El Paso Corp. Thursday reported a 190% surge in quarterly earnings, and in spite of the two Gulf Coast hurricanes that impacted operations in September, the pipeline group and the exploration and production (E&P) unit posted solid returns.

Net income rose to $445 million (63 cents/share) in 3Q2008 from $155 million (21 cents) in the same period of 2007. After adjusting for production-related hedges and other items, El Paso earned 35 cents/share, which was up from 22 cents in 3Q2007.

The natural gas pipeline unit earned $278 million, which included a $12 million loss from hurricanes Ike and Gustav. E&P earnings rose to $532 million — which was 129% higher than a year ago. E&P earnings included $214 million of mark-to-market gains on derivative contracts that were not designated as accounting hedges.

Production, including unconsolidated affiliate volumes, totaled 793 MMcfe/d, reflecting a production loss of 41 MMcfe/d because of the hurricanes and storms that impacted offshore operations.

“We had another solid quarter, with improved earnings in both the Pipeline Group and E&P,” said CEO Doug Foshee. “In addition, we placed three pipeline projects in-service, and we made continued progress on the Ruby Pipeline Project,” which would carry Rocky Mountain gas to West Coast markets. “On the E&P side, we completed our first two wells in the Haynesville Shale.”

Late Wednesday, before earnings were announced, El Paso said it had taken steps to meet its debt maturities and other ongoing obligations in 2009 “so that we can execute on our pipeline backlog and meet our financial obligations, even if current capital market constraints persist,” said Foshee.

The Houston-based company has “strong cash flow from our pipeline group that is essentially unaffected by changes in natural gas prices,” he said. In the E&P unit, El Paso placed 2009 hedge positions with a $9/MMBtu floor price on about 70% of its expected 2009 domestic gas output and on about 60% of expected 2009 domestic oil production hedged at $110/bbl.

El Paso has “substantial flexibility in our E&P program, which allows us to reduce near-term capital spending and retain sufficient liquidity while not impacting long-term growth potential,” said Foshee.

At the end of 3Q2008, El Paso’s liquidity totaled $1.9 billion, which was composed of $1.2 billion of cash and about $700 million available from committed bank facilities.

Through December, El Paso has sliced off around $300 million from its previously set $3.8 billion capital spending plans. In 2009, the company plans to cut spending overall by around $3 billion. Under next year’s spending plans:

Based on its current and projected liquidity following scheduled May 2009 maturities, “our plan does not contemplate having to access the capital markets until the second half of 2009,” Foshee said. “However, we will be ‘opportunistic’ in accessing the capital markets prior to that time.”

El Paso’s plan also includes the sale of around $150 million of noncore assets by the middle of next year. The company may consider taking on partners “on one or more pipeline expansion projects,” it stated.

“The company has numerous additional alternatives to address potential liquidity challenges if access to capital markets remain restricted, any of the asset sales or partnering opportunities outlined…are delayed or not completed or there is a further decline in commodity prices,” the company stated.

If credit markets dry up, El Paso said it might consider more cuts to capital spending, using secured financings, selling more noncore assets or partnering in some of its growth projects.

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