El Paso Corp. narrowed its losses in the final quarter of 2005 on a string of asset sales, and despite lingering effects from last year's devastating hurricanes in the Gulf of Mexico, the company's core natural gas pipelines and exploration and production (E&P) groups posted solid earnings.
In 4Q2005, the Houston-based company reported a net loss of $172 million (minus 26 cents/share), well below the net loss of $542 million (minus 85 cents) for the same period of 2004. Significant items for 4Q2005 included impairments from asset sales and restructuring costs, as well as a $72 million charge of noncash mark-to-market gains on production hedges and a $353 million charge from an unfavorable decision associated with a retiree medical benefits lawsuit. For the year, the net loss was $633 million (minus 98 cents/share), down from a net loss of $947 million (minus $1.48) for 2004.
"The days of the company consistently reporting losses are done," CEO Doug Foshee said during a conference call Wednesday. Foshee, who took over El Paso when the company was nearing bankruptcy, held firm to a commitment he made in 2003 to deliver results by 2006. Noting he had reported losses at El Paso "for most of my tenure here," Foshee said it has been an imperative to "rid this company as quickly as possible" of a legacy that added a huge amount of debt between 1996 and 2001.
"The losses are a necessary evil for the company to have a consistently bright future," Foshee said. "We are extricating from El Paso that which doesn't exist anymore," he said, referring to the bevy of asset sales and restructuring undertaken by the company in the past few years. This year, "will be a watershed year for us," and will quiet the past two years, which have had an underlying "noise...resembling that of a "five-year-old birthday party at Chuck E. Cheese's."
The turnaround is "complete," and the company has "a great deal of opportunity and momentum," said Foshee. "No company is better positioned to develop the natural gas infrastructure that will be needed in the United States and Mexico. Our E&P business has a solid multi-year inventory of projects that are economic at $5.50/MMBtu natural gas prices and position us to grow reserves and production organically."
The Pipeline Group's earnings before interest and taxes (EBIT) were $233 million in the quarter, compared with $369 million in 4Q2004. Results included $46 million of impairments for the Blue Atlantic, Seafarer, and Bahamas liquefied natural gas projects. In addition, Hurricanes Katrina and Rita reduced overall EBIT by $42 million, and higher environmental and legal reserves sliced off another $19 million.
Jim Yardley, president of El Paso's Southern Pipeline Group, was asked about the status of the company's proposed Continental Connector gas pipeline from the Rocky Mountains, which has garnered about 3 Bcf/d in preliminary interest (see NGI, Dec. 5, 2005). Kinder Morgan and Sempra Energy last week announced they had secured firm commitments for their entire 1.8 Bcf/d of firm transportation capacity on the other proposed pipeline, the 1,323-mile, $4 billion Rockies Express pipeline project (see related story).
"We've had a lot of interest in Continental Connector...really, we've had interest across all three different segments, from the Rockies segment, the Kansas City segment and downstream from there," said Yardley. "Our chore is to take that interest in what is real and what is unreal, in working on the three segments and figure out where to go next. This may take time, but that's where we are."
Asked if there was firm interest from interested parties and whether El Paso's project would indeed go forward, Yardley said, "I expect the fair way to look at it is that we've had a lot of interest, and now we're trying to determine which parties can sign up long-term interest and which can't. We'll know more in the next couple of months."
The E&P EBIT was $168 million, down slightly from $176 million in 4Q2004. Volumes averaged 686 MMcfe/d, excluding unconsolidated affiliate volumes of 73 MMcfe/d, which was down 11% from 2004 levels. The decrease is due to hurricane impacts, which reduced quarterly production by 97 MMcfe/d. The realized price for natural gas for the quarter was $6.55/Mcf, compared with $6.18/Mcf a year earlier. Total per-unit cash costs increased to an average of $2.05/Mcfe, ahead of $1.69 in 4Q2004, primarily because of higher production taxes resulting from higher prices and higher corporate and division overhead.
"We had a good year, but we know there's still room for improvement," said E&P Chief Lisa Stewart. She noted earnings were down 5% and production levels were off 9% from a year earlier mostly because of the shut ins in the Gulf of Mexico following the third quarter hurricanes. "Without the downtime, we would have been within 2% of our 2004 volumes, or relatively flat."
The Marketing and Trading segment reported an EBIT loss of $224 million for the quarter, compared with a loss of $85 million in 4Q2004. The 2005 loss was a result of mark-to-market losses in the power book and sales of the company's power contracts, including the Cordova tolling agreement. Also included in the 4Q2004 power book loss were locational power price differences between eastern PJM and the west PJM hub. These losses were partially offset by mark-to-market gains during the quarter relating to production-related swap and options contracts where lower gas prices reversed a portion of losses taken in earlier quarters of 2005.
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