June 3, 2002; Insull Debt Pyramids and Ponzi Income Schemes


Reading the glowing (and false, in our opinion) statements by El Paso (EP) as it announces yet another effort to come clean we have to repeat our concerns.  One of the intended steps to “strengthen” the company is to “sell” assets to its master limited partnership, EPN.  EP owns most of EPN and for what it doesn’t own it receives the proceeds of an obscene general partner tax on income and principal.  EPN would pay for the properties with debt that does not get reflected on EP’s balance sheet.  EPN in turn also has assets whose debt does not show on its balance sheet just as in the Insull energy infrastructure pyramids that collapsed 70 years ago.  Yet the debt-rating agencies, paid by the companies they rate, apparently bless the debt pyramid.


As for the price of the transfer, EP may point to a recent transaction whereby Duke Energy (DUK), through its partnership, TEPPCO (TPP), bought infrastructure in the same area.  The two general partners essentially act as shills for each other to set high prices.  DUK benefits because it can hype the distribution on its partnership and apply the 50% incremental general partner tax.  EP benefits doubly by receiving the full proceeds and from being able to hype the distribution on EPN and also apply the 50% incremental general partner tax.


Further, EPN looks to us like a 21st century version of a Ponzi income scheme.  If distributions are hyped, as they appear to be, then by definition they cannot be sustained.  New principal supports income payments to existing investors.  A Ponzi scheme usually looks good until it doesn’t.


Finally, we see irony in the position of Oscar Wyatt as highlighted in The New York Times.  Mr. Wyatt was a major stockholder in El Paso by virtue of El Paso acquiring Coastal Corporation where Mr. Wyatt also was a major stockholder.  Now that El Paso appears to be failing, the former owners of Coastal who still have El Paso stock are seeing their profits disappear.  The irony is that thirty years ago Mr. Wyatt was on the other side when his company, Coastal States Gas, acquired Colorado Interstate Gas while Coastal was on shaky footing.  Colorado Interstate owners saw the Coastal stock they received fall in price by some 80% and then be suspended from trading for six months.

June 6, 2003; Meter Reader: Got Income?