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El Paso Pipeline Partners, L.P. (NYSE:EPB)

Q1 2010 Earnings Call

May 6, 2010 11:30 a.m. ET

Executives

Bill Baird - Manager, El Paso Pipeline Partner & IR

Jim Yardley - President & CEO

JR Sult - SVP & CFO

Analysts

Craig Scherer - Tuohy Brothers

Operator

Good morning, my name is [Maulie] and I will be your conference operator today. At this, I would like to welcome everyone to the El Paso Pipeline Partners First Quarter 2010 Earning's Conference Call. All lines have been placed on mute in order to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions).

Thank you. I would now like to turn the conference over to Bill Baird. You may begin you conference.

Bill Baird

Thank you and good morning. We appreciate you joining our call. In just a moment I will turn over the call to Jim Yardley, who is President and Chief Executive Officer of El Paso Pipeline partners. Jim will be followed by JR Sult, who is Chief Financial Officer of our MLP. Throughout this call, we will be referring to slides which are available on our website, www.eppipelinepartners.com. This morning we issued a press release and filed it with the SEC as an 8-K and it's also on our website.

Please note that we have a financial and operational reporting package in the supporting materials of the webcast details located in the Investors section of our webcast which includes non-GAAP reconciliation. If you have not done so, please download this package so you have all relevant financial information.

During this conference call we'll include certain forward-looking statements and projections. The company has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable and complete. However, a variety of factors could cause actual results to differ materially from the statements and projections expressed on this call.

Those factors are identified under the cautionary statement regarding forward-looking statements section of our earning's press release as well as in other filings with the SEC, and you should refer to them. The company assumes no obligation to publicly update or revise any forward-looking statement made during this conference call, or any forward-looking statements made by the company, whether as a result of new information, future events or otherwise.

And with that I'll now turn over the call over to Jim.

Jim Yardley

Thanks Bill and good morning. I'll provide a brief overview and JR will review our financial performance and I'll finish up with a business and operations update. Slide three provides highlights for the quarter in which we continue to grow both organically and through acquisition. We're off to a great start for the year as earnings and cash flow are up significantly in 2010. During the quarter, we completed our largest acquisition to date and acquired controlling interest in Southern LNG and Elba Express. We're very exited about broadening our asset base and these assets are a perfect fit for the partnership.

Slide four summarizes this acquisition. In March, we completed the purchase of 51% interest in the entities that own the Elba Island LNG terminal and Elba Express pipeline. The $810 million was financed with a combination of debt, equity and cash on hand. We issued $425 million of 6.5% senior notes in our initial public debt offering, a transaction which was well supported and significantly over subscribed. This is our third acquisition for El Paso Corporation which has now taken equity units in two of the three transactions.

For the full year 2010 we expect Southern LNG and Elba Express combined to generate approximately $170 million of EBITDA and approximately $140 million of distributable cash flow, which both reflect the Elba IIIA expansion and new Elba Express pipeline from March forward. The transaction was immediately accretive to distributable cash flow and as a result of this transaction and our continued growth, we increased our quarterly distribution by $0.02 per unit for the first quarter.

Slide five shows our quarterly distribution growth which is supported by strong and growing cash flows. Our distribution is up 17% from last year. We've now increased our quarterly distribution for eight consecutive quarters since our IPO in 2007.

And now I'll turn it over to JR to review our first quarter financial results.

JR Sult

Thanks Jim and good morning to everyone on the call. I'm starting my comments on slide six titled first quarter 2010 key financial metrics. As Jim indicated we had an excellent start for 2010, driven by organic growth in our pipelines and acquisitions from El Paso Corporation, our supported sponsor.

Our scorecard of key financial metrics for the first quarter reflect the continuing success executing on our growth strategy. Earnings per unit for the quarter was $0.53, up 33% for the same period in 2009. adjusted EBITDA was approximately $135 million for the quarter, 36% higher than 2009 levels, while our distributable cash flow year-over-year increased by more than half to approximately $88 million.

Similar to previous calls, I'm going to drill down a bit more on the underlying drivers of the performance but I wanted to frame the discussion that follows with an overview of the key metrics. A complete reconciliation of adjusted EBITDA and distributable cash flow to our reported GAAP financial measures are included in our financial and operational reporting packaging on our website.

Moving onto slide seven, lets take a brief look at the more detailed results. Following our recent acquisition of a 51% internist in both Southern LNG and Elba Express, the partnership consolidates both for financial reporting purposes. Since this transaction was between entities under common control, we have retrospectively adjusted our historical financial statements for all periods to reflect our 51% interest in both entities.

El Paso's 49% interest in Southern LNG and Elba Express has been reflected as a non controlling interest for all periods pertaining. We reported net income attributable to partnership of $89.3 million for the first quarter, compared to $60.2 million in the comparable 2009 period. Increase in earnings was primarily driven reservation revenues with mainline by expansion projects.

These expansion projects include the CIG Totem storage project that went in service June of last year, the WIC Piceance project that went in service in October of 2009 and the Southern LNG Phase IIIA at Elba Express pipeline projects, both of which went into service on March 1st of this year.

Quarter-over-quarter results also befitted from increased equity earnings from SNG, primarily related to higher reservation revenues from the SNG rate case settlement. We also recognized an increase in allowance for funds used during construction or AFUDC on our expansion projects during the quarter.

Interest and debt expense for the quarter is approximately $3 million higher than the prior period due to Southern LNG's issuance of 135 million of private placement notes in February of last year, 165 million non recourse project financing of Elba Express that closed in May of last year and increased obligations incurred associated with the construction of the CIG Totem storage project that was completed in June of 2009. This increase was partially offset by decreased interest expense on our revolver associated with lower outstanding balance this quarter-over-quarter.

Turning now to slide eight, our earnings from our interest in Southern Natural for the quarter were $19 million, a 52% increase over the comparable period in 2009. SNG's earnings before interest and taxes for the quarter was $28 million higher than the comparable period in '09 primarily due to increased firm transportation revenue, as a result of the rate case settlement and went effective September 1st 2009 and higher service revenues due to increased through put driven by colder weather and increasing industrial demand.

Moving to slide nine, distributable cash flow for the quarter ended march 31st 2010 was $87.7 million, compared to $57.1 million in the prior period. Increase in distributable cash flow is due to our recently acquired interest in Southern LNG, increased cash distributions from CIG and related to our acquisition of a traditional 18% interest in July of 2009.

Higher revenues related to expansion projects and increased distributions from SNG primarily related to the rate case. Cash interest expense was higher for the reasons I've previously discussed. Maintenance capital from a majority of assets, CIG, WIC, Southern LNG and Elba Express were in line with those incurred in 2009.

Maintenance capital requirements associated with recently acquired Southern LNG and Elba Express pipeline are minimal. In the first quarter of 2010, this other net on the schedule included about $16 million of non-cash items, primarily AFUDC, earned on projects under construction during the quarter and $4.6 million related Elba Express distributable cash flow generated during the quarter, which cannot be distributed in the partnership in El Paso until Elba Express pays the first project financing debt service on June 30th.

Our growth in distributable cash flows continue to support the sequential distribution increases that Jim referred to earlier and even after our sustained distribution growth, we've maintained a distribution coverage ratio of about 1.5 times for the quarter reflecting the seasonally higher first quarter financial performance.

Finally, on slide 10, a quick snapshot of our capital structure at the end of the quarter. Overall our financial position remains very strong, supported by the highest quality assets of MLPs. Our capitalization at quarter end includes a consolidation of the two recently acquired assets Southern LNG and Elba Express and reflect El Paso's interest in those assets of non-controlling interest.

Our debt balance about $292 million or a $149 million net to our interest and obligations that Southern LNG and Elba Express as well as the $425 million of new 6.5% senior debt at our operating company that was utilized this partial consideration to acquire our interest in Southern LNG and Elba Express.

We continue to have substantial liquidity available to us under our revolving credit facility and those receivable from El Paso to fund our backlog has committed expansion projects.

And excluding of our $38 million of cash at Elba Express, we had about $338 million of total liquidity at the end of the quarter available to us to meet our operating expansion and other growth capital need. With that I will turn the call back over to Jim for an operational and business update as well as few closing comments. Jim?

Jim Yardley

Thanks JR. Slide 11, shows our throughput which is a mix picture this quarter and overall than 4%. In the Rockies we saw the impact of lower production for the quarter while SNG was up significantly due to colder weather and increased industrial demand as JR noted.

As a remainder throughput has little direct financial impact as our revenues are derived primarily from demand charges. We will however benefit from the organic expansions along our systems as we derive incremental revenue from the associated customers contracts.

The next two slides further describe our two newest assets, slide 12, is an overview of Southern LNG which owns the Elba Island LNG terminal located near Savannah, Georgia. Elba is currently one of only ten operating domestic marine LNG for receiving terminals. The terminal is currently undergoing its third expansion since been reactivated in 2001.

The first part of this expansion went in service in March an increased peak send out capacity to nearly 1.8 Bcf per day. When the new tank is placed on service this summer, Elba storage capacity will rise to 11.5 Bcf. Elba has long term tolling contracts with the subsidiaries of Shell and BG with an average remaining contract life of 23 years.

Similar to our pipelines the financial performance of the terminal is not dependent up on utilization of the terminal as almost all its entire revenue stream is fixed demand charges.

There could be a further expansion of Elba, as early as 2015 if BG elects to exercise and option to add another storage tank in vaporization capacity. Increase in total storage capacity to 15.7 Bcf and peak vaporization capacity to 2.1 Bcf today.

That additional capacity would be fully contracted to BG under 25 year tolling agreement. On slide 13, Elba Express pipelines went into service one March 1, on time and on budget. It's a 190 mile pipeline with 945 day of capacity extending North from Elba LNG facility that interconnects with SNG and then further North with the Transco pipeline.

A subsidiary of Shell has all of the capacity under a 30 year contract and it is the same take or pay type revenue stream as the Elba Terminal.

So, this is another perfect MLP asset. Elba Express also has an organic growth component. Phase B is a $30 million project it will additional compression to the pipeline increasing the capacity of the pipe by at least a 170 a day or replaced and services as early as 2014. This capacity is fully contracted to a subsidiary BG under a 25 year contract. BG's contract capacity on Elba Express Phase B could step up to 220 a day if BG declines their option to expand the Elba Island Terminal.

These expansions offer growth, long term contracts and incremental cash flow stability. Slide14 summarizes our substantial slate of organic growth projects. We show capital on a 100% project basis, consolidated EPB basis and net to EPB on a pro rata basis. As a remainder these projects are essentially fully contracted for all the capacity under long term agreements. It's a balanced portfolio of growth projects driven largely by Rocky supply and power gen needs in the Southeast.

In conclusion on slide 15, we had an excellent financial performance in the first quarter and continue to execute on our growth projects supported by our high quality pipeline assets. Our organic growth is driven by low risk projects backed by long term shipper contracts with high credit quality customers.

And these projects are on time and on budget, as we expand our asset base we are committed to maintaining a strong financial position enabling continued future growth.

And with that operator we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Craig Scherer with Tuohy Brothers

Craig Scherer - Tuohy Brothers

I got just a big picture question. There has been questions about on the C-Corp side about splitting things up for the advantages of the pure play. If things are drilled out a little at a time, I guess you guys have quite a run-rate of yours of attractive assets with growing distributions.

But if everything is done at once then the question where do you go from there and I wonder if you can comment about the advantage of being a pure play pipeline MLP versus some of the more conglomerate MLP structures we have seen lately that makes mid-stream and other kinds of operations.

Jim Yardley

Clearly the question with regard what the sponsor may or may not use best is best directed to the sponsor. But from our perspective, we like our growth profile that we see today whether that comes in terms of multiple transactions over multiple years; ultimately our sponsor decides to continue to support us in our growth strategy.

Clearly I think you need to look at the assets not only in the MLP and their organic growth potential but also the assets of the sponsor in the organic growth potential that's embedded within both assets as well and then third I know you have to look at the sponsors backlog, I mean so not only do I an opportunity to acquire assets that are currently in service with the pipeline growth at El Paso but also have the opportunity then with their slate of backlogs that ultimately potentially one day they will know those assets as well.

So, we like our position, where we sit today, but your question really is best directed for the sponsor. Clearly, your last question is I think a good one in terms of where we sit today is a pure pipeline versus some of our larger competitors that have both pipes and mid-stream. We think one of the reasons we tried at the levels we do today and the premium yield we have today as a result of the quality of those assets and I honestly believe that we will trade it at a premium valuation from a yield perspective to those other, larger, more diversified pipes as a result of that quality of that asset base.

Craig Scherer - Tuohy Brothers

Okay, so you're real happy with the fixed contracted portfolio and growth options and wouldn't really be thinking about anything subject over time to any kind of commodity exposure?

Jim Yardley

We think sitting here today, one of the reasons we are being rewarded the way we are is because of the quality of that asset base and the stability of the cash flows.

Craig Scherer - Tuohy Brothers

Great. Thanks a lot.

Operator

Your next question comes from the line of Louis Shamie with ZLP. Louis Shamie. Your line is now open for questions. And that question has been withdrawn.

Jim Yardley

Okay I guess hearing no other questions, we appreciate your participation on this call and we will now conclude our conference. Thank you very much.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

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