Doubts Still Hang Over Dynegy

Chuck Watson, Dynegy's chairman and chief executive, has said that his biggest challenge amid a probe by the Securities and Exchange Commission was maintaining the confidence of the ratings agencies. “I believe our biggest issue is to work with the ratings agencies to explain how we generate cash and earnings,” Mr Watson said in an interview. Moody's Investors Service placed Dynegy's ratings under review for possible downgrade when Mr Watson revealed last Thursday that an informal inquiry by the SEC over a natural gas supply transaction called Project Alpha. A downgrade would push Dynegy's debt into junk territory, making it difficult for the company to trade. Dynegy's shares fell by forty five per cent on the revelation. Mr Watson said Dynegy must work harder to renew its $1.2bn bank credit line but was “comfortable” that it would be approved this week. Moody's would be forced to take into account a failure by Dynegy to renew the credit line. It already says that Dynegy's sustainable recurring operating cash flow must improve significantly to support an investment grade rating. It expressed concern with Dynegy's more than seven billion in financial obligations, “coupled with the lack of transparency in the company's financial disclosure and aggressive business strategy”. Dynegy had until now escaped relatively unscathed the heightened scrutiny of the sector provoked by the collapse of Enron. Yet Dynegy faces a ten billion dollar lawsuit after backing out of an agreement to buy Enron, losses in its communications business and also many doubts over its credibility on Wall Street. Mr Watson said that Project Alpha had made the ratings agencies question the $1.3bn in cash Dynegy was generating this year. Dynegy decided, after consultation with the SEC, that cash flow associated with the April 2001 transaction should be presented as “financial”, instead of the previous classification, “operational”. The SEC acknowledged there was as good a reason to put it under operations as under finance, Mr Watson said, yet Dynegy amended its books to put to rest any questions in the post-Enron environment. While the move satisfied the SEC Office of the Chief Accountant, an informal inquiry by the Fort Worth, Texas, office remains open. Mr Watson doubted the regional office would overrule SEC headquarters but was disappointed others did not see the matter resolved. Moody's has been the most aggressive of the agencies in assessing Dynegy and is now questioning how it accounts for all its cash. “We have to talk them through how this money is generated,” Mr Watson said.

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