October 28, 2002; El Paso Energy Partners Unravels

To read the headline on sell recommended EPN’s latest quarter one would think the partnership is scoring dramatic growth.  Actually the growth has an artificial cast as a result of asset shuffles among related parties, EPN and El Paso Corporation (EP).  In fact an examination of the numbers indicates that cash flow was actually down from the second quarter of 2002 even though it was up from a year earlier prior to the latest deals.

More ominously, EPN management apparently conceded that the market had rejected the $600 million offering of institutional shares that EPN had been promoting for the past few months.  That implies another downgrade in the rating of EPN debt that is already junk quality, in our opinion.  Moreover, in the face of its financing failure, management suggests that it may unwind its latest “acquisition”.

Meanwhile EPN’s stock price holds up reasonably well considering the collapse in EP stock price.  Apparently the backers of EPN would have investors believe the entity is completely separate from EP.  That seems far-fetched when the two entities swap assets more or less at will.

We recommend that investors sell units of EPN on the basis of high valuation, high debt and a business model that is reaching diminishing returns.  General partner compensation near 30% of cash distributed currently and 50% incrementally is too high to allow for an attractive long-term return for limited partners, in our opinion, even if financial failure does not occur sooner.

Finally we offer a parting shot on the implications for EP.  Our main concern with EP is that management that sponsors a high-greed partnership like EPN cannot be trusted.  That management untrustworthiness appears to have cost the stockholders of large cap EP more than the entire value of small cap EPN.  Our suggestion is to stop the deception of EPN now and give EP a better chance to restore viability and regain market value.