El Paso Corp. said last week that it intends to get out of all its noncore businesses and pay down debt quicker in hopes of hitting net income of up to $750 million in 2006. The announcement Thursday followed news earlier in the week that the company had a net loss of more than $1 billion last year.
During an analyst conference, El Paso's CEO Doug Foshee said 2004 was a "foundation" for a turnaround, and he then outlined the company's plan for getting back in the black by next year. Foshee said the company has "made solid progress" since announcing its last long-range plan in December 2003.
"While we remain focused on reducing debt and costs, we are also building for the future by expanding our pipeline and production businesses," Foshee said. "The opportunities in the natural gas industry are outstanding, and we are well positioned to build new transmission infrastructure, locate new production sources, and deliver these supplies to the marketplace."
El Paso committed to netting between $1.2 billion and $1.6 billion by selling or "completing the evaluation of sale" for all of its remaining natural gas processing assets and its remaining domestic and foreign power plants, other than those in Brazil, by the end of 2006, Foshee said. And he expected debt -- net of cash -- to be "below $15 billion" in that same time period.
Other financial targets for being in the black in 2006 include:
"Key business drivers [in its pipeline business] will include major expansions, cost control, and continued success in capacity recontracting efforts," Foshee said. In addition, he contended that El Paso is "making substantial progress in turning around its production business," citing onshore operations that involve coalbed methane, Rockies, East Texas, and North Louisiana basins.
El Paso said Wednesday that its 4Q2004 losses more than doubled from a year ago after it sold most of its domestic and international power portfolio. The net quarterly loss was $620 million (minus 97 cents/share), versus a loss of $285 million (minus 47 cents) in 4Q2003. The company also requested a 15-day extension to file its 10-K annual report after an internal audit identified errors related to the carrying value of some investments.
Quarterly earnings fell $751 million on the power plant sales and a loss on power contract assets. Operating revenue in 4Q2004 fell to $1.36 billion from $1.56 billion a year ago.
For the year, El Paso reported a net loss of $1.024 billion (minus $1.60/share), compared with a net loss of $1.928 billion (minus $3.23) for 2003. El Paso had cash flow from operating activities totaling $1.3 billion, which was reduced by a $0.6-billion payment for the company's western energy settlement. Significant items, most related to the sale or planned sale of power assets and restructuring costs, reduced 2004 earnings by $1.2 billion and 2003 earnings by $1.3 billion.
The Pipeline Group, long El Paso's bread and butter, generated $1.3 billion in earnings in 2004, while completing "significant capital projects on time and within budget," the company said. For 4Q2004, earnings were $355 million, slightly lower than the $359 million generated in 4Q2003.
El Paso is pinning a lot of its turnaround on oil and natural gas production, and in the final quarter, output averaged 775 MMcfe/d -- 19% lower than 4Q2003. The decrease was attributed to declines in base production and lower capital expenditures. For 2004, the average production rate was 829 MMcfe/d (including discontinued operations), with annual earnings of $734 million. Quarterly earnings were $176 million, up from $148 million in 4Q2003.
The realized price for natural gas was $6.18/Mcf in 4Q2004, compared with $4.35 in 4Q2003. Oil, condensate, and natural gas liquids prices were up 55% to $39.44/bbl. Total per-unit cash costs increased to an average of $1.69/Mcfe in 4Q2004, compared with $.95/Mcfe for the same 2003 period because of higher costs and lower production volumes. In addition, part of the 2004 increase is due to higher workover activity, which is expensed in the current period. El Paso said its workover activity has been an "important contributor to stabilizing production."
The Marketing and Trading unit reported an earnings loss of $85 million in 4Q2004, compared with a loss of $105 million for 4Q2003, mostly because of lower expenses offset by higher losses on historical trading activity. In addition, the 4Q results benefited from a $53 million uplift in the value of contracts, which provide El Paso a floor price of $6.00 (put options). The company purchased these contracts in the final quarter as a part of its price risk management activities for El Paso's natural gas production.
Field Services reported a loss of $4 million in the quarter, compared with earnings of $130 million in 4Q2003. The loss was attributed to the sale of El Paso's remaining interests in GulfTerra Energy Partners to Enterprise Energy Partners. Cash distributions from Enterprise/GulfTerra totaled $7 million in 4Q2004, compared with $37 million in 4Q2003.
In its statement, El Paso said it requested an extension to file its 10-K with the Securities and Exchange Commission after internal auditors discovered "a number of material weaknesses in its internal controls." The company said it already has taken steps to correct the problem. The impact is expected to be no more than an additional $154 million loss in 2002 and up to an additional $70 million in net income in 2004. The impact was noncash, and any change would have no effect on the company's reported cash flow from operations for any period.
The statement noted that the company has "devoted considerable effort to make improvements in its internal controls in order to comply with the Sarbanes-Oxley Act of 2002...Based on the material weaknesses...management has concluded that it will issue a report which concludes that at Dec. 31, 2004, the company did not maintain effective internal control over financial reporting..."
Specifically, El Paso said it did not maintain effective internal controls over access to application programs and data, and "identified control deficiencies with respect to (1) inadequate design of its security access procedures related to identification of conflicting roles; (2) lack of compliance with its access security policies; and (3) a lack of independent monitoring of access to various systems by IT and financial reporting and accounting staff."
Additionally, El Paso said it did not maintain "effective internal controls related to its account reconciliation process, especially with regard to nonroutine activities, and [it] did not maintain effective internal controls related to identification, capture and validation of pertinent information necessary to ensure the timely and accurate recording of non-routine activities, primarily related to the divestiture of assets in the businesses the company has been exiting."
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