt to merge with Dynegy failed. Enron sued Dynergy for failing to complete the merger and there is doubt about the eventual ownership of Enron's Northern Natural gas pipeline.

Moody's Investors Service cited uncertainty surrounding the litigation with Enron as one reason for its downgrade of Dynegy's ratings.

Meanwhile, the company said that the commercial paper market was closed to the company for financing short-term liquidity needs. Rob Doty, chief financial officer, said Dynegy would pay off all the paper from its available bank credit lines and then seek to expand the credit lines.

He said, "Our liquidity is the same after paying off the commercial paper. We have $900 million in credit and cash available."

Dynegy executives told financial analysts not to worry about the risk management activities of the company.

"In the very worse case scenario, we could fully collateralize our entire risk management book for $350 million," said Doty.

Dynegy said it received 70% of its earnings from hard assets and the rest from the marketing and trading organization. Half of the earnings from trading came from marketing around the company's hard assets, Doty said.

As far as risks to the company's equity and liquidity from further downgrades, Doty said $270 million of debt is subject to payment if Moody's and Standard & Poors downgrades the company below investment grade.

On the positive side, Dynegy received $130 million from California for energy delivered last February. COO Steve Bergstrom said March's payment is due in a few days. The total exposure to the California Department of Water Resources is $316 million. Bergstrom said California's payment for bills prior to February is not settled yet.

Contact Ann de Rouffignac at annd@ogjonline.com

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