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El Paso Corporation (EP)

Q2 2007 Earnings Call

August 7, 2007, 10:00 AM ET

Executives

Bruce L. Connery - VP of Investor and Public Relations

Douglas L. Foshee - President and CEO

D. Mark Leland - EVP and CFO

James C. Yardley - President, Southern Pipeline Group

Brent J. Smolik - President El Paso Exploration & Production Company

Analysts

Carl Kirst - Credit Suisse

Richard Gross - Lehman Brothers

Faisel Khan - Citigroup

Carol Coale - Sanders Morris Harris

Nathan Judge - Atlantic Equities

Rebecca Followill - Pickering Energy Partners

Presentation

Operator

Good morning. My name is Tia and I will be the conference operator today. At this time, I would like to welcome everyone to the El Paso Corporation Second Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you.

I'll now turn the call over to Mr. Bruce Connery. Sir, please go ahead.

Bruce L. Connery - Vice President of Investor and Public Relations

Good morning and thank you for joining our call. In just a moment I'll turn the call over to Doug Foshee, our President and Chief Executive Officer. Others joining us on the participating on the call this morning are Mark Leland, our CFO; Jim Yardley, President of the Pipeline Group; and Brent Smolik, President of El Paso Exploration and Production.

Throughout this call, we will be referring to slides; they are available on our website at elpaso.com. This morning we issued a press release and filed it with the SEC as an 8-K and it is also on our website. During today's call we will include forward-looking statements and projections made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 projections, anticipated results, or other expectations expressed in this call. Those factors are identified under the cautionary statement regarding "forward-looking statements" section of the earnings press release as well as other SEC filings; and you should refer to them.

The company assumes no obligation to publicly update or revise any forward-looking statements made during this conference call or any other forward-looking statements made by the company whether as a result of new information, future events, or otherwise.

Please note that during the call we will use non-GAAP numbers such as EBIT and EBITDA, and we have included a reconciliation of all non-GAAP numbers in the appendix to our presentation.

Also, during this call we will talk about our proposed MLP. Nothing we say today shall constitute an offer to sale or the solicitation of an offer to buy any securities. Any offers, solicitations of offers to buy or any sales of securities will be made only in accordance with the registration requirement of the Securities Act of 1933 or an exemption there from. Our comments today are pursuant to and in accordance with Rule 135 under the Securities Act of 1933. Now I'll turn the call over to Doug.

Douglas L. Foshee - President and Chief Executive Officer

Thank you Bruce and welcome to our second quarter call. I am going to keep my comments brief this morning. In short, we had a very strong second quarter. In fact, operationally, it was the best quarter we've had in now almost 4 years that I have been with El Paso. Both businesses performed very well in the quarter and both are on target to meet our commitments to you for the year.

In E&P, work continues on three exciting wells in Brazil which Brent will talk more about and which we expect to report on more fully during the third quarter. We are also announcing today a portfolio high grade in E&P. We alluded to this back in February and we are now moving forward with it. Jim and his group continue to move our pipeline growth story forward with close to a project a month coming on stream the rest of the year, new projects added to the backlog, and more projects coming.

Underpinning our operations is strong natural gas price support for 2007 and now more into 2008. And finally, we continue to move forward on our MLP which we expect an IPO in the fourth quarter. As we've now gone in to the quiet period and since our General Counsel is standing over my shoulder with a piece of duct tape put over my mouth, we are limited in our comments, but I can say that it's expected to be larger than we stated back in February, and it will include interest in several of our Pipeline assets. And with that, I am going to turn the call over this morning to Mark.

D. Mark Leland - Executive Vice President and Chief Financial Officer

Thank you Doug and good morning. I am starting on slide 7 titled financial results. This quarter we are reporting earnings of $156 million or $0.22 per diluted share. Consolidated EBIT was $470 million, up 7% from the same period last year driven by strong operating performance by both our Pipeline and E&P groups. Second quarter 2007 EBIT also included an $86 million debt repurchase charge.

Interest expense was $231 million, which was down from $316 million in the second quarter of last year, reflecting the significant debt reduction realized this year. Our effective income tax rate for the quarter was a little over 29% compared to a 10% benefit in last year's quarter, which included several favorable tax adjustments. So, in short, we had a very strong quarter despite the debt repurchase costs and higher income tax expense.

There were two items impacting earnings this quarter, which are highlighted on slide 8. The largest of the two was the $86 million pre-tax or $0.08 per share loss from that the debt repurchase costs associated with debt we retired at our E&P subsidiary. I will provide a little bit of more color on our financial activities later in my remarks.

Also affecting this quarter's earning is the $9 million pretax or $0.01 per share gain on the puts and calls in the marketing segment used to hedge E&P cash flows. This gain is due to lower quarter-end gas prices and is primarily associated with the $7.50 per MMBtu puts we purchased last fall. Adjusting for the debt repurchase expense and the gain on the production hedges gives us an adjusted EPS of $0.29 per share, which puts us well on track to meet our full year earnings targets.

Slide 9 highlights business unit contribution. On a combined basis, our core Pipeline and E&P businesses generated $833 million of EBITDA versus combined CapEx of $613 million. EBITDA consists of EBIT plus DD&A, as you can see on slide 9.

Marketing and trading recorded EBIT of $5 million, and I will provide a little more detail on this in a minute. Power EBITDA was $16 million, which benefited from favorable Brazilian currency exchange rates this quarter. Excluding the debt repurchase costs, corporate EBIT was a loss of $13 million, which is primarily driven by increases in environmental remediation reserves on certain legacy sites.

As you know, one of our important pipeline investments is our 50% interest in Florida Gas Transmission, which is held by Citrus Corp. This is accounted for as an equity investment and as such we include only our 50% share of Citrus net income in our EBIT and EBITDA calculation. That reflects Citrus result after interest expense and income taxes, adjusting to reflect our proportional share of Citrus EBITDA for the second quarter brings Pipeline Group adjusted EBITDA to $445 million versus the $409 million in the table.

Many of you just look at EBITDA as a more comparable performance measure for wholly owned Pipeline systems. The difference in valuation between using equity income versus our share of Citrus EBITDA and subtracting 50% of Citrus debt is a little more than $1 per share assuming a 10 times multiple on 2006 earnings.

There is no question this is a more accurate valuation and we will continue to provide you this information on a quarterly basis. There is a chart in the appendix that provides all the relevant details for the adjusted EBITDA calculations.

Now turning to slide 10 on cash flow. For the first six month of this year, cash flow from operations was $865 million, which represents a $552 million improvement over the first quarter of 2007. The quarter-over-quarter improvement was primarily driven by strong operating results.

For the first six months ended June 2006, cash flow from operations was just over $1.4 billion, driven by nearly $700 million return of margin collateral, primarily from asset sales and from cash flow from the ANR operations. Excluding these items from 2006 highlights the much improved cash generation in 2007. CapEx for the first six months of the year was $1.4 billion and we paid $75 million in dividends.

Now before we turn to updates on the Pipeline and E&P group, I am going to give a brief overview of marketing results and an update on our hedge positions and financing activity for the quarter.

Slide 11 details earnings from the Marketing segments, which recorded EBIT of $5 million versus EBIT of $13 million last year. The primary drivers of this quarter's EBIT are $9 million marl-to-market gain on the production-related derivatives, a $15 million marl-to-market loss on our prior book including a $40 million loss related the changes in the fair value of our PJM capacity obligations driven by changes in the PJM markets. These were offset somewhat by favorable settlement of an outstanding California power rate dispute.

Given the wind down of our legacy trading operations, we no longer needed our NYMEX seats and associated shares. So we sold them this quarter for a gain of $23 million, which is also reflected in EBIT for the Marketing segment.

Slide 12 summarizes the balance of our 2007 hedge program. In short, the remaining program includes a 112 TBtu with an average floor price of $7.70 per MMBtu with a ceiling of $11.52 on 57 TBtu. The balance of our production is uncapped to the upside.

We continue to monitor the natural gas market and during the quarter we added to our 2008 hedge program, which is summarized on slide 13. Since our first quarter earnings call, we added 31 TBtu of 8 by $12 collars and 18 TBtu of $8.24 fixed price swaps to our 2008 hedge program. So in total for 2008, we have 116 TBtu floor on our domestic gas production at an average price of over $7.50 with quite a bit of upside given our $10.92 ceilings.

To put this in context, at the beginning of 2007, we had 222 TBtu hedge attributable to 2007 production volumes. Based on our current 2008 hedge positions, we have more than 50% of the amount hedged in 2007 hedge for 2008. We'll continue to be opportunistic on our hedging program with the goal of providing downside protection on the significant portion of our 2008 production, while leaving significant amount of upside.

We are busy in the financing arena this quarter. Some of the highlights are summarized on slide 14. We've finished the quarter with net debt totaling $11.6 billion. As we've discussed earlier, interest expense is down 27% compared to last year. We refinanced our last remaining non-investment grade indenture at El Paso Exploration & Production Company with an El Paso corporate investment grade indenture and a roughly 75 basis point savings. We also completed investment grade bond offering at EPNG, significantly reducing rates and we added to liquidity through $150 million unsecured facility that we'll upside as needed throughout the year.

Also, given the finances we have already made... we've completed this year and our current maturity profile, we don't anticipate the need to access the debt capital markets until well into 2008. So next, Jim Yardley will put some color on the Pipeline results.

James C. Yardley - President, Southern Pipeline Group

Thank you Mark. On slide 16, the Pipeline Group had a strong second quarter. Financially, our EBIT is up 11% from last year's second quarter and we are on target for the year. Operationally, we are seeing strong buying growth across our pipes, and on our $2 billion backlog of growth projects, they are advancing nicely towards in-service and we see more opportunities on the way.

On chart 17 on the financials, the pipes has an excellent second quarter and first half. EBIT is up $32 million compared to the second quarter of 2006 and $50 million compared to the first half of last year. This is all after a record year in 2006 in which EBIT increased 28% from 2005. So this second quarter is the latest in a string of quarters with consistent and outstanding performance for the pipes. The quarter-to-quarter increase in EBIT is due primarily to higher revenues. First, from increased usage and capacity sales on TGP and CIG, and second, from expansions on SNG, CIG, and TGP.

We also benefited from lower hurricane-related expenses in 2007 as compared to 2006. Our capital expenditure, CapEx, were lower in the second quarter of 2007, but most of this is due to higher hurricane-relating capital in 2006.

Finally, throughput is solidly, and the next chart looks at this more closely. On slide 18, you can see where our throughput growth in 2007 is coming from. A lot of this growth is in the Rockies. We have seen higher supply-driven throughput on CIG and our other Rockies pipelines, mostly from expansions. Also, higher demand-related throughput due to colder winter weather along the front range. We have also seen higher throughput in the Southeast on SNG, mostly due to power gen. In the Southeast, the temperatures have not been particularly severe, not overly cold in the first quarter, nor hot so far in the summer at least until the last couple of days. This increase in Southeast and power gen load is somewhat due to the drought there, that is curtailed hydro power, but it's also due simply to the growth in electricity demand with the majority of this growth going to gas-fired plants. Overall, a 7% increase year-to-date across our pipes, which is a significant increase in the pipeline business.

On slide 19, turning to growth projects, this shows that we are in the midst of a significant construction program this year and into early 2008. We have recently placed two projects in service, the Cypress pipeline from Elba Island to Northern Florida went in service on time and budget in May. It's already running at capacity nearly every day, primarily providing supply for power gens in Florida. And second, our Louisiana Deepwater Link was completed in July. This is the shallow water connection in to TGP from the deepwater Independence hub and Enterprise's Independence Trail deepwater pipeline from the hub.

As you may be aware, the Independence hub is located in 8,000 feet of water. Production has started and has planned to ramp up toward 1 Bcf a day. All this gas will come in to TGP, our 500 line through the Deepwater Link.

And as you can see, we have a number of projects under construction now. As Doug said, we will be placing in service essentially one project every month for the next several months through the first quarter of next year. Three of these are in the Rockies, two in the Northeast, and one each in Mexico and the Gulf of Mexico.

On slide 20, this is a summary of progress on growth projects that have not quite reached the construction phase or had just started construction. We talked at the analyst conference back in February about our $2 billion backlog of committed growth projects. Committed in that these projects are essentially fully contractive long term. This slide shows projects in the backlog that have achieved key milestones recently as we moved them toward construction.

First, we have added three new projects to the backlog since the beginning of the year by executing long-term precedent agreements with shippers. The first two are for power gens including the large one on SNG for a Southern company plant in Georgia, and the third the Medicine Bow project is another Rockies expansion, this one out of the Powder River, primarily for Anadarko and Williams.

We have also made progress in moving other projects through the regulatory approval process. We made certificate filings on three projects and received final FERC certificates on two others that have now moved in to constructions. All five of these are Rockies projects. I will talk more about one of these, the Kanda Lateral, on the next slide.

So the point of this slide and the prior one is to remind you that we have a sizeable backlog. We will be regularly placing some of these projects and service over the next several months. We are making steady progress on others behind them in the queue, and we are adding new projects to the backlog.

On slide 21, on last quarter's call, we highlighted one of our growth projects, the Cypress pipeline that had just gone in service. On this slide, this quarter I would like to do the same for another of our projects, the Kanda Lateral. It's a new 124 mile 24 inch pipeline from Wyoming Interstate's mainline sub to Uinta basin in Eastern Utah. We just started constructing the Kanda Lateral last month using one construction spread that will build from south to north. We will also add compression at Wamsutter. We expect to have the project in service no later than January 2008 and when complete we will transport gas for Anadarko under a 15-year contract.

Kanda is typical of several of our recent intra-Rockies expansions and others to come. Intra-Rockies in that these expansions increase takeaway capacity from various growing basins in the Rockies such as the Penance, Powder River, and in Kanda's case the Uinta. These expansions transport the gas primarily to one of the Rockies hubs, either Cheyenne or Opal for export beyond. The capacity of the expansions is essentially fully subscribed and generally they are easily expandable with further compression.

By the end of 2008, we will have completed 10 sizable expansion projects in the Rockies over a 4-year period. Very simply we have been able to capitalize on Rockies supply growth through a significant footprint there with CIG, Wick and Cheyenne plains. Over that period, we will have invested over $900 million in Rockies-related pipeline projects and expanded capacity by 3 Bcf a day, either basin takeaway capacity or export capacity out of the Rockies.

In summary, on slide 22, the pipes are having another outstanding year and we are delivering on our $2 billion of committed growth projects, and have more under development. We continue to see clearly the need for additional pipeline infrastructure and we are well positioned with our extensive market and supply connectively to capitalize on these opportunities.

And now I will turn it over to Brent to review E&P.

Brent J. Smolik - President El Paso Exploration & Production Company

Thanks Jim and good morning everyone. As you know, E&P is very focused on improving our performance and made good progress in the second quarter. Let me start on slide 24. I am pleased to report we had strong second quarter production averaging 850 million a day equivalence and that includes our proportionate share of Four Star, and that's about a 5% step up for the quarter and about a 9% increase over Q2 of 2006.

Our capital program is on target with more than 350 wells drilled in the first half of the year and that's about 55% of what we expected for our total year capital program. And remember that that number reflects a significant step-up in activity of about 8% versus the first half of 2006.

In Brazil, and that's an area that we expect to have long term growth, we continued our drilling operations in our Pinauna project during the quarter, and Bia, which is our second Brazil project that Doug referenced operated by Petrobras was declared a discovery back in April. And also in the second quarter, we continued our Q1 safety success by not incurring an employee injury for 131 consecutive days, and our employee recordable incidence rate for the first half of the year was about 0.45. So to put that in perspective for you, that's about half of the average recordable incident rate for similar-sized independent E&P companies from the data from 2006; and I believe that safety is an important evidence of operational excellence and I am pleased that we are achieving top industry performance in that area.

Moving to slide 25, the E&P segment reported EBIT for the quarter of $235 million versus $163 million for the same period last year. The increase is primarily due to increased production and higher natural gas prices. And as Mark noted, we have an effective hedge position in place and those hedges helped us to the tune of about $0.50 per Mcfe in our realized natural gas price.

Cash cost increased about $0.06 versus 2006. So I'll provide some more color in that area in just a few slides. Total CapEx for the quarter totaled $399 million and that included about $16 million of acquisition costs and it had significant activity increases as year-over-year and they are particularly in Brazil related to our three exploration wells, that was about $40 million and higher TGC spending due to our increased activity levels associated with the acquisition in January, that we closed in January. That was about $30 million increase, but all related to increased activity.

While we have successfully increased our activity levels and therefore our CapEx costs versus 2006, we still expect to be on track with our $1.7 billion full year estimate. Now on slide 26 is the break down of volumes by region. We averaged almost 860 million a day for the second quarter and that's the first time that we've performed at that level in three years, all the way back to Q1 of 2004.

Onshore division, inclusive of Four Star equity interest, continued its strong performance by achieving a 12th straight quarter of production growth. They are producing now about 439 million a day for the quarter, which is about a 7% step up over Q2 of 2006. And that division has now shown the ability to scale up operations and grow volumes more than about 215 million a day in total and we have grown every quarter since the second quarter of 2004.

Also, noteworthy in that division is grown organically just from the drill bit more than 85 million a day since the acquisition of Medicine Bow in 2005. South Texas has grown by volume increasing by about 7% over last quarter and about 8% over Q2 of 2006. That production step up in the second quarter is due to improved acquisition volumes and then better than the expected performance in two of our South Texas fields, Thompson and Jeffries. And as I noted on our first quarter call, we expected the Gulf of Mexico division to rebound in the second quarter and it did. So, the Gulf of Mexico team completed the installation of three facilities and added net production of approximately 45 million a day in June, and I will provide you a little bit more detail on that in a later slide.

In International, we basically held flat since we had the interest reversion in Brazil at the Fiscana Ariviana [ph] field in the first quarter of 2006.

If you turn to slide 27, I will give you an update on our full year production outlook. First half, let me say that we will deliver on our commitment to produce the 800 million to 860 million a day range of equivalent volumes and I believe that's a necessary step for the E&P organization to continue to build our creditability. With six months under our belt and a pretty good visibility for much of the remainder of the year, we have raised the low end of our target range. So we are now guiding to a range of 820 million to 860 million a day. So you can see that we expect second quarter to be the peak production period for the year, unless we have some exceptional results in some of our more active drilling programs.

The large source of that second quarter growth came from the Gulf of Mexico and going forward we expect Gulf of Mexico to decline some and we will continue our off-platform drilling and our re-completion and our workover activities, but like the first quarter, we don't have any new platform installations planned for the second half of 2007. And as a reminder, with our current asset mix, we plan to generally keep Gulf of Mexico, South Louisiana in that 175 million to 200 million a day range.

Offshore division is going to continue to deliver predictable steady organic growth and we expect South Texas to continue to grow as volumes from our drilling and re-completion programs continue to exceed the declines in South Texas.

On Slide 28, we have shown the full year 2006 cash cost and then the first two quarters of 2007. Cash costs were $1.92 for the quarter, that's a decrease of about $0.07 from last quarter, but an increase of about $0.06 from the full year 2006 averages. Our G&A unit costs were about $0.68, which is a decrease of about a penny from last quarter and a $0.09 increase over 2006. About half of that increase from 2006 is related to the restructuring of our marketing support functions and moving many of the marketing employees to the E&P company. The other portion is primarily related to higher staffing levels in general, as we increase our activity levels.

Severance tax, unit costs were $0.33, that's an increase of about a penny from last quarter $0.04 from the 2006 average. That increase is really due to the aggregate production tax rates were lower last year and we had higher tax credits realized in 2006. I am pleased to report that we have seen real progress though in the largest component of our cost structure which is direct lifting cost. This is especially pleasing since we are seeing higher lifting across... lifting costs kind of across the board for our industry peers.

We were at $0.85 in the second quarter, that's a decrease of about 11% from last quarter and from the full year of 2006 average. It's due to a couple of things; the overall focus that we've had on LOE some lower hurricane-related costs, and a decrease in our workover activity. And while the workover costs have moderated from the first quarter of this year and from 2006 levels, we are still doing all the workover projects that we need to preserve the value of our base production. For the full year, we expect the total cost to range from about $1.85 to $2 an Mcfe for the full year.

Turning to slide 29, as I mentioned, our capital program is on track. Despite some winter weather challenges that we had in the first quarter and some rain and the wet weather that we had in the second quarter, we drilled more than 350 gross wells in the first six months of the year and we had a 97% overall success rate. And that compares to about 330 gross wells that we drilled in the same period for 2006. In the first half of '07, we drilled 42 gross wells in South Texas with a 90% success rate. And onshore division, we continued great performance there drilling 306 wells with 100% success rate. We've completed all of them.

And then included in our year-to-date performance onshore, we've accelerated some of our architects [ph] drilling program, and we've completed the 2007 oil program drilling in Wyoming. Unfortunately, in the Gulf of Mexico, South Louisiana division, we were just 3 of 8 in drilling success for the first half of 2007, but the most significant progress here was bringing on four high volume wells in Q2 in the High Island and the West Cameron areas, and going forward we expect to drill kind of two to three wells per quarter for the remainder of the year.

So in aggregate, our activity levels are on track and we continue to build on the kind of repeatable, predictable programs that give us confidence in our ability to grow with the drill bit.

Turning to slide 30, I want to highlight those three Gulf of Mexico platforms that we've brought online in the quarter. The High Island 351 and West Cam 132, and West Cameron 95; those installations all occurred in about a one-month span in May and June, and the combined June production from those platforms is about 42 million a day net or about 65 million a day gross. The largest contributor of the three is High Island 351 platform, which brought on an incremental 34 million a day net to the company. And that's by the way the largest producing discovery for El Paso from this division since West Cam 62 and 75 came online in May of last year; and that was producing about 20 million a day when it came online.

On slide 31, I want to update you on the progress we are making on two the exploration wells in our Pinauna project in Brazil. Those are Cacau and Acai. We've drilled part of the target surgery section in the Cacau well and we are currently drilling in the target zone in the Acai well. And our plans are to continue drilling and evaluating both of those wells in the third quarter. So we should have some news relatively seeing on those.

Remember, the objective of those wells is to prove the upside... exploration upside potential in the Pinauna project and the wells have the potential to extend the field aerially and find a lower oil water contact for the field. And also, remember, we got about over 100 million barrels equivalent of un-booked resource potential here, and again, so we will know about that resource size, more about it soon.

Also, we announced earlier in the year that we are planning to sell 50% non-operating interest in the project. We've begun that process and we are targeting completion of the sale in the first quarter of 2008.

Turning to slide 32, I also want to update you on the Bia well. This is the 35% El Paso working interest well that we are currently drilling with Petrobras. As I said earlier, Petrobras announced the discovery of Bia, that's the ES 168 well in April, and since then we have jointly agree to drill an additional delineation or appraisal well to test the structure even further to the north on the same block that we jointly held with Petrobras and we have agreed to move to that well next with the same rig that's currently testing the Bia well.

Now turning to slide 33. In the Analyst Day this February, I stressed the importance of improving our capital efficiency and our operating efficiencies, and providing greater visibility in to our future growth. Improving on our portfolio is an important step in that direction. So in the second quarter, we took a very in-depth look at all the fields within the region so that we could determine where we are competitively advantaged. The key criteria that we focused on included the depth and quality of our inventory, the cost structure, the reserve life, and our technical competencies. And we completed a pretty thorough review of all the assets and we have identified all the areas where we think we're advantaged going forward. Incidentally, this process along with our normal project inventory reviews is going to help us to characterize our unproven reserves, this is kind of a side benefit. Remember, we don't utilize the probable and possible naming convention for our inventory, but in the process, we think we have determined to better way to characterize our unproven resources the next time that we do a full update.

Divesting of the none-core assets is going to definitely allow us to improve our focus on the remaining portfolio, and all that means is that we will retain most of our strong onshore assets and we will retain key Gulf of Mexico and South Texas assets. And at the same time, consistent with our past practices, we will continue to look for acquisition opportunities that will even further enhance the portfolio.

Slide 34 gives you a summary of the process and some of the sizing details of the divest best packages. In addition to the Pinauna sell down in Brazil, the domestic divestitures will range somewhere between 220 to 270 Bcf or up to about 10% of our total reserves as of the beginning of 2007.

The package is weighted towards our Gulf of Mexico and South Texas properties because generally those are the most developed, highest decline, shortest reserve life portion of the portfolio, but the packages will also include properties from our onshore division that we feel may no longer meet the portfolio needs.

The marketing process will begin soon. Our intent is to market the Gulf of Mexico and South Texas and the various onshore ES properties separately. We believe that that grouping allows us to maintain the most flexibility in terms of timing and rolling the packages out, and it allows to customize the packages to fit the logical buyers. And the lastly, we are targeting closing the transactions by the first quarter of the next year.

So, on last slide, 35, again, I am pleased with the second quarter results for E&T. Year-to-date production in the remaining capital program volumes give me confidence that we will deliver on our new guidance of 820 days 860. The capital program is on track with higher activity levels, higher than 2006 and slightly ahead of our current year plan. We are stating to see improvement in our cash costs and we will continue to focus on that area going forward. And we are making important progress on our exploration projects in Brazil. And maybe most importantly, we started the process of high-grading our portfolio process that I believe over time will improve our business metrics and is also going to improve our growth story over time.

With that, I will turn it back to Doug for closing comments.

Douglas L. Foshee - President and Chief Executive Officer

Thanks Brent. We've tried to show you this morning a glimpse of the kind of performance we are capable of. As we move into the second half of 2007, we see great reasons for optimism. We expect to complete the IPO of a larger MLP, which, as we stated back in February, will bring new opportunities to El Paso Corporation. Both businesses are running well and we expect that to continue in the second half of the year and provide some real momentum for us going into 2008. We will have more news on an exciting exploration program in Brazil in the second half. We expect to report on more growth projects in the pipes in the second half. And as a reminder, we have a significant amount of gas price protection employees for the balance of this year and in to 2008. And with that, we will turn it over to your questions this morning.

Question And Answer

Operator

[Operator Instructions]. The first question is from Carl Kirst with Credit Suisse.

Carl Kirst - Credit Suisse

Hi good morning everybody.

Douglas L. Foshee - President and Chief Executive Officer

Hi, Carl.

Carl Kirst - Credit Suisse

Just a clarification first off on Pinauna, the evaluation date that is coming at the end of September, if it's material, is it something that you guys would press release or we are going to have to be waiting for the third quarter call in November?

Douglas L. Foshee - President and Chief Executive Officer

We will likely report on that in advance of the third quarter.

Carl Kirst - Credit Suisse

Okay, great, thanks. The real question that I was kind of looking at here certainly with the upsize of the MLP, perhaps the asset sales... reserve asset sales, in the first quarter we could be seeing basically $1 billion here being raised, in that timeframe, I was kind of under the impression that with the pipelines getting back to investment grade, we are relatively comfortable with where the balance sheet stands today. Can you give us any color as to what perhaps your first use of proceeds might be?

Douglas L. Foshee - President and Chief Executive Officer

Well, it's pretty difficult to give you a picture of where we are going to be when we actually get those proceeds, but I think consistent with what we've said in the past sort of for the first time in a very long time, we have more than one option. We will certainly consider improving our balance sheet if we think that makes sense. We will continue to look at acquisitions and we have a significant amount of growth projects that aren't ready yet for primetime that could materialize by then. So I think it's going to depend on where we are at the time.

Carl Kirst - Credit Suisse

Okay, fair enough. Just as kind of a subset of that question, as far as some of the options and really going to speaks some more to question of intent, with respect to selling the reserves in the Gulf, South Texas, the various onshore, is the idea to... or do we have a stated idea to take those proceeds and specifically reinvest back in those areas or shift away from those areas or is it kind of more speaking to the broader question, Doug, where basically you just now had a lot of opportunities to assess?

Douglas L. Foshee - President and Chief Executive Officer

Well, I guess... I am going to let Brent answer the question about where we look to invest in E&P, but I would say, as we have done historically, cash that gets generated by the business units gets brought up to the holding company and it's fungible. So we will make the best decisions for the cooperation at the time. Now having said that, I want to give Brent an opportunity to talk about where we look to grow.

Brent J. Smolik - President El Paso Exploration & Production Company

Yes, Carl, if you go back to the criteria for the divestiture, we are keeping the places where we have highest quality inventory and large amount of it, and some of those are in the Gulf of Mexico and South Texas areas where we have got quite a lot of inventory yet. So we will continue to reinvest back in those areas. And then you have seen from our recent past behavior, we did an acquisition in South Texas last year, closed in January, and so we'd continue to look for those kind of opportunities in the areas where we think we are advantaged or we think they are core to us.

Carl Kirst - Credit Suisse

Great, thanks. I will jump back in the queue.

Douglas L. Foshee - President and Chief Executive Officer

Sure.

Operator

Your next question is from Rick Gross with Lehman brothers.

Richard Gross - Lehman Brothers

Good morning. I just want to follow-up on the Bio prospect. Could you tell us what the status of 168 is, is it still drilling, is it TD, is it testing, where are we in that whole timeframe?

Douglas L. Foshee - President and Chief Executive Officer

Yes, we have completed drilling and we are in the testing phase.

Richard Gross - Lehman Brothers

Okay. And in that context, how long before we... what's the timeframe for the rig move north?

Douglas L. Foshee - President and Chief Executive Officer

It will be fairly short. I don't know about the exact time. We are within... in a month we would be ready to probably finish up and move. And we will be a bit at Petrobras' mercy on when we talk about it... the results of it.

Richard Gross - Lehman Brothers

Okay. Trying to put words in your mouth, can we read anything positive from the implication of your moving north onto your properties as far as drilling the next delineation well and implications on unitization?

Douglas L. Foshee - President and Chief Executive Officer

Yes, we don't own anything in the block to the south. So all... I don't mean to be flippant, but north is good. And I meant to imply that. And then also the fact that you can read into, we have been on this for a while. So, we are gathering a lot of data on the well that we are on.

Richard Gross - Lehman Brothers

And then how far north?

Douglas L. Foshee - President and Chief Executive Officer

We don't have the exact final location yet, but it's a bigger step out than the current two wells, would be the way to think of it.

Richard Gross - Lehman Brothers

And the distance between the current two wells, to refresh my memory?

Douglas L. Foshee - President and Chief Executive Officer

We are only three miles.

Richard Gross - Lehman Brothers

Okay, great, thank you.

Operator

The next question is from Faisel Khan with Citigroup.

Faisel Khan - Citigroup

Good morning.

Douglas L. Foshee - President and Chief Executive Officer

Good morning, Faisel.

Faisel Khan - Citigroup

How you doing? On TGP, with Independence hub coming online into your pipeline system; what does that mean for the volumes farther north? Does that mean that you can pickup some incremental business on any excess capacity you might have?

James C. Yardley - President, Southern Pipeline Group

We could; it's... that could happen. The more likely thing that will happen is the TGP will become a supply distributor of that gas into other pipes, whether going to FGT or SNG or third party pipes. But in either case, whether it stays in the supply area, into other pipes or goes further north, it's nice incremental revenue for TGP.

Faisel Khan - Citigroup

Okay. And then on the pipe segment, just looking at the incremental growth in profit quarter-over-quarter, what's driving the higher equity earnings? I've forgot what was the changeover last year, is that $42 million in equity earnings over income compared to last year's about $35 million?

D. Mark Leland - Executive Vice President and Chief Financial Officer

Yes, you are aware that we've had a settlement in the first quarter on some litigation with Duke at Citrus.

Faisel Khan - Citigroup

Okay.

D. Mark Leland - Executive Vice President and Chief Financial Officer

Related to an old gas supply contract. That is probably primarily a --

Faisel Khan - Citigroup

Okay, okay, got you. And then in terms of the strategy on the MLP for the pipeline, do you think that the MLP will be used more for kind of growth... dropping assets into the structure or growing the assets organically at the structure? And how do you think that will affect your ability to compete with other pipeline projects out there?

Douglas L. Foshee - President and Chief Executive Officer

Yeah. We would... that's a question that obviously we would love to answer, but as I mentioned on the call, the General Counsel still hovers over my shoulder with the duck tape. So, because we are in a quite period, we are just not going to be able to comment.

Faisel Khan - Citigroup

Got you, sorry about that. In terms of the... I missed the amount of debt cash you said you have on your balance sheet at the end of the quarter?

D. Mark Leland - Executive Vice President and Chief Financial Officer

It's $11.6 billion net debt and I think about $300 million cash. The Q will be filed a little bit later today and you will have all that on that.

Faisel Khan - Citigroup

Okay. And then when we are looking at the cash flow and CapEx from E&P, if you break that out for the first six months, will you basically be cash flow positive or cash flow neutral at the E&P company excluding acquisitions?

Douglas L. Foshee - President and Chief Executive Officer

Excluding acquisitions, we are cash flow positive.

D. Mark Leland - Executive Vice President and Chief Financial Officer

Yes.

Faisel Khan - Citigroup

Okay. And can you describe a little bit what's going on with... what's driving the onshore growth? Is it one particular basin or is it all your assets onshore that are driving king of your 10% year-over-year growth?

Douglas L. Foshee - President and Chief Executive Officer

The good news is, it's just about across the board, and that's the only place East Texas is doing well, but about only place we don't have growth is at Raton and that's only because those are CBM wells that have to respond over time. And we have drilled a bunch of that program and we are in the completion phase on about half of it. And so, it's going to respond in the second half, but almost every other region in the Gulf and the onshore division has grown this year.

Faisel Khan - Citigroup

Okay and then one last question on the targeted sale of some of your properties, how much production would you be targeting on the sale? I know you talked about the actual reserves, but --

Douglas L. Foshee - President and Chief Executive Officer

Yes, we haven't announced production yet. Part of that's because if you saw the range of reserves, we are in that 220 to 270B range. So as we finalize those packages, our plan is to put those out with each of the divestiture package.

Faisel Khan - Citigroup

Okay, great. Thanks for time guys.

Douglas L. Foshee - President and Chief Executive Officer

Yes, thanks.

Operator

Your next question is from Carol Coale with SMH Capital.

Carol Coale - Sanders Morris Harris

Hi, good morning.

Douglas L. Foshee - President and Chief Executive Officer

Hi Carol.

Carol Coale - Sanders Morris Harris

Hi. Given the recent term loan in the credit market, I realize it's going to be hard to determine what the fourth quarter will look like. But I was just wondering if the recent events would effect how you might capitalize the MLP?

D. Mark Leland - Executive Vice President and Chief Financial Officer

I don't think... while we are still in the quiet period, we can't talk a lot about how... what we are planning for the MLP. We are very comfortable with our position and our plans with the capital market as they stand right today.

Carol Coale - Sanders Morris Harris

Okay. And then just I guess more broadly, I heard you mention earlier that you didn't have any plans to go to the debt market for additional capital in 2008. And so, what I interpret that to mean is that credit market wouldn't have any effect on your future financing decisions at the parent either?

D. Mark Leland - Executive Vice President and Chief Financial Officer

Correct. What I was implying was that we... given our maturity profile, we don't foresee any to go to that debt capital markets into well into 2008, which means we have got some minor maturities coming up that we can just hang around operating cash flow, and then later in the year we have some larger maturities that we will just plan to refinance and that's --

Douglas L. Foshee - President and Chief Executive Officer

Later 2008.

D. Mark Leland - Executive Vice President and Chief Financial Officer

Later 2008. So that's... we've got a yearish kind of window here to just to sit tight.

Carol Coale - Sanders Morris Harris

Thanks. Okay, that's clear. Okay, thank you, that's what I had.

Douglas L. Foshee - President and Chief Executive Officer

Thanks Carol.

Operator

Your next question is from Nathan Judge with Atlantic Equities.

Nathan Judge - Atlantic Equities

Hi, good morning. I just wanted to ask what your dry hole costs year-to-date have been so far and I realize that you capitalize them, but what that would have ranged?

Douglas L. Foshee - President and Chief Executive Officer

Let us dig a bit Nathan. We should have it in here, but let us dig a bit on that. About the only place that it's going to be is Gulf of Mexico and the total in the Gulf of Mexico for the first half was those 5 wells, and those 5 wells is less than $30 million. And I think the only other place that don't have in my memory is the TGC piece, and it's only going to be a couple of wells as well. And so total, total is going to be less than $40 million.

Nathan Judge - Atlantic Equities

Are you still pursuing ventures where you are joined up with partners where they are taking you to the casing point?

Douglas L. Foshee - President and Chief Executive Officer

Yes.

Nathan Judge - Atlantic Equities

Okay. Could you update on the New Albany Shale?

Brent J. Smolik - President El Paso Exploration & Production Company

Unfortunately we are still in the same place that we talked about in February and on the last call. We have got a handful of wells yet to drill that are testing multilaterals, the ones we call pitchforks, we have three laterals and one well, and they were testing different kinds of stimulation techniques on both the single horizontal laterals and multilaterals to be able to see if we can decide for the technique... the right completion techniques. And then end of third quarter is when we set our internal deadline to stop, reassess everything that we have collected data-wise and make a go or no go decision on it. So we are in that phase of gathering and testing.

Nathan Judge - Atlantic Equities

When would we hear when you will make a decision on that?

Brent J. Smolik - President El Paso Exploration & Production Company

We could be able to finalize at the end of the year... by the end of the year.

Nathan Judge - Atlantic Equities

Okay. And just on Egypt, can you just give us an update there?

Brent J. Smolik - President El Paso Exploration & Production Company

Yes, just didn't mention on the call, the main thing that we have done is we've shot an aeromag survey over a large portion of the block, which is good news. And then we have gone out for tender on the... on a 3D survey, that's over the most prospective part of the block that we think we are going to be able to get shot later this year, if not it will be early the following year and it's really just a function of if the winning crews are in country or out of country.

Douglas L. Foshee - President and Chief Executive Officer

We have also hired a very experienced country manager opened our office and built staff.

Brent J. Smolik - President El Paso Exploration & Production Company

Yes, we are up to a little over a dozen employees now in the office and we are actively growing that division to be able to get ready for operations.

Nathan Judge - Atlantic Equities

Is this a 2008 drilling program or is this further out?

Brent J. Smolik - President El Paso Exploration & Production Company

We have more time than that on the contract, but if the 3D is all stacked up in sequence, if the 3D survey happens like this year, then we will be in a very good position to be able to drill next year. That will give us plenty of time to acquire process, interpret, pick the location, get approvals and then spud. And so, we are currently looking at rigs and equipment right now and anticipating of being able to drill late next year.

Nathan Judge - Atlantic Equities

Thank you. And then just finally on the last question on pipeline, you have obviously given us new precedent agreements, and I need to check to make sure that this necessarily wasn't in your past presentations, but if you look at kind of your backlog and you look at your projected growth rate, how do they stack up relative to your expectations at the beginning of the year?

James C. Yardley - President, Southern Pipeline Group

Right on the mark. The... if the... first of all, on the backlog, the actual backlog when we talked back in February was $2.3 billion and we've... so we have added some projects and we delivered on some projects, the ones that we have the Cypress project as well as Deepwater and [indiscernible] backlog, but the backlog is still over $2 billion. And in terms of expectations with respect to new precedent agreements, primarily with that Southern company deal, we are right on the mark with respect to what we expected to come in with this year. Finally, as Doug mentioned, we have some nice prospects for additional projects that were not contemplated in the plan.

Nathan Judge - Atlantic Equities

Thank you very much.

Douglas L. Foshee - President and Chief Executive Officer

Thanks Nathan.

Operator

The next question is from Mark Caruso [ph] with Millennium.

Unidentified Analyst

Hi, guys nice job on the quarter. A quick question as far as your MLP strategy goes in general. Looking out on the E&P side, you guys are high-grading your portfolio and as far as looking at acquisitions, there is more and more competition from MLPs. Is that something that you guys are open to on the E&P side?

Brent J. Smolik - President El Paso Exploration & Production Company

Yes, we have not really spent a lot of time on E&P MLPs. And so that's not some thing you should anticipate any kind of an announcement from us on, certainly in 2007.

Unidentified Analyst

And then as far as in Brazil, for the update, I know you are quite limited as far as what PBR allows you to say, but will we get a pretty meaningful update as far as qualifying the play there after the appraisal wells drilling [indiscernible]

Brent J. Smolik - President El Paso Exploration & Production Company

We will see. Again, they are kind of in the driver's seat on the announcement there and they have already made the announcement to affirm their previous announcement based on the block to the south. And the only real new information we will get is the test data and we have already gotten log type test. So that's not going to be that much new information, so may be after the appraisal well before we get really meaningful update on that, the next well.

Unidentified Analyst

Got you. Thanks.

Operator

Your next question is from Rebecca Followill with Pickering Energy Partners.

Rebecca Followill - Pickering Energy Partners

Good morning. Brent, you talked where you were talking about on high-grading the portfolio and some work that you are doing that have might have implications for your technically mature and technically immature reserves, and the way that you look at those, can you give us some more color on what you are talking about and when you do, when would you do your next release of what you think those reserves are?

Brent J. Smolik - President El Paso Exploration & Production Company

W have had a release schedule right now, Rebecca. We work to figure out the right, best time to do that. But what we are talking about is the P2, P3 designations seem less useful to everyone, then characterizing them by which ones look like gas manufacturing unconventional resource type plays, which of them look like very repetitive, but more risky plays that we can describe risk on, and which ones look like real exploration. And so, I think what we've... as we worked through this divestiture work and as we've worked through the inventory updates through this summer, spring and summer, we've started to quantify in that way internally. So, it's starting to become clear to me that there is a way to describe these things that's useful for everyone else externally and useful for us internally for planning. So that's the gist of it, get it down to where we can explain them in terms of these look like gas everywhere, gas manufacturing, no geologic risk to the ones that look like. South Texas and East Texas look different and then ultimately the international Gulf of Mexico, other exploration areas look different.

Rebecca Followill - Pickering Energy Partners

Is this something... I mean, not to push you on a date, but this is something that would likely that you she would come out with year-end; would that be a good time to do it?

Brent J. Smolik - President El Paso Exploration & Production Company

We could either do it on a quarter call, but it's awfully hard to get through something like that. Maybe more likely we'll do it in the annual meeting next year.

Rebecca Followill - Pickering Energy Partners

Okay, thank you.

Douglas L. Foshee - President and Chief Executive Officer

Thanks, Becca.

Operator

The next question is a follow-up from Carl Kirst with Credit Suisse.

Carl Kirst - Credit Suisse

Hey, sorry, just two quick follow-ups. With respect to the New Albany, was it ever quantified or could you quantify what the New Albany was with respect to the 2.5Ts of the non-proved risk reserves?

Brent J. Smolik - President El Paso Exploration & Production Company

It's a small piece, we didn't count any inventory in there yet because we were still in that pilot phase. So it's relatively immaterial. I don't remember if we put it in that analyst slide, but if we did it was less than 100 Bs for sure, probably 56, 57.

Carl Kirst - Credit Suisse

Okay, that's helpful. Thank you. And just second, Jim, we have been talking more this summer about more takeaway pipeline capacity out of the Rockies, may be 2011ish timeframe. Have we moved to the point where we are actually in kind of serious conversations with producers to revive the continental connector project, would it actually be kind of a new project, new route, if you will?

James C. Yardley - President, Southern Pipeline Group

I think our general conclusion on the Rockies is that in that timeframe 11, 12, 13, somewhere in there looks to us as though there will be a need for additional export capacity out of the Rockies and it's not clear at this point whether that means expansions of Rex [ph], expansions of Cheyenne, expansions of something else or new Greenfield.

Carl Kirst - Credit Suisse

Okay, fair enough, thank you.

Operator

At this time, there are no further questions. I would like to turn the conference back to Mr. Connery for any closing remarks.

Bruce L. Connery - Vice President of Investor and Public Relations

We very much appreciate you joining the call and if you have any follow up questions, just please give a call. Thank you.

Operator

Thank you for participating in today's El Paso Corporation second quarter 2007 earnings conference call. You may disconnect at this time.

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