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El Paso's Credit Ratings Affirmed by Fitch

Fitch Ratings on Friday gave a thumbs-up to the credit ratings for El Paso Corp. (EP) and its core pipeline and exploration and production (E&P) subsidiaries, and said the outlook is "stable."

The ratings' action came on the heels of the Houston-based company's announcement earlier this month that it would cut its dividend, sell assets and reduce internal costs to fund the launch of gas pipeline and E&P projects in 2010 (see NGI, Nov. 9). There had been rumors that the company might be in financial difficulty. Last week the company cut around 6%, or 300, of its 5,000-plus workforce as part of the process to reduce costs, said spokesman Richard Wheatley. Most of the job cuts were domestic "staff and technical" jobs, he said. No further layoffs are anticipated.

Fitch said "the rating affirmation is reflective of the strength of the company's interstate pipeline system franchise and the cash flow stability and lower business risk profile that goes along with its interstate pipeline portfolio, as well as the hedge positions and cost improvements at the company's upstream business."

The company "is in the middle of a transformative capital spending plan, which will significantly increase both the size and scope of, primarily, its pipeline system," said the ratings agency. "Fitch notes that this spending program will weigh on EP metrics as the company works toward completing its project backlog.

"However, the ratings consider the lower business risk, steady cash flow nature of the proposed pipeline projects and reflect the belief that once completed the pipeline projects should provide adequate sustainable cash flow to support EP's debt levels."

The company is in the middle of a "multi-year $8 billion capital expenditure cycle, which will see EP grow its pipeline business significantly." The pipeline projects "on a consolidated basis will have over 90% of their revenue derived from capacity reservation charges with primarily investment grade counterparties, which should help mitigate commodity price/volume exposure and decrease counterparty risk."

Construction risk for the planned pipelines is a concern. "Construction costs, which had risen dramatically in the past few years, haven fallen more recently as steel and labor costs have contracted significantly. Additionally, this risk is offset in part by EP's push to lock in pipe prices, share costs with its construction contractors, contracted shippers, and enter into partnerships with joint venture partners on select projects," said Fitch.

"Taken as a whole, the scale and regional diversity the pipeline systems, which have access to the principal U.S. supply basins and deliver into major consumer markets, limits exposure to shifting natural gas supply/demand dynamics," said the ratings agency. "Additional delivery flexibility is provided from interconnected storage capacity and access to the Elba Island, GA, LNG [liquefied natural gas] receiving terminal."

Fitch said the E&P subsidiary's ratings are weighted by both its affiliation with the parent company and "the higher business risk inherent in an E&P operation due to its commodity price exposure." However, the unit's operations have improved, "with the company currently in the process of upgrading its reserve portfolio while continuing to successfully lower its finding, development and production costs."

The company also has hedged a "significant portion" of its production in 2010, and 2011, "which provides some comfort that earnings and cash flow will exhibit some stability in the event of a continued low commodity price environment."

Liquidity for the company is "adequate," said Fitch. At the end of 3Q2009, EP reported "roughly $2.4 billion in consolidated liquidity, consisting of $1 billion in cash and $1.4 billion in availability under various credit facilities."

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