El Paso Corp.’s securities filing late last week revealed that its Merchant Energy segment, which includes the company’s trading and risk management functions, posted an astounding increase in 2000 earnings before interest and taxes over 1999. The segment posted $3 million in EBIT in 1999, compared with $563 million for 2000.

For the year 2000, El Paso’s trading gross margin from physical energy commodity sales was $406 million, a $315 million increase over 1999’s $91 million mark. The trading gross margin from 1998 to 1999 only increased by $20 million. Power sales between 1999 and 2000 contributed the largest spike, rising from 79,361 MMWh in 1999 to 113,652 MMWh for 2000. Natural gas sales creeped higher, from 6,713 to 6,899 BBtue/d.

El Paso said the rise in commodity marketing and trading margins could be attributed to “significant price volatility” in gas and power markets which elevated the value of the company’s trading portfolio in 2000. El Paso also indicated that higher income from power transactions originated in 2000 versus 1999, also played a part in the increase.

As of March 2001, Merchant Energy set its exposure for sales of power and gas to the state of California, including receivables related to its interest in California power plant investments, at approximately $50 million.

“During the latter half of 2000, and continuing into 2001, California has experienced sharp increases in natural gas prices and wholesale power prices due to energy shortages resulting from the concurrence of a variety of circumstances, including unusually warm summer weather followed by high winter demand, low gas storage levels, poor hydroelectric power conditions, maintenance downtime of significant generation facilities, and price caps that discouraged power movement from other nearby states into California,” the company said in its filing. “We have historically been one of the largest suppliers of energy to California, and we are actively participating with all parties in California to be a part of a long-term, stable solution to California’s energy needs.”

El Paso’s production segment also made leaps and bounds in 2000. El Paso Production Co., the third largest gas producer in the United States, posted a dismal $257 million EBIT loss for 1999, but reported a positive $196 million EBIT in 2000.

The company attributed the increase to a significant decline in operating expenses. Production expenses for 2000 were $405 million lower than in 1999. The decrease was primarily due to full cost ceiling test charges incurred in the first quarter of 1999 and decreased 2000 labor costs as a result of an organizational restructuring following the Sonat merger.

On the whole, El Paso Energy increased its consolidated EBIT from $191 million in 1999 to $1.5 billion for 2000.

While Merrill Lynch analysts Donato Eassey, Carl Kirst, Steven Fleishman and Peter Staples were weary of two charges equaling approximately $1.7 billion relating to the Coastal Corp. merger, they remain optimistic on El Paso. About $812 million of the charge is a non-cash balance sheet cost relating to below market hedges on natural gas production. Merrill Lynch said this charge would not affect earnings, and the balance sheet impact likely would be reversed by year’s end. The remaining charge stems from company restructuring involving the merger.

“While these charges are significant, they do not change our operating EPS, nor our fundamental view on EPG’s valuation going forward,” said Merrill Lynch. Despite the charges, the firm labeled El Paso a long term “Buy.”

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