El Paso Corp. shares plummeted 22.5% to $6.20 Wednesday in response to a dramatic shift in strategy and drastic financial measures taken by the company because of its seriously weakened financial position. The company said it will cut its common stock dividend by 82%, a larger amount than was expected by some analysts, to provide about $425 million in annual cash flow. It also will sell another $2.9 billion in assets to help provide funds for continuing operations. The company currently has liquidity of $2.6 billion but only about $600 million is cash.

El Paso expects to report losses for the fourth quarter of 2002 and the full year mainly resulting from a $600 million charge against 4Q earnings because of the shutdown of its energy trading business and a $450-700 million after-tax asset impairment charge related to its Western Australian pipeline investment, telecom dark fiber, turbine inventory, and other miscellaneous power and merchant assets. The company said it expects ongoing earnings for 2002 to total $1 a share, well below the $1.31/share Wall Street forecast.

And the massive charges against earnings are expected to continue in 2003. Company officials predicted a $300 million special charge in the second quarter of this year from having to pay down about $1 billion in Project Electron debt and continuing charges from the shut down of energy trading.

The large capital requirements for this restructuring demand further asset sales. Among the assets El Paso now has on the block are about $1.1 billion in petroleum properties, excluding the Aruba refinery, and $800 million in power generation holdings. The company also announced a change in strategy that will involve exiting the LNG business, which had been so high on its list that many analysts considered it a core business for the company going forward.

Because of the rapid decline of its credit rating last year, El Paso said it has had to use about $600 million in working capital to fund the petroleum and LNG businesses and about $1 billion to fund energy trading. Funding those businesses going forward is no longer possible, executives said.

In addition to the proposed asset sales, El Paso plans to reduce capital expenditures 35% to $2.6 billion for 2003.

The new focus for the company will be on pipelines, midstream gathering and processing, exploration and production and a much smaller core of power generation assets with long-term sales contracts, company officials said during a conference call with analysts. CEO William Wise also told an analyst that an initial public offering of stock from its E&P unit was a possibility.

“In a volatile industry, we have taken significant steps to reduce expenses, strengthen our balance sheet, enhance our liquidity position, and exit the energy trading business. We have moved aggressively to address many of the issues that affected our industry and our business, and we are confident that the company is headed in the right direction,” said Wise.

He said the company intends to stick to a new five-point plan for 2003:

A total of 87% of El Paso’s 2003 capital budget will be spent on pipelines and exploration and production. El Paso wants to focus on its deep drilling program, which provides superior economic returns. El Paso Production Co. was the most active driller in the United States in 2002, and since the Coastal merger in January 2001, the company’s prospect inventory has almost doubled. Its success has been attributed to the transfer of the company’s South Texas deep-drilling expertise to the Gulf of Mexico, Canada, and Louisiana. The company’s 2003 E&P plan is focused on South Texas, coalbed methane and the deep-shelf play in the Gulf of Mexico.

El Paso has been the industry’s most active driller in the deep-shelf play and has rapidly grown its reserve position there due to a 67% success rate since 2000. The 2003 capital spending plan of $1.3 billion, which is down 48% from $2.5 billion last year, is expected to keep production roughly level with 2002 results. The company also has hedged 40% of its expected 2003 natural gas production at a Nymex price of $3.43/MMBtu, and 9% of its expected crude oil production at a Nymex price of $23.49/bbl.

Company officials also lauded their midstream operations, primarily the performance of El Paso Energy Partners, a publicly traded master limited partnership in which El Paso Corp. holds a 41% share, including the general partnership share. They praised the performance of El Paso’s interstate pipeline business and the large set of expansion projects that should provide continued solid results going forward.

El Paso’s core power business will consist of plants with long-term sales agreements that generate dependable earnings and cash flow. It plans to sell the remaining $1.1 billion of power assets in 2003. Meanwhile it is exiting the trading business and aggressively working to liquidate its remaining portfolio.

El Paso will cut its dividend to 16 cents from 87 cents per share annually. “While this decision was difficult for the board of directors, this action will provide the company with approximately $425 million in cash per year and will reduce the company’s balance sheet leverage by more than 1.5% per year,” El Paso said. The board declared a quarterly dividend of $0.04 per share.

Through cash flow from operations, the reduced capital program, lower common stock dividends, and proceeds from asset sales, El Paso expects to pay down $2.5 billion of debt and minority interest financings in 2003. The company has set a target of $150 million in cost reductions for 2003.

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