Ann de Rouffignac
OGJ Online
HOUSTON, Nov. 7 -- El Paso Corp. executives Wednesday disclosed the company formed a new off-balance sheet entity last week called Gemstone. The company in March reported forming a similar arrangement called Project Electron.
Off-balance sheet transactions have come under the spotlight ever since Houston's Enron Corp. revealed last month that it wrote down assets by $1 billion and also wrote down shareholder equity by another $1.2 billion in the third quarter. The equity write-down was linked to the off-balance partnerships. Many analysts complained that the financial details of Enron's partnerships were not readily understood.
Wise assured analysts that there was no "hook" back to El Paso's equity from the off-balance sheet transactions. "We think the more you know about our company, the greater confidence you will get. We will answer questions as long as anyone wants to ask them."
He said the debt is backed by assets belonging to those entities. Wise emphasized no executive or El Paso official has an ownership interest in the instruments.
Cash flow will be used to pay off the notes due in 2003 for Project Electron, which restructures contracts for qualifying facilities (QF) or small cogeneration power units that operate under the Public Utility Regulatory Policies Act. The law requires utilities to purchase electricity from QFs. The $1 billion of debt is supported by long-term power contracts with US utilities, El Paso executives explained.
Gemstone is backed by the assets of several power plants in Brazil. The plants have long-term power contracts with a state-owned utility and the state-owned oil and gas company.
"This is not a Brazilian distribution business where there have been so many troubles," said Ralph Eads, president El Paso Merchant Energy Group. "Gas-fired generating plants are really needed."
Company officials said El Paso equity equal to the debt of the off-balance sheet transactions would be negatively impacted, if three conditions were met simultaneously, including:
--The partnership couldn't pay the debt when due.
--El Paso's stock traded below $36/share for Gemstone and $27/share for Electron for 10 days.
--El Paso lost investment grade credit rating.
Executives said the poor outlook for power prices could cause some "dislocation" and create opportunities to acquire power plants at good prices. "The anchor tenant on the pipelines is power generation," he said. "We have opportunities to build new laterals for the pipelines to serve power plants."
Analysts also quizzed El Paso executives about the impact of Enron's financial woes on the industry and on El Paso. Executives said they might be interested in buying Enron assets.
"We have not reduced our trading with Enron at all," said Eads. "We have a $50 million credit limit and anything beyond that must be collateralized with assets or cash." Eads added transactions with Enron constitute 10% of El Paso's trading volume.
With respect to its telecommunications unit, El Paso executives said it is repositioning since that industry has retrenched. El Paso would be interested in selling if the right buyer made an offer, they said. Meanwhile, the 2002 capital expenditures for telecom will be $60 million and maintenance capital will be held to $25 million/year going forward, El Paso officials said.