The management of El Paso (NYSE: EP) -- the energy company, not the manufacturer of picante sauce -- is ending 2006 by continuing to pare non-core assets in order to improve the company's balance sheet and enhance its overall liquidity. The company recently announced the sale of ANR Pipeline Company, which now puts it in the position of unloading what probably can be classified as a core asset. It also is selling its Michigan storage assets and its half interest in Great Lakes Gas Transmission to TransCanada (NYSE: TRP) and TC PipeLines (Nasdaq: TCLP).
The deal apparently is worth $4.14 billion, including the assumption of $744 million of debt. Because El Paso will utilize tax loss carryovers in completing the transaction, the company will realize after-tax cash proceeds of about $3.3 billion. At the same time, following the close of the deal, El Paso will have approximately $1 billion of remaining tax loss carryovers.
In announcing the transaction, the company called the sale of the assets "a transformational event for El Paso." It noted that the result for its balance sheet would be an immediate elevation of its credit statistics to "a level that is at or very near investment grade level."
During the past three years, El Paso has sold several of its non-core assets in order to concentrate on its two core businesses: interstate natural gas pipelines and the exploration for and production of oil and natural gas. Structurally, it can reasonably be compared to Williams Companies (NYSE: WMB).
El Paso's pipeline segment is North America's largest, with 43,000 miles of pipe and delivery ability ranging from California to New England, along with access to both Canada and Mexico. The ANR unit being sold represents about 10,500 miles of pipeline and extends from Texas and the Gulf of Mexico to the midwestern and northeastern regions of the U.S. The pipeline segment also includes substantial storage capacity and an LNG receiving terminal near Savannah, Georgia.
The exploration and production segment operates onshore in several of the major U.S. producing basins: along the Texas Gulf Coast and offshore in the Gulf of Mexico. Its international operations are concentrated in Brazil. At the end of 2005, the company controlled more than three million net leasehold acres. From a relative size perspective, in El Paso's most recent quarter, the pipeline unit produced $305 million in EBIT (earnings before interest and taxes), compared to $141 million from exploration and production.
What, then, is a reasonable takeaway for Foolish investors interested in the latest El Paso transaction and its current composition? I must admit a favorable bias toward the company, and not because the stock is up nearly 30% since May. Rather, I applaud management's focus and its willingness to stick to -- and even intensify -- its core business knitting. Also, I believe that energy will be an extremely active sector for years to come. Those who agree probably should keep on eye on the steady reshaping occurring at El Paso.
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Fool contributor
David Lee Smith
does not own shares in any of the companies mentioned. He welcomes your questions or comments.
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