IN THE MONEY: Dynegy, Mirant Still Have Liquidity Concerns
02 Aug 17:10
By Michael Rapoport and Steven D. Jones
A Dow Jones Newswires Column
NEW YORK (Dow Jones)-To hear power-trading companies tell it, their liquidity
is just dandy.
For months, they've deluged investors with updates on how much liquidity they
have - $900 million here, $1.25 billion there. They use words like "strong" and
"solid" and "sufficient" to describe their liquidity position, to convince the
market that they can ride out the storm.
But for at least two companies, Dynegy Inc. (DYN) and Mirant Corp. (MIR),
those rosy liquidity figures may obscure a less heartening reality: When you
compare each company's own estimates over time of its liquidity - cash on hand
plus available credit - and take into account the substantial amounts of money
the companies have raised through financings and asset sales during the same
period, it appears both companies recently burned through hundreds of millions
of dollars in liquidity in a matter of weeks.
That's not a picture of healthy companies - and the companies tacitly
acknowledge, at least some of the time, that this is a problem of which they're
mindful. Dan Dienstbier, Dynegy's interim chief executive, began the company's
second-quarter conference call this week by telling analysts that the company
was "working literally around the clock to manage cash."
So far, though, "managing" cash has primarily entailed presiding over a rapid
cash burn. Investors were buoyed this week by Dynegy's announcement that it
would sell its Northern Natural Gas pipeline for $928 million in cash and
another $950 million in assumed debt. But that enthusiasm clouds the fact that
it appears that Dynegy has consumed about $1.1 billion in liquidity in the past
four months. Even if you take into account the fact that Dynegy spent some of
that money to pay down debt, the company has still eaten through $800 million
in four months.
Look first at the company's first-quarter conference call in April, when
Dynegy said it had $1.25 billion in liquidity. Later, in May, executives said
liquidity was $1 billion. Dynegy's energy-trading unit had required $250
million in capital in the prior four weeks, they said.
Soon after, Dynegy said it had obtained a $250 million bridge financing,
renegotiated deals with a unit for a $100 million gain and raised another $200
million from a secured financing. Combined, those actions added $550 million -
boosting liquidity at the time to $1.55 billion.
Then on a July 15 conference call, executives said liquidity was $900 million
- effectively $650 million lower than the previous estimate, once the
financings are counted. The company said $300 million of that amount went to
pay for maturing debt; another $350 million went to capital for its trading
activities.
On July 23, management said liquidity had fallen to between $800 million and
$850 million, down $50 million to $100 million from the week before.
Finally, on Tuesday, Dienstbier put liquidity at $700 million - another
decline of between $100 million and $150 million from the previous, week-old
estimate.
So that's $250 million in capital, plus $300 million in debt repayment, plus
another $350 million in capital, plus liquidity declines of $200 million since
mid-July. That's $1.1 billion, or $800 million sans debt repayment.
Or, to tabulate it another way: Dynegy began its second quarter with $1.25
billion in liquidity. It raised an additional $550 million for a total of $1.8
billion. Subtract the $700 million that remains and you get $1.1 billion that's
gone, including the $300 million debt repayment. Yes, the pipeline sale will
bring in nearly $1 billion more, but if Dynegy keeps going through liquidity at
current rates, that's not going to last long.
Dynegy officials said during this week's conference call that demands for
further trading capital wouldn't be as large as they've been in past months.
"You're going to see some modest increases there, but most of it has been
done," said Stephen Bergstrom, Dynegy's president and chief operating officer.
In addition, Dynegy expects progress soon on some deals to raise additional
funds, Dienstbier said during the call, including bids for some natural-gas
storage assets that are on the block. Dynegy spokesman Steve Stengel said the
company wouldn't comment further on liquidity issues beyond the statements on
the call.
The situation appears similar with Mirant. The company says it had $1.43
billion in liquidity as of June 30. Within days thereafter, it raised $370
million through a convertible-debt offering, thus making its effective
liquidity $1.8 billion. But on July 11, the company said its liquidity was $1.7
billion - and when it announced its second-quarter earnings Tuesday, it said
its liquidity was $1.55 billion. From $1.8 billion to $1.55 billion - that's
$250 million burned in under a month.
David Cathcart, Mirant's assistant controller for policy and reporting, said
the company was in "the strongest liquidity position we've been in so far this
year." The decline in liquidity during July, he said, stemmed in part from
"normal seasonality" - increased demand for power in the summer months requires
more working capital to fund, he said, and Mirant has some twice-yearly lease
payments that come due in early July.
Mirant has said it expects its liquidity to be $1.7 billion at the end of
2002, and Cathcart said that doesn't include proceeds of up to $1 billion in
planned additional asset sales, beyond the $1.6 billion in assets it's sold
since last December. If Mirant can execute those new sales, its liquidity would
obviously be much stronger.
But that begs a key question: If you don't have any liquidity worries, why
sell more assets? Cathcart said Mirant felt the need to manage its business so
as to "overcome" the current perception of the company. It's especially crucial
for Mirant to improve its finances to get back the investment-grade credit
rating from Moody's Investors Service that it lost in December, he said.
Mirant has another problem as well: So far, it hasn't been able to obtain a
new line of credit. The company converted its old line of credit into a
one-year term loan when it expired last month, a move that buys it time but
shows the straits the company is in.
It isn't hard to figure out why Dynegy and Mirant are in such a fix. Prices
for contract natural gas are down about 29% on a year-over-year basis and
spot-market prices are down even further. Energy trading units that were
profitable a year ago are now breakeven or worse. And the economic recovery
isn't as robust as predicted. With this background, cash and liquidity remain
the dominant issues.
To be sure, both companies appear to have enough liquidity for now, even if
they keep burning cas. Counting the expected pipeline-deal proceeds, Dynegy has
liquidity of $1.6 billion, which should last it for months, even at its current
apparent burn rate. Dienstbier said closure of the pipeline deal "should put
any concern about liquidity to rest at least for the immediate future." Mirant
should also have enough liquidity for awhile, especially if it executes its
planned asset sales promptly.
But given the economy and the scandalous disclosures that have rocked energy
trading in recent months, it's far too early to confidently predict when or
even if energy trading as a business is going to recover. And if it doesn't
recover reasonably soon, the likes of Dynegy and Mirant are going to be in
trouble.
Because both companies are playing a dangerous game. With their trading
businesses stalled and sucking up money instead of generating it, the companies
are staying afloat not because their operations are successful, but because
they're selling assets and turning to the market for financing. What happens
when there are no more assets you can sell, or when the market decides it's had
enough and refuses to give you any more money?
Dynegy and Mirant hope they won't have to find out.
- Michael Rapoport, Dow Jones Newswires; 201-938-5976;
michael.rapoport@dowjones.com
- Steven D. Jones, Dow Jones Newswires; 360-253-5400
(END) DOW JONES NEWS 08-02-02
05:10 PM |
