El Paso Corp. Thursday set a record capital budget for its extensive pipeline business and said it plans to launch an open season for its proposed east-to-west Ruby pipeline in February.

The Houston-based company, in its first multi-year earnings forecast in several years, predicted 6-18% earnings growth through 2012 for its domestic pipeline unit. It also is forecasting 8-12% growth for its natural gas-heavy exploration and production (E&P) unit through 2010.

Financially, all of the company's targets hit the mark in 2007, which bodes well for the new year, said CEO Doug Foshee.

"We feel very good about where we are for 2008," Foshee told energy analysts and investors during a conference call. "The balance sheet is in good shape...we have a new tool with our MLP [master limited partnership], and the two business units are doing very well. We have a lot of revenue, certainly for firm transportation and our price risk management in E&P. And in addition to that, we have really good growth projections."

But "maybe the biggest change in 2008 is that we have visible, multiple-year growth," Foshee said. "We've had it in the pipelines [business], but the new bit of business is the visibility beyond 2008 for E&P," which he called "much more respectable."

Even though El Paso is not scheduled to issue its final quarter or full-year 2007 report until Feb. 26, management offered analysts a taste of what to expect. The Houston-based company is forecasting 2008 earnings from continuing operations at $1.00-1.10/share, which is below Wall Street's average of $1.14. Still, analysts appeared impressed by the news.

Analyst Dan Pickering of Tudor, Pickering, Holt & Co. Securities Inc. called the forecast a "sea change" for El Paso to be able to forecast beyond one year. "Things are getting better," he wrote, and "production growth guidance is well above expectation."

The 2008 objectives assume a $7.50/MMBtu Henry Hub gas price and a West Texas Intermediate oil price of $70/bbl. El Paso has established an average floor price of $7.92/MMBtu on 141 Bcf and an average ceiling price of $10.05/MMBtu on 141 Bcf of 2008 gas production. The floor volumes represent 54% of the company's estimated domestic gas production for the year.

Last year El Paso predicted that its pipeline unit's earnings would grow 4-6% a year. The new forecast is driven by a backlog of committed pipeline projects worth an estimated $3 billion, Foshee said.

"We are entering 2008 with $3 billion in committed backlogs, and we expect to exit 2008 with an even larger inventory backlog, and that is after putting into service the projects that are scheduled," Foshee said.

Pipeline chief Jim Yardley told analysts the company expects to complete seven pipeline growth projects in 2008 at a cost of about $575 million. By 2009 another six new projects are scheduled for the backlog. The company now has a "committed inventory of pipe projects" of $3 billion, which is ahead of the $2.2 billion reported a few months ago. All of the inventory is fully contracted, he said.

"What is noteworthy is that these are all organic growth projects...straightforward expansions or extensions," which include committed pipeline, storage and liquefied natural gas projects, Yardley said.

Before considering potential sales to the MLP, El Paso's pipe unit is targeting 2008 earnings of $1.25-1.3 billion on a record $1.6 billion capital budget. About $400 million of the budget is maintenance capital with $1.2 billion allocated to growth projects. Several large pipe projects under development are not included in the backlog because El Paso has "not pressed the 'go' button" yet, Yardley said.

Among the pipe projects still awaiting the go-ahead is the Ruby pipeline, which would extend 680 miles from the Opal Hub in Wyoming to the Malin, OR, interconnect near California's northern border (see NGI, Dec. 10, 2007). PG&E Corp. last month agreed to acquire a 25.5% stake in the Ruby project (see NGI, Jan. 7). The Bear Stearns Companies Inc.'s Bear Energy LP also is close to an agreement to become an initial shipper, said Yardley.

"As you saw in the PG&E deal, there's a real logic for the market to be coming into the project as much as the suppliers," he said. "I think you know we are talking with Bear Energy as well on a sizable commitment to the project, to have equity in the project. We are closing in on turning around the production side of the equation," with an open season tentatively set for "early February through March."

In the next two weeks Yardley said the company would "know better where we are. We are very hopeful; the concept hangs together very well, and we like the progress we've made on the project..."

The only thing that has put a crimp in the project and other pipeline deals is rising capital costs, Yardley noted.

"The entire industry," he said, is being challenged by rising costs for pipeline materials and pipeline installation. "We have a high degree of certainty on some projects; we've secured contractors on mostly a fixed-price basis, which represents about two-thirds of our backlog. That pipeline and compression equipment is delivered or on order..." and "in total it will provide attractive returns."

El Paso's E&P unit has been on the rebound since early 2004 when it was forced to restate its proved gas and oil reserves by 41% (see NGI, Feb. 23, 2004; Feb. 9, 2004). This year, however, Foshee said the E&P unit "will not only be faster growing but more profitable and more predictable." El Paso is forecasting a jump in its output this year of about 12% over 2007 volumes to 850-930 MMcfe/d. The forecast is adjusted for about 120 MMcfe/d in scheduled asset sales, which are expected to be completed by the end of March.

CFO Mark Leland credited financial flexibility for the company's achievements.

"Before the current turmoil in the debt markets, we updated and expanded our credit facilities, and we repurchased and refinanced more than $5 billion of debt," Leland told analysts. He said with El Paso now in its fifth year of improved profitability, it was able to reduce its debt by more than $2.5 billion last year, and it dropped its interest expenses by 22%. In addition, the company's business units have been upgraded by the major credit ratings agencies, and the "pipelines are back to investment grade, which is very important given the expansion profile."

El Paso also launched the initial public offering of its MLP in November, ahead of the latest credit crunch (see NGI, Nov. 12, 2007). El Paso Pipeline Partners will own and operate a portion of the company's gas transportation system, storage and midstream assets, and it will allow the company to have financial flexibility over the "next three to five years," Leland said.

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