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10 Oct 2002
MOODY'S DOWNGRADES MIRANT CORPORATION (SR. UNSEC. To B1), MIRANT AMERICAS GENERATION, INC., MIRANT AMERICAS ENERGY MARKETING, L.P. AND MIRANT MID-ATLANTIC, LLC. RATINGS OUTLOOK IS NEGATIVE.
Approximately $6.6 Billion of Debt Securities Affected.
New York, October 10, 2002 -- Moody's Investors Service downgraded the ratings of Mirant Corporation
(Mirant) and its subsidiaries due to significantly lower operating cashflow
relative to its high debt burden coupled with the likelihood that future
operating cashflow levels may weaken further due to asset sales and challenging
market conditions for the North American merchant power business and the
energy marketing and trading business. Moody's assigned Mirant
a senior implied rating of Ba3 and the issuer rating of Mirant Americas
Energy Marketing, L.P. (MAEM) and the senior unsecured
ratings of Mirant Americas Generation, Inc. (MAGI) were lowered
to Ba3 from Ba1. Mirant's senior unsecured ratings were lowered
to B1 from Ba1 and are notched down from the senior implied rating due
to higher levels of debt at Mirant and reduced operating cashflow expected
from MAGI and MAEM, thereby weakening debt protection measures at
Mirant to a level Moody's feels no longer offsets the structurally subordinated
position of the senior unsecured bonds. Moody's also lowered the
rating for Mirant Mid-Atlantic, LLC (MirMA) to Ba3 from Baa3
to reflect the risk associated with comingling funds at the Mirant Corp.
and MAEM levels.
Moody's is maintaining a negative ratings outlook due to; (i) uncertainty
as to potential liabilities arising from ongoing government investigations
and lawsuits related to California's power markets and; (ii) uncertainty
surrounding the independent auditors current review of the company's financial
statements, which has prevented Mirant from filing its second quarter
10-Q and providing the required CEO or CFO representations in line
with SEC requirements. Clarity around both these issues,
with no material negative implications, would likely result in a
stable ratings outlook.
Moody's has lowered the following ratings:
Mirant Corporation senior unsecured debt to B1 from Ba1;
Mirant Americas Energy Marketing, L.P. issuer rating
to Ba3 from Ba1;
Mirant Americas Generation, Inc. to Ba3 from Ba1;
Mirant Mid-Atlantic, LLC to Ba3 from Baa3; and
Mirant Trust I preferred stock to B3 from Ba2.
The ratings downgrade reflects concerns surrounding Mirant's ability to
generate sufficient levels of operating cashflow relative to its total
debt of approximately $10.8 billion. Total debt consists
of consolidated recourse and non-recourse debt of $8.4
billion, off-balance sheet operating leases and turbine facilities
of $1.7 billion, a $218 million gas prepay,
a $118 million obligation related to construction projects that
have either been cancelled or deferred and $345 million of convertible
trust preferred securities. In addition, the acquisition
of PEPCO's generating assets in December 2000 included the assumption
of out-of -market TPA's and PPA's, which are not included
in the debt amount. Mirant's cash payments to PEPCO related to
these agreements will vary with PJM market prices, but when the
transaction closed the discounted fair market value of these obligations
was estimated to be $2.3 billion. PJM market prices
have come down since then, thereby reducing that amount, however
it continues to represent an additional financial obligation. Moody's
believes these obligations, which exclude unconsolidated minority
interest subsidiary debt of $500 million (Mirant's share),
are high relative to cashflow. The company has been selling assets
to reduce debt and has announced plans to sell additional assets.
Mirant expects to generate proceeds of $500-$750
million (excluding WPD which has already closed). The combination
of lower operating cashflow and cash needed for reinvestment in the business
is likely to result in minimal amounts of free cash flow, leaving
Mirant highly dependent upon asset sale proceeds to further reduce debt.
Many companies in this sector have announced similar plans, which
put downward pressure on prices and will likely result in a longer period
of time needed to complete the contemplated sales.
The downgrade further considers Mirant's reduced operating cashflow.
In 2001, consolidated operating cashflow before working capital
changes was $1.3 billion (adjusted for cash payments to
PEPCO and dividends received from Shajiao C). On a similar basis,
unaudited six-month results for 2002 indicate operating cash flow
of $235 million, compared to $836 million for the
first six-months of 2001. Operating cashflow after working
capital and adjustments related to non-recurring items yields similar
results. This clearly indicates a substantial reduction in the
level of cashflow Mirant is able to generate. This reduction is
largely due to the company's reliance on MAEM and North American merchant
activity for a substantial portion of its operating cashflow. These
businesses have been negatively impacted by weak power markets and a continuing
lack of investor and counterparty confidence. Moody's believes
challenging market conditions are likely to continue in the near term
and asset sales will negatively impact cashflow, therefore,
operating cashflow in 2003 may not be materially better and could weaken
The rating also reflects Mirant's current liquidity profile. The
company has effectively drawn all its available credit and has unrestricted
cash balances of approximately $1.8 billion as well as approximately
$400 million in cash at subsidiaries that would be available for
debt service at these levels. Debt maturities in 2003 include Mirant
Corp.'s $1.125 billion credit facility due in July
(the term out provision has already been exercised) and amortization of
debt at various subsidiaries totaling $437 million (including the
gas prepay). Assuming the company's operations don't consume cash
over the near term, Mirant appears to have adequate liquidity to
meet its obligations through year-end 2003. However,
the company has approximately $2.7 billion of maturities
in 2004, a significant portion of which will need to be refinanced.
Due to the current lack of investor confidence, access to public
debt markets is very limited. Furthermore, the banks have
also pulled back from the sector as a whole, resulting in significantly
increased refinancing risk.
Mirant is continuing to try and address these concerns through asset sales
and by restructuring its business. Trading and marketing activity
will decrease going forward as the company scales back its natural gas
related business and difficult market conditions continue. Mirant
hopes these steps will help reduce debt and significantly reduce the amount
of capital needed to run the business. As Mirant completes various
stages of its plan, Moody's will evaluate the impact on the company's
credit profile. At this point, Moody's believes Mirant's
most significant challenges will be reducing its debt to a level commensurate
with its cashflow and refinancing debt maturities in 2004.
Mirant owns an international portfolio of electric and gas assets.
MAEM is Mirant's US marketing and trading arm. Subsidiary MAGI
holds a portfolio of US power assets. MAGI subsidiary MirMA holds
power assets near Washington D.C.
Moody's Investors Service
John C. Cassidy
Vice President - Senior Analyst
Moody's Investors Service
No Related Data.
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