The announcement last week of an early end to Atlanta-based Mirant Corp.'s $4.6 billion stock buyback was not prompted by liquidity problems, according to Mirant CEO Edward R. Muller.
"We suspended our buyback program while we sort out whether and to what extent we would build new facilities at our California facilities. If we don't do that, we'll go back to returning the cash to our owners," Muller said last Wednesday at the Merrill Lynch 2008 Power & Gas Leaders Conference in New York. "We did not do this for any liquidity concerns. I know our timing is such that it comes at an awkward time for the market, but it is not an awkward time for Mirant."
When Mirant began the stock repurchase program last November, the company said it planned to return to stockholders "excess cash" in stages, with the first two at $1 billion each being completed in the first six months. On Monday Mirant said it had suspended the program after purchasing approximately 110 million shares -- about 43% of its basic outstanding shares -- for $3.856 billion.
"A significant consideration in our evaluation is that we recently submitted proposals for new generating plants at our facilities in Northern California in response to a request for offers from Pacific Gas & Electric," Muller said. "If our proposals are accepted, we want to ensure that we have funds for the required capital expenditures, and for other requirements of the business, even if turmoil in the credit markets continues and commodity prices are depressed."
The stock buyback plan was put on hold in part because of market changes since November, but '"it had nothing to do with the outlook of the business," Muller said. Mirant, which emerged from bankruptcy more than two years ago, is not headed down the same road as Constellation Energy Group, which stands in a precarious financial position based on the Lehman Brothers Holdings bankruptcy and could be bought out for $4.7 billion by Des Moines, IA-based MidAmerican Energy (see related story).
"It did not have to do with any liquidity concerns for Mirant," Muller said. "Mirant is in fine financial shape. It was before this, it is today, it will be tomorrow and it would be if we returned the remaining $744 million."
Last month Mirant reported adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $143 million for 2Q2008, compared to $230 million in 2Q2007. At the same time the company raised its 2008 EBITDA guidance from $861 million to $877 million and 2009 guidance from $1.062 billion to $1.096 billion. The lower adjusted EBITDA for 2Q2008 was principally from lower realized gross margins from fuel oil management and proprietary trading activities and lower realized value of hedges, partially offset by higher capacity revenues.
Mirant shares, which tumbled 8.8% on Monday from $24.46 to $22.30 before rebounding to as high as $24.15 later that day, declined during the week and traded as low as $21.60 on Friday.
In response to a request for offers (RFO) issued by Pacific Gas and Electric Co. (PG&E) in July, Mirant has submitted multiple proposals to expand one or more of its three existing natural gas-fired generation plants in the San Francisco Bay Area. They are the only generation projects currently being considered by Mirant, said Muller, who envisions a continuing volatile, hedge-driven market in which demand will outstrip supply.
PG&E is supposed to develop a short list of potential projects for which it hopes to negotiate contracts by the end of October, said Muller, who declined to give any details on the size and potential cost of Mirant's proposed repowering of one or more of its three California plants that collectively total 2,347 MW, including Potrero in San Francisco (362 MW) and the two East Bay Area plants, Pittsburg (1,311 MW) and Contra Costa (674 MW).
Qualifying his statement with the caveat that nothing may come of the PG&E RFO for Mirant, Muller said so far the company has "received sufficiently positive responses" to its proposed brownfield developments at its Northern California assets that in its current planning it needed to include the capital for these potential projects and that meant suspending its stock buy-back program.
"We're in a business that has volatile commodities that move around all the time, and none of that will change; there is no paradigm, in my mind, for natural gas and coal prices, for example," Muller said. "For commodities, there is no paradigm; they're volatile, and trying to predict them, even with fundamental models, is extremely difficult and beyond my ability."
In the long term, demand for power is growing nationally at about 1.5% annually on a generation base of about 1 million MW, said Muller, noting that the annual growth in demand doesn't seem that big until it is multiplied above the 1 million MW of capacity.
"We should be adding roughly 16,000 MW per year," he said. "We are not adding this much [annually] in the near term, and most of what we are adding is wind power, which is fine, but a megawatt from a windmill is not equal to a megawatt from a coal- or gas-fired plant, or hydro for that matter. It is not going to be available all the time, so we are continually falling behind.
"Little new, meaningful capacity is under construction; no new nuclear, limited new coal capacity, and some new gas capacity is under construction, but they produce quite expensive electricity."
Muller's conclusion is this supply-constrained situation favors the "incumbents," existing independent power producers, such as Mirant. "All of this means that in the long run we expect to see more brownfield development and repowering, but for us at this stage the only one worth talking about is the PG&E RFO. It is the only one that has 'legs' for us right now."
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