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 a few days ago because of its recent credit agreements (see Daily GPI, Nov. 6). In an interesting aside, CSFB, now involved in a billion-plus loan, released a 26-page in-depth report on CenterPoint’s prospects the same day Moody’s issued its downgrade. CSFB analysts said in the report that “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.”
What disturbed Moody’s was the $4.7 billion credit facility, obtained through a 30-member bank syndicate, which it completed in October. 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.
After the $400 million is paid, CenterPoint will use the remaining amount of the Berkshire Hathaway-CSFB loan, totaling 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.”
With the addition of CenterPoint, Buffet has upped his investment in the energy industry and provided a sorely needed cash infusion for the sagging energy merchants involved. This year, Buffet’s energy-related transactions have included the following:
Williams Cos.: With cash nearly depleted and $800 million in debt payments due, the Tulsa-based company put together a deal to ensure its liquidity that totaled $3.4 billion. In one of the transactions, Williams obtained a $900 million senior secured credit agreement with Berkshire Hathaway and Lehman Brothers Holding Inc., backing the loan with subsidiary Barrett Resources, its exploration and production company (see Daily GPI, Aug. 2).
Dynegy Inc.: MidAmerican acquired Northern Natural Gas Pipeline for $1.9 billion, which included $928 million in cash and $950 million in debt (see Daily GPI, July 30). The deal resulted in a $600 million loss to Dynegy, which had obtained the pipeline in its attempted Enron merger last year, but gave it liquidity, which it desperately needed.
Williams’ Kern River: In March, Berkshire unit MidAmerican Energy Holdings Co. purchased the Kern River Gas Transmission Co. for $450 million. At the same time, it purchased 1.5 million shares of convertible preferred stock in Williams Cos. for nearly $275 million (see Daily GPI, March 8).
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