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El Paso


has bought itself more recovery time.

With the clock ticking toward a shareholder showdown that could topple the company's entire leadership, El Paso announced late Wednesday that it has inked a crucial financing deal. By pledging virtually all of its valuable pipelines as collateral, El Paso secured a $3 billion revolving credit line that will help carry the company through the middle of 2005. The new facility replaces an old $3 billion bank line that, with a term-out extension, would have expired 13 months earlier.

The financing deal has taken some pressure off the company and its shares. News of the bank deal, coupled with two fresh buy recommendations, pushed the stock up 5.6% to a two-month high of $7.13 in late morning trading.

But even Lehman Brothers, which upgraded the stock from underweight to overweight, tempered its optimism with some caution.

"With heavy dependence on collateral recoupment, El Paso still rides a fine line between recovery and a slide into the need for more asset sales," Lehman Brothers analyst Richard Gross wrote Thursday.

UBS Warburg, which reiterated its buy rating, also warned that El Paso remains unsuitable for investors with a low risk tolerance. But both firms were generally upbeat, predicting that El Paso will have the means necessary to recover and move on.

Karl Miller, a former El Paso executive who now leads an energy-related acquisition firm, remains skeptical, however.

"They pledged all of their material assets to get the

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financing deal done," Miller said. "They are not fixing the company. They're just giving the banks more security."

Libor Day

Still, Lehman Brothers viewed terms of the new financing as quite favorable. The firm was bracing for a much higher interest rate -- Libor plus 7% instead of Libor plus 3.5% -- that would have snipped away at El Paso's earnings. After reviewing details of the deal, Lehman upped its 2003 earnings projections for El Paso from 60 cents to 85 cents a share. It also raised its 12-month price target for the stock from $6 to $9 and predicted that the shares could double over the next three years.

In the meantime, El Paso has pledged to slash costs in an effort to help the bottom line. After analysts sniffed at El Paso's original cutbacks -- which would have trimmed costs by $150 million by the end of next year -- the company upped the ante. It promised another $250 million in cost reductions and, in a letter last week to employees, warned that it would "aggressively attack" any waste.

"A preliminary review of our corporate costs reveal a disturbing trend," wrote John Somerhalder, president of the company's pipeline division. "We have to bring our costs in line with what we are going to be -- not what we were."

El Paso stressed that company expenses have not diminished at the same rate as company assets, which are being unloaded to pay down debt. Through a new strategy -- dubbed the "Clean Slate Initiative" -- El Paso is inviting employees to help outside experts identify opportunities to save.

Frank Powell, the former vice president of governmental and public affairs at Coastal, said El Paso has historically spent more money than it should.

"El Paso is not a cost-minded company," he said simply. "And it never really had to be before."

Powell is among a crowd of former Coastal employees supporting a proxy fight that's being partially financed by Coastal founder Oscar Wyatt. The dissidents are hoping to topple El Paso's entire board and replace it with a group of energy veterans at the company's annual meeting in June.

Although Wyatt is not himself a board candidate, the outspoken El Paso critic is expected to have some influence over the board he's now supporting. In the meantime, he's attracted considerable support from the very employees who once feared him.

"Oscar Wyatt is shrewd and frugal -- and ruthless," a former Coastal worker said. "But at least he treated everybody like dirt."