Fitch Affirms El Paso Corp.'s IDR at 'BB+'; Outlook Stable

• Press Release
• Source: Fitch Ratings
• On 1:56 pm EST, Friday November 13, 2009

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of El Paso Corp. (EP) and its core pipeline and exploration and production subsidiaries. A complete list of ratings is included at the end of this release. The Rating Outlook is Stable. Approximately $13.6 billion in debt is affected by today's rating action.

The EP rating affirmation is reflective of the strength of the company's interstate pipeline system franchise and the cash flow stability and lower business risk profile that goes along with its interstate pipeline portfolio, as well as the hedge positions and cost improvements at the company's upstream business. The ratings recognize that EP is in the middle of a transformative capital spending plan which will significantly increase both the size and scope of, primarily, its pipeline system. Fitch notes that this spending program will weigh on EP metrics as the company works towards completing its significant project backlog. However, the ratings consider the lower business risk, steady cash flow nature of the proposed pipeline projects and reflect the belief that once completed the pipeline projects should provide adequate sustainable cash flow to support EP's debt levels.

EP is in the middle of a multi-year $8 billion capital expenditure cycle, which will see EP grow its pipeline business significantly. Fitch notes that these pipeline projects on a consolidated basis will have over 90% of their revenue derived from capacity reservation charges with primarily investment grade counterparties, which should help mitigate commodity price/volume exposure and decrease counterparty risk. Funding for the projects is expected to be completed from a combination of operating cash flow, additional debt issuances both on a project financing basis and possibly at the parent company level, additional dropdowns to EP's pipeline Master Limited Partnership (MLP), El Paso Pipeline Partners (NYSE: EPB; Fitch Issuer Default Rating [IDR] 'NR'), and through asset sales. Fitch expects that EP's consolidated credit metrics will show relative weakness over the course growth capital spending, but rebound to more rating appropriate levels as the incremental EBITDA and cash flow generated by the new projects offsets additional debt the company needs to take on to complete the projects. Fitch expects EP's leverage on a consolidated basis to approximate 4.4 times (x) in 2009 with operating EBITDA/interest expense coverage of 3.1x based on Fitch estimates.

Other considerations regarding EP's capital spending include construction risk, which remains a concern for EP's planned pipeline projects. Fitch notes that construction costs, which had risen dramatically in the past few years, haven fallen more recently as steel and labor costs have contracted significantly. Additionally, this risk is offset in part by EP's push to lock in pipe prices, share costs with its construction contractors, contracted shippers, and enter into partnerships with joint venture partners on select projects.

The ratings for the individual pipeline subsidiaries consider the solid credit metrics and significant operating and financial affiliations each pipeline has with EP. Given this linkage the pipelines are all rated one notch higher than EP, lower than their standalone credit metrics and business risk profiles would indicate. EP's fleet of natural gas pipelines represented approximately 54% of the company's consolidated operating EBITDA for the first nine months of 2009 (adjusted for ceiling test charges at El Paso Exploration & Production). EP's pipeline segment is comprised of seven separate majority owned pipeline systems and four 50% owned systems. Taken as a whole, the scale and regional diversity the pipeline systems, which have access to the principal U.S. supply basins and deliver into major consumer markets, limits exposure to shifting natural gas supply/demand dynamics. Additional delivery flexibility is provided from interconnected storage capacity and access to the Elba Island, Georgia LNG receiving terminal. Each of the pipelines and storage facilities operates under FERC regulation. Nearly 76% of segment revenues are generated through non-volume sensitive capacity reservation charges, limiting earnings and cash flow volatility. However, FERC oversight does not provide meaningful credit 'ring-fencing' to protect the pipelines from affiliated company risk. Additionally, interests in two of EP's pipelines Tennessee Gas Pipeline (TPG) and El Paso Natural Gas (EPNG) are pledged as collateral to EP's $1.5 billion secured revolving credit facility.

While each pipeline company has standalone operating and financial characteristics at or higher than its current ratings, the debt ratings are constrained due to the pipelines' affiliate relationship with EP. As subsidiaries of EP, EP management has substantial control over its operations and finances, including distributions. EP's subsidiaries participate in EP's cash management program, which matches short-term cash surpluses and the needs of the participating affiliates. The pipeline subsidiaries have historically been cash providers under the cash management program in exchange for long-term notes receivable from EP.

The ratings at El Paso Exploration & Production (EPEP) primarily reflect its operating and financial affiliations with EP. EPEP's senior secured credit facility is notched above the IDR, reflecting the strong collateral position supporting this facility. The ratings also consider the higher business risk inherent in an E&P operation due to its commodity price exposure. EPEP operations have improved with the company currently in the process of upgrading its reserve portfolio while continuing to successfully lower its finding, development and production costs. Additionally, the company has hedged a significant portion of its production in 2010, and 2011 which provides some comfort that earnings and cash flow will exhibit some stability in the event of a continued low commodity price environment.

The Stable Outlook is indicative of EP's cash flow stability offset by the still significant leverage at the parent company and the plans for increased capital expenditures. Liquidity at the consolidated entity is adequate with EP, as of Sept. 30, 2009, reporting roughly $2.4 billion in consolidated liquidity; consisting of $1 billion in cash and $1.4 billion in availability under various credit facilities (excluding any cash and revolver availability at EPB).

Fitch affirms the following:

El Paso Corporation

--IDR at 'BB+';

--$1.5 billion senior secured revolving credit facility (2012) at 'BBB-';

--$500 million senior unsecured revolving credit facility (2011) at 'BB+';

--Senior unsecured notes and debentures at 'BB+';

--Perpetual preferred stock at 'BB-'.

El Paso Energy Capital Trust I

--Trust convertible preferred securities at 'BB-'.

Colorado Interstate Gas Company (CIG)

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-'.

El Paso Natural Gas Company (EPNG)

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-'.

Southern Natural Gas Company (SNG)

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-'.

Tennessee Gas Pipeline Company (TGP)

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-'.

El Paso Exploration & Production Company (EPEP)

--IDR at 'BB+';

--Senior secured revolving credit facility (2012) at 'BBB-';

--Senior unsecured debt at 'BB+'.

El Paso owns North America's largest interstate natural gas pipeline network comprised of approximately 44,000 miles of pipe, 220 Bcf of storage capacity, and an LNG import facility with 1.2 Bcf per day of send-out capacity. The company's upstream operations included year-end 2008 estimated reserves of 2.5 trillion cubic feet equivalent (Tcfe) of consolidated proven reserves.

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Fitch Ratings, New York
Peter Molica, +1-212-908-0288
Glen Grabelsky, +1-212-908-0577
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