Massive charges on international power assets and the impact of mark-to-market accounting on marketing operations led El Paso Corp. to report a second quarter loss of $238 million (minus 38 cents/share) compared with a profit of $5 million (1 cent) from the same period a year ago.

The company also reported in its Form 10-Q that it received an order in June from the Securities and Exchange Commission (SEC) requesting additional documents and information related to the United Nations’ Oil for Food Program, which governed sales of Iraqi oil.

El Paso originally received a request for information regarding The Coastal Corp.’s participation in the Oil for Food program in September 2004 from the grand jury of the U.S. District Court for the Southern District of New York (see Daily GPI, Nov. 29, 2004). El Paso acquired Coastal in January 2001.

“We have also received informal requests for information and documents from the United States Senate’s Permanent Subcommittee of Investigations and the House of Representatives International Relations Committee related to Coastal’s purchases of Iraqi crude under the Oil for Food Program,” El Paso said in its filing. “We are cooperating with the U.S. Attorney’s, the SEC’s, the Senate subcommittee’s, and the House committee’s investigations of this matter.”

In the second quarter, El Paso’s biggest losses were within the nonregulated power segment, which lost $381 million before interest and tax, compared with a profit of $102 million a year earlier. The loss included a $294 million impairment at its Macae plant in Brazil, $11 million in impairments on its Central American power assets, and $34 million in asset impairments in Asia.

Overall, El Paso’s five earnings segments — pipelines, production, field services, marketing and trading and power, reported earnings before interest and taxes (EBIT) of $613 million. The pipelines, production and field services segments contributed $1.259 billion of combined EBIT, partially offset by losses of $215 million within its marketing and trading segment and $431 million in the Power segment.

“Our Pipelines segment generated EBIT of $721 million, which was slightly above our expectations for the period,” El Paso stated in its quarterly report. “Our production segment generated EBIT of $359 million, which was slightly above our expectations for the period. Lower than expected production volumes and higher depreciation and production costs were more than offset by higher than expected commodity prices.”

The company said its marketing and trading segment generated an EBIT loss of $215 million, “which was a greater loss than our expectations. The performance was driven by significant mark-to-market losses on our production-related derivatives due to natural gas price increases during the period. In addition, our power contracts, primarily our Cordova tolling agreement, experienced significant losses during the period due to changes in natural gas and power prices.”

The field services segment generated earnings of $179 million, “which was consistent with our expectations” and primarily attributed to the sale of El Paso’s remaining interests in Enterprise.

Realized natural gas prices, which include the impact of our hedges, increased 8% while oil, condensate and NGL prices increased 33% compared to 2004.”

The production segment also is slowly turning around, the company said. Average daily production in the second quarter increased 2% sequentially from the first quarter to 775 MMcfe/d, and “was relatively stable compared with the third and fourth quarters of 2004. Specifically, during the last 12 months we have experienced increased production in our onshore region, relatively stable production in our offshore Gulf of Mexico region, and declining production in our Texas Gulf Coast region due to normal declines and mechanical well failures.”

For the rest of the year, El Paso said it expects daily production volumes for the year to average more than 810 MMcfe/d, including 10 MMcfe/d from its recent Medicine Bow acquisition and 24 MMcfe/d from a Medicine Bow affiliate.

El Paso will hold a conference call with analysts to discuss its 2Q earnings at 10 a.m. EST on Tuesday. The call will be webcast from www.elpaso.com.

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