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El Paso's Profits Up 22%; Pipeline Backlog Doubles

El Paso Corp., which has doubled its natural gas pipeline backlog from a year ago with eight projects on the drawing board, delivered a solid quarterly report, with profit rising 22%.

Net income from continuing operations in 2Q2008 totaled $191 million (25 cents/share), compared with $156 million (22 cents) in the prior-year period. Adjusting for production-related derivatives and one-time items, El Paso's profit amounted to 39 cents/share versus 29 cents in 2Q2007. Revenue fell 11% to $1.15 billion from $1.2 billion.

El Paso's pipeline group, which traditionally carries its earnings, reported a drop in profit for the quarter to $295 million from $318 million a year earlier. Pipeline chief Jim Yardley, who shared a microphone with the company's management team during a conference call Wednesday, said higher reservation revenues, primarily from several expansion projects placed in service during 2007 and 2008, were offset by higher operating costs (see related story).

The pipeline group's higher operating costs "primarily reflect increased labor costs and additional maintenance associated with required work on both the Tennessee Gas and SNG [Southern Natural Gas Co.] systems," Yardley noted. Still, even with the higher costs, El Paso's plan to achieve this year's targets remains in sight, he said. "The pipeline group is at full throttle."

El Paso now has eight pipeline projects it is readying for the next several years -- which is double the number it had just a few months ago, he noted.

"Last year we began highlighting three potential projects in the pipes that we were chasing but hadn't yet landed," said CEO Doug Foshee. "A new export line out of the Rockies, a significant expansion opportunity in the Southeast, and a significant expansion in the Northeast. We've now converted each of those into committed backlog."

Among the pipes now in the pipeline: "two major new projects -- the Ruby Pipeline and the TGP [Tennessee Gas Pipeline] Line 300 expansion, which increase our committed backlog to $8 billion -- a level that is more than two times larger than any time in our 80-year history," said Foshee. Future earnings from the new pipes were estimated at around $1.2 billion per year, Foshee said.

Subsidiary Ruby Pipeline LLC announced in June it would move forward with the east-to-west Rocky Mountain pipeline, which would have an initial capacity of between 1.3 Bcf/d and 1.5 Bcf/d (see NGI, June 30). El Paso plans to file with the Federal Energy Regulatory Commission in early 2009 for permission to build the 42-inch diameter pipe; it could be in service by 2011, Yardley said.

"We have a market commitment of 1.1 Bcf/d, and 100% of the pipe has been ordered," Yardley noted. Ten shippers have committed to the project, which he said would be a "green pipeline with a neutral" environmental footprint. Among those that have committed to the project is Anadarko Petroleum Corp. (see related story).

The TGP Line 300 expansion in Pennsylvania, announced in June (see NGI, June 9), would tap the Marcellus Shale, said Yardley. "Because of Line 300's existing route, it also sets up to follow expansions for producers," he said.

Besides Ruby and the TGP expansion, El Paso also is working on Phase VIII of its proposed Florida Gas Transmission Co. expansion (see NGI, Feb. 8), Foshee noted. Although a large greenfield project in the Northeast has not yet materialized (see NGI, April 21), Foshee applauded the announced expansion last week out of the Appalachian Basin "with our good customer Equitable Resources" (see related story).

"In total we now have a committed backlog of $8 billion, more than double the backlog from just a few months ago, and by far the largest backlog in our 80-year history," said the CEO. "This backlog will add $1.2 billion" in earnings a year for the pipe segment "over the next several years."

Yardley noted that El Paso's "throughput continues to increase very nicely. This 6% increase year-to-date versus '07 is on top of annual increases of 6% to 7% in each of 2006 and 2007. To put these increases in perspective, our throughput growth has approximately doubled the rate of total U.S. gas demand over the last three years. So, our throughput results highlight again our pipes are in the most attractive markets and supply basins in the country."

More of El Paso's throughput gains this year are "supply driven than demand driven," Yardley said. "On the demand side we don't see signs of demand destruction despite the higher gas prices in the first half. The power generation sector continues to show clear increases in gas usage year-to-year. We hear from some of our LDC [local distribution company] customers that usage per household has decreased, but this is offset by modest increases in the industrial sector. Steel plants and fertilizer plants in particular served by our pipes shows strong demand. In total, a very healthy picture on throughput."

El Paso's exploration and production (E&P) group, revamped in the past three years, also came roaring back in the quarter with a 29% increase in earnings to $304 million, compared with $235 million in the year-ago period. Costs, however, rose this year, said E&P chief Brent Smolik (see related story). Total per-unit cash operating costs increased to an average of $2.01/Mcfe in the quarter from $1.92 in 2Q2007. The increase resulted from higher production taxes, which rose with commodity prices, and was partially offset by a decrease in controllable costs -- direct lifting costs and general expenses, which were down 7% year-over-year.

Oil and gas production, including unconsolidated affiliate volumes, averaged 833 MMcfe/d; output was sequentially 4% higher than in the first three months of 2008. Total quarterly natural gas sales volumes fell to 662 MMcf/d from 679 MMcf/d in 2Q2007. The biggest drop in volumes was in El Paso's Gulf of Mexico and South Louisiana operations, which fell to 113 MMcf/d from 134 MMcf/d in the same period a year ago. Weighted average realized prices for natural gas, including hedges, jumped to $9.52/Mcf in 2Q2008, up from $7.57 in 2Q2007. Natural gas prices excluding hedges rose to $10.46/Mcf in the period, well ahead of the $7.72 received in the prior-year period.

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