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
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.