CenterPoint Energy Inc. (formerly Reliant Energy) is committed to reducing its debt and becoming more financially flexible. However, the credit ratings downgrade by Moody’s Investors Services to “junk” status points out the numerous financial problems still ahead for the Houston-based utility.
Moody’s on Monday reduced the holding company’s credit ratings and the ratings of its gas distribution subsidiary to “Ba1” from “Baa2,” which will result in a 50 basis point increase in the cost of its recently negotiated $4.7 billion credit facilities. The senior secured rating of the company’s electric transmission and distribution subsidiary remains investment grade.
“Despite today’s action by Moody’s, we remain focused on effectively managing our companies as we move toward the 2004 recovery of the investment in our generating units,” said CEO David M. McClanahan in a statement. The company noted that in two years, it plans to sell all of its generating assets and, under the Texas electric restructuring law, will be entitled to recover all of its stranded investment. By then, the company will reduce its debt to “levels more typical for combination gas and electric utilities.”
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 September 30th. RRI-related challenges have constrained CenterPoint Energy’s access to capital markets and as a result, the company implemented new credit facilities on Oct. 10, which Moody’s believes contain onerous terms. New facilities available to CenterPoint total $4.7 billion in 364-day bank financing, due in October 2003.”
However, said Moody’s, the facilities will mature on Nov.15 “unless $420 million is arranged…to replace the maturing bond. Both facilities contain mandatory commitment reductions next year ($600 million in each of February and June of 2003 for the parent, and $450 million in April for the TDU.)” CenterPoint now is working with third parties to arrange the financing, and plans to access the capital markets to replace bank funding next year.
“Available liquidity on its two bank facilities is very limited going into the winter heating season,” said Moody’s, “when [CenterPoint’s] working capital needs can be at their highest. Capacity under its $350 million revolver is fully utilized.”
The expiration of its $150 million trade receivables program has been extended to Nov. 15, while the company continues its negotiations to convert this program into a bankruptcy-remote structure.
“The trade receivables facility agreements currently being negotiated contain rating triggers,” said Moody’s, and a downgrade by one rating agency to below investment grade credit will restrict its use of the program.” Analysts noted that the negative outlook at CenterPoint and CenterPoint Energy Resources Corp., its regulated gas entity, “reflects near-term liquidity challenges in the mandatory commitment reductions required in the bank financing.”
Credit Suisse First Boston (CSFB) analysts on Tuesday offered their view of CenterPoint’s near- and long-term future in a 26-page report, listing some of the risks the company faces, which, as they 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.” They 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.”
Meanwhile, analysts at CreditSights said that Moody’s two-notch downgrade “should be a stable credit,” but the company “suffers greatly from mismanagement and a heavy debt burden, much of which rightly should have belonged to Reliant Resources.” With the downgrade and “CNP’s desperation, bondholders should be able to drive a hard bargain. We would consider this deal if the price is right and there is a clear path to pay the maturing bank debt next year and beyond.”
CenterPoint shares closed Tuesday down 17% to $6.35, down $1.30. This year, the stock has lost 76% of its value.
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