Moody's rates El Paso liquidity SGL-3, changes outlook

Moody's Investors Service assigned a speculative-grade liquidity rating of SGL-3 to El Paso Corp., confirmed its existing ratings and changed its outlook to developing from negative. Moody's also rated El Paso's $3 billion revolving credit facility due in 2005 at B3.

Moody's said the outlook change acknowledges some positive momentum in the company's credit but added that there remain significant uncertainties that could cause its ratings to be upgraded, confirmed, or downgraded over the next 12-18 months.

Much of this uncertainty is in El Paso's significant cash burn rate. In the quarter ended March 31, El Paso recorded roughly $90 million in negative cash flow from operations against gross capex of $717 million. The company has been making up its cash deficits through asset sales ($1.6 billion closed to-date this year), debt issuances ($1.9 billion to-date) and borrowings under its credit facilities.

El Paso's ratings could be revised downward if it is unsuccessful in narrowing its cash burn rate through containing its working capital and capital expenditures. However, Moody's noted recent positive developments, including the renewal and extension of its revolver that dims the specter of insolvency and clarity gained from the settlement of lawsuits related to the Western energy crisis and the conclusion of a close proxy battle.

The SGL-3 rating reflects that El Paso's internal cash sources appear adequate to cover its base cash needs over the next 12 months; minor outstanding amounts on the $1 billion credit facility (zero outstanding advances and $100 million in letters of credit expected to be rolled over to its $3 billion revolver), obviating a major cash repayment at its maturity in August; a sizable cash balance ($1.4 billion currently); sufficient covenant cushion that helps to ensure continued access to its revolver; relief from renewal risk on the revolver for another two years; and substantial assets that could be either sold or encumbered to raise cash.

Weaknesses in liquidity are: a high degree of variability and unpredictability in its working capital requirements that cause free cash flow deficits; capital expenditure levels that are proving to be difficult to reduce and persistently above forecasts; very little availability left on its $3 billion revolver ($200 million of availability expected when its term loan matures next month); and execution risk involved in meeting any cash flow shortfalls with asset sales and bank and capital market borrowings.

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