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El Paso Corp. (NYSE:EPB)

Q2 2008 Earnings Call

August 6 2008 12PM EST

Executives

James C. Yardley- CEO

John R. Sult - CFO

Bill Baird - Manager El Paso Pipeline Partner and IR

Analysts

Michael Blum - Wachovia

Operator

Good afternoon, my name is Kerry and I will be your conference operator today, after a time, I would like to welcome everyone to the El Paso Pipeline Partners Second Quarter 2008 Earning's Conference call. All lines have been placed on mute in order to prevent any background noise. (Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Beal Baird, manager of El Paso Pipeline Partner and Investor Relations. Sir, you may begin you conference.

Bill Baird

Good morning and thank you for joining our call. In just a moment I will turn over the call to John Sult, who is the key financial officer and controller over MLP. John will be followed by Jim Yardley, who is the President, Chief Executive Officer of El Paso Pipeline Partners. Throughout this call, we will be referring to slides which are available on our website, www.eppipelinepartner.com. This morning we issued a press release and filed with the SEC as an 8K and it is also on our website.

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 differ materially from the statements and projections expressed on this call. Those factors are identified under cautionary statements regarding forward-looking statements section of our earning's press release as well as of our filings with the SEC, and you sure 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 this call we will use non-GAAP numbers such as EBit and EBitdot and we've included a reconciliation of all GAAP numbers in the appendix to our presentation.

Now I will turn the call over to John.

John Salt

Thank you Bill, and good morning to everyone on the call. Overall, our second quarter performance continues to confirm the quality of our asset base. The stability of our cash flow as well as the visibility we have to grow future distributions to unit holders. This morning I plan to give you a brief overview of our second quarter performance before turning the call over to Jim Yardley. He is going to provide an operational update as discuss two organically growth projects recently announced.

We're starting on Slide 3 titled: 2-Q 2008 Highlights. For the second quarter, we reported a $23 million a 20% increase over 2007 levels. Heading now for the 6 months, it was $50.6 million. As a result of our solid performance, the Board of Directors of the General Partner recently declared an increase on the quarterly cash distribution to unit holders. On the July 21 the Board approved the distribution of 29.5 cents per unit to be paid August 14 reflecting a 2.6% increase from the level paid in the first quarter of 2008, and our first increase since our initial public offering late last year.

On the execution front in May, our affiliate Southern Natural Gas or SNG, played in-service, on time and on budget to Cyprus phase 2 expansion to transport more gas to Florida. The additional capacity for expansion is fully contracted to a single customer for a term of 20 years. El Paso Pipeline Partners own up to 10% of it. Finally, as Jim will discuss in a few minutes we can continue to expand the partnerships backlog of organic growth projects with the announcement for the WIC System expansion and the CIG Retone Expansion.

Turning to Slide 4 just as a reminder our financial results prior to our initial public offering in November 2007, are attributable solely to our predecessor Wyoming Interstate Company or WIC. The partnership of owns 100% of WIC. Financial results for our 10% interest in Colorado Interstate Gas or CIG, as well FNG, are only included beginning from the day El Paso's contribution to the partnership in November 2007.

Earning's before interest in taxes or EBIT for the quarter was $27.4 million compared to $24.7 million for the same period in 2007. Earning's from our 10% interest in CIG and FNG were the primary contributors to the higher quarter over quarter results. Earnings also benefited from revenues, the WIC collateral placed in service in January of this year, and increases in revenues on the collateral. Second quarter of 2007 results were benefited from an insurance recovery related to an insurance settlement.

Moving to Slide 5, cash available for distribution for the 6 months, was $50.5 million, that's based on the adjusted EBITDA is $71.7 million less cash interest expansion of 71.7 million less cash interest expense of 10.1 million and maintenance capital expenditure of $1 million. All of these items are adjusted for cash reserves and other non-cash items. The results, is a distribution coverage well in excess of 1.05 times, Adjusted EBITDA includes our share of distributions paid and declared by CIGNS in 6 months in $22.2 million dollars.

Finally, on Slide 6 our capital structure as of June 30. Partnerships initial capital structure and credit facilities were designed to provide financial flexibility to fund future growth. Debt capitalization as of June 30 was 55% based on outstanding borrowings under the credit facility of $495 million. In addition to our strong financial position and stable cash flow base with substantial equinity available to us under the revolving credit facility the funds are a sizeable backlog of expansion projects for other growth opportunities. As a result, we continue to be well positioned for future growth.

As I mentioned at opening of our remarks our second quarter performance continues to confirm exceptional quality of our asset base. The stability of our cash flow as well as the visibility we have to grow future distributions to unit holders. That visibility allowed our Board of Directors to increase the cash distribution to unit holders after all of the second full quarters since our initial public offering late last year. With that, I'll turn the call over to Jim Yardley, Jim.

Jim Yardley

Thanks JR, I'll give a short business update on Slide 7, picking up on JR's comment on the quality of our assets, throughput increased substantially on Wic, our 100% owned pipeline. WIC's business is primarily to move gas from various rockies-producing basins to the Rockie's export hubs primarily the Cheyenne, but also somewhat to Opal. WIC is the low cost provider of this transportation service from the Rockies. So WIC benefited from increasing Rockies production in general and production layer has increased even more than we anticipated. Wic also benefited from recent expansions out of the [inaudible] basins.

At our two 10% on pipes SNG's throughput increased primarily as a result of a full year of transportation on SNG Cypress line that moves gas from Alba Islands to Florida and CIG throughput was down due to significantly warmer weather along the front range relative to a very cold early 2007.

Remember the through put has relatively little impact on our revenues and cashflow because our revenues are derived primarily from fixed capacity payments but are not sensitive to through put weather or gas prices. We tracked throughput trends to get long term help of our pipelines.

Switching to Slide 10 this slide summarizes our organic growth projects. This is an attractive group of growth projects, the results from our pipelines beings well-positioned and the growing supply basins and in-use markets. We have long term contracts with customers on all these projects for substantially for all the capacity of them. Total estimated capital net to EPB is now to $242 million remaining to be spent over the next few years. So this represents significant organic growth.

In the second quarter, we added two important projects for this backlog the WIC system expansion and CIGs Retone basin expansion, and I'll talk about these on the next two slides.

On Slide 9 the WIC expansion, we recently landed commitments from shippers to expand WIC yet again. This general system expansion has 240 a day of capacity of primarily from the Uintah basin and Wamsutter areas. It consists of new compression on the pipeline out of the Uintah and an upgraded compression at WamSutter, also three miles of 20 inch pipeline. So this expansion follows in the trend of generally beefing up the WIC system as production comes on to move producer's gas from the Basin's to export hubs at either Cheyenne or Opal in the west. It's fully contracted with four producer shippers, and as you can see will provide a nice boost to cash-available for distribution when completed in 2010 early on 2011.

On Slide 10, our other big expansion, CIG is the latest expansion out Retone Basin. The Retone has experienced regular production increases over time. CIG is the primary takeaway pipeline there, and so CIG has expanded as the production has increased. In this expansion, CIG will install 15 miles of 16-inch pipeline to move an additional 130/day of return production directly north of the Cheyenne hub. It will cost about approximately $ 146 million. It's essentially fully contracted and will start producing revenue in 2010 once it's in service, and we've locked in the pipeline cost already. I think these two editions to our backlog at this quarter are solid evidence that our pipelines are well-positioned to grow.

In summary, on Slide 11, we've made excellent progress since the IPO last November, we strong earnings in cash flow, we've already increased cash distribution, we have an attractive and growing inventory of organic growth projects, and we have the financial flexibility to fund this growth, and with that, we will open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes the line of Michael Blum of Wachovia.

Michael Blum - Wachovia

Hi good afternoon, just a couple of questions, one, what type return would you expect on the Raton expansion?

Jim Yardley

Generally we've been talking about returns at both across the pipelines at the corporate level or an EPV, we generally have been referring to a multiple Capex represents relative to EBITDA and on this project as well as several others, that multiple is typically 7 times.

Michael Blum - Wachovia

The other question is this, as it relates potential drop towns in the future, just wondering how you're thinking about that now given the current state of the capital markets, the credit markets etc.. . Has your thinking changed in terms of timing of scope, or any other factors you're thinking about?

Jim Yardley

Yes, Michael, I could say the current environment is challenged but, first and foremost, our strategy has not changed. The one thing I think you need to keep in mind is that, in our sponsor we are willing and able as well to take equity on any potential transactions so that provides us, I think, a lot of flexibility when you think about how you might move forward, but first and foremost we understand that the market expects a certain level of growth, and we have every reason to believe that we'll be able to live up to those expectations.

Michael Blum - Wachovia

Thank you.

Operator

Once again, in order to ask a question, please press # and the number 1 on your telephone keypad. I would like to give everyone an additional moment to press # and the number 1 on your telephone keypad for any questions you may have.

Bill Baird

If there are further questions we would like to thank everybody for being on this call and thank you very much.

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