HOUSTON, Nov. 13, 2003 — El Paso Corp. reported results for the third quarter of 2003 and updated its progress on its 2003 operational and financial plan.
El Paso reported a net loss of $146 million, or $.24 per diluted share, for the third quarter of 2003 compared with a net loss of $69 million, or $.12 per diluted share, in the third quarter of 2002. Adjusted for significant items, the company had a third quarter 2003 net loss of $6 million, or $.01 per diluted share, compared with net earnings of $54 million, or $.09 per diluted share, in the third quarter of 2002.
Third quarter 2003 significant items affecting continuing operations totaled $91 million, or $.15 per diluted share, mostly attributable to various asset impairments. Last year’s third quarter results included significant items totaling $30 million, or $.05 per diluted share, related to asset sales. A complete schedule of significant items is attached to this release.
“We continued to show progress on debt reduction and liquidity in the quarter,” said Doug Foshee, El Paso’s president and chief executive officer. “In addition, we’re on track to meet our asset sales goal for the year. Unfortunately, a good quarter in the pipeline and midstream areas was offset by disappointing results in E&P as we continue to rationalize this business. My first two months at El Paso confirm my belief that while we have significant challenges still ahead, our people and our core assets will allow us to restore the long-term earnings power of the company and restore our balance sheet. I look forward to sharing in more detail later this year our plan for the future.”
Since reporting its second quarter 2003 earnings, El Paso has achieved a number of important financial and operational accomplishments that evidence continued progress implementing its 2003 operational and financial plan.
— Third quarter cash flow from operations totaled $752 million, raising year-to-date cash flow to $1.8 billion.
— The company’s obligations senior to common were reduced by approximately $620 million during the third quarter. Additionally, approximately $775 million of obligations senior to common were retired in October.
— As part of the asset sales, El Paso has eliminated $710 million of non-recourse project and power plant restructuring debt that was consolidated on El Paso’s balance sheet. Through the sale of El Paso’s interest in East Coast Power, L.L.C., the purchaser assumed $571 million of project debt. In addition, last month the company sold its interests in Mohawk River Funding I for $11 million, eliminating $139 million of non-recourse power plant restructuring debt.
— El Paso sold a 9.9-percent general partner interest in GulfTerra Energy Partners, L.P. (NYSE:GTM – News) to Goldman Sachs & Co. for $88 million. This transaction confirmed the significant value of the general partner interest and furthered El Paso’s and GulfTerra’s efforts to enhance the credit separation of the two companies. In addition, GulfTerra redeemed all of the Series B Preference Units held by El Paso for $156 million. These units would not have paid cash to El Paso until late 2010.
— The company announced a $500-million drilling venture with wholly owned subsidiaries of Lehman Brothers and Nabors Industries Ltd. that will result in an incremental $350 million of drilling activity over the next nine to 12 months. El Paso is pursuing additional drilling ventures in order to develop its substantial inventory as it reduces the capital spending for the production business.
— El Paso initiated a tender offer in October 2003 to exchange common stock and cash for the company’s 9.0-percent equity security units. If all units are tendered, this would result in a reduction of up to $575 million of balance sheet debt, an increase in shareholders equity of approximately $475 million, and a reduction in cash of up to $112 million.
— In September the company reduced its exposure to fluctuations in the Euro by entering into swap agreements that had the effect of replacing 250 million of Euro-denominated fixed-rate debt with dollar-denominated floating rate debt.
— El Paso made continued progress towards the liquidation of its trading portfolio.
THIRD QUARTER SEGMENT RESULTS
The Pipeline Group’s third quarter reported EBIT was $301 million compared with $302 million during the third quarter of 2002. Third quarter 2003 results include a $20-million benefit related to the revaluation of common stock to be issued under the western energy settlement, as the liability was adjusted for El Paso’s closing stock price on September 30, 2003.
The remaining significant item is a $3-million gain associated with an Australian asset sale. After adjusting for significant items, third quarter 2003 EBIT was $278 million compared with $302 million for the same 2002 period. The decline is primarily due to a favorable resolution of measurement issues at a processing plant serving the Tennessee Gas Pipeline Company (TGP) system in 2002, the sale of El Paso’s interest in the Alliance pipeline system, and lower revenues on the El Paso Natural Gas Company pipeline system as a result of expired capacity contracts that the company cannot remarket due to various Federal Energy Regulatory Commission (FERC) orders.
These factors were partially offset by completed system expansions and new transportation contracts, primarily on the Colorado Interstate Gas Company and Southern Natural Gas Company pipeline systems. Third quarter system throughput was down from 2002 levels as cooler summer weather and higher natural gas prices reduced demand.
El Paso’s Pipeline Group continues its active expansion program. In September, Cheyenne Plains Gas Pipeline Company announced plans to increase its capacity from 560 thousand dekatherms per day (Mdth/d) to at least 730 Mdth/d due to significant customer demand. The Cheyenne Plains system is expected to be in-service in early 2005, and the expansion is expected to be in-service in early 2006. The FERC has granted preliminary approvals for the original 560 Mdth/d project.
In August, El Paso Natural Gas Company announced the purchase of Copper Eagle Gas Storage, LLC, which is developing a natural gas storage project near Phoenix, Arizona. In addition, TGP placed the first phase of its South Texas Expansion Project, which connects TGP’s existing South Texas system to a new natural gas pipeline in northern Mexico, into service in August 2003.
Production’s reported EBIT for the third quarter 2003 was $103 million versus $179 million during the third quarter of 2002. Third quarter 2003 results include a $2-million ceiling test charge primarily relating to the company’s Turkish full-cost pool that was partially offset by a $1-million asset sale gain.
Third quarter equivalent production declined 32 percent due largely to sales of approximately 1.6 trillion cubic feet equivalent (Tcfe) of proved reserves since the third quarter of 2002, normal declines in base production, and mechanical failures on certain wells. The realized price for natural gas, net of hedges, rose to $3.95 per thousand cubic feet (Mcf) in 2003 from $3.21 per Mcf in 2002, while the realized price for oil, condensate, and liquids, net of hedges, rose to $23.82 from $22.19 per barrel (Bbl).
Total per-unit costs increased to an average of $2.95 per thousand cubic feet equivalent (Mcfe) in the third quarter 2003 compared with $2.02 per Mcfe during the same 2002 period. The per-unit costs were affected by a higher DD&A rate, which resulted from higher finding and development costs.
In addition, the sale of reserves at unit prices that were lower than the average DD&A rate contributed to the increase. Per-unit costs were also affected by higher workover costs and by increased G&A on lower equivalent production during the third quarter of 2003.
In the third quarter of 2003, the company produced 80 billion cubic feet (Bcf) of natural gas, 54 Bcf of which was hedged at an average price of $3.51 per MMBtu, or $3.65 per Mcf. The company has hedged approximately 54 trillion British thermal units (TBtu) of its fourth quarter 2003 natural gas production at a NYMEX price of $3.38 per million British thermal units (MMBtu) or $3.52 per Mcf.
For 2004, El Paso has hedged approximately 19 TBtu per quarter of its natural gas production at an average NYMEX price of $2.55 per MMBtu or $2.65 per Mcf. The company expects that its 2003 realized price for natural gas will be approximately $.20 less than the NYMEX spot price due to transportation costs and regional price differentials, net of adjustments for Btu content.
During the third quarter of 2003, El Paso Production drilled a total of 129 wells, with an overall success rate of 90 percent. Most of this drilling took place as part of the company’s coal bed methane and Gulf of Mexico deep shelf exploration programs. The deep shelf program continues to exceed expectations with a 56-percent success rate (nine successful wells out of 16 drilled) thus far in 2003. The average deep shelf well has had an estimated 48 Bcf of recoverable reserves with an initial production rate of 30.5 million cubic feet (MMcf) of gas per day and 1,479 barrels of condensate per day.
The most recent development in the deep shelf program is a confirmation well in the Jim Bob Mountain discovery. This well doubled the aerial extent of the original discovery to approximately 2,000 acres.
In Brazil, El Paso completed the Santos #14B “Luana” prospect well, as a discovery in the upper Itajai, with 75 feet of pay and estimated proved reserves of 162 Bcfe gross, 88 Bcfe net to El Paso’s interest. A confirmation well, Santos #15D, has been drilled and encountered 118 feet of upper Itajai. This interval, along with lower Itajai sands that are present in both wells, will be tested, and if successful, would further increase proved reserves.
Field Services reported EBIT of $33 million for the third quarter 2003 compared with a loss of $11 million during the third quarter of 2002. Third quarter 2003 results include a $2-million asset sale loss while last year’s quarterly results included a $47-million impairment of an asset that was contracted for sale along with a $1-million loss on an asset sale. Third quarter 2003 EBIT, after adjusting for significant items, was lower than 2002 levels, primarily due to the loss of earnings from divestitures of midstream assets in the mid-continent and north Louisiana. These items were partially offset by increased earnings from GulfTerra and reduced G&A expenses.
The earnings contribution from GulfTerra increased to $40 million this quarter from $17 million during the third quarter of 2002. GulfTerra had a strong third quarter due in part to contributions from the completion of the Cameron Highway transaction. Cash distributions from GulfTerra totaled $34 million during the quarter compared with $19 million in the second quarter of 2002.
Gathering, transportation, and processing volumes as well as gathering margins were below third quarter 2002 levels due to asset sales. In addition, processing margins were down slightly from a year ago due to an unfavorable movement between natural gas and natural gas liquids prices.
The Merchant Energy Group, consisting of domestic and international power, energy trading, and LNG, reported an EBIT loss of $37 million in the third quarter 2003 compared with a loss of $83 million in the prior-year period.
Significant items for 2003 total $91 million and include $68 million of impairments for LNG and power assets, including the East Coast Power project and turbines held in inventory. Merchant Energy also incurred losses of $13 million associated with domestic power asset sales during the quarter and $10 million of restructuring costs associated with the closure of the London office.
El Paso’s power business had third quarter EBIT, after adjusting for significant items, of $135 million versus $98 million in 2002. EBIT from the consolidation of Electron and Gemstone in the second quarter of this year increased third quarter EBIT by $61 million compared with the same period last year. This increase was offset by higher losses on the company’s merchant plants, mark-to-market losses on a derivative fuel supply contract, and lower earnings due to asset sales.
Trading operations had a third quarter EBIT loss, after adjusting for significant items, of $73 million compared with a $200 million EBIT loss in the same 2002 period. 2003 results reflect $33 million of losses from a decrease in fair value of derivative contracts and losses on accrual transactions, primarily related to transportation and storage demand charges not recovered during the quarter, $11 million of accretion for the western energy settlement, and $29 million of G&A and depreciation expense.
LNG and Other had an EBIT loss, after adjusting for significant items, of $8 million in the third quarter of 2003 versus income of $20 million last year. The decrease was primarily due to mark-to-market income from the execution of the Snovhit LNG supply contract in 2002 and mark-to-market losses on LNG supply contracts in 2003.
El Paso continues to show consistent progress in exiting the trading business. Since the beginning of the year through September 30, 2003, El Paso’s forward contract positions have declined 48 percent, including the liquidation of its European trading portfolio and its coal, currency, and interest rate books. In addition, the company’s transportation capacity has declined 57 percent, and storage capacity has declined 84 percent.
Detailed operating statistics for each of El Paso’s businesses are available at www.elpaso.com in the Investors section.
As of October 31, 2003, El Paso had $2.7 billion of available cash and lines of credit. As of September 30, 2003, El Paso had $2.0 billion of available cash and lines of credit, consisting of $1.3 billion of readily available cash and $.7 billion of lines of credit. The company had $1.6 billion of total cash on September 30, 2003.
NEW DEBT SCHEDULES ON COMPANY WEB SITE
El Paso has added a new section to its Web site that contains a complete schedule of the company’s debt as of September 30, 2003 along with a debt maturity schedule as well as an abbreviated legal organization chart with descriptions of the entities in the corporate structure. These materials can be accessed at www.elpaso.com in the Investors section, by clicking “Corporate Debt and Corporate Structure.”
El Paso Corp. is a provider of natural gas services and the largest pipeline company in North America. The company has core businesses in pipelines, production, and midstream services. Rich in assets, El Paso is committed to developing and delivering new energy supplies and to meeting the growing demand for new energy infrastructure. For more information, visit www.elpaso.com.