El Paso increases liquidity to help support trading operation
Ralph Eads, president El Paso Merchant Energy, a unit of El Paso Corp., Thursday said the earnings contribution from the company's marketing and trading operation will be $100 million less for 2002 than previously expected. Eads also said more capital will be required to support the trading operation since the Enron debacle.
HOUSTON, Dec. 13 -- Ralph Eads, president El Paso Merchant Energy, a unit of El Paso Corp., Thursday said the earnings contribution from the company's marketing and trading operation will be $100 million less for 2002 than previously expected.
Eads also said more capital will be required to support the trading operation since the Enron debacle. El Paso has moved to secure the extra liquidity needed for its trading operation and for the balance sheet with proposals to sell $2.5 billion in assets and an equity offering designed to breathe liquidity into the company as it moves $2 billion in off-balance sheet debt back to the balance sheet.
"The trading business will take more equity now and the cost of capital has gone up for this business," said El Paso Chairman Bill Wise.
Credit rating agencies are toughening their balance sheet requirements, requiring more capital to support energy trading operations. They are also taking a closer look at mechanisms that can accelerate debt when certain conditions are met. Analysts also observed counterparties in the energy trading and marketing business are requiring more guarantees.
Louis Gagliarni, an analyst with John S. Herold, Stamford, Conn., said firms engaged in physical commodities transactions with merchant companies are requiring more collateral than before. "Just like stock margins can rise during times of uncertainties, energy players are getting nervous and want more assurances," he said.
Bruce Connery, El Paso vice-president, investor relations, said trading "counterparties are requiring a stronger balance sheet now." He said actions being taken by El Paso will put El Paso Merchant in a good position to actually increase trading.
Meanwhile, the company lowered its estimates for earnings contributions for 2002 from El Paso Merchant by $100 million. Next year, reflecting the reduced forecast, executives said the trading operation is expected to contribute $1.5 billion, down from $1.6 billion. This year the El Paso Merchant is expected to contribute $1.3 billion.
Connery said the $100 million reduction in 2002 will come mainly from lower anticipated earnings on international assets. Eads also said 30% of merchant energy's earnings had been booked using so-called "mark to market" accounting. These are deals that are not consummated for at least 90 days. Earnings associated with these types of transactions are extremely volatile, industry observers said.
Company executives said, however, El Paso Merchant Energy is experiencing increased margins. Eads said demand for long-term deals is increasing as customers who had contracts with Enron look for a "replacement."
Wise predicted lower electricity prices and sputtering progress on deregulation of the electricity markets will create opportunities for El Paso. He said opportunities will arise out of the poor economic conditions as merchant companies sell off power plants and other assets under distress.