Despite the lackluster results from most of its operating companies, El Paso Corp. last week reported a significant corporate-wide gain in earnings during the first quarter thanks in large part to a nearly $2 billion infusion from asset sales. This was a complete about-face from the poor performance that it turned in for the same period a year ago.

The Houston-based energy giant posted first-quarter net income of $383 million, or 72 cents per diluted share, against a net loss of $400 million, or 80 cents per diluted share, during the same period in 2001. The results factored in $101 million in non-recurring charges stemming from an impairment of the company’s investments in power generation assets and oil reserves in Argentina, expenses related to its international oil and gas production activities, and the effects of a change in an accounting standard. In 2001, they included after-tax merger-related costs of $890 million and an after-tax net extraordinary loss related to FTC-ordered asset sales of $10 million.

Prior to deducting the $101 million in charges, El Paso’s first-quarter earnings totaled $484 million, or 90 cents per diluted share, against net income of $500 million, or 96 cents per diluted share, for the same period in 2001. Earnings before interest expenses and taxes (EBIT) were put at $684 million, compared with a loss of $68 million for the first quarter a year ago. The company projected that its per-share earnings for the second quarter would be 60 to 68 cents, followed by 85-89 cents for the third quarter, and 95-98 cents for the fourth quarter.

The energy company saw its operating revenues for the first quarter slide to $13.18 billion, compared to $17.76 billion during the first quarter in 2001.

In a conference call with analysts Thursday, Chairman William Wise said El Paso had a “very solid quarter,” during which he noted the company surpassed ExxonMobil as the largest natural gas producer in Texas, managed to reduce its debt to equity ratio, eliminated rating triggers associated with off-balance sheet transactions, was close to completing a $3 billion credit agreement, and continued to push further into the liquefied natural gas (LNG) business. The company’s board of directors has authorized the company to make a “major strategic move” into the LNG area, according to El Paso officials.

However, nearly all of El Paso’s individual business sectors — gas pipelines, production, and processing/gathering — posted lower earnings (prior to excluding one-time charges, interest expense and taxes) compared to a year ago. The exception was El Paso Merchant Energy, which saw a slight gain.

Offsetting these losses was the $1.75 billion that El Paso received from asset sales during the first quarter. This allowed the company to reduce its overall debt by 0.8%, according to Wise. He further noted that El Paso has just identified an additional $250 million in assets that it plans to sell in the future to further improve its balance sheet.

The first-quarter 2002 EBIT earnings for the El Paso Pipeline Group were $399 million against $422 million during the same period a year ago, the company reported. El Paso blamed unusually warm weather across the nation during the first quarter for reduced total throughput. It noted that its natural gas pipelines serving the western and midwestern regions of the country partially offset the lower results from pipelines in the East.

Likewise, first quarter earnings for El Paso Production fell 16% to $209 million from $248 million during the same period in 2001, due in large part to substantially lower prices for natural gas liquids. Gas production during the first quarter of 2002 was estimated at 1.48 Bcf/d, which was essentially flat with the previous year. Realized gas prices were $3.46/Mcf compared with $3.48/Mcf during the first quarter in 2001.

The production fall-off was par for the course, with Wise noting that the industry is expecting a drop of anywhere from 2% to 11%. Everyone recognizes that there is an “imbalance coming.” Nevertheless, El Paso “continues to have excellent results in South Texas,” company officials said, and is moving further into the Gulf deepwater, where it reported it has 41 identified prospects.

Natural gas liquids production, however, rose 59% to about 55,400 b/d during the first quarter, primarily due to the start-up of production from new fields in the Gulf of Mexico, the company said. But realized liquids prices during the first-quarter period fell sharply to $15.68/barrel from $27.42/barrel a year ago.

El Paso reported that it has completed or executed agreements to sell $1 billion in oil and gas assets, including $94 million of related gathering and processing facilities. In total, it said it sold 1,066 Bcf equivalent (Bcfe) of proved reserves for $913 million, or 86 cents per Mcfe. Based on these sales, El Paso estimated that its 2002 annual production will be about 500 Bcf of natural gas and 16.7 million barrels of liquids. Current production, excluding properties destined for sale, is 1,359 MMcf/d of gas and 51,020 b/d of liquids, according to El Paso.

El Paso Merchant Energy posted first-quarter EBIT earnings of $405 million against $394 million during the same period a year ago due largely to the higher income from the company’s PURPA power contract restructuring activities. “The company continues to enjoy a high level of activity in this area and a substantial backlog of additional opportunities,” El Paso said.

Marketing, customer activity and trading contributed EBIT profits of $73 million during the quarter, reflecting weaker fundamentals in natural gas, power and petroleum markets, El Paso noted. The EBIT for this area was reduced by $61 million during the quarter as a result of El Paso’s decision to revise its methodology for calculating its valuation reserves for its trading portfolio, the energy company said.

Despite the lower earnings in this area of its business, El Paso still is “perceived as one of the stronger, if not strongest” traders of energy products, the company said. The company has a “firm backlog” of approximately $400 million in natural gas and power activity, according to El Paso.

El Paso’s Field Services segment turned in a first-quarter EBIT of $51 million, down from $65 million during the same period in 2001. The decline was primarily due to lower processing margins and gathering volumes, it said. Gathering volumes fell 7% to 5,706 BBtu/d, while processing volumes rose 2% to 3,969 BBtu/d. Average gathering and transportation margins rose 16 cents/MMBtu from $14 cents/MMBtu during the first quarter of 2001, El Paso reported. But first-quarter processing margins fell to 11 cents/MMBtu from 17 cents/MMBtu a year ago.

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