Energy Deregulation: an unnatural DISASTER.
news.ft.com
Gas and power debt approaching critical mass
By Sheila McNulty in Houston
Published: February 17 2003 22:02 | Last Updated: February 17 2003 22:02
The debt crisis in the US gas and power sector continued to grow over the past year
and has become more acute, with $477.6bn in outstanding borrowings, research
commissioned by the Financial Times reveals.
The energy traders are responsible for a large portion of that debt, according to SNL
Financial, an independent research firm that says $116.65bn of the sector's debt is
held by what - pre-crisis - were the top nine traders, companies such as Dynergy and
El Paso, both Texas-based, and Duke Energy of North Carolina.
The combined market value of the nine is now $28.1bn. This is down 73 per cent from
$103.2bn before the December 2001 collapse of Enron, the biggest US energy trader,
undermined confidence in the sector. Most of these companies have had their credit
ratings cut to "junk" status - a red flag for the banks, bond holders and private equity
lenders who lent them money.
"The debt problem in the power sector has reached critical mass," says Karl Miller,
senior partner at Miller, McConville, Christen, Hutchison & Waffel, a New York-based
energy acquisition company. "The companies simply do not have the cash flow to
service the debt. They have collateralized most of their other assets to live through
2002 and early 2003, in essence providing a very short-term fix to a serious, long-term
industry problem."
US commercial banks, including JP Morgan Chase and Citigroup, have been forced
to start taking big provisions against their energy loans and industry experts believe
lenders are facing billions of dollars in losses. Energy merchants will have to find
$40bn to replace debts that come due this year alone, according to Standard & Poor's,
the ratings agency.
The expiration of their various loans and credit lines this year will present a formidable
hurdle for some energy traders, as they were so desperate last year for additional
credit that they signed agreements on bankruptcy terms. SNL Financial's research
shows that last year, when the energy sector was under intense pressure to reduce
its debt, its borrowings grew from $450bn at the end of 2001 to the $477.6bn now
outstanding.
Financial markets are largely closed to the energy traders, who have failed to regain
investor confidence. So, to reduce their debt, they must raise funds through operating
profits or by selling assets. But neither of these options is promising. Overcapacity in
the sector has hit electricity prices and in turn dented profits.
Asset disposal is difficult, as the market is already swamped with distressed sellers.
Moreover, many of the most sought-after assets companies were willing to part with
were sold for quick fixes last year. |
