Global squeeze hitting home

Oct 08, 2008 (The News & Observer - McClatchy-Tribune Information Services via COMTEX) -- PGN | Quote | Chart | News | PowerRating -- Two of the Triangle's largest and most stable corporations are getting pinched by the nation's economic slowdown. And they likely will feel a further squeeze in the future as borrowing costs rise because of the global credit crunch.

While businesses everywhere are having a harder time borrowing money, Progress Energy and Martin Marietta Materials are both considered barometers of the broader economy. Progress Energy's electricity sales and Martin Marietta's revenue from rocks, gravel and other construction materials depend on healthy economic growth to fuel new office buildings and factories, new homes and new corporate expansions.

The Raleigh-based companies report slowing sales as the country's bad economic news spreads.

"We're not recession-proof, and we're not immune to these financial ills," said Progress Energy CEO Bill Johnson.

And both companies borrow heavily to pay for acquisitions, expansions and operations. So far, the rising costs to borrow haven't hit hard at Progress Energy and Martin Marietta, but it's probably only a matter of time.

Last week, rating agency Moody's warned that it is reviewing Martin Marietta's $1.1 billion of debt for a possible downgrade, citing weakening demand for its products. Such a move would force Martin Marietta to pay higher fees and interest rates the next time it borrows money.

The company last raised $300 million in April with an interest rate of 6.6 percent, said Anne Lloyd, chief financial officer. If the company did that today, it would have to pay nearly 8 percent, she added.

"Our lenders have told us we have access to capital," Lloyd said. "But it will cost more. That's typical of every borrower out there."

Martin Marietta has $200 million in debt that it will need to refinance or repay on Dec. 1, and company officials are considering their options, Lloyd said.

Timing so far has been on Progress Energy's side as well. The company borrowed $1.5 billion in July at about 6 percent. Had it delayed issuing corporate bonds and borrowed now, it would pay about 8 percent in interest, which would have added about $30 million a year in debt payments, CFO Mark Mulhern said.

The $700 billion economic bailout Congress passed last week and other efforts could ease the crunch for all companies in coming weeks and months. But until then the effects, compounded by the slumping economy, are reaching all levels of corporate America.

Rising costs and slowing sales already have spurred Progress Energy and Martin Marietta to cut costs, including by eliminating jobs. Higher borrowing costs could increase pressure to slash expenses.

In August, Martin Marietta announced it had reduced its work force about 7 percent from a year earlier. It now has about 5,400 workers.

Moody's announced that its review of Martin Marietta's debt rating, which is expected to conclude within a month, will focus on "the company's ability to offset declining volumes with price increases and cost reductions over the coming year."

Progress Energy has virtually stopped growing in Florida and is cutting 300 positions in that state amid a backlog of vacant homes that are unsold or in foreclosure. The company could begin to see the same effects in this state as North Carolina's economy continues to slow. The company will provide a financial update when it releases earnings Oct. 31.

With $1 billion cash on hand, Progress Energy still depends on credit to function. The company is carrying about $11 billion in debt and finances operations with short-term and long-term borrowing.

Before the credit crisis, Progress Energy took out short-term loans about once a week to cover its expenses. But as financial institutions have become more cautious, Progress Energy has been forced to borrow on a daily basis to make payroll and cover other expenses. Daily borrowing is not only inconvenient but subject to fluctuating interest rates.

There are some bright spots. Martin Marietta is getting a boost from increased spending in North Carolina on roads and other infrastructure. And overall, the state's economy, especially in the Triangle, is faring better than the nation as a whole.

Progress Energy officials also are relieved the economic crisis didn't erupt after the company had begun construction on multibillion-dollar nuclear plants. The company is seeking federal licenses to build two reactors in Florida and two at the Shearon Harris site in southwestern Wake County.

Nuclear plants take at least a decade to complete, are expected to cost at least $7 billion per reactor and require massive cash transfusions to keep projects moving along and prevent costly delays.

Had the economy tanked with nuclear plants in mid-construction, costs could spiral out of control.

"In the middle of a major capital project you need cash flow, and you'd get it at a much higher panic rate -- that's what would happen," Johnson said. "One thing you worry about is lack of investor confidence in your ability to perform."

So far, Progress Energy's stock price has held up amid the economic storm. Its shares are down about 8 percent in the past year. Counting the company's dividend, investors have lost about 4 percent.

Martin Marietta's stock, however, has fallen more than 40 percent in the past year.

"Most of this is tied to the economic cycle we're in," Lloyd said. "Martin Marietta as a company hasn't really changed."

alan.wolf@newsobserver.com or (919) 829-4572

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