El Paso Corp. remains on track to launch a master limited partnership (MLP) before the end of the year that would hold many -- if not all -- of the company's natural gas pipeline assets, the CEO said Tuesday.
Speaking to investors and analysts during a conference call to discuss first quarter earnings, CEO Doug Foshee reiterated plans to launch an initial public offering (IPO) for an MLP. He first announced the plan during an analyst conference in February (see Daily GPI, Feb. 22). He said then that El Paso would use "about $500 million in assets" to start the MLP.
How many pipeline assets are rolled into the MLP may depend on a possible decision by the Federal Energy Regulatory Commission (FERC) concerning return on equity (ROE). Last year FERC unanimously rejected an administrative law judge's decision of a single-digit ROE for Kern River Gas Transmission and interstate gas pipelines in general in favor of one in the double-digit range (see Daily GPI, Oct. 20, 2006). FERC rejected the use of MLPs in the Kern River rate case, but the decision made clear that the Commission was not making a generic finding that MLPs could not be considered for future proxy groups, according to FERC staff.
"Any court ruling that comes this summer [regarding MLPs] won't affect our doing an MLP," Foshee said. "If the ruling is negative for MLPs, it may affect how many assets we put into it, but there are more than enough to cover an IPO and then some. We will look to assets with long-term negotiating rates. If it [a court ruling] goes the other way, many more, if not all, of the assets held in the pipeline business would be appropriate for MLP assets."
Foshee noted that El Paso had "no control on timing by FERC. It is of some importance to the industry," he noted, and because the "pace is up" for MLPs, "it's on the radar screen at FERC."
El Paso's disappointing earnings report on Tuesday triggered a 3.45% sell-off in the stock in early trading. First quarter net income was $629 million (89 cents/share), compared with $356 million (49 cents) in 1Q2006. However, excluding special items, earnings from continuing operations were 18 cents/share, well below the 26 cents/share estimate by a consensus of Wall Street analysts. The quarter's results included a gain on the sale of ANR Pipeline Co. and related assets, as well as a charge for debt repurchase costs. The ANR pipe was sold to TransCanada late last year (see Daily GPI, Dec. 26, 2006).
Expansion projects and colder weather in January and February revved up the Pipeline Group's throughput, which was 9% higher than 1Q2006 levels. Production volumes in the Exploration and Production (E&P) segment also jumped 7% over a year ago.
"I am very optimistic about the balance of the year," said Foshee. "The macro picture still looks very good for infrastructure, and we plan to build on the $2 billion-plus backlog in infrastructure." He added, "We have a real wind in our sails heading into the balance of the year."
Similar to sentiments expressed by other executives in the energy industry, Foshee noted that cash-unit costs are higher than they were a year ago, "but we fully expect them to come down during the year." Total per-unit cash costs increased to an average of $1.99/Mcfe in 1Q2007, compared with $1.71 in 1Q2006. El Paso blamed the higher operating costs on increased production expenses resulting from higher workover activity levels, industry inflation in services, labor and material costs and lower severance tax credits.
Foshee called 1Q2007 "the most impactful in the company's history. With the completion of the ANR sale, we reduced our debt to $11.7 billion, which is approximately half of what it was only four years ago. As a result, our pipelines regained investment-grade credit ratings, which lowers the cost of capital that we employ toward our $2.3 billion backlog of expansion projects. And our pipeline and E&P businesses delivered very good results, putting us on a path to achieve the 2007 goals that we announced in February."
In the E&P segment, production volumes averaged 750 MMcfe/d, excluding unconsolidated affiliate volumes of 70 MMcfe/d, versus 1Q2006 volumes, which averaged 694 MMcfe/d, excluding 71 MMcfe/d of unconsolidated affiliate volumes. The gains followed success of El Paso's onshore drilling program, recovery of volumes shut in by hurricane damage in 2005, and new discoveries in the Gulf of Mexico and South Louisiana.
The realized price for natural gas in the quarter was $7.19/Mcf, compared with $7.03 in 1Q2006. Oil, condensate and natural gas liquids (NGL) realized prices were $49.32/bbl, down 4% from the same period in 2006. Total natural gas sales volumes in the quarter reached 630 MMcf/d, ahead of the 578 MMcf/d in 1Q2006 and flat compared with the final three months of 2006.
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