| El Paso Faces Bankruptcy Threat on Pipeline Case, Investors Say
By Jim Polson
Houston, Nov. 30 (Bloomberg) -- El Paso Corp., already selling assets to pay bills, faces potential bankruptcy should federal regulators determine the largest U.S. pipeline owner manipulated natural-gas prices, analysts and investors said.
That's how high the stakes may be when the Federal Energy Regulatory Commission holds a hearing Monday on claims by California and the regulator's chief administrative law judge that El Paso withheld gas during the state's energy crisis two years ago, sparking a 20-fold increase in prices. California is seeking at least $3.7 billion in refunds and penalties.
``Their survival is at stake,'' said Jon Kyle Cartwright, a Raymond James & Associates analyst who rates El Paso's debt ``avoid'' and doesn't own its stock or bonds. ``If the commission decides El Paso was manipulating prices, then the company will find it very difficult to win any lawsuit brought against them by the state of California, shareholders or bondholders.''
Houston-based El Paso denies any wrongdoing. Moody's Investors Service this week cut its rating on $25 billion of El Paso debt cut to junk status. The cut came at a time when the company needs cash after losses in energy trading, a business that collapsed following the bankruptcy of Enron Corp. a year ago.
Separate Lawsuits
El Paso's lawyers will urge the commission to reject the findings of FERC Chief Administrative Law Judge Curtis Wagner, who said the company reduced deliveries on a pipeline that supplies 42 percent of California's gas. Prices rose above $50 per million British thermal units in December 2000, compared with about $2.50 a year earlier.
``It's a key issue not to be found to have behaved improperly by FERC,'' said Kathleen Vuchetich, who helps manage about $1 billion at W.H. Reaves & Co., which sold its El Paso shares on Sept. 23, the day Wagner's findings were disclosed. ``El Paso couldn't withstand all the civil liability that would come out of California if they were found guilty by FERC.''
The company faces 11 separate lawsuits alleging that it helped inflate energy prices in California, El Paso said in a filing this month. Some of the suits seek triple damages.
FERC's probe of El Paso's conduct predates investigations of alleged abuses in electricity trading. Power prices in California surged 10-fold during the winter of 2000 and 2001.
Scrutiny of the power and gas industries intensified after Enron, once the largest energy trader, collapsed and disclosed such trading tactics as misleading regulators and the market about supply and demand.
Calls for Collateral
Moody's dropped El Paso's credit ratings to Ba1, one level below investment grade, which triggered calls for collateral by lenders. The added collateral won't exceed El Paso's $1.5 billion in cash and available credit, the company said. Moody's indicated an unfavorable ruling by the commission may trigger another rating downgrade.
A finding by the commission of wrongdoing will make it harder for El Paso to refinance debt, investors said. The company has $2 billion in debt slated to come due next year, Moody's said. El Paso plans to sell $2 billion in assets next year, after an expected $4 billion this year.
``I would like to think that the judge will be reversed by FERC, but the best that will probably happen is that some of it will be set aside,'' said James Halloran, who helps manage about $24 billion at National City Private Client Group, including 934,000 El Paso shares. ``If they find them at fault for some portion, it could look bad for them going into court.''
El Paso's shares have fallen 81 percent this year, wiping out almost $22 billion in market value. Yesterday, the stock fell 3 cents to $8.52 in New York Stock Exchange trading.
Non-Essential Maintenance
El Paso has insisted its California pipeline delivered as much gas as it could safely, given colder weather, higher demand and an August 2000 explosion on the pipeline in Carlsbad, New Mexico, that killed at least 11 people.
The California Public Utilities Commission first brought allegations against El Paso to federal regulators in April 2000. The state commission said the company's trading arm, El Paso Merchant Energy, signed three contracts with the El Paso pipeline for gas-carrying capacity, raising concerns over possible affiliate abuse.
The contracts resulted in California's gas and electricity users being overcharged by $3.7 billion, said Kevin Lipson, a lawyer for Southern California Edison, the state's second-largest utility. About two-fifths of California's electricity last year came from gas-fired generators.
Wagner said in his ruling that El Paso's pipeline unit withheld at least 10 percent of the capacity it promised to California in 1996, ``and perhaps much, much more.''
The unit reduced capacity by doing non-essential maintenance, expanding deliveries to other states and Mexico, failing to refer customers to an alternate route, and by not running the line at its maximum allowable operating pressure, Wagner's report said.
The Law and the Facts
``You can't have regulators second-guessing day-to-day decisions pipelines make that could affect safety,'' said Rusty Cates, a vice president at International Gas Consulting Inc. in Houston, which performs engineering analysis for pipelines, including El Paso's. ``Wagner is the chief of the FERC administrative law judges, but he's not a pipeline engineer.''
FERC probably won't fine El Paso more than $10 million, said Halloran, the National City investor. Cartwright, the Raymond James analyst, said the commission won't rule as harshly as did the administrative law judge.
``The judge had to decide on the law and the facts,'' Cartwright said. ``The commission will make a political decision, and they will take into account that El Paso could be chased into bankruptcy.'' |
