Moody's cuts Dynegy rating; liquidity sufficient, company says

In a move bound to further roil the markets, Moody's Investors Service downgraded energy merchant Dynegy Inc. to one notch above junk bond status late Friday and warned further cuts were possible. Dynegy chief financial officer Rob Doty said he is confident the Houston company has sufficient liquidity but a review of its capital structure is under way.

Kate Thomas
OGJ Online Staff

HOUSTON, Dec. 16 -- In a move bound to further roil the markets, Moody's Investors Service downgraded energy merchant Dynegy Inc. to one notch above junk bond status late Friday and warned further cuts were possible because of legal risks related to Dynegy's failed bid for Enron Corp.

Moody's lowered its rating on $5 billion worth of Dynegy debt to Baa3 from Baa2. Standard's & Poor and Fitch IBCA have maintained Dynegy Holdings rated at BBB-plus, watch negative.

Dynegy chief financial officer Rob Doty said he is confident the Houston company has sufficient liquidity but a review of its capital structure is under way "in light of the many changes occurring in our industry."

In a statement, Doty said Moody's tied the risk of future credit downgrades to the company's exposure to Enron. Now in bankruptcy protection, Enron sued Dynegy for $10 billion after Dynegy scuttled a proposed merger between the two cross town Houston rivals.

Dynegy countersued over Enron's failure to turn over Northern Natural Gas Pipeline. Dynegy asked a Harris County, Tex., district judge to enforce a deal awarding the pipeline to Dynegy in exchange for $1.5 billion in cash, under terms of the now-terminated merger agreement with Enron.

"Dynegy remains confident in its position with respect to this litigation," Doty said. He also noted Dynegy's off-balance sheet financing is limited to leases and project financing and does not include equity-backed transactions that led to Enron's write down of $1 billion in shareholder equity and restatement of earnings.

"These off-balance sheet obligations are fully disclosed in our financial statements, have been detailed to the ratings agencies, and have always been included in their analyses of the company," Doty said.

Moody's said its ratings downgrade reflected its concern about Dynegy's leverage relative to other similarly rated companies engaged in energy marketing and trading. While a significant portion of the company's marketing and trading operations is supported by physical assets, the ratings agency said Dynegy "doesn't have a large base of hard assets that generate a substantial stream of fairly predictable cash flows."

Some Dynegy counterparties have asked for extra collateral, but Moody's said the company does appear to have sufficient available credit to fund near term incremental liquidity needs. However, Moody's said the company's strong growth will place considerable importance on access to capital, "which is another factor supporting the need for a stronger balance sheet."

Moody's said the rating also takes into account Dynegy's relationship to ChevronTexaco Corp., Dynegy's largest shareholder.

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