Still smarting from an unfavorable ruling at FERC and its droopy stock price, embattled El Paso Corp. last week tried to assure investors that its liquidity position remained “strong” after Moody’s Investors Service compounded its troubles by lowering the rating on the company’s $23 billion in debt to near junk status.

Moody’s downgraded the 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 the action, Moody’s cited concerns about the low level of El Paso’s cash flow compared to “substantial debt,” although it acknowledged the company’s liquidity appeared to be adequate to meet its “foreseeable near-term obligations.” Moody’s estimated El Paso’s cash balance at about $1 billion, net of $250 million of commercial paper outstandings, and said the company also would have access to a $3 billion bank facility next May.

As of Sept. 30, El Paso pegged its net available liquidity at a slightly higher amount of $4.5 billion, including $1.3 billion in cash and $4 billion in bank facilities (minus $800,000 of commercial paper outstandings and other demands).

Moody’s said it believed El Paso’s ability to improve its recurring cash flow in the near term would be challenged by the severe downturn in the merchant energy sector. It also signaled it was concerned about potential litigation arising from a FERC judge’s finding last month that subsidiary El Paso Natural Gas manipulated natural gas prices in California by withholding large amounts of pipeline capacity during 2000-2001.

El Paso’s stock has taken a beating on Wall Street in the wake of the FERC judge’s decision. It closed at $6.49 a share Friday — a far cry from the $54 that it went for a year ago.

Responding to Moody’s action, the Houston-based energy company said it has made “significant progress in strengthening its financial profile and creditworthiness” over the past 10 months. It noted it has issued $2.5 billion of equity securities, completed or announced $2.5 billion in asset sales, eliminated $4 billion of rating triggers and reduced costs by approximately $300 million. El Paso plans to sell another $2.5 billion in assets this year and next.

“El Paso is disappointed that Moody’s rating action appears to be influenced by the market uncertainty created by the recent proposed decision by a Federal Energy Regulatory Commission Administrative Law Judge,” the company said. The judge recommended that the full Commission take penalty action against El Paso, possibly in the form of refunds.

“El Paso believes that this decision is fundamentally flawed and will be overturned” by the full Commission, which has the option to accept or reject in full or in part the FERC judge’s ruling. FERC Chairman Pat Wood has indicated the agency will issue a final ruling in the high-profile case by the end of the year.

“If the order is unfavorable, the company is likely to pursue a rehearing by the FERC and, if necessary, an appeal in the federal courts,” Moody’s said. “While the ultimate impact of these proceedings will not be known for some time, they could potentially bring about other litigation and proceedings that could have a negative effect on El Paso’s financial position or business operations.”

El Paso investors were biting their nails even before Moody’s acted last week. “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 to investors and analysts, seeking to quell their concerns and market rumors. 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,” it said in the e-mail that was filed with the Securities and Exchange Commission (SEC). Also, “we have provided a thorough disclosure of our other guarantees and support obligations in our 10-K [filing].”

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.

Lastly, “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,” the company said.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.