EPG has been using Limited Partnerships to finance projects
while keeping the debt off of the balance sheet.
There is an interesting quote in the below article: some of
independant power producers are trading below private market
value of their assets.
Private market value is a benchmarket that several
fund managers such as Bill Nygren use when purchasing
stocks.
He and his colleagues at Chicago-based Harris Associates are value managers who buy shares of a company only when it's trading at 60% or less than what they think it's really worth. Nygren has run the focused and now closed Oakmark Select fund since its 1996 launch, and its 28% annualized gain over the past five years tops all mid-cap value funds and ranks third in the entire fund universe.
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El Paso Dn 9%; Off-Balance Sheet Funding Raises Concerns
By Christina Cheddar
Of DOW JONES NEWSWIRES
December 11, 2001
NEW YORK -- Fallout from Enron Corp.'s (ENE) financial troubles continue to hurt the stocks of other companies with energy trading operations, as these companies are receiving closer scrutiny from investors.
Earlier Tuesday, shares of El Paso Corp. (EPG) sold off briskly after a media report discussed how El Paso raised money for projects using <b.off-balance sheet financing vehicles.
Although the media report didn't contain any information that hadn't been released by the company before, some investors obviously were concerned by the comparison it drew between El Paso and Enron.
El Paso shares were recently trading at $38.60, down $3.30, or 7.8%, on volume of 16.1 million, compared with the stock's average daily turnover of about 3 million shares. At this level, the stock has rebounded from a 52-week low of $35.00 set earlier Tuesday morning on the New York Stock Exchange.
Enron used a number of i>special-purpose entities to keep debt off its balance sheet. These financing vehicles, which were in some case run by Enron's management, are now under investigation by the Securities and Exchange Commission.
Revelations about Enron's off-balance sheet vehicles also set in motion a series of events that culminated in bankruptcy filings by more than a dozen Enron units, including its core wholesale energy trading operations.
El Paso spokeswoman Norma Dunn attributed the decline in El Paso shares Tuesday to the market's current uneasiness toward special-purpose financing vehicles. She added that it was important to note the differences between the way El Paso and Enron structured these vehicles. Off-balance sheet financing is provided for under the guidelines established by Generally Accepted Accounting Principles.
According to Dunn, the debt of El Paso's financing vehicles is fully supported by the cash flow from the related projects.
"There is no change in our financial position," Dunn said. "We have very solid cash flow." She added, the company also was "very comfortable" with the current estimates for the El Paso's fourth quarter.
A survey by Thomson Financial/First Call estimates El Paso will earned 81 cents a share in the fourth quarter. A year ago, El Paso earned 78 cents a share during the same period.
In early November, as revelations were trickling to the market about Enron's financial structure, El Paso outlined its off-balance-sheet financing vehicles with analysts and investors at a meeting in New York.
The pipeline company has two special-purpose vehicles, Electron, or the Limestone Electric Trust, and Gemstone, which funds El Paso's Brazilian power-generation business. Electron provides funding for a power project organized under the Public Utility Regulatory Policies Act, or PURPA.
None of El Paso's executives has an ownership interest in either vehicle.
El Paso would be responsible to pay back debt owed by Electron if its stock falls below $27 a share and its credit rating, which is now three notches above non-investment grade, is downgraded to junk status.
Gemstone also has triggers for the repayment of debt. These conditions are a drop in El Paso's stock price to below $36 a share, and the downgrade of its debt to non-investment grade.
Analysts said they don't see a downgrade of El Paso's debt looming on the horizon.
UBS Warburg analyst Ron Barone said he felt Tuesday's concerns were overdone, and created a buying opportunity for investors. "It's much ado about nothing," he said.
Barone rates El Paso a strong buy with a 12-month price target of $65.
Basu Mullick, portfolio manager of the Neuberger Berman Partners Fund, owns El Paso shares, and said he believes the company has "well disclosed" the facts of its off-balance-sheet financing vehicles.
"These are not new stories," Mullick said. "This is the worst financial market.... when uninformed investors trade aggressively."
According to Mullick, the Enron debacle has forced him to take a harder look at the energy-trading companies in which he invests.
"I want to understand more about the balance sheet of the companies, and more about their cash flow. I'm trying to make sure there is more there than the qualified opinion of a sell-side analyst." Still, he said he is confident of the stocks he owns in the group, which includes Dynegy Inc. (DYN) and Williams Cos. (WMB) as well as El Paso.
J.P. Morgan analyst Anatol Feygin said he has been "amazed" by the market's reaction to what he called, "old news," and said it was an indication of how "skittish" the market is now.
On Monday, investors drove down shares of Calpine Corp. (CPN) almost 17% after an article in The New York Times on Sunday drew comparison between Calpine and Enron.
In a conference call Monday, Calpine management called the comparisons "ridiculous," citing the difference in the company's businesses models.
Still, Calpine shares were down again Tuesday, shedding another 92 cents, or 5.2%, to $16.87.
Other stocks in the sector, including NRG Energy Inc. (NRG) and AES Corp. (AES), have been under pressure in recent weeks. NRG shares recently traded down 5.7% at $13.30, while AES shares fell to $13.98, down 77 cents, or 5.4%. By comparison, NRG shares hit a high of $37.70 in March. In February, AES shares traded as high as $60.15.
In fact, the shares of many independent power producers are trading at a discount to the private-market value of the companies' assets, which means the market isn't assigning any value to the companies' trading and marketing operations. |
