Marking his one-year anniversary as CEO of El Paso Corp., Doug Foshee said Tuesday that the company is “well down the road on fundamentals,” and today is focusing on its strategic natural gas pipeline franchise and revamped exploration and production (E&P) unit.

Foshee spoke at the Lehman Brothers CEO Energy/Power Conference, and offered a “retrospective” on El Paso since he took over last year (see Daily GPI, July 17, 2003). Although it’s made strides, the CEO said that the coming year will demonstrate what the company is capable of doing. He also predicted that if gas prices remain higher, El Paso will remain a “big player” with the pipeline franchise, and a comer in its E&P operations. However, challenges remain.

When he came aboard last September, Foshee said, “what troubled me was when I talked with investors, with employees, even with the management team, [they didn’t seem] to agree on what we were going to be. I couldn’t get a clear message. So, we went back to the drawing board and looked at the long-range plan, and the enduring purpose of the company. We also had to agree on what we will be accountable for, and we’ve done that as well. We’ve made significant headway in communication, not only externally but internally.”

Foshee also had to build a new leadership team, and by the end of 2003, he’d nearly completed that Herculean challenge. Of the seven-member executive team, four were new at the end of last year: the CEO, general counsel, head of non-regulated operations and head of human resources. A fifth newcomer arrived in January 2004, when Apache Corp.’s Lisa Stewart came on board to steer the E&P operations. In addition, El Paso’s board of directors replaced seven of its 12 members.

“Once we agreed on the purpose of the company, we had a lot of changing to do structurally…to fit the company to a purpose” he said. El Paso streamlined operations, reduced its cost structure and eliminated a lot of jobs and unused office space. It cut five business units to two, dramatically reduced the size of its holding company and increased business units’ accountability. “We’re still in the process of having a ‘nice to have’ company to a ‘got to have’ company.” However, given the prior two years and the meltdown in the merchant energy industry, Foshee noted that the new management plan has begun to come together.

Foshee now wants the company to focus on 2006. “In December 2003, we rolled out a road map for a long-range plan. We knew we were selling out of multiple industries, not just multiple assets. We also set out on an annual basis to look at the milestones in our long-range plan.” In the past year, the plan has been to “sell a lot of assets and reduce a lot of debt, and not sell down out of our franchise, but fund both of those…pipelines and production.”

All of El Paso’s long-term goals are directed toward 2006, when Foshee expects the company’s net debt to be reduced from its current $17-18 billion to about $15 billion, for earnings per share to be between $.75-$1.10, and free cash flow in the range of $200-400 million.

The CEO also expects strong growth in the strategic pipeline franchise. The original target through 2006 was 2-5% earnings growth in the unit, and to date, he said El Paso is “ahead of the plan” for 2004. The current estimate now puts the pipeline earnings’ target at the higher end of planned growth.

“The pipelines are the cornerstone of El Paso. They were five years ago; they are today; they will be five years from now,” Foshee said.

One area that is proving a “bit more challenging” is in resurrecting the E&P unit. A new plan to rebuild the stumbling unit was rolled out in June, and even though unit cash costs are higher and volumes are lower, “they were outweighed…we got lucky on gas prices.” However, Foshee said the unit is still “rated as incomplete.” The 2004 forecast was revised downward in June from 850-950 MMcfe/d to 825-875 MMcfe/d because, “I don’t think it was fair to saddle a new management team with a forecast they had nothing to do with building.” The current earnings estimates are based on gas prices at or above $5.50/Mcf.

“I believe El Paso is a new company,” Foshee said in closing. “It has a new board, it has a new management team. A whole lot has changed. We acknowledge we have a whole lot of work left to do. In spite of the fact of the buffeting our company has taken, we’ve actually outperformed S&P in the last 12 months, by almost 400 basis points. We don’t claim that as a victory,” but he added that the gains indicate that the energy sector is handling its problems and moving ahead.

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