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El Paso to Move Some Pipe Assets into MLP by Year's End

El Paso Corp. is drawing up plans to create a master limited partnership (MLP) to initially hold about $500 million worth of its domestic natural gas pipeline franchise. The MLP, expected to roll out by the end of this year, would not only enhance the value and financial flexibility of its bread-and-butter franchise, but likely would boost El Paso's opportunities to compete for future greenfield pipe projects.

CEO Doug Foshee, who hosted a half-day analyst conference in New York City on Wednesday, said it's too early to announce which pipes would be included in the MLP package.

"About $500 million in assets will start it, and we're putting it together to roll out," Foshee said. He added, though, that the pipes considered for the MLP package would probably be those with stable earnings, cash flow and less risky tax structures.

El Paso's diverse system touches about a quarter of every molecule of natural gas delivered in the United States. Several systems are wholly owned: Tennessee Gas Pipeline (TGP), El Paso Natural Gas, Southern Natural Gas (SNG), Colorado Interstate Gas (CIG), Wyoming Interstate Co. (WIC), Mojave Pipeline and Cheyenne Plains Gas Pipeline. The sale of ANR, another wholly owned pipe, to TransCanada Corp. is "imminent," Foshee said (see Daily GPI, Dec. 26, 2006).

Less likely for MLP inclusion would be El Paso's 50% stake in Florida Gas Transmission, San Fernando Pipeline and Samalayuca Pipeline. Great Lakes Gas Transmission, in which it holds a 50% stake, also is being sold to TransCanada.

But the MLP will only improve the stable pipe franchise going forward, said the CEO. This year, El Paso's 55,500-mile interstate system is on track to achieve year-over-year earnings growth of 4-6%, Foshee said. "2007 opens a new chapter for El Paso. The ANR sale is the capstone on four years of hard work to restore El Paso." Foshee was named CEO of the company in 2003 (see Daily GPI, July 17, 2003). Once the ANR sale is completed, "we expect an investment grade rating" for the pipes, said Foshee. "It's the best overall franchise in the business," and this year will be one in which he expects the company to "separate from the pack."

What is keeping the management team's enthusiasm on track is El Paso's forecast for U.S. gas use to "grow at a 2% a year clip, and the growing debate on greenhouse gases is favorable for gas as a heating source," he said. Like many of its peers, El Paso's bottom line was scuffed in 2006 by high service costs and a dwindling labor pool. In 2007, earnings projections are keyed to $7/MMBtu (Henry Hub) gas prices; in 2006, the forecast used $8/MMBtu prices, which reduced reserves by about 60 Bcf.

Acknowledging some "leadership missteps," Foshee said El Paso's poor financial condition in 2003 "left us with a knife in a gunfight. Imagine what we can do without those distractions," he said. El Paso now focuses on only two things: pipelines and exploration and production (E&P). When Foshee joined the company, he recalled that there were close to 20 business units, and he inherited a filing cabinet full of litigation.

"We are getting the old news behind us," Foshee said. "We're restoring our financial condition...lowering our financial complexity." The company has "widened its aperture of opportunity as we look forward, once again profitable for the first time since 2000, and going from one of the most opaque to one of the most transparent of our peers."

What has kept El Paso in the game has been its pipeline group; beginning this year, a huge ramp-up in spending is planned. The pipeline segment spent about $392 million to complete new projects that were placed into service last year. This year, El Paso has set aside $610 million for the WIC Kanda Lateral, SNG's Cypress Pipeline, TGP's Northeast ConneXion New England project, and CIG's High Plains pipeline. In addition, $400 million of maintenance capital spending is planned, which includes $80 million for the ongoing pipeline integrity program, which is 65% complete.

"In 2007, we are making the largest commitment to pipeline growth capital in the history of our company as the result of the numerous infrastructure opportunities that we have developed," Foshee said. The company also has an "aggressive" drilling program this year, which is expected to add "significant new volumes beginning in late 2008."

The company is scheduled to report its 4Q2006 and full-year 2006 earnings on Tuesday.

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