Ann de Rouffignac
HOUSTON, Jan. 31, 2002 — Pipeline operator and energy marketer El Paso Corp. reported 2001 earnings of $93 million, or 18-/share, after a $1.6 billion nonrecurring charge for its merger with Coastal Corp. and other items.
El Paso lowered its 2002 earnings projections to $3.30-$3.45/share on lower than expected gas prices. In December, El Paso projected $3.40-$3.55/share. El Paso shares were trading up 4.98% to $37.32 at mid-day on the New York Stock Exchange.
Income for 2000 was $1.3 billion, or $2.57/share. The $1.6 billion charge in 2001 included $1.3 billion of merger related charges, a $108 million writedown on assets, and a $135 million noncash writedown for oil and gas reserves because of accounting requirements.
Company executives said the Houston company has made progress on balance sheet restructuring and is well positioned for a credit ratings upgrade. El Paso executives downplayed any problems that might result from its off-balance sheet debt guaranteed by company equity. Executives said the company is preparing a tender exchange for the $1.95 billion of contingent debt from two off-balance sheet special purpose entities.
The debt has ratings and share price triggers that would precipitate issuance of El Paso shares, if a credit ratings agency downgraded the company to below investment grade and El Paso’s share price dropped below a certain level. For $1 billion of this debt, the share price can’t drop below $27.07. For $950 million the share price trigger is $36.16.
“We see no realistic scenario of that happening,” said CEO Bill Wise on a conference call. “We will be successful in the tender exchange process to eliminate the triggers.”
Wise added in the worse case scenario the contingent debt would be removed with cash on hand in combination with the company’s access to other funding sources. Wise said the tender offer will be completed in April. The bondholders will get a new piece of paper with an El Paso Corp. guarantee, he said.
Wise added El Paso is making progress on its balance sheet restructuring that should satisfy the ratings agencies. At the end of 2001, El Paso had a 57.7% debt to total capital ratio, including $17 billion of total debt.
The company said debt will be reduced to 50% by the end of 2002, including the treatment of the debt for the two special purpose entities. Contracts will be in place by the end of the first quarter for 50% of the assets planned for sale, Wise predicted.
All El Paso’s businesses except oil and gas production reported lower earnings before interest and taxes (EBIT) compared to last year.
The production segment’s improved results were from higher realized natural gas prices and an 11% increase in oil and gas production. The unit realized $3.44/Mcf compared to $2.62/Mcf for 2000. El Paso Production Co. reported EBIT of $920 million, compared to $609 million the year before.
El Paso hedged about 75% of its production in 2002 at a New York Mercantile Exchange (NYMEX) price of $4.05/Mcf and about 57% of 2003 production at $3.85/Mcf. El Paso will realize about 30-/Mcf less than the NYMEX price because of transportation costs and regional price differentials.
The pipeline group reported EBIT earnings of $1.03 billion, down from $1.32 billion for 2000. Field Services or the midstream part of the company reported EBIT of $195 million, down from $214 million for 2000.
El Paso Merchant Energy reported $897 million in EBIT for 2001, compared to $929 million for 2000. The company said that 53% of the income from the merchant energy group was cash or generated by fees, 30% derived from long-term trading and origination of deals, and 18% from short-term trading and origination.
“About 30% of the income was from mark-to-market accounting and that translates to 10% of the total company EBIT,” said Ralph Eads, president of El Paso Merchant Energy. “We do not mark-to-market long-term investments that are not liquid and we use third party verification of the prices used.”