New York, September 24, 2002 — Moody’s Investors Service placed under review for possible downgrade the debt ratings (Baa2 senior unsecured) of El Paso Corp. and its subsidiaries.
Moody’s review is prompted by the concern that El Paso’s cash flows are not likely to soon recover from the low levels experienced in the first half of this year. The review is also prompted by Monday’s announcement that
The Federal Energy Regulatory Commission’s (FERC) Chief Administrative Law Judge (ALJ) had issued a proposed decision that El Paso’s pipeline subsidiary El Paso Natural Gas Company had exercised market power by withholding capacity that could have flowed to California during the energy crisis of 2000/2001.
The ALJ recommended that the FERC institute penalty procedures for this proceeding as well as for another proceeding regarding violation of FERC’s standard of conduct between El Paso’s pipeline and its merchant energy affiliate.
Moody’s will assess what impact that the FERC’s decision may have on El Paso’s financial position or business operations.
Moody’s review will also focus on the following issues:
1) Near-term cash flow prospects for merchant energy and that segment’s longer-term impact on the risk profile of the company.
Poor industry conditions and a large production hedging program have caused El Paso’s energy merchant segment to be a net consumer of cash in the first half of this year.
Moody’s will assess the impact of El Paso’s efforts to downsize its merchant energy activities and to curtail working capital allocated to them. Moody’s will review the financial resources that El Paso is likely to require for its production hedging and its merchant businesses.
2) El Paso’s highly leveraged financial position relative to its cash flow generating capabilities. Annualized second quarter 2002 retained cash flow-to-debt was about 2% (cash flow from operations after changes in working capital and price risk management activities relative to debt adjusted to include on-balance sheet debt, minority interest financings, operating leases capitalized, and the Limestone and Gemstone debt).
3) The impact of El Paso’s various regulatory proceedings and investigations.
4) The company’s asset sales and the use of those proceeds for debt reduction.
In addition to $1.8 billion sold since December 2001, El Paso targets selling additional $1.5 to $2 billion of assets (not including the $782 million of assets it plans to sell to El Paso Energy Partners, L.P., its 26%-owned MLP affiliate).
Having issued $2.4 billion of common stock and $575 million of mandatorily convertible securities since December of 2001, El Paso does not plan further equity issuances as a means to improve its leverage.
5) The outlook for El Paso’s non-merchant businesses (pipelines, E&P, and field services).
Moody’s will monitor the company’s ability to sustain cash flows from these businesses while curtailing capital invested in them, particularly E&P. Moody’s will also assess the impact from El Paso’s long-term strategic initiatives in liquid natural gas and its other growth businesses.
Moody’s notes that the strength of El Paso’s integrated gas franchise and the relative predictability of its non-merchant businesses help to buffer the cyclical nature of its merchant business.
6) The performance of numerous equity investments and their impact on cash flow.
The company has several structured financings with complex and aggressive accounting. Income from equity investments and mark-to-market adjustments has resulted in earnings that are booked before cash flow is realized. The company also has extensive investments in non-U.S. markets which have periodically had material impact on earnings.
7) The prospects for power projects in Projects Electron and Gemstone and their effect on El Paso’s cash flow and financial position.
Moody’s will assess the impact of the depressed power prices in the US and its impact on Electron and ultimately on El Paso, as it prepares to unwind its Electron vehicle in March 2003.
Moody’s will also review the prospects for El Paso’s large investments in power projects in Brazil through its Gemstone vehicle, given the economic and political uncertainties in that country.
8) The financial impact on El Paso Corp. from its El Paso Energy Partners.
Although separate and distinct by legal and accounting standards, El Paso Corp. has significant influence on El Paso Energy Partners as its general partner. Although El Paso Corp. accounts for Partners as an equity investment under US GAAP, a consolidated analysis may more appropriately capture the financial and commercial interrelationships between the two.
Moody’s notes that El Paso’s near-term liquidity appears sufficient. The company has maintained its cash balances at about $1 billion, net commercial paper outstanding of about $250 million. It also has a $3 billion 364-day bank facility expiring in May 2003 and a $1 billion term loan expiring in August 2003.
The 364-day facility has a term-out option and without a MAC clause. El Paso has $240 million of short- and long-term debt maturities for the remainder of the year, which should be manageable given its current liquidity position.
The following ratings are under review for possible downgrade: El Paso Corporation – Baa2 senior unsecured debt, Baa2 Bank Credit Facility, Baa3 subordinated, (P)Baa2 senior unsecured shelf, (P)Baa3 subordinate shelf, (P)Ba1 preferred shelf, P-2 commercial paper; El Paso CGP Company – Baa1 senior secured, Baa2 senior unsecured, Baa3 subordinate; ANR Pipeline Company – Baa1 senior unsecured, Baa1 long-term issuer rating; Colorado Interstate Gas Company – Baa1 senior unsecured, Baa1 long-term issuer rating; Coastal Finance I – Baa3 preferred stock; El Paso Natural Gas Company – Baa1 senior unsecured, Baa1 LT issuer rating, P-2 commercial paper; El Paso Tennessee Pipeline Co. – Baa2 senior unsecured, Ba1 preferred stock, (P)Baa2 senior unsecured shelf, (P)Ba1 preferred shelf; Tennessee Gas Pipeline Company – Baa1 senior unsecured, P-2 commercial paper; Sonat Inc. – Baa2 senior unsecured; Southern Natural Gas Company – Baa1 senior unsecured; El Paso Energy Capital Trust I – Baa3 preferred stock; El Paso Capital Trust II – (P)Baa2/(P)Baa3 preferred shelf; El Paso Capital Trust III – (P)Baa2/(P)Baa3 preferred shelf; Limestone Electron Trust – Baa2 senior unsecured guaranteed notes; Gemstone Investor Limited – Baa2 senior unsecured guaranteed notes. Based in Houston, Texas, El Paso Corporation is a diversified energy company.