Buffett Builds Pipeline Empire
By C. Bryson Hull
Monday July 29, 4:22 pm Eastern Time
HOUSTON (Reuters) - Cash-strapped energy wholesaler Dynegy Inc. on Monday sold Northern Natural Gas pipeline -- its spoils from a failed takeover of bankrupt rival Enron -- for $928 million to a firm controlled by billionaire Warren Buffett, who is amassing pipeline assets on the cheap.
Even though Dynegy sold the pipeline for nearly $600 million less than it paid, the sale was still good news since it will pump cash in and strip billions in debt off the Houston firm's troubled balance sheet. News of the deal pushed Dynegy shares out of penny-stock territory.
MidAmerican Energy Holdings Co., a Des Moines, Iowa-based energy firm controlled by Buffett's Berkshire Hathaway Inc. (NYSE:BRKa - News), will also assume $950 million in debt for the pipeline.
Houston-based Dynegy paid $1.5 billion in January for the 16,600-mile pipeline, which stretches from Texas' oil- and gas-rich Permian Basin to the Great Lakes. The outright sale of the pipeline was a surprise, since Dynegy had planned only a partial sale or a joint venture.
Buffett, whose key investment principle calls for buying undervalued assets, stuck true to form with the pipeline purchase, which he made at a sharp discount.
It is the second time this year that MidAmerican has snapped up a pipeline from a troubled energy merchant. In March, MidAmerican snared the Kern River Gas Transmission Co. from the troubled Williams Cos. (NYSE:WMB - News) for $450 million.
The purchase price of Northern Natural was about 98 percent of the pipeline's regulatory book value, or about 8.4 times earnings from ongoing operations, said John Olson, an analyst with Houston investment bank Sanders Morris Harris.
"Dynegy is building a little character today, but their stock price is up," he said. "When you're in a liquidity trap, you take what you can get."
Dynegy's shares closed up 76 percent at $1.20 in New York Stock Exchange trade, making a gain of 52 cents. Dynegy's junked credit and cash-flow problems have led industry analysts to speculate that it could go bankrupt. The crisis in the energy merchant sector has shaved 97 percent of the value off of Dynegy's stock this year.
NEW PIPELINE MAGNATE
Buffett has expressed interest in the pipeline business since the mid-1990s, and has pledged to invest $10 billion in the sector. The massive cash and credit crunch besieging energy merchants like Dynegy and Williams have given Buffett the perfect opportunity to snap up assets at low prices.
MidAmerican now has two major pipelines to complement its utility holdings in the U.S. Midwest.
"He is accruing some definite value here. Northern Natural is about one of the best in the business," Olson said.
NNG was one of two pipelines Enron had when it was born in 1986, and was considered the backbone of its prized pipeline system. Though not part of the glamorous, asset-light image Enron pitched during better days, NNG was a steady earner, with 70 utility customers and numerous industrial clients to buy the 4.3 billion cubic feet of gas it moves each day.
"It is another step forward in our strategy of making sound investments in the U.S. energy infrastructure," said David Sokol, MidAmerican's chairman and chief executive.
After unloading the pipeline, Dynegy only has $300 million in near-term debt payments, due in November. No other debt payments are due until May 2003.
The pipeline was supposed to be Dynegy's consolation prize after its $9 billion deal to buy its larger Houston rival Enron (Other OTC:ENRNQ.PK - News) fell apart last November.
Dynegy broke the deal off after its $1.5 billion investment -- financed by ChevronTexaco Inc. (NYSE:CVX - News), its biggest shareholder -- disappeared and Enron made a regulatory filing showing its finances were far worse than suspected. Enron filed for bankruptcy just a few weeks later.
Ratings agency Standard & Poor's said the sale had no immediate effect on Dynegy's junk credit rating, even though it provides cash and relieves near-term debt. S&P noted said the sale does not change the fact that Dynegy still owes ChevronTexaco the $1.5 billion, which is due in November 2003.
NNG will still leave a bad taste in Dynegy's mouth. Besides the 38 percent loss it took on the sale, it still faces a $10 billion lawsuit from Enron that contends Dynegy went into the merger to solely ruin Enron's finances and snare the pipeline.
Merrill Lynch (NYSE:MER - News) advised Dynegy, while Lehman Bros. (NYSE:LEH - News) advised MidAmerican.
(Additional reporting by Arindam Nag in New York) |
