El Paso, Coastal take $1.3 billion FAS 133 charge

El Paso Corp. and merger partner Coastal Corp. Monday said they took a combined $1.3 billion noncash charge to 2000 earnings due to a change in accounting rules dealing with hedging and derivatives activities. Net of taxes, El Paso's portion of the charge was $821 million, while Coastal's was $457 million. The charges reflect lost opportunity cost from natural gas hedges in place on Dec. 31, 2000, for both companies, compared to natural gas futures prices at that time.

March 26, 2001

2 min read

By the OGJ Online Staff

HOUSTON, Mar. 26�El Paso Corp. and merger partner Coastal Corp. Monday said they took a combined $1.3 billion noncash charge to 2000 earnings due to a change in accounting rules dealing with hedging and derivatives activities.

Net of taxes, El Paso's portion of the charge was $821 million, while Coastal's was $457 million. The charges reflect lost opportunity cost from natural gas hedges in place on Dec. 31, 2000, for both companies, compared to natural gas futures prices at that time. The opportunity cost is the difference between the hedge price and the actual price of the natural gas on the New York Mercantile Exchange.

Charges related to Financial Accounting Standard (FAS) 133 do not affect reported earnings but do directly impact the stockholders' equity section of the balance sheet under "accumulated other comprehensive income,'' the company said.

Earlier this year, Chairman William Wise said 75% of this year�s production is hedged at $3.70/Mcf, including some older contracts. As these hedges roll off over time and the remaining hedges are revalued at future points in time, these FAS 133 charges to other comprehensive income should be reduced, El Paso said.

Based on current natural gas futures prices, the company said it expected the combined FAS 133 charges of $1.3 billion to be reduced by $500-$600 million as of Mar. 31, with additional reductions in succeeding quarters.

Released in June 1998, FAS 133 culminated the US Financial Accounting Standards Board's controversial and nearly decade-long effort to develop a framework for derivatives and hedge accounting. The new rule became effective in June 2000.