El Paso Corporation

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El Paso Corporation

1001 Louisiana Street
Houston, Texas 77001
U.S.A.
Telephone: (713) 420-2600
Fax: (713) 420-6030
Web site: http://www.elpaso.com

Public Company
Incorporated: 1928
Employees: 11,855
Sales: $12.1 billion (2002) Stock Exchanges: New York Ticker Symbol: EP
NAIC: 486210 Pipeline Transportation of Natural Gas

With over 55,000 miles of pipeline in its arsenal, El Paso Corporation—formerly known as El Paso Energy and the El Paso Natural Gas Company—owns and operates one of the largest natural gas transmission systems in North America and is one of the region's largest independent natural gas producers. The company expanded rapidly in the mid-to late 1990s, acquiring Tenneco Energy, Sonat Inc., and Coastal Corporation in multi-billion dollar deals. El Paso faced controversy in the early 2000s related to its involvement in California's energy crisis. In addition, accounting errors forced it to restate its financial performance from 1999 to 2003. The revisions slashed the value of its oil and gas assets by $2.7 billion. El Paso has been divesting non-core assets and restructuring in attempt to revamp its image.

Early History

Paul Kayser, a young Houston attorney, founded El Paso Natural Gas in 1928. In 1929, Kayser obtained a franchise from the El Paso City Council to sell natural gas to the city. He proposed construction of a 200-mile pipeline that linked El Paso with natural gas wells located near the city of Jal, New Mexico. After obtaining financing for the ambitious project, he immediately began hiring work crews and securing equipment and supplies.

Pipeline construction methods at the time were crude in comparison to techniques developed during the mid-1900s. The lines were built by hand and the men who worked on the lines had to be extremely tough. Difficulties related to building Kayser's pipeline were amplified by the fact that his pipes would cross some of the most difficult terrain in the southwestern United States. The pipeline had to cross 200 miles of rivers, mountains, and deserts, and it had to be built to withstand all types of natural disasters. Although the work was tedious and time-consuming, Kayser's crews pioneered new methods of welding, ditching, and crossing unique terrain. The line was finished and put into service in 1930.

Unfortunately for Kayser and his fledgling start-up, the Great Depression began shortly after the building of the pipeline. El Paso generated profits of $283,000 during the pipeline's first year of operation, but the Depression-era economy threatened to quash the venture. Fortunately, the city of El Paso continued to buy Kayser's gas. The company was able to pay its debts and to expand its pipeline system during the early 1930s. The company built new lines extending to the copper mining areas of southern Arizona and northern Mexico and in 1934 extended service to Tucson and Phoenix, Arizona.

During the late 1930s, El Paso enjoyed steady growth. It built new pipeline systems extending throughout the oil-and gas-rich Permian Basin in south Texas and extended lines north and west to accommodate growing regional demand. By the late 1930s, the company was generating revenue of about $5 million annually and was beginning to post strong profit gains. Expansion slowed during World War II as the nation's labor and resources were steered toward the war effort. Following the war, El Paso benefited from strong demand for natural gas in the growing southwestern United States. As the postwar economy and population boomed, cities throughout the region demanded energy sources to fuel growth and development.

El Paso experienced explosive growth in the late 1940s. Gains during that period were due in part to the completion of a 700-mile pipeline reaching from El Paso's Permian Basin operations to California. El Paso began supplying gas through a 26-inch pipeline and also began construction of new, larger pipelines aimed at the burgeoning California market. As a result of those efforts, El Paso's assets rose from about $23.5 million in 1945 to $285 million in 1950. Meanwhile, sales increased from $9 million to $41 million and net income climbed to a record $9 million in 1950.

Growth and Diversification: 1950s–70s

During the early 1950s, El Paso continued to post steady gains as demand for its natural gas increased. It built or purchased pipes reaching as far north as Ignacio, a small town in southern Colorado, and continued its westward expansion, bolstering its feeder pipes going to California and increasing sales throughout Arizona and New Mexico. By 1955, El Paso captured nearly $30 million in profits annually from about $180 million in sales. By the early 1960s, those figures had risen to more than $40 million and $400 million, respectively.

El Paso's big gains during the late 1950s were partially attributed to its 1957 acquisition of part of the operations of Pacific Northwest Pipeline Corporation. The acquisition gave El Paso a presence in several western and northwestern states, with pipelines reaching as far as Washington and connecting to other companies' networks in Canada. In addition to geographic expansion, El Paso began to diversify during the 1950s into related oil and chemical businesses. It created El Paso Products Company as a subsidiary to manufacture chemicals from natural gas derivatives. Despite forays into other industries El Paso remained focused on buying, transporting, and selling natural gas.

After 35 years of leadership, El Paso's founder left his chief executive duties during the early 1960s. The company's president, Howard Boyd, replaced Kayser. Kayser had transformed his company from a tiny start-up supplier with 200 miles of pipeline to a $500 million corporation with 20,000 miles of pipe delivering gas throughout the western United States. Throughout his reign, he remained committed to the pragmatic development of natural resources and sound business practices. "There is nothing more vital to our economy than the orderly, wise, and free use of our precious natural resources developed under practical, intelligent conservation policies," Kayser stated in 1954.

El Paso continued to grow at a rapid pace during the late 1960s and early 1970s. Although natural gas industry profits were generally cyclical, El Paso's overall sales and earnings grew during the period. By the early 1970s, El Paso operated one of the nation's largest pipeline systems. It stretched from northern Mexico to the northeast tip of Washington, with extensions throughout the Southwest and reaching into Wyoming, Idaho, and Oregon. Although federal regulators kept El Paso from operating its own pipes in specified regions, its lines connected with those of other operators to give El Paso access to markets in California, Kansas, Oklahoma, and Nevada.

Partly in an effort to minimize its exposure to cyclical gas markets, El Paso diversified during the late 1960s and 1970s. By 1974, non-gas operations contributed about one-third of El Paso's annual $1.3 billion in revenues. The company's largest non-gas division was its petrochemical business, which manufactured a variety of chemicals used in the growing synthetics industry. El Paso also became heavily involved in the fiber and textile industries, particularly nylon, rayon, and other synthetics. Other El Paso's subsidiaries were involved with mining, gas and oil exploration, insurance, copper wire, and real estate development.

One of El Paso's most intriguing and promising ventures during the 1970s was a venture into liquefied natural gas. In 1969, El Paso reached what it termed a "historic agreement" with Sonatrach, an Algerian national oil and gas company. Under the arrangement, the Algerian company would deliver a billion cubic feet of natural gas in liquid form daily to El Paso Natural Gas. El Paso would then distribute the low-cost gas through its pipeline network. The ambitious project required the construction of a nine-ship fleet of special tankers to be owned and operated by El Paso, as well as the construction of storage terminals on the East Coast and in Algeria. El Paso moved 230 employees to Algeria for the project. Liquefied gas deliveries commenced in 1978 and made a significant contribution to El Paso's bottom line.

Although El Paso's liquefied gas venture represented an important success during the 1970s, its non-gas-related operations were generally less fruitful. El Paso jettisoned some of those operations and posted losses from major activities like chemical and fiber manufacturing. To make matters worse, El Paso was harmed by a Supreme Court decision in 1974. For several years, federal regulators had been trying to renege on their decision in the late 1950s to allow El Paso to acquire its northern operations. El Paso fought their efforts but was defeated. In 1974, El Paso was forced to divest the holdings, effectively terminating its natural gas operations north of New Mexico and Arizona.

Despite some setbacks, El Paso managed to sustain long-term growth during the 1970s. Sales dipped following the 1974 divestiture but surged back up to $1.15 billion in 1975, rising to more than $2 billion in 1978. Earnings, however, fluctuated around $50 million to $60 million annually. El Paso's huge revenue gains during the late 1970s reflected turbulence in energy markets.

El Paso benefited from the Natural Gas Policy Act which was passed in 1978. That act basically allowed El Paso to begin competing with other Texas companies for the purchase of natural gas reserves. El Paso greatly increased its reserves after the act was passed, building up a sizable reserve base near its Permian Basin pipeline operations as well as in other regions of the country. It simultaneously boosted its output capacity to meet the expected surge in demand during the 1980s.

Company Perspectives:

The root word of stewardship, steward, means custodian or keeper. The key idea behind this value is service. As active stewards of El Paso, we serve our fellow employees, our customers, and our shareholders by consistently building long-term value. Of all our five values, this value has the most intrinsic worth. By embracing the idea of stewardship and striving to get it right, El Paso is continuously working toward excellence as a company.

As a result of strong natural gas markets and El Paso's increased output capacity, sales topped $2 billion in 1978, rose past $3 billion in 1980, and then increased to nearly $4 billion in 1981. In 1981, El Paso reported record earnings of $147 million. Unfortunately, El Paso's profit gains were short-lived. During the late 1970s and early 1980s, industry competitors had hustled to boost natural gas output capacity with expectations of strong demand. However, a weak economy and a newfound emphasis on energy conservation slowed market growth. Supply outstripped demand in 1982, and natural gas prices dropped. Furthermore, El Paso's chemical businesses suffered major setbacks in 1982. Although El Paso's sales rose to $4.3 billion in 1982, its net income dropped to $53 million.

The Burlington Purchase: 1983

The El Paso Company, as it became known in the 1970s, ceased to exist as an independent corporation in 1983. The company was purchased by Burlington Northern Inc. and became a wholly owned subsidiary. Burlington was a $9 billion conglomerate active in mineral development, timber and forest products, and rail carrier systems. Although El Paso was experiencing some problems at the time, Burlington viewed the company as an excellent complement to its existing mineral development operations.

The acquisition seemed like a good move, particularly in light of new federal legislation scheduled to take effect during the mid-1980s. The legislation had effectively deregulated certain aspects of the natural gas industry. Prior to the mid-1980s, El Paso, in accordance with the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978, was in the business of purchasing gas from other producers, transporting the gas, and then selling it to local distribution companies. Its business began to change in 1984. Federal legislation passed in 1984 had a tumultuous effect on prices, transportation, and contractual relationships between customers and suppliers. The net effect was that natural gas industries and markets became more competitive. As a result, El Paso shifted from merchant to distributor during the late 1980s and early 1990s. Rather than owning the natural gas it transported, it simply provided transportation services for a fee charged to the owners and/or buyers.

El Paso prospered under Burlington's management. Over the next few years, Burlington spun off or sold several of El Paso's nonperforming divisions and streamlined the company's natural gas operations. El Paso's conversion to transportation services, moreover, was well timed. During the late 1980s, gas prices remained suppressed. While many of Burlington's competitors went deep into debt buying up reserves, Burlington emphasized the service end of the industry through El Paso. Going into the early 1990s, El Paso was recognized as the low-cost provider of natural gas transportation services in its market.

In the early 1990s, Burlington changed its business strategy. After shunning the natural gas exploration and production business for several years, it decided to shift its focus to take advantage of a projected upturn in natural gas prices. During the early 1990s, Burlington sold most of its subsidiaries and rein-vested the proceeds into natural gas reserves.

The El Paso Spin-off: 1992

Burlington completed the spin-off of El Paso Natural Gas Company on June 30, 1992. William A. Wise was selected to act as president and chief executive of the once again independent El Paso. The 45-year-old Wise had been with El Paso since 1970, working as an attorney and then serving in various management positions. Wise was credited with helping the company make a transition to transport services during the late 1980s and with helping to make El Paso a low-cost industry leader. When El Paso regained its independence, its pipeline consisted of a 20,000 mile network connecting three oil producing regions in Texas, Oklahoma, and New Mexico to buyers primarily in California, Arizona, New Mexico, and Texas. Sales during 1993, its first full year of operation, topped $900 million, about $90 million of which was net income.

El Paso was in a relatively strong position in its industry going into the mid-1990s. It was the largest supplier of natural gas to the state of California and had successfully changed from merchant to transporter in compliance with new (1992) federal regulations. However, it was also facing obstacles. Most notably, the California gas market was becoming glutted, dampening profits in El Paso's most important region. Nevertheless, investors were enthusiastic about El Paso's chances, as evidenced by a doubling of the company's stock price between 1992 and early 1994. El Paso was pinning its long-term hopes on the rapidly expanding Mexican market, to which it had unsurpassed access. It was also engaged in an ambitious effort to vastly increase its access to the northern California natural gas market.

Key Dates:

1928:: Paul Kayser establishes El Paso Natural Gas.
1930:: The company's pipeline is finished and put into service.
1957:: Part of the operations of Pacific Northwest Pipeline Corporation are acquired.
1969:: El Paso reaches a liquefied natural gas agreement with Sonatrach, an Algerian national oil and gas company.
1983:: Burlington Northern Inc. buys El Paso.
1992:: Burlington completes the spin-off of El Paso Natural Gas Co.
1996:: El Paso acquires Tenneco Energy.
1999:: Sonat Inc. is purchased.
2001:: The company buys Coastal Corporation in a $24 billion deal.
2002:: FERC rules that El Paso is guilty of manipulating the California natural gas market.

Problems in the Mid-1990s and Beyond

As part of its growth strategy, El Paso embarked on an impressive acquisition journey during the mid-to late 1990s. Three of the company's largest acquisitions significantly added to its holdings. El Paso acquired Tenneco Energy in 1996 in a $4 billion deal. Wise commented on the purchase in a December Inside F.E.R.C. article. "This watershed event unites the strengths of two seasoned organizations and caps 18 months of growth and change in our business." Wise went on to claim that the acquisition solidified the company's "place as a major player in domestic and international natural-gas transmission, gathering, processing and marketing, as well as electric power development." Indeed, as a result of the purchase El Paso gained control of the only coast-to-coast natural gas pipeline in the United States. Shortly after the purchase, the company adopted the El Paso Energy corporate moniker.

El Paso's next big move came in 1999 when it made a $6 billion play for Sonat Inc., a natural gas transporting and marketing firm. In order to clear regulatory hurdles, El Paso was forced to sell off its East Tennessee natural gas pipeline, 17 compressor stations, a liquefied natural gas facility, and Sonat's Sea Robin pipeline and its one-third interest in the Destin pipeline. The joining of El Paso and Sonat created the largest natural gas transmission system in North America. The company rounded out its spending spree with the $24 billion purchase of Coastal Corporation in 2001. Coastal had become an attractive target, mainly because of its natural gas reserves, and El Paso was eager to add it to its growing arsenal.

Over the past six years, El Paso had transformed itself into a leader in natural gas pipelines, gas processing, exploration and production, field services, and merchant energy, and the company planned to expand further into liquefied natural gas and telecommunications. Its revenues had also grown dramatically from $2.9 billion in 1995 to $21.9 billion in 2000. The company changed its name to El Paso Corporation in 2001.

El Paso began to face significant challenges during 2001. The Enron Corporation bankruptcy and the ensuing loss of investor confidence in energy companies forced the company to clean up its balance sheets. At the same time, El Paso came under fire for its alleged involvement in California's energy crisis. An August 2001 BusinessWeek article summed up the situation, reporting, "State and federal regulators are investigating charges that El Paso used its control of a key pipeline to sharply boost the price of natural gas flowing into the state. El Paso says it certainly didn't manipulate the market and blames higher prices on California's unique energy problems." In the end, however, the Federal Energy Regulatory Commission ruled that El Paso had manipulated the supply of natural gas in California in 2001 and early 2002. The company eventually reached a $1.6 billion settlement but continued to assert its innocence in the matter.

By 2002, El Paso was struggling under a mountain debt. As such, the company began a major sell off of its non-core assets. Over $3 billion in assets were jettisoned in 2003. Additional holdings were sold the following year, including part of its interest in GulfTerra Energy Partners, its refinery in Aruba, domestic power plants, various production properties, and chemical operations. At the same time, the company became entangled in a proxy fight with displeased shareholders that had watched the company's stock fall by 90 percent in recent years. Wise was ousted during the turmoil and Doug Foshee was tapped to oversee El Paso's turnaround.

During 2004, Foshee worked to reposition El Paso. According to the company, it planned to focus on pipeline operations in the United States and Mexico, production in the United States and Brazil, and marketing and trading. It also continued to clean up its accounting records. In 2004, the company revised its 1999–2003 figures, which resulted in a $2.7 billion drop in the value of its oil and gas assets. The move left it subject to an investigation by the Securities and Exchange Commission. While the past several years were indeed tumultuous for El Paso, the company appeared to be slowly emerging from the problems it had encountered in the early 2000s.