Fitch Affirms El Paso Corporation & Subsidiaries; Outlook Stable

July 18, 2008 4:35 PM EDT

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings of El Paso Corporation (El Paso) and its core pipeline and exploration and production subsidiaries. A complete list of the ratings is included at the end of this release. The Rating Outlook is Stable. Approximately $11.4 billion of debt is affected.

The El Paso rating affirmations reflect the consistency in the company's credit profile given the improvements at the company's upstream business and the cash flow stability and risk profile benefits derived from its pipeline portfolio. While in recent years, El Paso has exited the merchant power business, downsized its trading operations, and improved its balance sheet and lowered debt for 4 straight years, these benefits are expected to moderate as the company embarks on a transformative capital spending plan which will significantly increase the size and scope of both its pipeline system and its E&P portfolio. Free cash flow is projected to be negative through 2011 and spending is expected to be funded through additional debt issuances at the parent company level, additional dropdowns to the newly formed pipeline MLP, El Paso Pipeline Partners (NYSE: EPB), and through asset sales. As such, Fitch expects El Paso's credit metrics will remain relatively flat over the course of the growth capital spending as the incremental EBITDA generated by the new projects should offset the additional debt the company needs to take on to complete the projects. Additionally, the company recently announced a $300 million share buy-back plan, so equity issuances remain unlikely.

Other considerations include project cost escalation, which remains a risk for El Paso's planned investments, particularly on the pipeline side where the industry has seen construction costs rise dramatically in the last 9 to 12 month. This risk will likely be offset in part by El Paso's push to share costs with its construction contractors, contracted shippers, and with joint venture partners. In addition, while improvements at the E&P business have been made and commodity prices are clearly in the company's favor for the foreseeable future, several issues still remain including relatively high development costs for newer investments.

The ratings at the pipeline subsidiaries are significantly affected by the operating and financial affiliations each has with El Paso. As subsidiaries of El Paso, El Paso has substantial control over the pipelines operations and finances, including distributions. Given this linkage the pipelines are all rated one notch higher than El Paso, but ratings are still constrained given what their stand alone credit metrics and business risk profiles would indicate. The individual pipeline companies are generally characterized by having moderate-to-low-risk operations providing El Paso a stable financial base. Given the scale of the asset base, El Paso's pipeline portfolio has access to most major North American production basins and supply markets.

The ratings at El Paso Exploration & Production (EPEP) reflect similar operating and financial affiliations with El Paso as well as the significant collateral value of the secured credit facility. EPEP operations have significantly improved with the company currently in the process of upgrading its reserve portfolio while continuing to focus on lowering its production costs. The ratings on the secured credit facilities at EPEP and EP are notched one notch higher than their respective IDRs to reflect the significant recovery from the collateral used to secure the loans.

The Stable Outlook is indicative of the improvements in El Paso's credit profile offset by the still significant leverage at the parent company and the plans for increased capital expenditures at all of El Paso's subsidiaries which is projected to keep credit metrics relatively flat over the next few years.

    Fitch affirms the following:

    El Paso Corporation

    --IDR 'BB+';

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

--$500 million unsecured letter of credit facility (2009) 'BB+';

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

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

    --Perpetual preferred stock 'BB-'.

    El Paso Energy Capital Trust I

    --Trust convertible preferred securities 'BB-'.

    Colorado Interstate Gas Company (CIG)

    --Issuer Default Rating (IDR) 'BBB-';

    --Senior unsecured debt 'BBB-'.

    El Paso Natural Gas Company (EPNG)

    --Issuer Default Rating (IDR) 'BBB-';

    --Senior unsecured debt 'BBB-'.

    Southern Natural Gas Company (SNG)

    --Issuer Default Rating (IDR) 'BBB-';

    --Senior unsecured debt 'BBB-'.

    Tennessee Gas Pipeline Company (TGP)

    --Issuer Default Rating (IDR) 'BBB-';

    --Senior unsecured debt 'BBB-'.

    El Paso Exploration & Production Company (EPEP)

    --Issuer Default Rating (IDR) 'BB+';

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

    --Senior unsecured debt '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 2007 estimated reserves of 3.1 trillion cubic feet equivalent (Tcfe) of consolidated proven reserves.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Source: Fitch Ratings

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