Kinder Morgan, Inc. (KMI) Q3 2007 Earnings Report, Transcript and Summary

Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the El Paso Corporation's Third Quarter 2007 Earning 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. Mr. Bruce Connery, you may begin your conference.

Thank you, and good morning. We appreciate you joined our call. In just a moment I will turn the call over to Doug Foshee, our President and Chief Executive Officer. Others with us this morning who will be participating in the call are Mark Leland our CFO; Jim Yardley, President of our Pipeline Group; and Brent Smolik, President of El Paso E&P Company. Throughout this call, we will be referring to slides that are available on our website at elpaso.com. This morning we issued a press release and filed it with the SEC's and 8-K, and it is also on our website. During this call, we will include forward-looking statements and projections made in reliance on the Safe Harbor provision 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 in the earnings press release that was filed with the SEC this morning, 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 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'll use non-GAAP numbers such as EBIT and EBITDA and we have included a reconciliation of the all non-GAAP numbers in the Appendix to our presentation. Also during this call, we will talk about our proposed MLP. Nothing we state the does constitute an offer to sell or solicitation of an offer to buy any securities. Any offers, solicitations of offers to buy, or any sales of securities will only be made in accordance with the registration requirement of 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. With that complete, I will turn call over to Doug.

Thanks Bruce. Good morning and thanks for joining us. Team El Paso delivered another very good performance in the third quarter. Earnings from continuing operations were up 33% from a year ago and both the pipes and E&P were ahead of target for the quarter. We'll spend couple of minutes highlighting the E&P Groups quarter. EBIT was up 65% over the last year's Q3. Marketing this quarter was a non event, just how we like it. We completed the acquisition of Peoples and should have the integration largely complete by year end. We were able to convince about three quarters of the Peoples' staff to join Team EP. Our divestiture packages are on track and we had significant exploratory success in Brazil which sets us up for longer term volume and reserves growth. In the Pipeline Group during the quarter, EBIT was up 9% over last year's Q3 and throughput remained strong. We continue to deliver on our growth projects, most recently with TGPs Northeast ConneXion New England which went into service just last week. And we continue to replace and grow our backlog with quality projects keeping the overall backlog above the $2 billion level, even as we roll off and put into the service existing growth projects. While we have been working hard this year to make sure that we deliver on commitments we made to you performance in 2007. We have been working equally hard to ensure that we can create an organization that's capable of long-term sustainable growth. At E&P that's measured by our backlog of drilling projects which has grown substantially with the rate on Peoples acquisitions, the recent exploratory success in Brazil, our success this year in Gulf of Mexico lease sales and the continuing work of our technical teams to generate new ideas on existing properties. The EMP team has done a great job this year in improving both the quantity and the quality of these opportunities. In the Pipes, our ability to grow and grow sustainably is most easily measured by our backlog. Jim is going to talk more about specific projects in the backlog later, but the point I'd like to make is that not all backlogs are created equal. What we report to you are projects for which we have commitments. But rest assured there other projects that we are working on, that haven't hit this list yet. Some are bread and butter incremental additions to existing pipes and some are larger and more strategic. We look forward to sharing more good news with you on our backlog as we finish out 2007. Finally we continue to move forward on the formation and IPO of our master limited partnership. We filed our third amendment to the S1 yesterday morning, to update the filing to reflect our third quarter numbers, as well as to respond to a few questions. We continue to work with the SEC to move forward as expeditiously as possible and expect an IPO this quarter. And with that, I will turn to our Mark to talk about the financials.

Thank you, Doug and good morning. I am starting on slide 7 entitled financial results, the third quarter was another in a string of good quarters for El Paso. On the financial side we are reporting earnings this quarter of a $146 million or $0.20 per diluted share. Consolidated EBIT was $483 million, up 57% from the same period last year driven by strong performances in both the Pipeline and E&P groups. Note that last year's third quarter included a $133 million mark-to-market charge related to MCV sale. However even adjusting for last year's one-time loss, EBIT was up nicely year-over-year. Interest expense was $228 million which was down from $294 million in the third quarter of last year, reflecting a significant debt reduction in liability management efforts completed early this year. Our effective income tax rate for the quarter was a little over 39%, compared to a $98 million benefit in last year's quarter, which included several favorable tax adjustments. On our effective... our effective tax rate was up a little this quarter compared to either the first quarter or the second quarter's this year, due to the non-taxable Brazilian power impairments, which I will talk more about on the next slide. So no matter how you cut it, we had a good another strong quarter. There were several items impacting earnings this quarter which are highlighted on slide eight. The first is the $65 million or $0.09 per share loss from the impairment of certain of our power investments in Brazil. The majority of this charge relates to the Porto Velho plant which is located in the upper Amazon River basin. Continuing developments in the Brazilian power markets have impacted the value of the plant and as I mentioned earlier, this international charge is not subject to U.S. income tax. So the pre and post-tax impacts were the same. The second item is an $11 million pretax or $0.01 per share loss associated with Case Corporation retiree medical benefit, indemnity liability that was increased due to an unfavorable interim core drilling. Offsetting this negative... the negative items was a $77 million pretax or $0.07 per share gain or income from the reversal of a liability associated with the legacy crude oil marketing and trading issue. The liability was reversed on the expiration of the statutory limitations attributable to the potential claim. And finally, also affecting this quarter's earnings is a $15 million pretax or $0.01 per share gain on the puts and calls in the marketing segment used to hedge E&P cash flows. So adjusting for these items results an adjusted EPS of $0.22 per share, putting us well on track to meet our full year earnings targets. Slide nine highlights business unit contribution. On a combined business, our core E&P and Pipelines businesses generated $795 million in EBITDA versus combined CapEx of $1.582 billion, which includes the $879 million Peoples acquisition. EBITDA consists of EBIT plus DD&A as you can see on slide nine. Marketing and trading recorded an EBIT loss of $8 million, which I will provide more detail on in a minute. Power EBITDA was a loss of $66 million, driven almost entirely by the Brazilian power impairment I discussed earlier. Corporate EBITDA was a gain of $55 million, which includes the $77 million crude oil trading liability reversal. And $11 million retired medical indemnity loss I discussed on the last slide. As I highlighted in last quarter, one of our most important 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% shares interest Citrus net income in our EBIT and EBITDA calculations which reflects Citrus results after interest expense and income taxes. Adjusting to reflect our proportional share of Citrus EBITDA for the third quarter brings Pipeline Groups EBITDA, adjusted EBITDA of $445 million versus $369 million in the chart. There is a chart in the Appendix that provides the relevant details on adjusted EBITDA calculations. I am now turning to cash flow on slide 10. For the first nine months of this year cash flow from continuing operations was $1.493 billion, which means for the third quarter, cash flow from continuing operations was $611 million. For the nine months ended September 2006, cash flow from continuing operations was just over $1.7 billion, driven by nearly $900 million of return of margin collateral, primarily from the power book sale and the reduction gas prices from the hurricanes the previous year. So, excluding this collateral return from 2006 shows a significantly improved cash generating capabilities of El Paso for 2007, in 2007. For the first nine months of this year CapEx including the Peoples acquisition was just under $3 billion and we paid $112 million in dividends. Slide 11 details earnings for the marketing segment which experience another quite quarter. Reporting an EBIT loss of $8 million versus loss of $108 million last year, reflecting the continued decline in the size and volatility of the book. The primary drivers of this quarter's EBIT are $50 million mark-to-market gain on production-related derivatives, and $11 million mark-to-market loss on the remaining power contracts. And the relatively, in relatively small losses in the gas book, and $9 million loss in improve transportation gas supply obligation. The bulk of this $9 million loss from the capacity we hold on the aligned pipeline, which was released November of this year will not impact earnings or cash flow going forward. Slide 12 summarizes the balance of our 2007 hedge program. In short, the remaining program includes 58 TBtu with an average floor price of $7.68 per MMBtu and an average ceiling price of $11.25 per MMBtu on 36 TBtu. We have a negligible amount of our oil production hedged in 2007. Year-to-date we've received a referenced over $160 million in settlements from our 2007 hedge program, most of which are showing up in the E&P segment, pro forma higher realized prices. We continue to monitor the natural gas market and during the quarter, we added to our 2008 hedge program bringing the total amount hedge for 2008 up to 137 TBtu and an average floor $7.92 per MMBtu and an average ceiling of $10.06 per MMBtu. To put us in context at the beginning of 2007, we had 222 TBtu hedged attributable to the 2007 production plans. Based on our current '08 hedge positions, with more than 61% of that amount hedged, that the amount we hedged in 2007 from 2008, and we will continue to be opportunistic in our hedge program, throughout the rest of this year and into 2008, for the goal of providing downside protection and leaving a significant amount of upside for our shareholders. Slide 13 provides a quick update where we are with the formation of our IPO of our pipeline MLP, which we have named El Paso Pipeline Partners. Since we filed our registration statement with the SEC, we are in a quiet period and cannot discuss the MLP to any great extent as Doug mentioned. The current status is that we have received two sets of comments from the SEC and filed a third amendment yesterday and were currently working with SEC to finalize the registration and expect to complete the IPO in the fourth quarter of this year. The efforts this year to restore balance sheet continued to manifest themselves in our financial results which are highlighted on slide 14. We finished the quarter with net debt totaling $12.6 billion which reflects the Peoples acquisition and over the next six months we expect our debt level to drop sharply with the MLP IPO proceeds and the sale of the E&P properties in the first quarter. As we discussed earlier interest expense is down 22% compared to last year and we have completed the liability management program in resulting activities result and associated activities resulted from the NR sale, In addition we upsized our revolver at the E&P company $1 billion dollars and extended its maturity to 2012. We also upsized our unsecured LC facility from $150 million to $500 million as of today, with very attractive rates despite the rocky credit markets this quarter. Also given the financings we have already completed in our current maturity profile, we don't anticipate the need to access the debt capital markets until well into next year. So with that, I will turn it over to Jim Yardley who will put some more color on the pipeline results.

Thanks Mark, on slide 16 the Pipeline Group had a strong third quarter. Financially our EBIT results were excellent up 9% from last year's third quarter. Operationally we continue to see very solid volume growth across our pipes. On the regulatory front we received final approval from FERC on our EPNG rate case settlement, which is a major settlement. We also received FERC certificates on both the Southeast Supply Header Pipeline and on our next expansion on Elba Island together with the related Elba Express offtake pipeline. And we continue to make significant progress in advancing our $2 billion backlog of expansion projects. Slide17 on the financials; another excellent quarter EBIT was up $22 million compared to the third quarter 2006 and year-to-date up $72 million or 8% verses 2006 year-to-date. Nearly all the increase in the third quarter EBIT was due to higher revenues primarily expansions on TGP, CIG and SNG and from increased capacity sales realization and throughput. Capital expenditures were higher in this year's third quarter versus last year's primarily due to greater spending on various growth projects. And throughput as you can see was up significantly in the next chart, on chart on slide 18 looks at this more closely. So, on slide 18, the increased throughput year-to-date is driven by both supplier-related and demand-related activities. On the supply side, in the Rockies CIG, Wyoming Interstate and Cheyenne Plains all benefited from a continued and substantial increase in Rockies production. Also from our Piceance expansion project on WIC. On the demand side in the east, we've seen significantly higher power generation loads on both SNG and TGP. This was somewhat due to a warmer summer and the drought in the southeast. But also simply the increased utilization of gas-fired plants that capture most of the underlying growth in electricity demand. Also on the demand side CIG benefited from the colder weather in the first quarter along the front ridge. So, in total throughput is up nicely, year-to-date 6%. On slide 19 this was a little more color on our over $2 billion backlog of committed growth projects. Projects that we have firmly in hand and there all essentially fully contracted long term. This slides schedules up the project backlog by expected in service day over the next few years, and a couple of comments on the slide, first, we've been very active and successful this year in placing projects and services. We now completed five growth projects in 2007 including TGP Northeast ConneXion New England expansion, which went into service last week, right on time to meet increased winter heating demand. I will speak further about this project in just a minute. So these five completed projects might drop other backlog, backlog remains over $2 billion as Doug said, because we have been successful in landing additional new business, signed long-term preceding agreements to support further expansions. The new projects on this list are, large SNG SESH system three project for southern company, the TGP Carthage project for Entergy and the WIC Medicine Bow Expansion. Second I think you can see that our growth is varied and diverse. We have expansion projects on our pipes across the country, some are demand related either for power gens or the LDC market and some are driven by supply. Out of the Rockies, Deepwater Gulf or LNG related. The commonality across these projects is that they are all primarily straight forward expansions or extensions of our existing infrastructure. So, we have been busy in 2007, executing on this project backlog moving projects the regulatory approval and constructions. But you see we remained very busy throughout 2008 and 2009 and beyond, construction is underway on several of these projects listed including our 2010 Elba Expansion project. We just program here to build our fifth tank class month, immediately after we received FERC certificate in September. Let me emphasize again on this chart what Doug said upfront. This slide shows our committed projects only, those for which have binding long-term preceding agreement with customers. We have numerous other growth projects under development for which we do not yet have PAs. These projects under development are a varied group, some are small bolt-on expansions of our existing pipes, some are very large, and they are all across the country and will have new for you soon on some of them. On slide 20, on each of the last two quarterly calls we have highlighted particular growth projects, on the first quarter call, we reviewed the Citrus, pipeline to North Florida, and then the Kanda Lateral project in the Rockies last quarter. Today we discussed two projects on TGP, our Deepwater Link project in the Gulf, and our ConneXion New England project. The Deepwater Link project shown here is TGP shallow water ConneXion from the Independents Trail Pipeline into TGP. Independents Trail runs from the deepwater Independents Hub up to the shallow water, and the Independents Hub platform is located in 8000 feet of water in Mississippi Canyon approximately 200 miles, Southeast of New Orleans. It's the deepest water producing platform in the world. Through Independents Trail NTGPs Deepwater Link, the Hub is solely connected to TGP. Gas began flowing in mid July and has ramped up steadily to approximately 700 MMcf per day now, and is expected to reach approximately 1 Bcf a day by the end of the year, all flowing into TGP. So it's a lot of gas supply for the TGP system primarily moving up our 500 line and the projects strategically positions TGP to capitalize on future deepwater developments in the Eastern Gulf. On slide 21; at the other end of the TGP system, we have just placed in service our ConneXion New England Expansion project. All of the expansion capacity has been fully subscribed under long-term contracts primarily by subsidiaries of national grid and energy east. The expansion facilities include additional compression at seven compressive stations, six existing ones and one new one, a total of 55,000 horsepower of additional compression. The project was placed in service November 1 which is actually one year ahead of the original schedule anticipated by our customers and by us. We were able to advance the in-service state by deciding early on in the development process and a close coordination with our customers to order the compressor units prior to having regulatory approvals. In combination with an accelerated installation effort, we successfully advanced the project a year for the benefit of our customers. This project is typical of many of our midsized expansion projects across our pipes. It's a straightforward expansion of existing pipeline. It's fully subscribed long term with high quality customers placed in service timely to meet market needs and providing good solid returns for El Paso. In summary on slide 22, our pipelines continue to deliver and we remain on track for another great year. We are executing on our $2 billion of committed growth projects and we have more under development. And with that I'll turn it over to Brent on E&P. Brent J. Smolik - President El Paso Exploration & Production: Thanks Jim and good morning everyone. I want to begin by taking a moment to briefly reflect on the past year, since I arrived at El Paso. Our E&P business has improved substantially and I want thank the entire E&P organization for their hard work and their commitment. In just four quarters we have improved the consistency and the predictability of our performance. And we are on track to meet our 2007 goals. We further matured our organizational capability which is reflected in our activity levels and in our results, and we began the year focused on high grading our portfolio. In the first half of the year, the E&P team worked hard to determine where we were advantaged and where we are not, and which let us to the divestures that we announced in August into the acquisition of Peoples Energy, and then finally we have advanced our projects in Brazil and Egypt. These achievements are all consistent with our overarching goal that we set to improve our credibility, visibility and our capability as an organization. So let's look at the quarter results on slide 24. We produced about 850 million a day and including our proportionate share at Four Star, which is a 5% increase over Q3 of '06 and through nine months we are up about 7% compared to last year, and we are on-track to meet our full-year production guidance. Our capital program is also on target for the year. It is about $1.7 billion excluding the Peoples acquisition and we are holding our capital flat despite some delays and some overruns in the Gulf of Mexico and in Brazil. Now I am proud of the fact that we have executed on our capital plans in a tough market. It took a lot of hard work by many people in the organization, including the 220 new employees that we have hired in E&P this year and that number includes the peoples and employees that have just joined us at the beginning of the fourth quarter. We delivered strong unit costs, unit cash costs performance in Q3 and the quarter was a big one for our portfolio high grading efforts. Finally we made significant progress in Brazil and I will update you on both of our exploratory projects in just a moment. In total, E&P continued to deliver on our commitments and if you move to slide 25, you can see the E&P segment reported third quarter EBIT as, Doug, pointed out of $232 million which is a 65% increase over last year, that increase is primarily due to the replaces higher realize prices, lower cost, and higher volumes. Our gas hedges have generated a significant amount incremental margin this year and they added about $1.19 per Mcfe to our realized price in the quarter. CapEx for the quarter excluding acquisitions was $349 million, where we also booked just over $880 million for the acquisition of Peoples. And as I mentioned earlier, our production unit cost are both highlights, our production and unit cost are highlights for the quarter, and I'll review both of those in a bit more detail. But virtually every metric of our performance improved versus a year ago. Slide 26 shows a breakdown of volumes by region for the past five quarters. As expected for the third quarter, production was down a bit from the second quarter but only slightly and again versus the first nine months of 2006, volumes were up about 7%. All our domestic divisions grew compared to last year's 3Q. Onshore continued its strong performance at $423 million a day for the quarter. This is down slightly from the second quarter, but that was largely due to a decline in our non-operated Four Star joint venture. The onshore division is showing the ability to increase activity levels over the past several quarters, and has doubled production over the last three years. Sales taxes grew about 12% compared to the third quarter of '06. This is due to the acquisition that we completed in January in sales taxes and then we... in our better expect performance in Thomson and Jeffery's fields. The Gulf of Mexico volumes improved about 8% versus last years 3Q and slightly exceeded our expectations for the quarter. As we said before the Gulf of Mexico volume should normally be in about the $175 million to $200 million a day range, and they are back down to that level now and will remain that for the remainder of the year. So in total the fourth quarter we expect to produce about $840 million a day or above on our existing assets, plus remember we will add the Peoples volumes of roughly $70 million a day. Slide 27 shows our cash cost components for the quarter compared to prior periods. As we have stated all year at cost, both expense and capital are major focus for the company and a key part of us becoming a top tier E&P Company. In Q3 our total unit cost, cash costs were $1.77 per Mcfe which continued our trend of improvement throughout the year. Lifting costs were about $0.83 in the quarter, that's a decrease of 13% from last year's average and an improvement due really to the continued focused on LOE, lower hurricane related cost and to a decrease in our work over expenses. Our G&A unit costs were $0.64, that's a decrease of about $0.02 from last quarter. But we expect our run rate to be a bit higher on a going forward basis on unit cost basis. Now remember versus 2006, approximately half of that G&A increase is related to restructuring of our marketing support functions and moving many of the marketing employees to the E&P Company. The other portion of the increase is primarily related to higher staffing levels in general as we increase our drilling and activity levels. We expect total cash costs for the year to be in the $1.85 to $1.95 range, again right in line with the targets that we set for ourselves at the beginning of the year. Turning to slide 28, our activity levels are also on track for the year. We have drilled about 542 gross wells for the first nine months of the year and we have achieved a 98% success rate. Overall, our drilling results have been on target in terms of success rate with the exception of our Gulf of Mexico South Louisiana division, and there our success rate on new drill wells is 418 for the first nine months. However, we still have the fourth quarter to go and we already know that we will have a few more successes like on the second well that West Cameron 75 for example. Our long-term track record on new drills in the division is being closer to 70% success. So it maybe a couple of wells off of that historical success record by year end. Also we are happy with... very happy with the success in Brazil and Pinaúna expiration wells, where we had a lot of difficulty drilling those wells and they took longer and therefore cost us more than we had planned. The activity there, the rig is essentially complete and will be demobbed this week. We have captured a number of key learnings from that program. You learn a lot when you drill tough wells like that and we will integrate those learnings into the field development program, when we go forward with that drilling. Our capital drilling program for the year is complete in many of the project areas and we are actively planning for our 2008 programs, some of which will begin ramping up later this year. Turning to slide 29, one of the biggest achievements for the third quarter was advancing our portfolio high grading efforts. We closed the Peoples acquisition of September 28th and it was important for us to get started quickly on those properties. We have spent about six weeks in the pre-closing period, planning the integration, and we had an integration team ready to go as soon as we closed. The integration activities are well underway across the board in our operations area and in the administrative back-office functions. Because of the efforts of our E&P organization, we will be largely completed with the integration by year-end. Operationally we are maintaining the combined pre-deal activity levels as we had planned and unfortunately we've retained most of the Peoples employees and we are happy to have their skills and experience on the El Paso team. Well we are also making progress on our planned divesture activities. Our intend is to market the Gulf of Mexico, South Texas and various onshore properties separately and we believe that strategy allows us to maintain the flexibility that we need and to customize the packages to fit the logical buyers for each of those areas. We hope to receive bids by year end and to close by the end of Q1, 2008. In total, we expect to sell up to about 300 Bs [ph] of reserves which is higher than we have previously announced. But that's the same set of assets, we have just now updated the reserves in inventory for our 2007 activities. Internationally, we also announced last quarter that we are selling down 50% of our Pinaúna project. That process in still underway with bids due also before the end of the year. The timing of that closing will be dependent on government approvals, but we hope to have the sale completed by the first half of 2008. So, let's turn to a brief update on the Brazilian exploration beginning on slide 30. First the Pinaúna project, I trust that you all saw yesterday's announcement that we drilled two successful exploration wells at Pinaúna. Like I said the drilling was challenging and time consuming but the good news is that we have extended the original field limits with those wells. The Cacau-1 well oil as we expected and we confirmed that with core data and we just completed testing the Açaí well and that well tested gas and condensate from the top of the Açaí structure, it rates over 10 million a day which were limited by the test equipment that we had on location. We are evaluating the test results and we are also evaluating the possible development scenarios for the field. And based on our earlier assessment, we now believe that the entire field area contains up to about 90 million barrels of all equivalent, which includes the 12 million barrels of crude reserves that we currently have booked. No doubt knowing our final development plan at this time, it's hard to predict the timings of first oil, but it's likely to be sometime in late 2008 or early 2009. Turning the slide 31, I would also like to update you on the Bia project. As you know, the 168 well was a delineation well that followed Petrobras's discovery. The 164 well to the south on their 100% owned block. In the May release, Petrobras noted that we had encountered roughly 130 meters of gas bearing sand in the 168 well, we've just finished drilling and testing that well in September and then we jointly agreed to drill an additional delineation well to the north, the 177 well which is about 3 kilometers further north in order to further evaluate the structure. The rig began drilling in September. It has already penetrated the top of the objective section which came in structurally higher than we had mapped. And it will take a few more weeks to finish and drilling... finish drilling and then some additional time if we choose to test the well. We are thrilled with our Bia and our Pinaúna exploration success in Brazil. It speaks to the potential of our exploration program here and as a reminder we got about 25 undrilled prospects, in various stages of maturation in Brazil. So, moving to slide 32, we are obviously pleased with our third quarter E&P performance and with our performance over the past year. We delivered another strong quarter of production performance, which keeps us on track to deliver our full year guidance. The capital program is on plan and we expect some improvement at our cash cost and we achieved those and that will remain a key priority going forward. We have made tremendous progress on our portfolio high grading efforts by adding the right kinds of assets to our inventory, and by advancing our divesture process and then finally, we've had significant exploration success now at Brazil. So, our third quarter performance like our performance in the past several quarters should hopefully give you some comfort and confidence that El Paso E&P is moving in the right direction. So, now I would like to turn back to Doug for closing comments.

Thanks Brent. Let me close this morning by saying that we expect fast a furious finish to 2007. First the MLP is important to us both tactically and strategically and we working to clear the SEC and get out on the road to tell our story as soon we came. We also expect to have another good quarter in the fourth quarter both financially and operationally. When we do it will complete the fifth consecutive year of improved earnings. Over that time, we've trimmed down to two businesses, resolved a multitude of legacy issues and fixed our balance sheet. We talk a lot internally about the value of having that phase behind us. But the following statistics really put into perspective the job that has been done by our staff. During that five-year period, we sold $16.5 billion worth of assets and closed an average of 5 transactions a month for 60 months. That's to me is still a stunning statistic. So when we talk about having management time freed up to think about growth it's real. It's one thing to have the financial flexibility and the time to accommodate growth though and quite another to deliver it sustainably. We think, we are beginning to do just that. Our opportunity backlog has grown both organically and through acquisition in each of two core businesses. In E&P its been through a combination of acquisitions, successful exploration, success at lead sales and a normal process of portfolio management. In the Pipes, it's has been organic driven by a combination of a solid macro environment for gas, the need to reform the nation's infrastructure and a competitively well positioned footprint as the nation's largest interstate pipeline company. We have built what we think is the best quality backlog in the industry and we are not finished. We look forward to adding to that backlog as we finish out the year. So, we look forward to a very strong finish to the year and to getting a running start to the New Year. And with that we are happy to open it up to your questions this morning. Question And Answer

[Operator instructions]. Your first question comes from Shini Augustini [ph] at UBS Securities.

Good morning guys. Just a couple of quick questions here, just with respect to the Pinaúna, press release that you put out yesterday and so forth, you are taking it upto 90 MMBOE from 37 and so forth. You've talked about this opportunity, exceeding 100 on a resource potential basis or I guess on the three peak type of number. Has that been updated as well to you or you thinking that it can exceed to 200 may be even 250 on a go forward basis?

No, that's really where we getting out with the 90. We discovered hydrocarbons in both of the two wells and both of the two structures that we tested to the south. But the columns weren't as big as big as the high side that we had predrilled, and then the second structure tested gas, at the top of that structure. So, when we remap it and recalculate the volumes the range now goes up to about 90 total.

Okay, you'd mentioned that you are sort of wrapping up the drilling program for this year. On the Analyst Day you said that you are looking to drill 650 wells in '07 including 23 in the high-risk category. How do you expect the end of the year to shape out of this on a go forward basis?

We will be very close to that number. The only exception maybe that we had a few non-operated CBM wells, that are operated they are in Wyoming and we have couple of our own tail end of our CBM programs in Black Warrior and Raton. But other than that on a gross well count, we will be very close, what we started the year at, what we forecasted.

Okay and you'd mentioned 300 Bcfe is kind of the reserve number. What is the daily production number that you are looking to sell between...

What we talked about on the divestures is that, we are selling up to 120 million a day of '07 production, and then a total of all three packages.

Okay. And just one final question on the Pipeline segment, Exxon [ph] noted on its conference call that more Pipe is needed to get gas out of the Rockies and so forth and they are looking to back projects. Is that of interest to you and do we see a resurrection of some of the other projects that have been shelled in the past?

I think its safe. I think its safe to say that we have been looking at Rockies takeaway projects for some time and this goes back at least a year but as we... and so I think its common knowledge know that looking at the macro and flair production there is need for additional takeaway capacity above and beyond Rex and say that 2011 and 2012 timeframe. There are a number of thoughts directionally as to where the additional pipe capacity up ahead. One of the things that has struck us for a while is that in addition to the need for additional takeaway capacity out of the Rockies. If you look at the California market and the macro there, you could make a case study that they probably need additional capacity over the course of the next 10 years, especially with Canadian gas falling of a little bit. So, I think we are clearly in the hunt and I think we will have some more news on this over the course of the next several weeks.

Okay great. Thank you very much.

Your next question comes from Faisel Khan of Citigroup.

Good morning.

Hi Faisel.

How are you doing? Just want to understand on some of the major drivers of your cash cost coming down. I think you talked about kind of lower work over work activity, but, can you talk about how this... talk with the sustainability of those lower cash cost going forward?

Yes, if you go back to the beginning of the year, the first quarter was a little higher because we get some of the front-end loading of our G&A, where we have seen us work that down over course of the year. Our operating expenses have two components in are the LOE pieces of it, that we don't have some the hurricane expenses last year, so that's permanent.

Okay.

And then in third quarter we had a little less work over expenses, but that will come back over time a little bit and then on the third quarter, we also got a benefit in there, because we had some lower severance taxes that's not always good, because I mean likely lower prices, but we also thought and got some credits for lower severance taxes and we won't always get those credits every quarter. So I think of the run rate the $1.77 was outstanding quarter and I think the run rate is closer to the 180 to 190 range.

Okay. And that includes kind of your estimates of a consolidating your new operations from the peoples operations?

Yes.

Okay.

For this year

Yes for the fourth quarter.

Okay. If you remind us how much the volumes for peoples is going to contribute on a go forward basis.

When we acquire that we were in $70 million a day range and we were pretty to close to that range today around $70 million. We'd expect that to grow as we go forward, just like we expect our base assets to grow, but its about 70 today.

Okay, on your onshore volumes it look like sequentially there is a little bit a dip in onshore volumes. Can you just talk about what happen over there?

Yes, it was largely our Four Star interest, some of that's just a base decline in that joint venture. We report those separately and disclosures is about, if you look inside of that, it was largely Four Star and then inside of Four Star, some of that was base decline and then some of that was just some out of period adjustments that hit us have to be negative for that quarter. So they compounded with the base decline. So I think the onshore business is still solid and will expect that determine on going forward.

Okay, so on a... but if I know you report the Four Star volumes below, kind of onshore volumes separately. But if I look at the onshore gas volumes for the quarter versus the last quarter, they look like they came down about 7 million cubic feet a day.

Yes, and they was catered and they was small bids little later our response in the return were showing up and they are showing up today. Little, a fewer completions here and there in South Texas and East Texas. All things that we see coming back on in the fourth quarter.

Okay. And so one last question, on the pipeline side equation, you talked about the strength in the quarter coming from increased gas power generation. Are you seeing that that was more a result of customers signing up more from transportation or is that more interruptible capacity?

A lot of it was just the power plants running and being able to serve them and so we pick up either commodity revenue within FT, we pick up interruptible transportation if they don't have firm, park and loan as well. So it's from variety of haves, but it's all related to power gens running at a higher level.

Okay. And you also talked about how California was a growing power generation market. If I remember right, there was a lot turn back capacity on the California leg of the EPNG line. I know you have lot of growth in the East of California stuff, but is there opportunities to export more gas on the...into California with some of the open capacity I turned back a long time ago?

The picture in California... California is probably about a 6 Bcf a day market and it gets about half of its gas through EPNG and TW coming across the South West and then another quarter of current and probably another quarter or so coming down from Canada, but... so Canada is likely to decline in volumes of making further opportunities for EPNG and TW. At the same time across EPNG the growth in the East of California markets is substantial, so that even without a lot of demand growth in California, we see the value of EPNG capacity probably increasing overtime. Put on top of that further increase in demand in California and we think they need additional capacity beyond that.

Okay, thanks for the time.

Yes.

Your next question comes from Carl Kirst of Credit Suisse Securities.

Hi, good morning everybody.

Hi Carl.

Brent, can you break out the 300 these [ph] into the three packages? Brent J. Smolik - President El Paso Exploration & Production: No, Carl, I never have that in front of me, we have got those teasers out publicly though, they are starting to point to those for the public.

Fair enough, I'll take a look at that. Brent J. Smolik - President El Paso Exploration & Production: Okay.

Let me... I just want to make sure, I'm clear on there values numbers on we are looking to 90 million barrels of kind resource potential, correct me if I am wrong, where we were thinking prior. Is that we had 12 million barrels approved, 25 million that were kind of non-approved but what you guys weren't really risk adjusting because you were pretty sure they were there. Then there were this 100 million of resource potential that was being risk adjusted at 34%. And so, I am trying to kind of take that to where we are today and perhaps may be the question is of the revised 90 and perhaps what may be what you are telling the final bidders. What are you seeing as the breakdown between kind of the approved the probable and the resource because I believe those breakdowns were in the fusers that were out there? Brent J. Smolik - President El Paso Exploration & Production: Yes, so I had... actually its filed as project that had [indiscernible], book and a mean of about 37 that we used to sanction that project is really unchanged, and if anything maybe have gone a little better, because we have learned more about the rocks. In that full range it gets it up to 90, would be... with the resource that we think we have identified in the southern two structures. And that's exactly how we laid out to the prospective buyers as we'll show them what... they have got all the data already as a matter of fact and we are in the process of having one on one with itself. It's really unchanged that the Pinaúna development project was some upside from the two southern structures.

Okay, now that's helpful and I guess from the comments you said earlier, you not yet have an update for the capital, the development cost I guess we had them taking the 400 million range it looks like that it can some upward bias on that? Brent J. Smolik - President El Paso Exploration & Production: We haven't updated that yet and really the only... if you remember about the only uncertainties we had were the top sides. And if we thought we had a much bigger oil case with that to expand the top side, and that's part of what we evaluate now. We look at the development concepts since we found some gas on the top of the SAE structure and we will see before you had to adjust the top sides. But really the rest of the infrastructure wont change, the two platforms and pipelines and that certainly won't change.

Okay. And juts the last question on that, I know it kind of sounds we got off little bit of delay maybe into it, but with final bids still being expected in the fourth quarter understand, you are going back and forth on that right now. Is it possible that we could have an announcement as early as year end or is that even an announcement is not likely until perhaps early '08?

It's possible, I mean that's the timeline that we have talked about probably as bids do in December. And so we just got to see when we get and remember we are selling up to the certain percentage and a discovered, but not yet developed project. And so depending on how confirming or non-confirming the bids come in, to see El Paso can work through it. Yes, it's across our time line that we are working off right now,

Carl, I would say it's possible that it could be December [ph] could easily flop our into the first month of '08.

All right Okay, enough, fair enough and then on, on the third well being...

If everything goes well and you chose tested...

What's the timing, that we might hear evaluation date on that. Is that also kind of a January-type of event or could that, could that also fall into 2007?

Remember that, we always have to work through Petrobras, who have the larger share of it, in the operator. So, they control the announcement on every,...on those project. But I think right now we are drilling, we are drilling the well we will finish it up soon, we may or may not test it. Because we've already tested two wells on the structure. But, we will agree that technically, and then based on that timing would be the, that would effective to us. So could be early December could roll into January depending on testing. If we release anything as a partnership.

And Petrobras may decide to keep it tight.

Right, if we release anything as partnership.

Okay. Fair, fair enough, last question and I will jump back in the queue here. But this is just more of a 30000 foot conceptual with Tennessee because you had the great plateau on independence and what that going on. Certainly as a whole though, Gulf of Mexico, gas production kind of continues to decline. We are now down into the 7 plus Bcf a day range, I mean as you guys sort of look out to the future TGP at least from that Gulf Coast, Header System over the next five years, I mean what are your thoughts to maintaining the volume integrity or there are some other things that can be done helping you to tap in the LNG. Can you touch on that a little bit?

Sure, so the general...generally flat to declining Gulf of Mexico overall. But at the same time LNG is going to be coming in there, with the new rig gas terminals being built. They tend to be located more towards the western gulf than eastern gulf, the footprint of Tennessee stretches mainly from the Central Louisiana eastward I guess, I think you may have seen the announcement that we just made concerning our buyout of Columbia Gulf Share of the Bluewater System that we have jointly owned together with NiSource over the course of many years, that will help us on Tennessee do a couple of things, move gas that already is on our 800 line over to the 500 line west to east. The 500 line is much more fuel efficient. But then secondly as gas does come on through the LNG projects it also will help us move gas from west to east.

Is there anyway to secure that gas from the LNG facilities, is going making the TGP versus any of the other long haul pipe [ph]?

No, it will be...we will be competing with others. But I think that we are well positioned to get our share.

Fair enough. Thanks guys.

Thank you Carl.

Your next question comes from Eric Lambrecht of Citadel.

Hey guys, glad to see that the...you guys are main targets on the E&P side consistently, just what to know, you guys and when we believe this company is not trading at its fair value and discount to the some of the parts. And with cash coming in from the pending MLP and your credit statistics at, your credit statistics improving to a level they have been at in quite some time. Now, I just wanted to understand how you are thinking about share buybacks and don't share buyback make sense as a way to amplify the other investments that you are making.

Yes couple of things. One is remember that we have already made the decision for what we are going to do, at the RTF proceeds and we don't, I don't anticipate that changing and that is that the IPO proceed will go to debt reduction. We have also been pretty public about the fact, that in the future. Just generally but specifically with regard to the MLP for the first time in 5 or 6 years we have every arrow in our quiver and so we will be very I think opportunistic about. How we use proceeds from future dropdown, should we choose to do that? And it will be fact specific, one thing you cant ignore though is that we as an industry are in the midst of kind of a once in a career build out of infrastructure in the U.S.. We expect to get our fair share of that, so we see growth capital. Good growth capital opportunities in the pipeline and on the E&P side of our business. So, we will weigh those against the incremental value of share repurchases and debt reduction and dividend changes.

Okay.

Your next question comes from Mark Quiso [ph] at Millennium.

Good morning guys. Just quick clarification questions as far as the Pinaúna goes. The $90 million if I recall is just one of the sections you guys are marketing and second section is that correct....package? Brent J. Smolik - President El Paso Exploration & Production: Yes, actually it's the entire block. It's hard to carve those blocks in an international concession, we are marking the block and up on the northern end that it is an older discovery called Cameral. It will go with it.

But those the reserve associated with that are independent of the Pinaúna number that put out today? Brent J. Smolik - President El Paso Exploration & Production: Yes, all we have been talking about today is the greater Pinaúna area, the discovered development project and the two structures just south...

Got you. And then as far the year goes, how... I know Petrobras recently how are you guys are handling situation where this could be more material for you than for them as far as releasing data. Is you are at their mercy if it becomes a material event for you and you would be required put out an 8-K? Brent J. Smolik - President El Paso Exploration & Production: No the relationship is good. We can work with them on things that we need to announce and just when we jointly agreed that it's time to talk about it. We will get something else. The materiality of the project to them is.....if you think about it, they are hungry for gas in country and they are looking at how do they increase gas production indigenously. And so I think the project would be significant enough for them, that will keep it moving forward and we keep the news and with that.

Got you, great. Thanks so much.

We will need to end the call at this point. The factor is, we had an hold about two minutes and courtesy there, we will do that. But we appreciate you joined us and call back if you have further questions.

This concludes today's conference. Thank you for participating, you may now disconnect.