Mirant lays out plan to boost liquidity, restore Moody's credit rating

Kate Thomas
OGJ Online Staff

HOUSTON, Dec. 20 -- A credit downgrade to junk bond status by Moody's Investors Service helped accelerate a sell off in the stock of independent power producer Mirant Corp. Thursday, despite the overnight plan to boost the company's balance sheet.

In rapid fire succession, Mirant sold 60 million shares of common stock for $13.70/share, rather than the 40 million announced just after midnight Wednesday, said it would cut next year's capital expenditures, and revised its 2002 earnings forecast twice in 1 day. The company also told investors to expect growth in the next 5 years to average 10-15%/year, not the aggressive 20% the company had targeted.

At midafternoon the stock was down $2.46/share to $13.61 on volume of more than 25 million shares. Average volume is about 3 million shares.

Mirant was the latest in a growing list of energy companies to be downgraded or put under review by the credit rating agencies, reflecting tightening standards following Enron Corp.'s sudden collapse. Judged one of deregulation's success stories until recently, Mirant CEO Marce Fuller said she was "surprised" and "disappointed" by Moody's action. The company had no forewarning of the downgrade, she said, and Mirant was not on credit watch with Moody's.

Moody's said it took action based on expectations of "restricted" cash flow in the coming months and the company's "heavy debt burden."

Fuller told analysts and investors during a hastily rescheduled conference call the company wasn't given an opportunity to respond and that it appeared the downgrade reflected a change in Moody's criteria for rating debt not a response to a change in Mirant's business plan.

The company remains an investment grade credit risk with both Standard & Poor's and Fitch IBCA. Fuller said Mirant hasn't received any indication of a change "at this time. I can assure you management takes this current situation very seriously," she said.

Chief financial officer Ray Hill said the company's scaled back growth plans are intended to maintain existing ratings and help convince Moody's to reinstate Mirant's investment grade rating. He said Mirant expects to have total sources of liquidity of $4.8 billion through the end of 2002, excluding proceeds of $759 million, less issuance costs, from the common equity offering.

The total also assumes Mirant's planned $600 million acquisition of Puerto Rico's EcoElectrica Holdings Ltd., jointly owned by Enron Corp., doesn't close by yearend. Fuller said that was looking less likely, in which case the contract is cancelable.

Capital budget cut 40%
To improve liquidity, Fuller said the company would cut the capital budget in 2002 to $2.6 billion from a planned $4.1 billion, which will require canceling all planned acquisitions and power construction projects on the drawing board after 2003. She said the company will complete the 5,700 Mw of additional generating capacity planned in 2002-03.

Hill said asset sales are expected to generate another $1.6 billion in cash, including $900 million from the previously reported sale of the German utility Bewag. He said prior to Moody's action, the company's cash position would have been sufficient to support its construction, acquisition, and trading programs.

But the effect of the downgrade was to raise by $600-$700 million Mirant's working capital requirements. From $200 million to $300 million will be required to support the company's trading program at its current level, Hill said.

"That's a lot of capital to put behind that business," he said, and isn't a particularly efficient use of money. For 2001, Hill said Mirant is maintaining guidance for the full year of at least $1.95/share. It excludes a one-time charge relating to Mirant's Enron exposure, which could be as high as $111 million pretax, Fuller said.

As a result of reduced capital expenditures and the commom stock offering, Mirant lowered its 2002 earnings guidance to $2-$2.10/share from $2.55-$2.65/share. After the offering was increased to 60 million common shares, Mirant trimmed its earnings guidance again for next year to $1.90/share from $2/share.

"With these steps, we are responding to the reality of the current market and capital environment," Fuller said. "We have a plan that works and should not require us to access the debt and equity capital markets during 2002."

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