As if there wasn't enough bad news already, Houston electricity provider Reliant Energy Inc. announced Monday it was
reviewing strategic alternatives, including a possible sale.
Sources confirmed that Jeff Holzschuh at Morgan Stanley and Bill Montgomery and Tim Kingston at Goldman Sachs Group Inc. are advising Reliant, along with Mike Rogan at Skadden, Arps, Slate, Meagher & Flom LLP in Washington.
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Reliant's board formed a special committee of directors to review its options, including Evan Silverstein, the committee's chair and former general partner of hedge fund SILCAP LLC; Steven Miller, former CEO of Shell Oil Co.; Joel Staff, chairman of Reliant and its former CEO; and William Transier, a former CEO of oil explorer Endeavour International Corp. Staff also agreed to serve as executive chairman of the board.
In a statement, Reliant CEO Mark Jacobs said the company has adequate liquidity to support the business. "In light of the challenges facing our industry and the economy as a whole, we believe it is appropriate to explore the full range of options to enhance stockholder value while we continue to execute on our current business plan," he said.
Reliant has been in financial straits since Hurricane Ike pounded Houston and Galveston, leaving 4 million of its customers without power, some for weeks. Last week, it cut its profit forecast and reconfigured its credit backstops to cut the risk of a liquidity crunch.
Still,
bond rating agency Gimme Credit LLC, which rates its bonds at "underperform," said in a report last week that it wasn't just the hurricane that put Reliant in a bad position. "Failed strategies and bad policies are also to blame and will likely have longer lasting consequences," analyst Carl Blake wrote in a report Oct. 2.
Blake noted that last week Reliant replaced its inexpensive off-balance-sheet funding with Merrill Lynch & Co., which the company claimed couldn't meet its needs, with $1 billion in high-cost, on-balance-sheet capital. The funding, which was 3.5 times more expensive and far more restrictive, boosted Reliant's total debt to $3.6 billion from $2.9 billion. But Blake wrote that it has total liquidity of $2.7 billion, which gives it adequate coverage for its projected uses of $1 billion to $1.4 billion, even if natural gas prices decline another $4 per thousand cubic feet equivalent.
So who are some likely buyers? The most obvious ones would include deep-pocketed private equity firms like Kohlberg Kravis Roberts & Co. and TPG Capital, which have played in this space before. But would they want to do an all-cash deal, given the fact that borrowing would be tough right now? And would they have regulatory problems, since they own TXU Corp. up the road in Dallas? Another possibility is MidAmerican Energy Holdings, a unit of Warren Buffett's Berkshire Hathaway Inc., which agreed to buy Constellation Energy Group Inc. a few weeks ago. But Buffett may have too much on his plate already. -
Claire Poole
