El Paso Corp. CEO Doug Foshee on Friday issued a report card on the progress the Houston-based company has made in the past few months, and though it’s not in line for valedictory status at this point, the company expects to achieve its production target this year. And, he said, there’s been above-average progress in asset sales and in reducing expenses.

That’s the good news. However, the company’s CFO also warned that the 41% proved reserves cut announced in February may result in pre-tax charges higher than $1 billion it estimated in March. And this year’s production isn’t expected to come anywhere near last year’s.

Foshee and his management team held a conference call with financial analysts Friday morning to detail the company’s progress to date, and to provide an update on its finances. Foshee said the company was ahead of schedule on selling assets and reducing its debt, and its first-quarter cash flow was higher than expected. But CFO Dwight Scott warned that more bad news may be ahead because of the 41% reduction in its proved reserves, which was announced in February (see Daily GPI, Feb. 18).

In previous disclosures on the impact of the reserve revisions, the company stated that the pre-tax ceiling test impact as of Dec. 31, 2003 would be approximately $1 billion if the impact of the revisions were all reflected in the fourth quarter of 2003 (see Daily GPI, March 11). Scott did not detail Friday what the final financial impact might be, but the announcement sent El Paso’s shares downward. At the end of the day, El Paso was down 56 cents, to close at $7.17.

“The combination of lower historical reserves, different and often lower historical natural gas prices, and finding costs over this period may result in cumulative ceiling test charges that are greater than the $1 billion pre-tax charges that we expected to take in the fourth quarter of 2003,” Scott said during the call.

Foshee said financial restatements are underway for El Paso Corp. and its subsidiaries from 1999 through 2003 based on the reserves revisions. Also, its first quarter 2004 Form 10-Q “will be delayed pending the filing of the Form 10-Ks.” No date was given for the restatements, but the annual stockholder meeting is scheduled for Sept. 9, 2004.

Lisa Stewart, who took over the beleaguered exploration and production (E&P) unit in January, said she expects El Paso to hit the low end of its 2004 oil and gas production target this year. El Paso sharply cut its projections a few months ago and is cooperating with an investigation by the Securities and Exchange Commission (see Daily GPI, May 4).

El Paso’s long-range plan, said Stewart, is to restore the production business to profitable growth, and as part of that process, the company is reviewing all drilling opportunities and establishing a capital allocation process designed to produce more predictable results. In addition, the near-term focus is on a “return to leadership in both drilling and operating costs,” and plans an overall review in June.

“With our results to date and the remaining capital program, we believe we can achieve the low end of our production target of 850-950 MMcf/d average for the year,” said Stewart during a conference call with analysts. The average daily production rate for the second quarter is estimated to be 823 MMcfe/d, down from 956 MMcfe/d in the first quarter and 1,003 MMcfe/d in the fourth quarter of 2003. Production for 2003 was 1,169 MMcfe/d.

Besides hitting its production targets, Foshee said El Paso had made “meaningful progress” on some of the “key challenges” the company identified in its long-range plans. He said El Paso was “well ahead of schedule for our asset sales, and we have received good value for the assets we have sold.” The company also has eliminated between $40 million and $50 million of annual expenses through a reorganization completed in the first quarter.”

Foshee said, “taken together, these results represent significant progress toward achieving the goals we laid out for the market last December. In addition, El Paso’s first quarter cash flow was higher than anticipated in our plan, and this is helping us further accelerate our debt reduction.”

El Paso’s long-range goal is to sell $3.3-3.9 billion of assets by the end of 2005. Since Dec. 1, 2003, it has announced the sale or sold about $3.5 billion.

Because of the progress in asset sales, a significant dent has been made in the company’s debt, Foshee noted. The company’s debt, net of cash, was reduced by approximately $2.4 billion between Sept. 30, 2003 and March 31. By the end of this year, El Paso expects its net debt to be approximately $17 billion, because $1.9 billion of previously announced asset sales are expected to close by then. The closings also will result in the elimination of approximately $1 billion of non-recourse debt from the company’s balance sheet, which will be partially offset by approximately $275 million of non-recourse financing for the Cheyenne Plains Pipeline.

El Paso’s liquidity increased to approximately $2.7 billion at the end of the third quarter, which consisted of $1.5 billion of readily available cash and $1.2 billion of capacity available under its $3 billion bank facility. The company defines “readily available cash” as cash on deposit or held in short-term investments that is easily accessible for general corporate purposes. During the second quarter of 2004, El Paso purchased approximately $130 million (face value) of its 7.71% Gemstone notes due October 31, 2004 at an average price of 101.6%, reducing its debt maturities for the remainder of 2004.

El Paso’s main business, the pipeline group, “continues to meet or exceed the assumptions included in the company’s long-range plan, and the inventory of expansion opportunities remains solid.” The Cheyenne Plains Pipeline project, which has a filed cost estimate of $420 million, has received Federal Energy Regulatory Commission approval and is currently ahead of schedule with expected completion in early 2005. The company is in advanced discussions to obtain approximately $275 million of the capital required for this project through a non-recourse project financing.

Foshee said that the marketing business had been profitable in the final quarter of 2003, but incurred a minor loss in 1Q2004. The marketing business also is making “solid progress” in reducing the number of contract positions in its trading portfolio, which was comprised of more than 35,000 positions at the end of 2002. El Paso now expects to have fewer than 6,000 positions at year-end 2004.

El Paso also had made steady progress selling domestic power assets during 2004, he said. In addition, the financial performance of its international power assets has been “slightly ahead of the assumptions included in the long-range plan.”

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