El Paso exits energy trading

El Paso, the largest natural gas pipeline company in the US, said in a statement that “substantially diminished business opportunities” and the higher capital costs of trading lay behind its decision to leave the sector. It previously announced in May that it was planning to reduce its exposure to trading and cut staff as it repositioned itself as an asset-based natural gas company.

But a combined $3.6 billion of asset sales in the past six months has failed to boost the company’s financial position. It posted a net loss of $69 million in the third quarter, and earnings contributions from its trading operations plunged by $336 million from the previous quarter. The company’s share price fell by 17% to $7.58 in mid-morning trading on the New York Stock Exchange following its announcement.

The move is sure to hit liquidity further, but the trading sector is by now resigned to the exit of almost all the energy merchants that have dominated the market for the past five years, according to one analyst. “No-one is surprised to hear this. Energy traders are resigned to working with low levels of activity in the over-the-counter market for at least another six to 12 months, until new entrants – specifically investment banks and European energy companies like RWE - ramp up their operations," the analyst said.

Traders estimate that liquidity in the US energy sector has fallen by as much as 70% from 2001.

El Paso plans to transfer most of its energy trading portfolio to a separately capitalised subsidiary, Travis Energy Services, by the first quarter of 2003, and liquidate the portfolio within two years.

But the move has been attacked as an example of “smoke and mirrors” accounting by Karl Miller, a former El Paso and Enron executive who now heads Miller McConville & Company, a New York-based company that buys energy assets.

“El Paso’s announcement today that they intend to set up yet another off-balance-sheet vehicle under the guise of ring-fencing the debt and obligations of their failed trading business [is] the same old story for a failed business and management team,” Miller said.

“As soon as the credit rating agencies and market focus in on a portion of debt that should be included on their corporate books, management seems to always find another off-balance-sheet vehicle push the debt on to. Unfortunately, there are no awards being given for financial engineering in the power and gas sector in this market," Miller added.

El Paso was criticised by rating agency Moody’s Investors Service earlier in the week for transferring assets to a part-owned subsidiary. A spokesman for El Paso was not available for comment.