Acknowledging some positive momentum in the company’s credit while noting that “significant uncertainties” remain in the next year to 18 months, Moody’s Investors Service on Monday assigned a first-time “Speculative Grade Liquidity” rating of SGL-3 to El Paso Corp.

Moody’s liquidity ratings go from SGL-1 through SGL-5, with an SGL-1 the best liquidity rating and an SGL-5 reflecting poor liquidity.

Moody’s also confirmed El Paso’s existing ratings, and changed its rating outlook to “developing” from “negative.” It also assigned a “B3” senior secured rating to El Paso’s $3 billion revolving credit facility due in 2005. And, El Paso Production Holding Co.’s outlook has been changed to “developing” from “stable.”

Moody’s said that the change in outlook noted some uncertainties that could cause the company’s ratings to be upgraded, confirmed or even downgraded in the next 18 months.

“Much of this uncertainty is in EP’s significant cash burn rate,” said analysts. “In the quarter ended March 31, EP recorded roughly $90 million in negative cash flow from operations against gross capex of $717 million. The company has been making up its cash deficits through asset sales ($1.6 billion closed to-date this year), debt issuances ($1.9 billion to-date), and borrowings under its credit facilities.”

Analysts said El Paso’s ratings could be revised downward “if it is unsuccessful in narrowing its cash burn rate through containing its working capital and capital expenditures.” However, Moody’s noted “recent positive developments, including the renewal and extension of its revolver that dims the specter of insolvency and clarity gained from the settlement of lawsuits related to the western energy crisis and the conclusion of a close proxy battle.”

The SGL-3 rating, said analysts, reflects: 1) El Paso’s internal cash sources that appear adequate to cover its base cash needs over the next 12 months; 2) minor outstanding amounts on the $1 billion credit facility (zero outstanding advances and $100 million in letters of credit expected to be rolled over to its $3 billion revolver), obviating a major cash repayment at its maturity in August; 3) a sizable cash balance ($1.4 billion currently); 4) sufficient covenant cushion that helps to ensure continued access to its revolver; 5) relief from renewal risk on the revolver for another two years; and 6) substantial assets that could be either sold or encumbered to raise cash.

However, Moody’s noted that El Paso’s liquidity shows weakness in several areas, including: 1) a high degree of variability and unpredictability in its working capital requirements that cause free cash flow deficits; 2) capital expenditure levels that are proving to be difficult to reduce and persistently above forecasts; 3) very little availability left on its $3 billion revolver ($200 million of availability expected when its term loan matures next month); and 4) execution risk involved in meeting any cash flow shortfalls with asset sales and bank and capital market borrowings.

“In addition to operating and investing cash needs, EP has a substantial amount of debt maturing in the intermediate term as well as cash obligations related to its recent settlement with the western states.”

The corporation’s ratings could be downgraded, said Moody’s, if it is “unable to narrow the gap between operating cash flow and capex over time, its operating cash flow falls appreciably below its projections and cash balances deplete more quickly than expected.”

Conversely, its ratings could be upgraded “should asset sale proceeds or capital market offerings raise its cash balances to levels well above its plan, or if there is a sustained improvement in net cash flow, including a reduction in the variability of EP’s working capital requirements.”

Capital expenditures, said analysts, remain “stubbornly high and consistently above recent forecasts. Much of this variance in spending has been in [exploration and production], whose reserve profile demands substantial reinvestment to offset very rapid well declines.” Moody’s said El Paso had spent “roughly $717 million, roughly a quarter of its 2003 budget, in the first quarter of 2003.”

The SGL rating “anticipates some reduction in spending from elimination of capital requirements related to assets that have been sold; however, EP has yet to demonstrate a permanent reduction in capital spending.”

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.