DTE Energy: Auto focus
DTE Energy Center (DTEEC) was formed to buy the utility assets of DaimlerChrysler in and around Detroit. These consist of onsite steam, lighting, water and transmission facilities at eight manufacturing plants. The initiative stems from DaimlerChrysler's hiring of DTE, the local utility, to replace a support unit. The auto maker eventually decided that DTE's expertise, as well as potential cost and efficiency savings, might make a larger acquisition worthwhile. Goldman Sachs provided a way to spread the risk but, while a 50% partner, is largely silent equity.
It is also a co-manager on the bond issue, but Citigroup has snagged the title of bookrunner. DTE Energy Center LLC, the issuer and project company, has bought the assets of Utility Assets LLC, owned by DaimlerChrysler. Utility Asset's subsequent obligations are guaranteed by DaimlerChrysler North America Holding Corporation (rated at A3/BBB by Moody's/S&P).
Utility Assets was formed to create a separate entity to its putative client - Chrysler, but the physical and operational separation has been more difficult to achieve. The utility systems are embedded at the various manufacturing sites, the Detroit Mack Avenue Engine Plants I and II, the Warren Truck Assembly Plant, the Indiana Transmission Plants I and II, the Sterling Heights Assembly Plant, the Toledo North Assembly Plant and the Sterling Heights Stamping Plant.
While this spin-off of assets is unusual, DTE has built separate utility systems at a number of other sites, 39 in all, of which nine are at car plants. DTE Moraine, which supplies compressed air to a General Motors assembly plant and paint shop in Moraine, Ohio, DTE Tonawanda which performs similar functions at a GM plant at Tonawanda, New York, and DTE Northwind, which supplies GM's headquarters, are all technical precursors.
The operational separation of the assets is difficult, since the transfer of the labour force - heavily unionised - is not possible. As the ratings agencies both highlight prominently, labour relations remain the responsibility of DaimlerChrysler. While DTE will have a project manager at each site, employees will be the responsibility of DaimlerChrysler, and discipline will not be handled by DTE. S&P describes this arrangement as 'cumbersome'. Nevertheless, the United Auto Workers has supported the move, mindful that the manufacturers' current penchant for spinning off parts suppliers does not always bring better member benefits.
In all other respects, however, the contract favours DTE. Fuel will be the responsibility of the former owner, and specified O&M costs will be passed through. There is some capital expenditure and upgrading, but this has been included in the financial assumptions. The deal also benefits from a standard debt service account, and has a base case debt service coverage ratio of 1.5x.
The deal's rating is BBB/Baa2 (Moody's/S&P), and in S&P's case the project has the same rating as its obligor. While a project with a single obligor would expect to find that its rating is substantially derived from the obligor's ratings, it rare to see both at the same level. As both agencies point out, the deal has a force majeure regime with which most lenders would be very satisfied.
As Mark Rigby, finance director at DTE Energy Services, notes, 'the force majeure provisions were broadly favourable to lenders, but are similar to what we have negotiated on past industrial service agreements. The biggest difference here is the sheer number of systems - 62 in all.'
While the deal is heavily dependent on DaimlerChysler's credit, it does not expose the lenders to the vagaries of the US auto industry, which has become used to hearing its own obituary. Rigby points to a termination agreement and schedule that would provide for the payment of a fixed sum to DTE Energy Center in the event of the withdrawal of a system or an entire plant. The proceeds would then be applied to pay down debt.
The other chief potential complication comes from ensuring access rights, and the ability of the operator to perform under the contract. This last is within the abilities of DTE. There have also been the required capital expenditures for which the former owner will provide reimbursement. Nevertheless, the bond indenture anticipates a scenario under which the borrower needs to raise more debt to fund improvements.
Nevertheless, a mixed group of buyers attended the bonds' sale, from project bond buyers, to utility specialists to auto industry specialists. Rigby says that the deal benefited from the desire by many players in the power business to diversify their exposures. Goldman's participation, which apparently began after the financing was largely complete, did not come through its dedicated power group.
The DTE financing is for the time being unique - in its size, scale, and financing arrangements. DTE Energy Services' vice-president, business development, Karl Wittbold, says "car manufacturers don't really want to be in the utility services business. It is a business that we can do better. DaimlerChrysler is ahead of the competition in recognising this. We expect there to be some sizeable assets on the market in the coming years."
DTE Energy Center LLC
Status: closed May 17 2004
Size: $288 million
Location: Michigan, Ohio, and Indiana, USA
Description: purchase of utility systems at eight DaimlerChrysler plants, as well as 20-year service agreement
Sponsors: DTE Energy Services, Goldman Sachs
Debt: $244 million
Bookrunner: Citigroup
Maturity: 2024
Coupon: 7.458%
Independent engineer: Burns & Roe
Lawyers to the underwriter:
Latham & Watkins
Lawyers to the borrower:
Paul Hastings, Hunton & Williams
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