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El Paso to Remove Off-Balance Sheet Debt, Sell Gulf, Midcontinent, Rockies Assets
As part of a massive overhaul of El Paso Corp., conceived by the management team after the stock fell amid rumors of dubious debt transactions (a la Enron Corp.), the company made two major announcements last week: it simplified its balance sheet to remove any off-balance sheet debt, and it announced it will divest itself of $2.25 billion in assets by the second quarter in the Gulf of Mexico, Midcontinent and the Rocky Mountains to enhance its liquidity.
In a conference call to boost investor confidence, Ralph Eads, president of the El Paso Merchant Energy Group, the assets are “things that we would have sold previously, but were not in a position to do.” CEO William Wise noted that El Paso’s earnings into next year would be “less attributable to divestitures and a reduction in capital and mostly in (cutbacks) in the international power business.” Wise added that 80% of El Paso’s earnings before interest and taxes are “things we can point to with specificity.”
Though the company has not specifically announced which assets it will divest in the next two quarters, Eads included these locations on the short list:
El Paso also is divesting some Texas midstream assets to its master limited partnership. These assets include the sale of EPGT Texas Pipeline (GTT) — formerly PG&E Gas Transmission Texas and before that Valero — to El Paso Energy Partners LP (EPN). Also to be sold are some refinery assets, including the Eagle Point refinery and some coal assets that had been part of The Coastal Corp. (which has since merged with El Paso).
The GTT assets include the largest intrastate pipeline in Texas, a strategically located gas storage facility, and numerous natural gas processing plants. GTT was purchased from PG&E by El Paso in December 2000 for $840 million. In January 2001, El Paso sold to EPN its GTT South Texas natural gas liquids business for $133 million. “Based on preliminary discussions with El Paso, EPN expects to acquire the remaining GTT assets in early 2002,” El Paso Energy Partners LP said in a statement Wednesday.
Even with the projected asset sales, Eads said that production in 2002 will increase about 2%, reaching 660 Bcfe/d with a capital budget of $1.7 billion. “The budget is oriented toward drilling and drilling opportunities,” said Eads. He said El Paso views its exploration and production unit “as a bank,” and expects the unit to generate more than $1 billion next year.
Operationally, he said El Paso is on track to add 1.5 Bcf from its Gulf of Mexico and South Texas properties. “We have 400 Bcfe in South Texas fields alone…136 locations left and most of those are not booked. We feel very good about our ability to sustain our production in South Texas,” and he added that the company’s Santa Fe field was the “best we’ve ever found.”
As part of its simplified accounting plan, El Paso will reduce its capital spending to $3.1 billion in 2002 from $5 billion in 2000 to generate free cash flow in excess of $1.5 billion in 2002. In addition, it plans to increase common equity by at least $1.3 billion through a combination of retained earnings and equity financings. And it will eliminate or renegotiate the rating triggers in certain financings.
The company said this plan will reduce its debt-to-capital ratio from 56% to 50% by the end of 2002 and will simplify its financial structure. The lowered debt-to-capital ratio reflects $2 billion of off-balance sheet debt associated with the Project Electron and Gemstone financings coming onto the company’s balance sheet. El Paso said it expects the plan to ensure that it will have stronger and more stable credit in the energy industry.
Based on current commodity prices, El Paso predicts earnings of $3.30 per share this year, which is about 3 cents per share lower than Wall Street consensus estimates, according to Thomson/First Call, and it expects to achieve earnings per share in the range of $3.40 to $3.55 in 2002, compared to Wall Street estimates of between $3.60 and $3.85.
“The credit requirements in our industry have changed and we have decided to implement a plan to respond proactively to that change,” said Wise. “In particular, last Friday (Dec. 7), one of the major credit rating agencies announced a new posture toward ratings triggers in financings and we are addressing those changes. We are in a strong position to reduce liabilities quickly and simplify our capital structure. We have the assets, cash flow and liquidity from banks to prosper in this changed environment and move forward to secure an even stronger market position. We believe this plan positions us for 10-15% long-term earnings growth.”
Wise added that El Paso remains an “asset and cash flow-rich” company. He said the company’s assets have generated $4 billion in net operating cash flow year to date. “Our strategy continues to be centered around owning and operating quality assets, as evidenced by our ongoing investments in infrastructure across the energy value chain from pipeline expansions to power generation facilities.”
El Paso’s assets include 58,000 miles of interstate pipeline and associated storage facilities, 24,000 miles of gathering and intrastate pipelines, and 35 processing and treating plants. Domestically the company generates 6,974 MW of power and has more than 6 Tcfe of gas reserves.
In reaction to El Paso’s announced intentions, Moody’s Investors Service confirmed the company’s debt ratings and affirmed its rating outlook as stable. “Although there is execution risk, our ratings anticipate that a substantial part of these initiatives will be completed by end of the first quarter 2002 as planned,” Moody’s said. “The company’s rapid growth, which includes the equity-financed acquisitions of Sonat Inc. in 1999 and Coastal Corp. early this year, has resulted in rising debt levels, including off-balance sheet financings.” But Moody’s noted that El Paso has a “deep and diverse portfolio of assets which could be sold.”
Moody’s also said because of El Paso’s lower spending plans it should be able to finance its entire capital program from its internal cash flow of about $4 billion. “This reduction should result in surplus cash that could be applied to paying down debt or for other uses.”
Moody’s said that El Paso’s book equity is understated, because the Sonat and Coastal acquisitions were accounted for under the pooling method. “El Paso currently has $4 billion of financings, both on- and off-balance sheet, that contain rating triggers. About $2 billion of it is associated with share trust financings that are accounted for as off-balance sheet (and which Moody’s includes in its leverage analysis), and the rest is associated with certain financings that are treated as minority interest on the balance sheet, but that Moody’s believes have debt attributes. El Paso’s plan to eliminate or renegotiate certain of those rating triggers stabilizes its credit quality, because such rating triggers could worsen a company’s liquidity or financial position at a time when its credit is faltering.
“El Paso’s near-term liquidity position is sufficient,” Moody’s said. “Its core businesses — regulated pipelines, E&P, field services, merchant energy activities — generate ample cash that should be able to meet substantially all its needs.”
Meanwhile, El Paso Energy Partners LP reaffirmed its earnings expectations of $12 million to $17 million for the fourth quarter 2001 and $55 million to $60 million for the full year. For 2002, EPN expects net income to increase to $70 million and cash flow to exceed $230 million. EPN also reaffirmed its expected capital investment budget for 2002 in the range of $500 million to $750 million. Included in this budget is the anticipated acquisition of additional midstream assets from El Paso Corp., such as the EPGT Texas Pipeline (GTT). EPN owns five offshore pipelines, a salt dome storage facility in Mississippi, a gathering system in Alabama, more than 600 miles of natural gas liquids gathering and three fractionation plants in South Texas, and a gas processing facility in the San Juan Basin of New Mexico.
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