Energy may be taking breather from recent run; Reliant down on earnings; CMS holds steady

By Sara Rosenberg

New York, May 8 - There were a number of conflicting reports on the energy sector as a whole in Thursday's secondary bank loan market as some traders found the sector to be slightly weaker simply because after running up recently it needed a resting period, some traders found the sector to basically feel the same and yet other traders believed that any dips or plunges are probably more a result of earnings or specific news related to the credit rather than an overall tone.

"The energy sector is slightly weaker overall," a trader said. "It's slightly weaker on fatigue."

However, a second trader disagreed, saying that "the bonds are off" in energy names but the bank paper doesn't seem to have weakened during trading hours.

One example cited by the first trader was Reliant Resources Inc.'s bank debt, which was quoted at 85 bid, 87 offered, down from 86 bid, 88 offered. "I haven't seen any trades," the trader added.

But, Reliant did report lower-than-expected financial results for the first quarter, which may have affected levels on the company's bank paper. In fact, according to yet another trader, Reliant's drop was more likely a result of the earnings news as opposed to overall market behavior.

On Thursday, the Houston energy and electricity company reported first quarter 2003 numbers that included a loss from continuing operations of $56 million, or $0.19 per share, compared to income from continuing operations of $81 million, or $0.28 per share, for the same period of 2002. Excluding an accrual of $47 million, pre-tax for the payment that will be due to CenterPoint Energy in 2004 under Texas' deregulation legislation, the loss from continuing operations was $27 million, or $0.09 per share, larger than the mean analyst expectation of a loss of $0.07 per share.

The first quarter loss reflects the accrual for the payment to CenterPoint Energy, a decline in wholesale earnings due to significantly lower trading margins, continued weakness in the wholesale markets and hedge ineffectiveness losses, according to a news release. Furthermore, the company incurred an increase in interest expense, primarily associated with the acquisition of Orion Power Holdings and amortization and expensing of financing costs associated with the recently announced financings.

"Our first quarter was one of progress and accomplishment despite the earnings performance," said Joel Staff, chairman and chief executive officer, in the release. "We closed a new financing package that has stabilized the company's capital structure, and we are now positioned to transition our capital structure to one that reflects our business profile. The agreement to sell our European business and the decision to discontinue proprietary trading were important steps in our ongoing effort to sharpen our strategic focus. Our top priorities going forward will be to achieve resolution of outstanding legal and regulatory issues and to accelerate the momentum we have begun to see in regaining our corporate credibility."

Guidance for 2003 includes income from continuing operations to be between $0.50 and $0.70 per share, excluding the impact of transitioning from mark-to-market to accrual accounting, ($0.15); the accrual for payment to CenterPoint Energy under Texas deregulation legislation, ($0.10); and the reversal of California-related reserves, $0.15. The mean analyst estimate for 2003 was $0.81 per share.

On the flip side though, CMS Energy's bank debt was quoted in line with previous levels, according to a trader, who added: "There hasn't been a lot of movement in that paper." The company's bank debt is being quoted between par and 101, depending on the tranche, with the A loan somewhere around par, the B loan around par ½ and the C loan around 101, according to a second trader.

CMS also released financial results for the first quarter on Thursday. However, unlike Reliant, CMS beat analyst expectations. The company reported net income of $79 million or $0.51 per share, compared to net income of $42 million or $0.32 per share in the first quarter of 2002. Ongoing net income, under non-Generally Accepted Accounting Principles, was $78 million or $0.50 per share, compared to ongoing net income of $79 million or $0.60 per share in the first quarter of 2002. The mean analyst estimate was income of $0.27 per share.

In addition, the company reaffirmed its earnings guidance for 2003 and expects that reported net income will be roughly break even, dependent largely on the timing and proceeds from planned asset sales and ongoing net income will be in the range of $0.80 to $0.90 per share, compared to the mean analyst expectation of $0.80 per share.

"The focus over the past year has been to increase our financial flexibility and liquidity and implement our back-to-basics strategy. We're selling underperforming and non-core assets. Our goal is to be a smaller, stronger company with less business risk and more predictable earnings," said Ken Whipple chairman and chief executive officer, in a news release. "The record shows we're making good progress, but there are still many challenges ahead."

Over the past year, CMS said it has made progress on various initiatives including: the completion of $2.1 billion in financings at CMS and Consumers Energy, which boosts liquidity and financial flexibility, cuts interest costs and addresses maturities through 2004 at the parent and well into 2004 at the utility; exceeding the cash balance goal of about $400 million, split between the parent and the utility; continuing efforts to reduce operating expenses, with the capital expenditure budget being cut by another 35% to 40% this year; and, staying on track with the asset sales program, with about $3.7 billion in asset sales, including assumed debt, completed or announced in 2002 and so far in 2003.

Meanwhile, Nextel Communications Inc. was a "little softer" on Thursday, at 98 bid, 98¾ offered, compared to 98¼ bid, 98¾ offered, according to a trader.

Asked whether the softening had anything to do with a downgrade by Goldman Sachs & Co. equity analysts on the Reston, Va. wireless company to "underperform" from "in line," the trader responded: "It probably doesn't. It's pretty close to par here, so how much higher do you want it to go."

In follow-up news, International Steel Group Inc. completed the purchase of the assets of the Bethlehem Steel Corp. In connection with the acquisition, ISG obtained a $1 billion credit facility (Ba2/BB+) consisting of a $300 million two-year term loan A with an interest rate of Libor 325 basis points, a $400 million four-year term loan B with an interest rate of Libor plus 350 basis points and a $300 million three-year revolver with an interest rate of Libor plus 275 basis points. UBS Warburg, Goldman Sachs and CIT were the lead banks on the Cleveland steel company's deal.

"This is an important day for ISG. We are now able to serve our customers with a significantly broader line of products and services through a network of conveniently located facilities," said Rodney Mott, president and chief executive officer, in a news release.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.