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Moody’s Downgrades El Paso Debt Rating

November 26, 2002

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HOUSTON (AP) _ Moody’s Investors Service downgraded El Paso Corp.’s debt ratings to junk Tuesday, citing concerns about weak cash flows and a pending Federal Energy Regulatory Commission ruling on whether the company withheld natural gas during California’s energy crisis in 2000 and 2001. El Paso shares tumbled.

The credit rating agency questioned El Paso’s reliance on cash from asset sales in a volatile market to fill the gap between capital expenditures and cash flow from operations.

Moody’s said it may take time to exit investments in telecom, international power and other businesses ``given difficult industry conditions, volatile capital markets and a glut of energy and other assets being sold by other companies.″

El Paso shares dropped $2.05, or 19.2 percent, to close Tuesday at $8.63 on the New York Stock Exchange.

In a release responding to the downgrade, El Paso said it would draw down $1.5 billion from a $3 billion revolving credit facility expiring in May 2003 in order to post additional cash or collateral as required under existing contractual obligations.

But it said its liquidity is more than adequate to meet the company’s cash needs.

As part of a plan announced in May to strengthen its balance sheet, El Paso expects to have sold $4 billion in assets by the end of 2002 and $2 billion more in 2003 to repay debt and supplement cash flows.

Earlier this month El Paso became the third energy company to announce plans to dump its cash-hungry marketing and trading business as well, following leads of Kansas City, Mo.-based Aquila Inc. and Houston-based Dynegy Inc.

``Given a capital spending program that will likely exceed cash flows and a significant amount of upcoming debt maturities, (El Paso) will continue to need asset sales to supplement its liquidity,″ Moody’s said.

``Access to the capital markets at favorable terms is uncertain given the current volatility, and may continue to be difficult until there is a favorable resolution to the FERC proceedings,″ the agency said.

A.G. Edwards & Sons analyst Mike Heim complimented El Paso’s efforts to sell assets, but noted the company could sell too many potential earnings sources.

``Clearly El Paso is still in a liquidation mode, but they’ve been doing a pretty good job selling off assets. My concern is the lack of earnings power as they sell off those assets,″ Heim said.

El Paso noted that in addition to asset sales, the company has issued about $2.5 billion in equity securities and has access to $4.2 billion in cash if needed.

``El Paso’s credit posture is significantly stronger today than it was at the beginning of the year,″ said William Wise, chairman and chief executive.

``It is regrettable that Moody’s has largely ignored this progress and has acted based upon the uncertainties associated with the Federal Energy Regulatory Commission process, rather than waiting for the actual results. We continue to believe our position will be vindicated,″ Wise said.

In September Judge Curtis L. Wagner, the FERC’s chief administrative law judge, ruled that El Paso, through its El Paso Natural Gas pipeline subsidiary, held back at least 10 percent of the capacity on its pipeline delivering gas to California from November 2000 to March 2001. California experienced high demand and high natural gas prices during that span.

El Paso has argued that high demand and a shortage of natural gas led to California’s high prices, and the company vehemently denies Wagner’s conclusion. The FERC will conduct a hearing on Wagner’s ruling on Monday.

Moody’s attributed its negative outlook for El Paso to the possibility the pending FERC ruling could invite more lawsuits that may hurt the company’s financial position.

El Paso already is among energy companies under investigation by FERC, the Securities and Exchange Commission and other agencies for trading and accounting practices.

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