The common stock price of El Paso Corp. took a massive hit again Tuesday, as the ratings agencies focused on the adverse FERC administrative law judge decision of Monday (see Daily GPI, Sept. 24). Standard & Poor’s placed El Paso and its affiliates on CreditWatch with negative implications, and Moody’s also initiated a review for possible downgrade.

At the same time the California Public Utilities Commission (CPUC) felt “vindicated” by a Federal Energy Regulatory Commission ALJ’s ruling that the El Paso Natural Gas pipeline used its market power to drive up prices at the California-Arizona border. It noted, however, that the final decision and consumer refunds are still to be determined in the next phase of the proceeding.

“California’s natural gas customers really suffered during the winter of 2000-2001, and we’ve waited 2 ½ years for this ruling,” said Harvey Morris, principal CPUC counsel who headed the case at FERC. “But we won’t be satisfied until we get rate relief from FERC for California consumers, and we look forward to the remedy phase of this complaint proceeding at FERC.”

It is also still is up to the full Commission to endorse or reject the judge’s decision. El Paso Chairman William Wise strongly criticized the decision Monday and indicated the pipeline will argue against it before FERC. Beyond a final FERC decision would be a potential appeal to the courts.

El Paso’s stock fell another 29% to $5.30 Tuesday, after dropping 35% — or more than $4 — in trading Monday.

CreditSights analyst Dot Matthews pointed out that if FERC adopts Wagner’s findings as its own, it would likely result in a hefty fine, “as we doubt FERC could let this go with a wrist slap. It would also give some validity to a lot of private lawsuits.”

While El Paso has denied the judge’s finding that it withheld pipeline capacity during the critical time in November 2000 through March 2001, Matthews noted that ALJ Curtis Wagner is FERC’s chief judge, not “some bureaucrat just brought in for a day to make an off the wall ruling. FERC can still disagree, but we are a lot more concerned than if it were another, less knowledgeable, judge.”

UBS Warburg’s Ron Barone continued his “Buy” rating on El Paso, reflecting its “asset heavy/cash flow generating portfolio” and “currently severely depressed valuation,” but noted it expects the FERC case “will now be a long and drawn out process with significant political pressures.” The UBS update notes El Paso’s response to the decision, pointing to inconsistencies in the judge’s stated capacity of the lines, potential double counting of sections of capacity and upstream/downstream and Transportation Department limitations on throughput. Barone projects a full Commission ruling in the first quarter of 2003 with the issue not finally resolved until mid-2004, barring a settlement.

Prudential Financial labeled Wagner’s decision “politically motivated,” and lacking “consistency, motivation and logic.” That company also retained it Buy rating, but noted “there are significant regulatory litigation and media risks in the stock, and we recommend that only risk-tolerant investors consider EP at this time.” Prudential criticized the general media’s handling of the story, reporting it as a FERC decision instead of an ALJ recommendation.

Prudential’s energy team, headed by Carol Coale, also noted the relatively small amount of capacity and profits involved and questioned its impact on the market.

S&P’s credit analyst, John Whitlock said “the CreditWatch with negative implications listing for the El Paso family reflects the market uncertainties regarding sustainable cash flow and the current regulatory environment.”

Moody’s listed eight points its review of El Paso’s rating (Baa2 senior unsecured) will focus on:

The rating service noted that industry conditions and a large production hedging program have caused El Paso’s energy merchant segment to be a net consumer of cash in the first six months. “Moody’s will assess the impact of EP’s efforts to downsize its merchant energy activities and to curtail working capital allocated to them.”

Moody’s notes that EP’s near-term liquidity appears sufficient.

After 10 weeks of hearings before the ALJ and extensive briefs by all of the parties, the CPUC said FERC’s Wagner found that El Paso exercised market power. In his initial decision, the ALJ found that El Paso had exercised market power by withholding “extremely large amounts of capacity that could have flowed to California delivery points in violation of its certificate obligation and … its 10-year settlement agreement which substantially tightened the supply of natural gas at the California border significantly broadening the basis differential.”

The latest proceeding was directed by FERC after Wagner in an earlier case originally found no fault with El Paso (see Daily GPI, June 12, 2001). The Commission ordered the judge to go back and do it over and also expanded the scope of the investigation.

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