Houston-based El Paso Corp. sent an e-mail to investors and industry analysts Monday in an attempt to dispel rumors that its off-balance sheet arrangements were “negatively impacting” the company’s stock. The company took this action after its stock nose-dived on Wall Street last week following an unfavorable ruling from a Federal Energy Regulatory Commission judge about El Paso’s pipeline.

But despite the assurances, Moody’s Investors Service moved Wednesday to downgrade the debt ratings on senior unsecured debt and bank credit facility from Baa2 to Baa3, for El Paso Corp. and its subsidiaries, and placed the ratings under review for further downgrade. In taking this action, Moody’s cited the low level of the company’s cash flow compared to its “substantial debt;” its belief that El Paso’s ability to improve its recurring cash flow in the near term will be challenged by the severe downturn in the merchant energy sector; and its concerns about litigation arising from the FERC judge’s finding that El Paso Natural Gas withheld large amounts of pipeline capacity to drive up gas prices in California during 2000-2001.

Even with a bleak cash-to-debt ratio, Moody’s said it believes El Paso has adequate liquidity to meet its “foreseeable near-term obligations.” The company “has maintained its cash balances at about $1 billion, net of about $250 million of commercial paper outstanding.”

El Paso stock took it on the chin again in the wake of the downgrade, falling by $1.90 a share to close at $6.90 Wednesday. The company’s stock traded at $54 a share a year ago.

El Paso investors were biting their nails even before Moody’s acted. “Some investors stated…they received a short-sell recommendation report that suggested that El Paso has a multitude of off-balance sheet entities with debt that could become recourse to the company,” El Paso said in a Sept. 30 e-mail seeking to quell investors’ concerns, which was filed with the Securities and Exchange Commission (SEC). The company noted it has been above-board with its investors about the arrangements, previously reporting that it guaranteed $1.95 billion of senior secured notes of two off-balance sheet entities, Gemstone and Electron (Limestone).

“Both of these financings have been disclosed in our SEC filings, [at] analyst meetings and conference calls, and we include those guarantee obligations as debt when discussing our obligations.” Also, “we have provided a thorough disclosure of our other guarantees and support obligations in our 10-K [filing]” with the SEC.

El Paso “does own interests in numerous unconsolidated affiliates (mostly power) that have project finance debt; however, that debt is generally non-recourse to El Paso, except as reported in our financial statements,” it assured investors and analysts. The Electron debt (Limestone notes) will mature on March 15, 2003, and “we expect the joint venture to retire it on schedule,” the company said. The Electron joint venture “will be terminated simultaneously with, or prior to, the retirement of the debt.”

El Paso said it intends to consolidate Electron assets and liabilities on its corporate balance sheet in the first quarter of 2003. “We do not believe this will have a negative credit impact on the company,” it noted, adding that it will address the consolidation in “greater detail” during it third-quarter earnings conference call.

The energy company sought to dispel “rumors…that we have guaranteed the returns for the Electron and Gemstone equity investors, as well as other ‘undisclosed’ financings.” Equity investors in Electron and Gemstone face “real equity risk,” but “we do not have any financings in which we provide credit support through an obligation to issue El Paso common stock to such equity investors.”

In July, El Paso reported it completed the removal of ratings triggers that would have required the immediate repayment or issuance of equity of $4 billion associated with Electron, Gemstone and two minority interest financings, Trinity River and Clydesdale. Because a small portion of Limestone note holders did not exchange their notes for El Paso-guaranteed notes, “we continue to have contingent equity support for less than $1 million of Limestone notes currently outstanding.”

El Paso also has a ratings trigger associated with its $300 million minority interest financing in El Paso Energy Capital Trust IV. “We have not removed that trigger due to the size of the financing and its 2003 maturity,” it said.

“Our announced [$5 billion] asset sale program is on schedule. While there are a lot of assets on the market, we possess a number of valuable assets that we believe will bring sufficient value to allow us to reach our debt reduction.” El Paso already has sold $1.8 billion of assets since last December, and expects to sell an additional $1.5 billion during this quarter (excluding the $782 million of assets it will sell to El Paso Energy Partners LP, its 26% owned master limited partnership affiliate). The company anticipates approximately $1.3 billion of sales next year.

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