El Paso Corp.’s quick response to negative reports about its off-balance sheet transactions may have stopped its stock from sliding even further Tuesday, finally closing down almost 7% to $39.17. The stock had slid to almost $36 early in the day after rumors surfaced that the Houston-based company had conducted related-party deals similar to those conducted by bankrupt Enron Corp.

El Paso had disclosed its related transactions in a Securities and Exchange Commission (SEC) filing in November, noting it was responsible for $950 million worth of debt if a partnership failed to make bond payments or the company’s shares fall below $36.16 and the bond rating drops to junk. El Paso’s Standard & Poor’s credit rating is three levels above junk status, but its stock price has fallen in the past few days. Enron’s S&P credit rating was at the same level in early October, and its fall was sparked by revelations of liabilities from off-balance sheet partnerships.

El Paso officials have said they could write a check immediately to cover the $950 million if necessary. The focus on El Paso’s finances is the latest ricochet off Enron’s financial troubles. San Jose, CA-based Calpine Corp. in recent days has also faced increasing scrutiny in comparisons with Enron (see Power Market Today, Dec. 11), and has seen its stock fall almost 17% this week.

According to the SEC quarterly report filing, El Paso used affiliated partnerships to sell $1 billion in bonds in 2000 and almost $950 million in October 2001. Last month, El Paso Chairman William Wise explained the company’s two related-party entities, Gemstone and Project Electron (see Daily GPI, Nov. 9).

Project Electron, formed in 2000, owns U.S. power plants that have been acquired and restructured by El Paso. Gemstone is an entity that owns El Paso power plant assets in Brazil. The SEC filings indicated that Project Electron has $2.3 billion in current value and $1.3 billion in debt for Project Electron assets.

Gemstone was financed by El Paso with $300 million in equity capital, giving it title to five El Paso power plants. Dutch banker Rabobank Nederland contributed $50 million into Gemstone to gain a 50% partnership stake. According to El Paso, the partnership’s profit follows payment to bondholders and is split according to the paid-in capital. El Paso would receive 86% of the profit; Rabobank would receive 14%. The 50% stake for Rabobank allowed El Paso to keep the debt off of its balance sheet. The November 2001 SEC filing showed Gemstone had $1.3 billion in asset value and $950 million in debt.

As executives indicated last month, the El Paso partnerships are unlike Enron’s because El Paso has hard assets to back them up. Ralph Eads, president of El Paso Merchant Energy Group, said Enron’s transactions used assets that were declining in value while El Paso’s assets are “creditworthy and have long-term power supply contracts.” Also, El Paso said that no officer or director in the company profited from Gemstone or any trading company assets.

If El Paso’s stock were to fall and trigger payment for the bonds, Eads said El Paso “could write a check tomorrow” to cover the debt. Enron was not able to do that because most of its hard assets were already debt-ridden.

Credit Suisse First Boston analyst Curt Launer said Tuesday that there was no similarity between El Paso and Enron regarding off-balance sheet partnerships, calling the comparisons “completely off base and evidence of a lack of understanding of the value of El Paso vehicles.” As Launer pointed out, El Paso has been forthright in explaining “every aspect” of Project Electron and Gemstone, and added that the debt ratings agencies have already included El Paso’s transactions in their ratings.

“We consider it inappropriate that El Paso has been subjected to increased scrutiny of these off-balance vehicles in light of the Enron situation. However, our analysis shows that none of the negative consequences created or suffered by Enron are similar to El Paso’s situation.” Credit Suisse rates El Paso a “strong buy” with earnings estimates of $3.30 per share in 2001 and $3.70 per share in 2002 with a target price of $70.

UBS Warburg analyst Ronald Barone also discounted the bad press about El Paso. “This company is not an Enron,” said Barone. “There is now an excellent buying opportunity in EPG shares,” he said, adding that El Paso is “a credible company, with quality assets and a well-regarded management team.”

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