El Paso Pipe Note Offerings, Mid-Continent Reserve Sale Spark FERC's Interest

A couple of transactions that were announced by El Paso Corp. earlier this week to improve its liquidity position have raised a red flag at FERC, which has asked the Houston-based energy company to furnish further details by mid-March.

The Federal Energy Regulatory Commission said it wants to know more about the intended $500 million sale of El Paso's Mid-Continent natural gas assets to Chesapeake Energy Corp. of Oklahoma City, OK; and the sale of $700 million in senior unsecured notes by El Paso pipeline subsidiaries, Southern Natural Gas (Sonat) and ANR Pipeline.

"Specifically, what natural gas assets are being sold to Chesapeake Energy, how will El Paso use the proceeds from [Sonat's] and ANR's issuance of $700 million in notes, and will these notes be included in [Sonat's] and ANR's capital structure for rate-setting purposes?" FERC's Chief Accountant John M. Delaware wrote in a letter to El Paso CFO Dwight Scott on Wednesday [FA02-36]. The agency directed El Paso to reply by March 12.

In the wake of Enron, the Commission has become increasingly "concerned over the financial control exerted by parent companies over the assets of their FERC-jurisdictional subsidiary companies, and the effect this could have on the rates paid by customers," Delaware said. He noted the Commission conducted a sweeping audit of dealings between parents and their jurisdictional subsidiaries last year, and found that there had been "significant cash transactions" between affiliated companies and that intra-corporate controls were lax.

In an effort to protect jurisdictional companies from having their cash funds drained by parent companies facing bankruptcy or other financial troubles, the Commission last summer proposed a rule that would set limits on the involvement of regulated public utilities and natural gas and oil pipelines in intra-corporate cash management programs, or money pools (see Daily GPI, Aug. 5, 2002). The proposal still is pending at FERC.

Sonat is expected to sell $400 million of senior unsecured notes due in 2010. Of that amount, El Paso will receive $295 million in cash in exchange for transferring the ownership and management of its 50% interest in Citrus Corp., parent of the Florida Gas Transmission (FGT) pipeline system, to Sonat, and Sonat will cancel out $305 million in receivables on its books with El Paso, El Paso President Brent Austin told NGI. The fair-market value of El Paso's interest in Citrus was estimated at $600 million (see Daily GPI, Feb. 26).

Sonat will retain the remaining $95 million of the net proceeds from the note offering to fund capital projects this year, El Paso said in a press statement on Tuesday.

ANR will seek to raise $300 million through the sale of senior unsecured notes. At the same time, El Paso said it will transfer ownership of its 50% interest in the Great Lakes Gas Transmission pipeline to ANR at a fair-market value of about $400 million. ANR is expected to use $267 million of the proceeds from the note offering to reduce loans owed to El Paso, and separately ANR will cancel $400 million in intercompany receivables with El Paso. ANR is expected to retain $25 million of the proceeds from the note for its 2003 capital projects.

Both transactions will provide El Paso with "some immediate liquidity," said El Paso's Austin. Plus, he noted it puts the ownership of the pipelines in the hands of companies that are situated closer to the FGT and Great Lakes' facilities. Citrus and Sonat are located in the Southeast, while ANR and Great Lakes serve the Midwest region.

As for the sale of the Mid-Continent assets, Chesapeake Energy reported it will pay El Paso $500 million for an internally estimated 328 Bcfe of proved natural gas reserves, 70 Bcfe of probable and possible gas reserves, 293,000 leasehold acres and current production of 67 MMcfe/d. The El Paso proved reserves have a reserves-to-production index of 13 years, are 96% natural gas (or natural gas liquids) and are 71% proved developed (see Daily GPI, Feb. 25). The deal is expected to close in March.

Along with the El Paso pipeline note offerings and planned Mid-Continent reserve sale, El Paso said Tuesday it obtained a new $1 billion financial commitment in order to retire the projected $825 million net balance of its Trinity River financing in March of this year. The financing commitment was arranged by Salomon Smith Barney and Credit Suisse First Boston.

In addition, the company said it sold its European natural gas trading book for an estimated $80 million, including recovery of cash collateral. It declined to identify the buyer.

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