[Perhaps we should call it La Nomi :o)]
Financial Times; Feb 18, 2003
FIRST PAGE: Crisis in US energy sector deepens as debt tops $477bn
By Sheila McNulty in Houston
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. "
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. For many of the companies, their traditional energy businesses are struggling, not least because electricity prices have been hit by overcapacity.