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UBS Acquires El Paso Trading Positions for Undisclosed Amount

Investment giant UBS on Friday said it acquired about 200 physical and financial natural gas positions of El Paso Corp.'s noncore merchant natural gas portfolio in late September. Terms of the transaction were not disclosed.

The Swiss-based banker said it would use a total return swap to allow novation consents within El Paso Marketing LP (EPM) counterparties to occur over time. Most of El Paso's remaining trading positions were in the eastern United States and Canada with 21 different counterparties.

"This was a win-win transaction between UBS and EPM as it levered UBS' core strengths to provide a structured solution that met all EPM's goals for their portfolio transfer," said UBS' Mike Curry, head of U.S. Structured Products.

El Paso in late 2003 announced it would exit several businesses, including physical gas trading, to focus exclusively on domestic natural gas pipelines and exploration and production (see Daily GPI, Dec. 16, 2003). In September 2005, CEO Doug Foshee said EPM's trading book had shrunk from a peak of about 40,000 contracts to fewer than 4,000 contracts.

Last December EPM said it sold most of its remaining wholesale power trading portfolio to Morgan Stanley Capital Group Inc. for $442 million (see Daily GPI, Dec. 20, 2005). The assets included all power positions other than the Cordova tolling arrangement and some positions in the PJM power pool. Constellation Energy Commodities Group Inc. in January received $177 million from El Paso to assume the Cordova power purchase agreement (PPA) between EPM and Cordova Energy Co. LLC (see Daily GPI, Jan. 4).

Following the sale to Morgan Stanley, EPM's credit exposure was reduced from 24 counterparties to two, both of which were said to be investment grade. In addition, EPM's power deal count was reduced to 104 deals from 921 deals. EPM had continued to manage the remaining PJM power portfolio with its only exposure through the locational basis price volatility associated with delivery obligations in the PJM market.

On Nov. 6, El Paso reported a 3Q2006 marketing and trading segment loss of $108 million, compared with a loss of $398 million in 3Q2005 (see Daily GPI, Nov. 7). Results were primarily driven by a noncash, mark-to-market (MTM) loss on gas supply agreements with its Midland Cogeneration Venture (MCV) because of its sale. In 3Q2005, earnings were impacted by a $382 million MTM loss on production-related hedges, partially offset by a $45 million MTM gain on a tolling agreement.

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