August 20, 2002; Kurt Wulff Quoted on High Greed Partnerships by Sheila McNulty in Financial Times     

Concern over energy traders dumping assets

Companies have been making quick sales to affiliates, but are the prices they pay fair value? asks Sheila McNulty

Energy industry consultants are beginning to question whether distressed traders are using affiliates as ‘dumping grounds” for assets — and problems.

As the crisis of confidence in energy traders has grown, companies have turned to affiliates for help.

El Paso announced last week that El Paso Energy Partners — the company’s master limited partnership, or MLP — would raise funds to buy $782m in assets from the US energy trader.

El Paso Energy Partners then registered 20m shares for an initial public offering to raise up to $684.6m to buy El Paso’s San Juan assets.

Williams, the Oklahoma based energy company, in April sold Williams Pipe Line to Williams Energy Partners, its MLP, for $1bn. Dynegy, the Texas-based trader, announced plans in February to establish an MLP, but that process has been slowed by market conditions, undermining Dynegy’s financial position.

Energy traders are general partners of their MLPs and can get higher prices for their assets — and seal deals faster through affiliates than in the open market, which is saturated with energy assets for sale.

‘This raises some serious red flags” says Karl Miller, an industry adviser who has held senior positions at Enron, El Paso Energy, Electricité de France and PG&E. “I think there are some serious fiduciary issues here.”

Consultants worry that energy traders may be transferring their problems to MLPs, which they suspect are paying too much for assets, in spite of independent valuations, and raising debt levels to do so.  

Indeed, high debt is why Colorado-based Duke Energy Field Services (DEFS) has not sold any assets this year to Teppco Partners, its MLP.  DEFS, which owns the general partnership of Teppco  Partners, says that with about 67 per cent debt against 33 per cent equity, Teppco is more highly leveraged than it would like.

DEFS, a subsidiary of Duke Energy, has identified assets it could sell to the MLP, which only buys long-life assets with fee-based earnings streams.

But Teppco must raise money through share sales to make additional acquisitions. It reduced a recent issue of 5m units to 3m, because of market conditions, but is expected to sell  additional units before the year’s end.

‘For high-greed partnerships, acquisitions are transfers among related parties at artificial prices’

Kurt Wulff, an independent energy investment analyst, has been sounding alarms about MLPs for months. “A few US MLPs are acceptable, but most are likely toxic to investors’ future wealth,” he said in July. He has “strong sell” recommendations on Enron offspring Kinder Morgan Energy Partners, as well as El Paso Energy Partners.

A recent report by Platts, the energy research and consulting group, called Kinder Morgan the “grand daddy of the MLPs”, paying $6.lbn for 30 acquisitions since Richard Kinder, the former Enron president, bought out Enron Liquids LP in 1996.

As partnerships, the MLPs avoid the 35 per cent corporate tax, enabling them to pay more for assets. Yet, consultants say investors in MLPs get increasingly fewer profits — as general partners, energy traders get up to 50 per cent of any incremental distribution increases.

That, consultants say, is another reason why traders want to stuff MLPs with assets: they provide cash, via general partner payments. “Often for high-greed partnerships, acquisitions are mere transfers among related parties at artificial prices,” Mr Wulff says.

Consultants say the process can be helped by some MLP directors being directors of their affiliate trading companies.

William Wise, El Paso chairman and chief executive, says he is the only El Paso director who is an executive for the company and its MLP. “We have a rigid process of fairness,” he says.

 “There are a number of assets we have transferred and could transfer and benefit the unit holders, as they have high cash flow. We get to use the proceeds from the sale to pay down debt,” Mr. Wise says. “I think it’s a very high quality, symbiotic relationship.”

Credit rating agencies and equity analysts have not called the energy traders on the MLP issue. “Taking a charitable view, I think the MLP sales can be accomplished more quickly than putting the assets on the auction block,” says Carol Levenson of Gimme Credit. “I can’t speak to the question of valuation.”

Financial Times, August 20, 2002