El Paso Corp., owner of the largest U.S. natural gas pipeline system, on Wednesday reported an unexpectedly large net loss for the second quarter as a result of a series of write-offs tied to discontinued operations, asset impairments and the western energy settlement that it says are intended to turn the financially strapped company around.

The Houston-based energy company saw a net loss of $1.19 billion, or $1.99 per diluted share, for the second quarter compared to a loss of $45 million, or eight cents per diluted share, for the same period a year ago.

El Paso’s second-quarter performance was affected by an after-tax charge of $836 million for discontinued operations primarily related to its decision to sell its Aruba refinery, and a $264 million charge attributable to an impairment of its telecommunications operations and the western energy settlement .

The company’s stock fell 52 cents to $6.88 in early-morning trading, immediately following the release of the earnings report, then rebounded to close at around $6.95 a share, down by more than 6% for the day.

Excluding the one-time charges, El Paso reported a net income loss of $8 million, or 1 cent per share, for the April through June period. This was far shy of the analysts’ consensus earnings-per-share (EPS) estimate of 13 cents for the company in the quarter, as reported by the research firm Thomson First Call. El Paso turned in an EPS of 53 cents in the second quarter of 2002.

Assuming the company doesn’t incur any other significant charges, El Paso said it expects to report a net loss of $2.35 to $2.65/share for the entire year. The company’s continuing operations, however, will likely turn in earnings ranging from 15 to 45 cents/share, it believes.

Thomson First Call analysts had predicted an annual EPS of 78 cents for the energy company. As a result of the dismal second-quarter performance, Credit Suisse First Boston said Wednesday it was reducing its EPS estimate for El Paso (from continuing operations) this year to 40 cents from 90 cents. It also lowered its 2004 EPS estimate to 60 cents from $1.

“Although this has been a difficult year for El Paso shareholders, we believe that the actions we are taking will position us for further debt reduction and earnings growth in 2004,” said Chairman Ronald L. Kuehn Jr.

In an effort to restore confidence in the sagging company, El Paso announced that Douglas L. Foshee will take the helm as president and CEO beginning Sept. 2. It also said the company has increased its year-to-date cash flow from operations to $1 billion from $527 million for the first half of 2002; reduced its consolidated obligations senior to common stock by $1.5 billion; completed 78% of its planned asset sales for a total of about $2.7 billion; and has completed several key financings and extended its near-term debt maturities. As for the company’s liquidity, it said it had $3 billion of available cash and lines of credit as of July 31.

On a segment basis, El Paso said its reported earnings before income taxes (EBIT) for the pipeline group were $145 million in the second quarter, far below the $323 million for the same period a year ago, due to a $154 million charge primarily related to the western energy settlement. Excluding the one-time charges, the pipeline group’s EBIT was $299 million for the latest period versus $324 million for the second quarter in 2002.

Other factors affecting pipeline results were the sale of Colorado Interstate Gas Co.’s production properties, the sale of ANR Pipeline’s ownership interest in the Alliance pipeline system, and lower revenues on the flagship El Paso Natural Gas pipeline system. These factors were partially offset by the reactivation of the Elba Island liquefied natural gas (LNG) facility in Georgia and new pipeline expansion projects, including Southern Natural Gas Co.’s South System 1 expansion, it noted.

Total throughput of El Paso-owned pipelines during the second quarter was 19,007 MMcf/d, compared with 19,080 MMcf/d during the comparable quarter in 2002.

El Paso’s production segment saw a reported EBIT of $168 million for the quarter, compared to only $7 million for the second quarter in 2002. But the company noted that the 2002 results were negatively affected by a $234 million ceiling test charge associated primarily with Canadian and other international natural gas and oil properties.

Second-quarter equivalent production fell 25% due largely to sales of proved reserves since early 2002, while the realized prices for both gas and oil rose during the period. El Paso estimated it sold 96,857 MMcf of gas at $4.06/Mcf during the second quarter, compared to 120,020 MMcf of gas at $3.45/Mcf during the same period a year ago.

El Paso said it has hedged 108 TBtu of its remaining expected 2003 gas production at a Nymex price of $3.65/Mcf. For 2004, it noted it has hedged 75 TBtu of its gas production at a Nymex price of $2.70/Mcf.

The company said its exploration program has had good results so far this year, particularly in the deep shelf Gulf of Mexico and Brazil. However, “delays in connecting new wells, the loss of production from existing Gulf of Mexico and South Texas wells, and a faster than anticipated decline of base production have caused reduced expectations for 2003 production.” It now projects that its full-year 2003 production will range between 450 and 470 Bcfe, approximately 85% of which will be natural gas.

The reported second-quarter EBIT for El Paso Field Services — the company’s midstream business — was a loss of $54 million, compared to a gain of $54 million for the comparable period last year. The quarter’s result were influenced by an $80 million impairment of a joint venture interest in the Dauphin Island pipeline system, the Mobile Bay gas processing plant and related assets, as well as by the sale of approximately $1 billion of midstream assets during the past year to GulfTerra Energy Partners. Absent the one-time charges, Field Services’ EBIT for the second quarter was $23 million, El Paso reported.

As a result of its asset sales, El Paso Field Services’ gathering and transportation volumes plunged to 444 BBtu/d during the second quarter from 2,265 BBtu/d in the same period in 2002, according to the company. Total processing volumes dipped to 3,202 BBtu/d for the latest quarter, compared to 3,956 BBtu/d in the second quarter a year ago.

The reported second-quarter EBIT of El Paso Merchant Energy Group, which includes domestic and international power, LNG and energy trading, fell to $76 million from $123 million for the prior-year period due partly to an $18 million charge for the western energy settlement.

Absent one-time charges, El Paso’s power business turned in a pro-forma second-quarter EBIT of $169 million versus $213 in the year-earlier period. Its trading operations had a pro-forma EBIT loss of $95 million in the quarter, compared with a $132 million EBIT loss in the second quarter in 2002. A lower spread between gas and power prices at the end of the quarter caused a $31 million mark-to-market loss on a power tolling arrangement in the Midwest, the company said. El Paso noted it also incurred approximately $15 million of demand charges for transportation and storage contracts that were not fully utilized due to decreased activity as the company continues to exit the trading business.

El Paso says it has made “consistent progress” in exiting from its trading operations. Since the beginning of the year, forward contract positions have dropped 40%, including the liquidation of El Paso’s European trading portfolio and its coal, currency and interest rate books, it noted.

El Paso’s LNG and “Other” businesses fared no better in the second quarter, reporting a pro-forma EBIT loss of $17 million, compared with a gain of $53 million a year ago. This was partly the result of mark-to-market losses on LNG supply contracts this year, El Paso said. It noted that it is continuing to pursue the sale of LNG supply contracts, as well as its domestic power facilities.

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.