August 5, 2002; Debt Zooming for El Paso Energy Partners

The news is no better for Strong Sell EPN.  True, year over year quarterly growth is strong.  But it is practically all in the transfer of assets from its parent, the beleaguered El Paso Corporation. 

Our valuation numbers for EPN have deteriorated after taking account of second quarter results.  The impact of the April acquisition was much as expected, but we reclassified preferred units as debt rather than equity.  As a result EPN’s ratio of Debt to Present Value increases to 0.64.  Again Present Value may be only two thirds of what we estimate.  Such a reduction for EPN would wipe out most of the equity value.  Thus, one might ask if the limited partners of EPN have much more than a worthless piece of paper in a debt-soaked industry segment beset by scandal and self-dealing.

El Paso would transfer another infrastructure asset to EPN to run up debt even further.  Now this might be all right if the partnership could raise a billion dollars of equity at the current price.  That seems far-fetched in view of the recent experience of Kinder Morgan.  EPN, too, has reached the top level of the pyramid.  New investors would be transferring a high proportion of economic value not only to the GP, but also to earlier investors in the pyramid.