New York, Nov. 17, 2003 — Moody’s Investors Service confirmed the ratings of El Paso Corporation (B3 senior implied) and changed its outlook to “negative” from “developing.”
The confirmation acknowledges El Paso’s current liquidity position and recent moderation of its cash burn rate. Nevertheless, the reduction in outlook reflects concerns about the continuing erosion in cash flows from operations before working capital changes, reflecting much in part the production declines in El Paso’s E&P segment.
Along with pipelines, E&P (accounting for roughly half of the company’s 9 months’ EBITDA and a fifth of its assets) is a principal business for El Paso and vital to the financial recovery of the corporation overall. Moody’s believes that organic improvement in the credit is unlikely short of strategic action that could materially improve the company’s heavily leveraged financial condition. Given the fluidity of this situation, Moody’s will closely monitor the company and take rating action as necessary.
It remains to be seen what, if any, rating implication will be from El Paso’s turnaround plan, which Moody’s expects to assess next month.
The confirmation of El Paso’s ratings acknowledges the substantial liquidity currently available ($2.7 billion of available cash and unused capacity on its bank facility) and a recent moderation of its cash burn rate. In the past two quarters, El Paso’s cash flow from continuing operations (before working capital changes) has been somewhat below expectations due in part to E&P’s performance.
However, this weakness has been offset by higher than expected recovery of cash collateral paid in prior periods, so that El Paso remains on track to meet its 2003 operating cash flow target of $2.4 billion. Consequently, operating cash flow in the past two quarters has been sufficient to cover both capital expenditures and dividends.
Nevertheless, such inflows in working capital will not be repeatable every quarter, since cash collateral in- and out-flows will fluctuate with gas prices and the company’s hedge position. While curtailing capital spending has helped El Paso to conserve its liquidity for now, Moody’s believes that cutting back much more may be difficult without compromising the value of its core businesses. The organic decline in production is one fallout from the cutback and indicates the need for more reinvestment to sustain and grow cash flow.
Operational setbacks at the E&P segment highlight the difficulties that El Paso faces overall in sustaining a turnaround, burdened with debt and underperforming assets, particularly in its merchant energy segment. A turnaround will entail a considerable amount of time and execution risk. For example, it will take time to gauge El Paso’s success in transitioning E&P’s concentration from shorter-lived production plays to longer-lived coal bed methane and stemming the production declines seen in each of the past seven quarters. Moody’s notes that such negative momentum in production is not easily reversed.
Also, El Paso’s ability to reverse its deep losses is limited by the depressed results of its merchant energy assets that may take a while to divest and from very high interest expenses. Adverse conditions in the merchant energy sector and ongoing asset sales will also continue to hinder a normalization of the company’s cash flows. Although we anticipate additional asset sales will enable the company to further de-leverage, debt will be only incrementally reduced (given some $21 billion of debt net non-recourse project financing) and still far out of line with its weak operating cash flow.
For further details on El Paso’s E&P business, please refer to Moody’s November 11, 2003 press release changing the rating outlook for El Paso Production Holding Company, El Paso’s E&P subsidiary, to “negative” from “developing.”
The outlook on the following ratings has been reduced to “negative” from “developing”:
El Paso Corporation – Senior unsecured debt Caa1, senior implied B3, subordinated Caa3, senior unsecured shelf (P)Caa1, subordinated shelf (P)Caa3, preferred shelf (P)Ca;
El Paso CGP Company – Senior PRIDES Caa1, senior unsecured Caa1, subordinated Caa3;
ANR Pipeline Company – Senior unsecured B1, long-term issuer rating B1;
Colorado Interstate Gas Company – Senior unsecured B1, long-term issuer rating B1;
Coastal Finance I — Trust preferred stock Caa3;
El Paso Natural Gas Company – Senior unsecured B1, long-term issuer rating B1;
El Paso Tennessee Pipeline Co. – Senior unsecured Caa1, preferred stock Ca, senior unsecured shelf (P)Caa1, preferred shelf (P)Ca;
Tennessee Gas Pipeline Company – Senior unsecured B1;
Sonat Inc. — Senior unsecured Caa1;
Southern Natural Gas Company – Senior unsecured B1;
El Paso Energy Capital Trust I — Trust preferred stock Caa3;
El Paso Capital Trust II — Shelf (P)Caa1/(P)Caa3;
El Paso Capital Trust III — Shelf (P)Caa1/(P)Caa3;
Gemstone Investor Limited – Senior unsecured guaranteed notes Caa1.
Based in Houston, Texas, El Paso Corporation is a diversified energy company.