Warren Buffett, the “Omaha Oracle” whose knack for investment risk has turned a mighty profit for believers, added another energy company to his hefty portfolio on Friday, as Buffett’s Berkshire Hathaway Inc. and Credit Suisse First Boston (CSFB) agreed to loan cash-poor CenterPoint Energy Inc. $1.31 billion. The three-year loan, which carries a 12.75% interest rate, ensures CenterPoint will make a Nov. 15 deadline to pay off a $400 million facility, and more important, allow it to maintain a $4.7 billion credit facility.
The lifeline, however, comes at a steep interest rate and will be secured with CenterPoint’s second mortgage bonds. The Houston-based company’s board of directors approved the transaction, which is scheduled to close Tuesday (Nov. 12). In early trading Friday, the Buffett-led investment had done little to inspire CenterPoint investors; the stock was trading down about 6% at $6.78.
CenterPoint was downgraded by Moody’s Investors Services to a “junk” rating last Tuesday because of its recent credit agreements. Moody’s, concluding a review begun July 31, said CenterPoint’s (CNP) negative ratings outlook “reflect the limited financial flexibility experienced by the holding company, given delays in spinning off its 80%-owned subsidiary, Reliant Resources Inc. (RRI), which it finally accomplished Sept. 30th.”
What disturbed Moody’s was the $4.7 billion credit facility, obtained through a 30-member bank syndicate, which it completed in October. Moody’s said that the credit facilities contained “onerous terms.” The 364-day secured credit facility requires repayment of $1.2 billion by June 2003, with the remaining due in October 2003. Under the syndicate’s terms, CenterPoint is required to pay down $400 million by Nov. 15, including $300 million of senior debentures for CenterPoint Energy FinanceCo II LLP and $100 million in debt for CenterPoint Energy Inc. As Moody’s pointed out, following the facility maturing on Tuesday, CenterPoint also has $600 million due in February and $600 million due in June of 2003. Another $450 million is due in April 2003 for subsidiary TDU. The capacity under a $350 million revolver has been fully used, said Moody’s.
After CenterPoint pays off its $400 million credit facility on Tuesday, it plans to use the remaining amount of the Berkshire Hathaway-CSFB loan, which will be about $850 million, to pay off existing bank loans for Houston Electric LLC, a CenterPoint utility.
“We are gratified that Berkshire Hathaway and CSFB have demonstrated their confidence in our business operations and financial plan by participating in this significant debt financing to CenterPoint Energy’s electric utility unit,” said David McClanahan, CenterPoint’s CEO. Calling it an “important milestone,” McClanahan said the loan “removes all uncertainty around the refinancing of maturing debt at our electric utility, and it removes the immediate acceleration requirement contained in our recent $4.7 billion bank credit facilities.”
The CEO added that the loan would move CenterPoint “significantly forward on our road to deleveraging the company in 2004-2005, when we will receive a multi-billion dollar cash infusion from the sale of our generation assets and the recovery of our stranded investment under the provisions of the Texas restructuring law.”
In an interesting aside, CSFB, involved in the deal with Berkshire Hathaway, offered its view last week of CenterPoint’s near- and long-term future in a 26-page report, listing some of the risks the company faces, which, as analysts see it, include the following:
“Refinancing; access to capital markets (expected bond offerings and possible need for equity issuance); de-leveraging balance sheet (debt pay down and liquidity); recovery of stranded costs through true-up proceedings (if no longer probable, could result in a write-off of the remaining balance); securitization (locking in the value of stranded costs); legislative risk related to stranded cost recovery and ECOM true-up; regulatory environment; costs associated with decommissioning the South Texas project nuclear generating plant; litigation and investigations; rating agency scrutiny; and deteriorating power market fundamentals.”
CSFB analysts also noted that CenterPoint management and its general counsel believe it is “entitled to be indemnified by Reliant Resources for any losses arising out of the following: 1) the formal investigation of Reliant Resources financial reporting and round trip trades; 2) certain regulatory proceedings and lawsuits relating to trading and marketing activities of Reliant Resources; 3) the investigation by the Texas Utility Commission into potential manipulation of the ERCOT market; 4) the lawsuit filed by California Attorney General naming Reliant Energy and Reliant Resources relating to charges for ancillary services; 5) the Attorney General complaint that Reliant Energy and Reliant Resources “charged unjust and unreasonable prices” for electricity; and 6) the California Attorney General and California Department of Water Resources lawsuit alleging market power and over-charging consumers resulting from Reliant Resources 1998 acquisition of electric generating facilities from Southern California Edison.”
Said CSFB, “The company believes that it is ‘bullet proof’ and at this time has taken no reserves against any of the above mentioned matters.” Analysts noted that even though the master separation agreement “is said to protect CenterPoint, at this time we cannot determine the scope of such indemnification nor quantify the likelihood of any potential damages. We also believe that it will depend on any further financial deterioration at RRI.”
After CenterPoint separated from RRI, it said it would grow through its traditional, regulated business. However, the analysts noted that transforming itself to a “pure play” energy delivery-based company “is complete in some respects with the spin off of RRI and incomplete in others.”
For one thing, noted CSFB analysts, “CenterPoint is highly leveraged with $9.8 billion in total debt (80% debt/cap ratio). We expect debt for year-end 2003 at about $9.5 billion (78% debt/cap ratio). Management’s long-term target is mid-50%.” The key challenge, they said, is for CenterPoint to de-leverage its balance sheet. Regarding the refinancing issues it still faces, CSFB analysts said, “It seems clear that CenterPoint will remain under intense scrutiny for some time, and questions will arise as to refinancing needs, free cash flow and ample liquidity.”
Since early this year, Buffett’s Berkshire Hathaway has made several investments in cash-strapped energy companies, picking up some profitable assets along the way, including the following:
March 2002: Berkshire unit MidAmerican Energy Holdings Co. purchases the profitable Kern River Gas Transmission Co. for $450 million from cash-poor Williams Cos. At the same time, MidAmerican purchased 1.5 million shares of convertible preferred stock in Williams Cos. for nearly $275 million (see NGI, March 11).
July 2002: Considered a coup of sorts when Dynegy Inc. took it from Enron in January, Dynegy found it impossible to keep Northern Natural Gas Pipeline, and sold it to MidAmerican at a $600 million loss for $1.9 billion, which included $928 million in cash and $950 million in debt (see NGI, Aug. 5).
August 2002: As its cash continued to drain, and with $800 million in debt payments due, Williams put together a $3.4 billion mega-deal in late July with several institutions, including Berkshire Hathaway and Lehman Brothers Holding Inc. The two provided Williams with a $900 million senior secured credit agreement, and in return, Williams backed the loan with one of its favored assets, Barrett Resources, its Denver-based exploration and production company. If Williams defaults, “substantially all” of Barrett’s assets would be taken over by the Berkshire-Lehman group. Williams purchased Barrett in May 2001 for $2.5 billion (see NGI, Aug. 5).
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