IN THE MONEY: Banks Key Piece In El Paso Liquidity Puzzle
01 Apr 07:20
By Steven D. Jones
Of DOW JONES NEWSWIRES
VANCOUVER, Wash. (Dow Jones)--Liquidity is improving at El Paso Corp. (EP),
but renegotiating bank debt is still the key for revival of the Houston gas
exploration and pipeline company.
On Friday, the company had $1.5 billion in cash. It had an equal amount of
available bank credit, giving it total liquidity of $3 billion. That was a $400
million improvement over liquidity at the end of January and the prospects
helped boost the stock Monday to $6.05 at the close, up 15 cents or 2.5% on the
day.
The Houston company, which has been hammered by the demise of merchant energy
business, lost $1.7 billion, or $2.92 a share, last year. In response, it is
returning to its roots and taking "the steps necessary to strengthen our
financial position," Ronald Kuehn, chairman and chief executive, told analysts
in a Monday morning call.
El Paso has sold assets to raise cash. But its annual report filed just after
the earnings call shows that even though the trading business is shrinking
fast, it is consuming cash as it does so.
Liquidity is improving, but some of the improvement is the result of
increased borrowing. The turnaround is going to take time and cash, which makes
the talks to renegotiate a $3 billion revolving loan agreement maturing in May
even more important.
"We are working hard with the banks," Dwight Scott, chief financial officer,
told analysts on the call. He wouldn't discuss progress of the talks, but said
El Paso has "collateral we can offer them that makes the deal work."
In the fourth quarter, El Paso's debt increased by $1 billion. Debt to
capital, as defined by its lending agreements, stood at 63%. But compared with
total obligations, it stood at 72%.
El Paso had $600 million in cash at the end of January. It has received $1.2
billion in cash from asset sales since then for a total of $1.8 billion.But on
the conference call, Scott said that cash on hand on Friday was $1.5 billion,
or $300 million less.
In response to questions during the call, management said that cash flow from
operations was entirely consumed by capital spending during the period. So that
means if the cash wasn't spent on capital projects, it was consumed as working
capital by the business during February and March.
A company spokesman said El Paso is trying to "minimize" its use of working
capital, but the demand varies depending on prices for gas and oil. "As we exit
businesses such as petroleum that are users of working capital, we will not
have those demands."
Energy Marketing And Trading Unit Eats Cash
One of the businesses consuming cash is El Paso's energy marketing and
trading unit. Trading drove El Paso profits to record levels in the past. Now
tearing apart the web of 40,000 contracts, some of them involving both gas and
electricity moving among several parties, is expensive.
In late November, credit rating agencies lowered El Paso debt to junk status.
The moves demanded El Paso pump about $2 billion in capital into its trading
and marketing business to back up its positions with counter parties.
The company satisfied the demand with cash on hand and pulling down $1.5
billion of the $3 billion revolving loan facility that matures in May.
Now the company is trying to settle, close or otherwise unwind a large share
of that business and get the capital back. But doing so in time to meet the May
deadline on the revolver is not possible, so El Paso is seeking to renew it.
And the amount of capital behind the trading business is way out of
proportion to its value to El Paso shareholders.
At the end of September, El Paso said the fair value of its outstanding
energy contracts was $969 million. By the end of the year, the value had
plunged to a negative $59 million - a reversal of more than $1 billion in just
90 days.
Half of the plunge in value came from eliminating mark-to-market accounting.
Under that system, every quarter, El Paso estimated the fair value of future
deliveries and then included noncash gains, or losses, as income during the
period. The company will no longer do that. From now on, El Paso will use
accrual accounting, which realizes income in the quarter it is received.
Currently, El Paso has $1.2 billion in cash and another $200 million in
letters of credit backing up specific energy contracts the company wants to
unwind. Scott told analysts the company expects "that amount of money to come
back to us as we unwind our trading book." He didn't say how long that process
would take.
And unwinding isn't a cheap process. El Paso expects the marketing and
trading business will consume about $90 million this year, and Scott told
analysts "we've seen a higher burn rate than that in the first quarter."
Besides shutting down the trading business, El Paso has slashed its dividend,
cut capital spending and sold billions in assets from tugboat companies to oil
refineries. It also has settled major charges with federal regulators that it
manipulated Western markets during the energy crisis of 2000 and 2001. That
cost another $644 million after taxes.
These aren't the types of events executives crow about, but in El Paso's case
they are pluses.
"We are starting to hear rumors that the banks are lining up," says John
Edwards, a Deutsche Bank energy analyst. The fourth-quarter and year-end
numbers aren't likely to raise cheers among bankers, but "at least there were
no bombs," says Edwards, who recently upgraded his rating on El Paso stock to
hold from sell. He doesn't own the shares, although Deutsche Bank has done
investment-banking work for El Paso in the past and affiliate Deutsche Bank
Asset Management does hold a position in El Paso.
"I don't want to overstate this," he says, warning that liquidity remains
tight. "The situation is still tight, but I'm not as pessimistic asI was."
-By Steven D Jones, Dow Jones Newswires; 360-253-5400; steve-d.jones@wsj.com
(END) Dow Jones Newswires
04-01-03 0720ET |
