El Paso shares fell another 4% Wednesday after Morgan Stanley analyst Scott Soler cut his El Paso stock rating to “underweight” from “equal weight” and lowered his outlook on the entire natural gas industry to “cautious” from “in-line.”

El Paso shares already had plummeted 19% on Tuesday after the company’s debt rating was cut to junk by Moody’s (see Daily GPI, Nov. 27).

Moody’s cut El Paso because of weak cash flows, high debt and expenditures, high execution risk in its energy trading shutdown and potentially worsening liquidity problems going forward. Moody’s said by mid-2004 the situation could force El Paso to pledge up as much as $5 billion of assets as collateral. The downgrade will likely prompt El Paso to post $2.2 billion in cash collateral over the next 30 days, according to Soler.

Soler also lowered his view of the natural gas industry to “cautious” from “in-line” because natural gas companies Dynegy Inc., El Paso and Williams Co. will likely underperform the S&P 500 over the next 12-18 months. Dynegy shares fell 7% to $1.19. Williams lost 6% to $2.66.

Meanwhile, Reliant Resources stock added 2% percent to $2.57 despite another Fitch Ratings downgrade — this time to B from BB. The outlook is negative until Reliant can restructure or refinance about $5.7 billion of debt and lease obligations. “The tightening bank credit environment for energy merchants…could frustrate RRI’s efforts to complete its planned global refinancing,” Fitch said. “RRI has publicly acknowledged that a Chapter 11 reorganization is an alternative if it is unable to extend its current bank exposure.”

Moody’s downgraded El Paso’s ratings on senior unsecured debt Ba2 from Baa3, and assigned the company a senior implied rating of Ba1 with a negative outlook. In addition, Moody’s lowered the ratings on all of its subsidiaries’ debt.

Moody’s said its negative outlook on El Paso reflects the uncertainties related to the pending ruling by the Federal Energy Regulatory Commission (FERC) regarding the alleged exercise of market power in the California gas market and violations of marketing affiliate rules and other FERC regulations in the use of El Paso Natural Gas pipeline capacity. “While the ultimate impact of these proceedings will not be known for some time, they could potentially bring about other litigation and proceedings that negatively affect EP’s financial position, liquidity, or business operations and lead to a rating action,” Moody’s said.

“EP and its subsidiaries are also subjects of numerous government investigations and lawsuits that potentially could have material impact. The ratings consider potential calls on cash as a result of the effects of collateral calls, ratings triggers, and other demands on liquidity that may result from the downgrade.”

The company has paid off all its commercial paper and has about $1 billion of cash available as a liquidity cushion. It 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 one-year term-out option, which, if exercised, could potentially provide liquidity through May 2004. EP has approximately $2 billion of maturing debt in 2003, $1 billion of which is the Electron debt due in March.

The company is concentrating its asset sales efforts in this quarter and the next in order to prefund the retirement of the Electron debt. The company expects to have sold almost $4 billion of assets by year-end, and plans to sell $2 billion more in 2003 to repay debt and to supplement its operating cash flows.

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