El Paso Corp. is hoping to fast-forward some huge E&P asset divestments, in advance of the expiration of pooling-of-interests rules. Whether the Securities and Exchange Commission will waive the tax penalties was uncertain at press time but all indications were that it would work out. Bill Wise, chairman, president and chief executive officer, says 2001 was "a very trying year." Most fresh to everyone in the business is the collapse of Enron Corp., and the stock-price punishment now being endured by companies like it in the energy-trading business. The El Paso plan is in response to that. It hopes to move some off-balance-sheet accounting to the corporate balance sheet, remove stock-price-related triggers from some of its debt deals and reduce its leverage to 50% from 56%. Wise notes that 2001 also hosted record-high gas prices and some destruction in gas demand, the California energy crisis and allegations that energy-trading companies had manipulated prices, the $26-billion merger and integration of El Paso and Coastal Corp., the September 11 tragedy and additional softening in demand for energy. It has all resulted in a sense of urgency. El Paso will put up for sale $1 billion in E&P properties in the deepwater Gulf of Mexico, shallow Gulf, the Midcontinent and the Rockies, as well as approximately $1.25 billion in midstream, downstream and coal assets. Its merger with Coastal was closed in January 2001, forming a company with more than 6 trillion cubic feet equivalent of gas reserves. Structured under the tax-free pooling-of-interests merger rules, no more than 10% of the combined company's assets may be sold within the first two years of closing. El Paso has made a few, small divestments since the merger, so these would be added to the $2.25 billion, putting the total over the top. Ralph Eads, president of El Paso's merchant energy and production groups, says the E&P assets that will be sold are some the company planned to divest upon the expiration of the pooling rules. For example, "we've thought for some time we needed to be larger in the Midcontinent or exit," Eads says. The sales may occur as soon as this quarter. El Paso management put the plan together rapidly, and analysts have been impressed with the gutsy approach. Credit Lyonnais Securities (USA) Inc.'s Gordon Howald says, "The way El Paso has handled this crisis is the model that other companies in this industry should implement." He believes the tax penalties for early asset divestment will be waived. "Given the significant change to El Paso's external operating environment, we suspect the SEC will not prevent El Paso from doing this, given the benefits to creditors and shareholders." Wise says the balance-sheet plan should increased El Paso's market share, long-term. Howald agrees, "If the proper opportunities are presented, El Paso also could be in a strong position to acquire assets which other financially distressed companies may be forced to divest at very attractive, fire-sale prices." The company's plan is to also reduce capex in 2002, to $3.1 billion from $4.6 billion in 2001. Despite that and the asset sales, it expects to grow production 2% in 2002-a lot of it from its prolific South Texas discoveries and from very-promising deep drilling in the shallow Gulf. Eads says, "The Enron situation is unique...The structure of the industry is durable."

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