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El Paso


is kicking its merchant energy business -- once a star performer -- off the corporate team.

The Houston energy giant revealed elaborate plans Friday to slide its money-gobbling trading business into a separate entity and package it up for sale. The troubled unit pushed El Paso to an unexpected third-quarter loss and continues to threaten an investment-grade rating that's just one notch above junk.

But if all goes as planned, El Paso's trading business will soon become Travis Energy Services -- a separate structure, headed for liquidation, that will be capitalized and rated on its own.

"To me, this is a great step in the right direction," said John Olson, an analyst at Sanders Morris Harris who owns the stock. "Without merchant energy, this stock is worth about $23 a share."

The market felt otherwise. News of El Paso's third-quarter loss, coupled with its game-changing strategy, sent the stock down 17% to $7.62 in midday trading Friday.

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Some critics, long suspicious of El Paso's complicated accounting, accused the company of attempting to pull yet another trick play. They described Travis Energy as a new off balance sheet vehicle designed to bury the debts and failures of El Paso's disastrous trading arm.

"To be fair to El Paso management, they are no doubt the best off balance sheet shufflers in the business, following the demise of


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," said Karl Miller, leader of a New York-based energy acquisition firm. "Unfortunately, there are no awards being given for financial engineering ... in this market."

Early next year, El Paso plans to transfer the bulk of its trading portfolio to Travis Energy, a separate counterparty that will be supported by $600 million in credit secured by two El Paso assets. The company will spend up to two years liquidating that portfolio, whose value is expected to sink from $968 million to as little as $338 million next quarter.

Already, the division is draining El Paso's profits. Without merchant energy, El Paso would have posted third-quarter earnings of 33 cents a share even after funding its business operations. Instead, it weathered a staggering $171 million trading loss that dragged the entire company $69 million into the red.

In the end, El Paso posted a 2-cent loss from operations instead of the 27-cent profit analysts were expecting. The company earned 78 cents a share in the same period last year, just before Enron's bankruptcy sent the entire sector into a tailspin.

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Peter Cohan, a Massachusetts author and investment strategist, expressed some relief that El Paso had joined the crowd charging out of the merchant energy businesss.

"El Paso's decision to exit the energy trading business makes sense -- although its timing is about 18 months too late," said Cohan, who has no position in the stock.

But like Miller, Cohan questioned the need for a complicated exit plan that differs vastly from the industry norm.

"This looks like it's going to be another off balance sheet entity," Cohan said. "El Paso seems to create a new shell company every time it does something."

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El Paso does have immediate plans to consolidate at least one off balance sheet structure, however. The company announced Friday that it will buy out the 80% of Project Electron that it does not own and bring the entity's debt -- estimated at $1.8 billion -- onto the balance sheet in the first quarter of 2003.

Together, that hike in debt and the drop in El Paso's trading portfolio have some wondering about El Paso's true net worth. They questioned whether a dramatic shift could trigger bank covenants and possibly even threaten bankruptcy.

But the company expressed total confidence in its financial stability. The company said it had $4.5 billion in total available liquidity at the end of the third quarter. It expects to fund next year's operations with cash generated from operations and asset sales. It has offered no guidance yet on 2003 earnings.

"Our liquidity and balance sheet enhancement program are both very strong," El Paso CEO William Wise assured analysts on Friday.