Enterprise Products Partners LP (EPD) 2001 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your El Paso Partners (Company: El Paso Energy Corporation; Ticker: EPG; URL: http://www.epenergy.com/) fourth quarter and year end 2001 conference call.

At this time, all parties have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Director of Investor Relations, Sandy Ryan. Madam, you may begin.

Thank you, .

Good morning, everyone, and thank you for joining us this morning for our 2001 year end and fourth quarter conference call. This morning Bob Phillips, Chief Executive Officer, will begin our call with an overview. Following Bob will be Mark Leland, Senior Vice President, to discuss financial results.

James Lytal, EPN President, will go over our developments in the offshore. And Keith Forman, Chief Financial Officer, will discuss the balance sheet. Other members of management are also here to assist in the question-and-answer portion of the call.

And now, I wish to make you aware that this call will include forward-looking statements and projections made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. El Paso Energy Partners 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 these projections and anticipated results or other expectations expressed during the call, including, without limitation, oil and natural gas prices, continued drilling, exploration and production activity in the United States and areas of the Gulf of Mexico serviced by El Paso Energy Partners, and successful negotiation of customer contracts and pipelines, platforms and storage facilities.

While the partnership makes these statements and projections in good faith, neither the partnership nor its management can guarantee that the anticipated future results will be achieved. Reference should be made to El Paso Energy Partners and its affiliates, Securities & Exchange Commission filings for additional important factors that may affect actual results.

I'll now turn the call over to Bob Phillips.

Thank you, Sandy, and thank all of you for joining us this morning.

As you'd expect, we're very pleased to report these record cash flows, almost $50 million for the fourth quarter of 2001, and $161 million for the full year 2001. We're excited about reaching this level. This is a level of significance in the MLP universe at a run rate of more than $200 million a year at cash flow.

It's a small group that not only have performed at this level that have accomplished this level of cash flow with this type of midstream, diverse asset portfolio, but also have experienced a growth rate that we have for the three years that El Paso has been managing this partnership, with average growth of more than 46 percent per year in cash flow. And I think that's significant.

Our size is now substantial. Our asset group is diversified. We've got four very strong performing business segments.

Gas pipelines contributed over 30 percent of our cash flow this year. We had a couple of significant events there. We added the other 50 percent of deepwater holdings, which is High Island and East Breaks. That consolidated our interested in the western part of the Gulf, where there's a lot of deepwater activity.

We're excited about that. You also know we announced several new gas gathering opportunities in the eastern Gulf of Mexico through our gas gathering system over there. So, we're pleased with gas pipelines.

Our liquid business was our largest contributor for the year, contributing 34 percent of the cash flow. As you know, we purchased El Paso's natural gas liquids business in Texas back in January of 2001, got a full year of contribution there. And we acquired the Chaco Plant, located in the San Juan basin in October of 2001.

The Chaco Plant is truly the crown jewel of El Paso's gas processing fleet. So, it's now in the partnership and is a significant contributor going forward as well.

In the platforms segment, platforms contributed 20 percent of our cash flow. Very pleased with our continuing growth in that business. As you know, we bought the Prince TLP on line in September of last year, and that's been a good contributor as well.

And our final segment is our gas storage segment. Contributed about 10 percent of the cash flow for 2001. We see a big upside in our storage business in the next year. We did get FERC approval of our 63-mile pipeline system that we're constructing from the Petal in Hattiesburg, Storage facility over in Mississippi, up to interconnections with a number of pipeline systems.

And, we expect that pipeline to be completed in mid 2002. Once that's completed, the seven company starts using that storage facility for long-term storage under a 20-year agreement. We should see the cash flows from that business increase as well.

On the investment side, we're pleased to have exceeded our $500 million capital spending target for the year. We spent almost $570 million. Seventy-five percent of that was on acquisitions and 25 percent on organic projects.

I think as we increase our capital spending in 2002 and 2003, I think that's probably a good barometer for us, about 75 percent acquisitions and 25 percent organic spending. We are making good progress towards the additional acquisitions from the El Paso Corporation and have been talked about El Paso's midstream assets are being evaluated by the partnership.

We expect to complete a transaction in that area probably by the end of the first quarter. You also know that we've announced a number of new deepwater pipeline platform projects, which James will talk about in some detail and answer your questions there.

So, I guess, in summary, I would point out that we think our strategic model seems to be working fine. We think it's a unique business plan within the MLP universe -- a combination of accretive acquisitions from El Paso.

If you'd look back at those acquisitions, at the values and how those assets have performed, I think you'll see that that's been very favorable for the partnership. We combine that with selected acquisitions from third parties, where we can acquire things that are strategic and fit our investment profile.

And, we add to that the very unique opportunity to invest in the deepwater trends of the Gulf of Mexico with these organic, high return pipeline platform projects that really round out our portfolio and add substantially to the out year cash flow projections.

Balance sheet remains sound. We've taken a disciplined approach. That's part of our strategic model is to be very mindful of our balance sheet, particularly in this environment. It's resulted in improved coverage ratios and lower cost to capital.

And again, all of that has ensured to the benefit of the unit holders, as we've seen our total returns again exceed 40 percent for the year. So, we're very pleased with 2001, the third year that we've had this partnership under management. I think it's been our best year. We've certainly done everything that we told the analysts community and our unit holders that we would do at the beginning of the year.

We've probably exceeded expectations in a number of areas of terms of adding assets and reaching cash flow levels as well as the diversification of our portfolio. So, we're going to stay with the program, probably won't do anything significantly different in 2003, other than just get bigger and continue to increase cash flow and distributions in the 10 to 15 percent per year range.

So, with that overview, I'll turn it over to Mark Leland.

Mark will take you through the financial and operating statistics package, which I would say has expanded. Hopefully you'll get a lot more information out of that package. We want to make sure that our disclosures are as transparent as possible. And I think you'll be pleased with the information that we're providing you as a back up to this earnings announcement.

Mark.

Thank you.

As Bob mentioned, the partnership completed a tremendous quarter and year in which cash flow and net income were records. For the quarter, cash flow was nearly $50 million. This is up 63 percent from the record fourth quarter 2000, and it's also up 25 percent from the third quarter of this year.

To put it in perspective, cash flow in all of 1998 was just $52 million. Adjusted net income, as I mentioned, was also a record for the quarter, totaling $19 million, up three and a half times from the same period last year and up 40 percent just from the third quarter of this year.

Cash flow for the full year 2001 was $161.4 million, up 51 percent from last year. Adjusted net income was nearly $62 million, up three fold from last year. And adjusted earnings per unit were 58 cents per unit versus a three-cent loss for 2000 -- full year 2000.

Reported net income and earnings per unit were -- excuse me -- $55.1 million and 38 cents per unit, respectively. The difference between reported net income and what I refer to as adjusted net income related to net charges associated with the asset sales that occurred in January of 2001.

During the quarter, all of our segments performed well. Gas gathering and transportation cash flow was slightly down for the quarter compared to the same quarter last year, due primarily to the assets we sold in 2001.

That was offset by the acquisition of remaining 50 percent in Deepwater Holdings, which was completed in mid October of this year. Gas lines are down about seven percent for the same period last year, due to shelf production slowing as drilling rig rates came down during the last half of 2001.

The Canyon Express project and Medusa Deepwater Gas projects we announced in the fourth quarter will add volumes and cash flow to this segment in the latter part of 2003 and all of 2004.

Liquid transportation and handling cash flow nearly doubled this quarter to $21 million, driven by the addition of the Chaco Cryogenic Plant, which, as Bob mentioned, we acquired in October. Coupled with solid performance in our Texas NDLP based top lines and in our offshore oil pipelines all rounded out this segment.

The Chaco Plant averaged about 648,000 decatherms per day during the two-and-a-half months that we owned it this quarter. This is a fee-based plant in which we earned a fee per inlet decatherm as opposed to the production of liquids at .

Cash flow from the platform business was $12.3 million, more than twice as much as the fourth quarter last year. This increase is driven by higher gas volumes on the East End 373 platform from as well as from contribution from the Prince Platform, which came on line in late September.

Prince averaged just under 4,000 barrels per day in the quarter. This is a little bit less than we expected due to problems that El Paso Production Company had in completing the second well during the third.

Cash flow from the storage segment was essentially flat year over year. This is what we'd expect from this segment until the Petal expansion comes on line in mid 2002, which will add about $16 million a year at cash flow on an annual basis.

Petal and Hattiesburg cad runs are essentially full, which is somewhat limited sales, a space there. And their own gas sales segment continues to tail off essentially break even this quarter as we let the volumes decline in our production there.

Cap ex -- let me just close with cap ex for the year. Bob mentioned we had $568 million in spending. Four hundred twenty four million was due to acquisitions, about $141 million due primarily to growth projects, and that was Prince and Crystal are the primary drivers there.

We had about $3 million in maintenance cap ex. For the quarter, total capital spending was about $332 million. Two hundred and twenty-nine million of that was acquisitions, $48 million related primarily to the Crystal expansion, and then we had about $1 million in maintenance cap ex.

And so, with that, I will turn that -- turn the call over to James, who will highlight some of our deepwater projects.

Thank you, Mark.

As Bob mentioned, Prince has installed and is a strong technical success for the partnership. We're excited that we can cover also the Prince project with the Marco Polo project, which allows us to expand our platform and pipeline infrastructure into the prolific Grand Canyon areas of deepwater.

The Marco Polo platform will be located on Anadarko's Marco Polo development in Grand Canyon 608 in about 4,300 feet of water. It will be sized to handle 100,000 barrels of oil a day and 250 million cubic feet. The platform is sized not only to handle the Marco Polo production but other fields and, we believe, will be developed in the area.

Anadarko has several blocks in the area that they plan to drill and there are already fields in the area with existing discoveries that we believe will now be developed because of our new platform infrastructure.

We are forming a new 50-50 joint venture with Cal Dive International to own the platform. Cal Dive has a proven experience of construction experience in deepwater construction projects, especially subsea tie-backs, and also has experience in exploring smaller deepwater fields as a producer. We believe this makes them an ideal partner to attract new production to the platform.

Now, the platform's estimated the cost to approximately $200 million. The partnership's net share that'll be $100 million, and we anticipate project financing a significant portion of that, similar to what we did at Prince.

As part of the Marco Polo transaction, we will construct a new 34-mile, 14-inch oil pipeline to connect to our Allegheny oil pipeline. Through this new pipeline and the Allegheny pipeline, the oil can access our 36 percent owned Poseidon oil pipeline.

The estimated cost of the oil pipeline is $26 million. The into the gas off the platform is yet to be determined, but we believe there is a good chance the partnership will have the opportunity to gather the gas into our affiliate, A&R's pipeline system.

It's located on the shelf and can take gas to the shore, where existing processing infrastructure owned by field services as well as multiple pipeline connections are located.

In spite of the lower commodity prices that we're seeing, we're still seeing significant drilling activity in the deepwater. Our portfolio of opportunities to build platforms, oil pipelines and gas pipelines has never been stronger.

We're also seeing opportunities to do subsea tie-backs to our existing platforms, as well as connections to our existing gas pipeline. So, those types of deals are opportunities to add volumes and revenues without spending capital.

So, as Bob mentioned earlier in the call, our future does look bright and we continue to look at significant projects in the deepwater, and it will be part of our growth story going forward.

With that, I'll turn it over to Keith.

Hi.

We spent this call thus far touting our quarter and full year of results with superlatives such as "largest", "best" and "record".

I won't be able to use those terms when I speak about our balance sheet and leverage because what we've done the last quarter is the same as we've done the previous six quarters -- keep our debt at manageable levels, maintaining a balance sheet more than capable of supporting the growth in cash flows we expect to record in 2002.

Our debt totals at year-end were as follows. We had $300 million outstanding under our revolving credit facility, $425 million of senior subordinated notes outstanding in two separate issues, and $95 million outstanding under a non-recourse term loan used to project the Prince Tension Leg Platform.

Our total on balance sheet debt was $820 million at year-end. Our ratio of total debt to total capitalization was 62 percent. And when excluding the non-recourse capital, this ratio is 59 percent. These same ratios a year ago were 63 percent and 61 percent, respectively, the latter when non-recourse capital was excluded.

As I say, consistency was the buzz word with respect to leverage this past year. In fact, debt to total capital, excluding non-recourse capital, remain in a band of 57 percent to 61 percent in each of the four quarters of 2001.

The more important leverage ratio of debt to adjusted EBITDA tells a similar story of financial discipline. For the year, our EBITDA of $161.4 million, when divided into our debt of $820 million yields a ratio of 5.1 times.

However, this is not a fair assessment of our leverage given the timing of our fourth quarter acquisitions. Remember that debt was incurred in October to close our Chaco and Deepwater Holdings acquisition, yet the cash flow for the year ended December 31st of $161 million only contains two-and-a-half months of cash contributions from the acquired assets.

All of the debt incurred, however, is on our balance sheet. We believe a fairer measure would be to use a pro forma cash flow, which would include a full year of Chaco and Deepwater Holdings cash flow. Annualizing our fourth quarter cash flow of $50 million is a good approximation of this amount.

Dividing the $820 million by $200 million shows a more representative ratio of debt to adjusted to EBITDA of 4.1 times. When we exclude our non-recourse debt and the cash flow attributable to the Prince Tension Leg Platform, this ratio is 3.8 times.

From a capital raising perspective, we had another busy quarter on top of an already busy year. In October, we raised a total of $212 million in common equity net of fees. For the year, we raised a total of $279 million in common equity, which is just about half or the same 50 percent equity, 50 percent debt mix we indicated we'd adhere to as we grow our partnership.

We finished the year with $300 million of availability under our revolving credit facility, which is adequate to fund a significant portion of the debt component of our 2002 capital plan. In fact, as Bob mentioned earlier, our capital spending this year will be in the range of $750 million to $1 billion.

If we assume that the mix of capital spent on acquisitions and organic growth is the same this year as last, then we could be looking at $200 million to $250 million of organic growth projects. As has been our practice, many of these large projects will involve equity partners and non-recourse project financing.

There is one more financial measure that we were successful in achieving during the year, and that was significantly improving our fixed charge coverage ratio. We maintained a ratio of cash flow, divided by our interest expense and cash distributions to unit holders of 1.1 times, up from .9 times for the full year 2000.

This was our target for the year and a level we target as a minimum for us going forward. We said this before, but it bears repeating. Our partnership is on a strong financial footing as it ever has been, and this foundation is capable of delivering the growth we have forecast for the partnership in 2000 and beyond.

That concludes our prepared remarks. And I'll ask to open the lines for questions.

Thank you.

The floor is now open for questions. If you have a question or a comment, please press the number one followed by four on your touch-tone phone at this time.

If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Once again, if you do have a question or comment, that's one, followed by four on your touch-tone phone.

And our first question is coming from David Fleisher of Goldman Sachs (Company: The Goldman Sachs Group Inc.; Ticker: GS; URL: http://www.gs.com/).

Hi.

Maybe I'll start out just by asking the general question then a specific parts of that. James talked about still seeing a significant deepwater program out there with the lower prices. And yet, prices haven't been lower for that long. And I guess I'd like to put that in perspective and find out more what you're hearing from the operators and if you have any more perspective there.

And then, specifically, as -- if gas prices stay at $2, if we have a really tough year, if you have any insights for us there. But then, specifically, if you can give us some numbers and what you're seeing on Prince and Poseidon as the throughput that you're looking for there.

You had indicated, that there had been some delays here in the second well. And if you can help us understand what the drilling program is by El Paso here in '02 and what volumes we should be looking for in '02 and '03 going forward now.

David, this is James.

I'll start with the drilling activity. I think we are seeing it stay active. I think, as we've talked about before, these deepwater projects are long life projects. A discovery today probably isn't going to come on for three years. So, I don't think people are looking at today's prices necessarily.

They're looking out over the long term. I think if you look back to the period of lower prices back in 1999, the rig counts stayed pretty strong in the deepwater in relation to the large drop off we saw with jack up rigs back in that period of time.

So, we think -- and the size of these projects, too, the producers can make these work at lower commodity prices also. So, we're not seeing the slowdown like we are seeing at on the shelf where you have projects with shorter production lives. The present value is affected more by today's commodity price. So, we believe we're going to continue to see it be strong out there.

As far as Prince, Mark had mentioned that we had anticipated that there would be six-week intervals between wells coming on. We thought the second well would come on in November. They ran into -- they weren't necessarily reservoir type problems but mechanical problems in completing the wells, which delayed them.

So, the production from the second well did not come on till the latter part of December. During the period, they were having to deal with these mechanical issues. They were also forced to shut the first well in. So, that well was shut in for a couple of weeks in December. So, that did -- that caused the impact.

I think, going forward, they're completing the third well. It seems to be going better than it did on the second well. I think if you stayed on six-month intervals -- excuse me, six week intervals you'd be looking at -- we're probably looking at late February for the next well and then another six weeks for the fourth well to come on.

Can you tell us anything from the production that you've seen from those first two wells as they've been filling and whether there was positive, negative or no surprise from those volumes and, therefore, the implication for volumes this year?

David, the second well did not -- is not flowing at the rate the first well was. I think you're looking at a combined approximately 7,000 barrels a day.

The second well is about 1,500 to 2,000 barrels a day of that. This -- I think it depends. This field has multiple pays. Some are thicker and cleaner sand. Some are grainier. I think the second well is one of the not as clean, but it's positive that it's producing at those kind of rates.

So, I can't speak necessarily for how the E&P company is going to produce these wells, but I think, based on the first well, the cleaner sands have tended to flow the higher rates. And if the second well is indicative, probably the or less clean sands are going to flow at the lower rates.

Do you have any guidance, any help for us, in trying to predict the volumes on Prince, in particular, but then also Poseidon?

David, this is Mark Leland.

We think that Prince will probably average around 12,000 barrels a day throughout the year, up and down as it cycles in, as the new wells come on. Poseidon is running solid at around 155,000 to 160,000 barrels a day.

That ought to come up throughout the year as the volumes from Prince come up as well as volumes from the South 204 platform, which we've tied into Poseidon. And we think that ought to average up slightly over the year and probably average in the 180,000 barrels a day range.

Mark, we have not mentioned that field South 204 should come on any day now and it should add 20,000 to 25,000 barrels a day to Poseidon.

OK.

Second separate question here, more to Keith's area and maybe to Keith, probably to Keith. You gave us the debt figures and the ratios. I think the last number you had indicated was on about $400 million. You had short-term rates of around four percent in the fall when you had a conference call a few months ago.

I was wondering if you could just update us on your thoughts in terms of short term versus long term. Have you soft or changed where you are there? And how are you viewing the markets with these really nice, low short-term rates?

And, will you want that to be? And what are your thoughts about changing that at some point when rates go up, or is this going to be a ratio that you'll try to stay at?

As far as the 1.1 to one, that's a ratio that we've targeted as a minimum. I think as we go forward I think we wouldn't mind seeing 1.2 or whatever.

But, with respect to our debt mix, as the year evolves and we announce some of the projects, both -- because right now we've only announced one organic project and then, as you all know, we're completing Crystal, and that does not add up to $200 million or $250 million.

And also, we have yet to put a license plate on the acquisition that we are working diligently on. But as we identify those projects and the timing, it'd be very prudent of us -- and I think we will do a portion of that in the long-term markets.

And by a portion, I think you'll see of the debt components -- let's just say the debt component on $750 million is $375 million and on $1 billion it's obviously $500 million. At least half of that number will be in longer-term markets. And depending on the timing, once again, if it's a first quarter event, maybe in midyear you'll see us do that.

As far as one of our project loans, on Poseidon, we did fix a portion of our debt during the quarter there at a rate of about -- I think it was 550. We locked it in for a three-year period. So, we are looking at things like that. But just because interest rates are low doesn't mean the swap spreads are as low.

So, when you swap it out you add our borrowing spread to that. It's almost equal, as you would expect, to a 10-year treasury or -- I meant to a 10-year bond at our rating. So, we just as soon maybe enter the senior sub note market again.

OK. Thank you.

Thank you. Our next question is coming from Neil Dingman of RBC Capital.

Yes, good morning, gentlemen, and congratulations on the quarter. Just two very quick questions.

I was wondering, on the -- regarding the distribution growth, if you are still for, I guess, '02 and '03 targeting kind of a mid teen growth level there or kind of what that level you're looking at for going forward.

And then, just very quick, as far as you had mentioned on the growth cap ex for '02, '03 and was wondering with these new projects can we -- is it safe to assume that the maintenance cap ex will be just slightly higher?

Thanks.

First, I'll just go in reverse order, maintenance capital.

Maintenance capital will be a little bit higher in 2002, primarily due to the acquisitions that we made this year. Both Chaco, Deepwater and the TNF business carry with it some additional maintenance capital. And I think that should be in the $10 million range.

And then, on our distribution growth rates, we're still on target for the 10 to 15 percent growth rate that we've talked about in the past.

And let me speak to the distribution growth rate because that's an important feature of our story.

We've been as successful as most out there in increasing the distribution, 10 percent per year over the history of this partnership IPO'd back in 1993. We've been a little bit more aggressive in the distribution growth rate in the last couple years, 11.4 percent last year, I think, quarter over quarter.

They're showing me a 13 to 13.5 percent growth rate in distribution quarter over quarter. I will tell you that we are targeting 10 to 15 percent per year growth. We'd like to hit the high side of that to the extent that our portfolio allows us to do that.

But, we are always mindful of that coverage ratio that Keith talked about -- 1.1 to one being kind of floor for that. I know that there are other MLPs out there that are promoting our coverage ratios as being a really important part of their performance.

I think if you investigate that you'll probably see those coverage ratios are not as high as maybe you'd expect. They need to be calculated on a fully diluted basis. More importantly, there's a difference in the diversity and the stability of cash flows from these different MLP asset portfolios.

And, when you examine our portfolio it is as well diversified and the cash flows are as stable as any other MLP portfolio out there. So, when we say that we're going to adhere to the 1.1 to one coverage ratio and attempt to grow to the high side of the 15 percent per year distribution, that is exactly what we're doing, being mindful of the stability of our cash flows.

So, that's what you can expect. And, really, it's almost -- it's more statistical or mathematical than it is emotional from our standpoint. And I think our unit holders want us to manage with that kind of discipline. So, that's exactly where we are.

We added so many great assets in '02 -- in '01 that will contributed higher cash flows in '02 that we're very, very comfortable with the low side of that distribution for '02. And to the extent that we had any growth at all in our business, I think we'll be comfortable with a high side of that distribution growth rate for '02 as well.

Thank you. Our next question is coming from Ross Payne of Wachovia Securities.

Great quarter, guys. A question on the storage side.

You mentioned about $16 million or so in additional EBITDA coming from your expansion in that area. What is the timing on that as you look into 2002? Is that immediate or is it more midyear, that kind of thing?

Well, the $16 million is a full year rate and they contract with southern companies begins in July 1, 2002. So, we'll have a half a year in addition to what we have had this past year. So, the first full year that you'll see of that expansion will be 2003.

OK.

Yes. And the key thing there is that that revenue and cash comes to us regardless of the usage. So, that's very predictable.

OK. Great.

Also wanted you to comment, if you could, you obviously are going to have a fair amount of assets coming from El Paso Corp.

Can you comment on what you think the acquisition environment's going to look like for 2002 relative to '01 given all the companies in the news talking about divestitures, et cetera? And would you increase your percentage of outside acquisitions relative to acquisitions done from El Paso Corp. as you look into '02?

Well, let me address the question from a multiple of cash flow standpoint.

We typically acquire assets on the basis of a multiple of cash flow. When you look at historically at the assets that we've acquired from El Paso, our general partner, they've been in the average range of about eight times cash flow.

Interestingly, just in the last several months there have been two or three fairly large midstream asset acquisitions by MLP buyers. And the calculated multiples are right at that eight times. So, notwithstanding whether assets had for some time prior to that been priced higher or whether they're declining right now, we see the market today at about eight times cash flow.

And to the extent that you're spending eight times cash flow for very long term, very stable cash flows coming from midstream assets with no commodity volatility and under very long-term contracts, we think that's a fair price.

Now, as far as comparing internal acquisition opportunities to third parties, we simply look at the value that we can pay for the type of assets that we want -- very long term, midstream only, no trading, no production, no commodity volatility.

And, to the extent, that we can either acquire or trade for those kinds of assets at those values, we know that given our cost to capital we're going to make -- continue to make a profit for our unit holders.

So, I don't think we're going to do a whole lot different than what we've done over the last couple years, and that is stay with the program of looking at the company's assets first to the extent we can buy those at the right price and meld them into the partnership.

We'll do that, look selectively at third party assets. To the extent we can buy something at a really good price and it fits in our portfolio, then we're going to be all over that as well, keeping a fair amount of dry powder in our back pocket per James Lytal's offshore development team because they're spending money out there, too.

But, the difference is those are very high return long-term projects. The internal rates of return of those projects many times has seen 20 percent. And so, we like the idea of blending in those kind of projects as well to our acquisition scheme.

OK. Great. Thanks. That's very helpful.

Thank you.

Our next question is coming from Carl Kirst of Merrill Lynch (Company: Merrill Lynch & Co. Inc.; Ticker: MER; URL: http://www.ml.com/).

Good morning, everybody, and nice quarter. And actually, it's nice to have an up unit in a down market here. Most of my questions have been hit.

But, Keith, with respect to the balance sheet strength, as you guys continue to get larger and fund any acquisition or organic growth through half that half equity, that ratio is going to continue to come down. A lot of consternation in the market, at least on a broader market sense, about ratings and the rating agencies.

As you look forward, whether it's 12 months, two years, what have you, when do you think EPN might be able to inflect into potential investment grade rating?

I know those guys are on the call. Too bad you guys can't just have a sidebar conversation. I'm hoping that it happens soon.

I think that we've been so active in capital markets and with acquisitions it's really hard to find a time where we can just settle down and go sit there and say, "Hey, we have nothing on the radar screen. The company we are today is the company we're going to be in another 30 days."

But, we think that what we really needed to show the agencies and everybody is consistency, and that's why I kept on using that word and pointing out that it was six consecutive quarters.

And, at some point here, I hope that it's recognized that we're not just a one shot wonder, that this is our way of doing business and it will continue to do our way of doing business with debt to EBITDA ratios of less than four times and debt to total cap in the 50 to 60 percent range. So, I think we're there.

I think when you look at the types of businesses we have -- and not to demean what we do here, but our business is very simple. We're not very complex. Our top line is really almost the product of our tariffs and our volumes. And I think we're pretty easy to get to the asset level here to see what we're doing. And hopefully that's recognized given all the other noise that's happened in the sector.

It really hasn't happened in the MLP sector, by the way. I think there's only been one problem there directly related to the guys down on Smith Street. But we share your wishes that it gets recognized soon.

Fair enough. One other quick question, Bob or Mark, on the FERC approval, I guess, that's needed for the storage expansion.

Is there anything out there, I guess, to be concerned with that could somehow -- that the FERC would take issue with on the pipeline and somehow the storage contract revenues get delayed, pushed off or basically something that comes out of left field we should be just on the watch for, as unlikely as it might be?

Carl, the approval that we received in December was the project construction approval, and that is the most significant approval that you look for in a FERC regulated pipeline project.

All FERC approvals are always for construction projects are always conditioned on a final what we call an environmental clean up approval. And that is at the end of the project it's a fairly administrative process and it's one in which you make sure that the FERC staff is with you all along the way.

You have to get a final environmental clean up. And we expect to do that. And that is the only thing within that FERC proceeding that would slow down or delay the completion of that project. All other aspects of the FERC process have been fully approved by the FERC.

And in the instance of disclosure, I would say that -- and this is a very, very technical net -- that the Southern Company did have some outstanding issues with the tariff. Those issues have all been cleared up. The final agreements between Petal and Southern are ready to be signed.

We've been working, as we always do in this business, off of precedent agreements, and we're very, very close to actually signing the final transportation agreement, which would clear up all of the tariff related issues associated with that.

So, the answer is, we don't see anything that is material that would stand in the way of that project being completed on time and actually beginning to enter cash flow to our benefit in the end of the second quarter, beginning of the third quarter of this year.

Great. Thanks, Bob, and good luck.

Thank you.

Our next question is coming from Adam Leight of Credit Suisse First Boston (Company: Credit Suisse Group; Ticker: CSGKY; URL: http://www.credit-suisse.com/).

Good morning.

It's been pretty exhaustive so far, but I got one simple and two -- one Gulf question. The first one, Keith, how much cash did you have at the end of the year?

Twenty three million.

Forty-three million.

So, your debt ratios look better. On the cap ex front, obviously this is going to be kind of a lumpy sort of expenditures. Can you give us a sense, ballpark terms, what your first acquisition might entail?

Adam, I can tell you what is public information right now, and that is that in December of last year El Paso Corporation announced a $2.25 billion recapitalization balance sheet enhancement plan.

And, as a part of that announcement, they did tell the public that El Paso intends to sell approximately $750 million worth of midstream assets to the partnership as well as $1 billion or more of E&P assets, oil and gas properties, which are being sold to oil and gas operators, and then there are other assets within the organization that would be expected to be sold over time.

I guess my question on that $750 million is that one -- is that one chunk or is that multiple parts?

In all likelihood, that will be one transaction. And we have been working on that transaction and don't have anything to announce today.

But, as I said in my opening comments, El Paso Corporation has committed publicly that that transaction be completed before the end of the first quarter. And we have been working accordingly on that schedule.

Right. OK. I just -- I wasn't sure on the nature of the dollar figure.

On the -- I guess the second part of this, with the $1 billion of upstream assets that they're selling, obviously there's a chunk of that in the Gulf.

How does that affect your organic growth projects? And then traditionally on the timetable presumably, a large portion of your $200 million, $250 million has not been identified and is probably a latter part of the year set of outflows.

Well, you asked multiple questions.

The first one is, will our -- will El Paso Corporation's E&P business unit plan divestitures have a significant impact on our Gulf of Mexico business. And I think the answer is no at this point in time, but they haven't completed any of those sales. So, I think that's a very subjective no at this point in time.

We don't know of anything that is expected in that area that will have a material negative effect on us. In fact, if you look at a lot of the announcements we've made recently, they are with companies like Anadarko and like Murphy and like Totel El and others that are substantial companies that have a substantially larger deepwater property base than does our E&P company. So, that's the first answer.

I guess the second answer, the $250 million, well we have a pretty substantial net equity commitment in the Marco Polo project, a platform in oil line and in gas line. We're spending about $32 million in total on our Medusa project.

I'm going to leave it to Keith or Mark to tell you exactly how much of that capital budget is essentially already spoken for in terms of announced projects. But I will tell you that we're still actively looking at deepwater projects at this point in time. And I would expect a continuation of more investment opportunities throughout this year.

We're just -- deals are teed up better today than they ever have been before. And it's a very exciting time for us. We've actually probably got more deals than we have capital right now. And I would say, that we'll probably wind up at the end of the year looking back at 2002 and realizing we were capital constrained given the number of investment opportunities we have.

As a result, we're trying to pick those with the highest rates of return and the greatest certainty of performance.

I think I'll just add to that.

Adam, the projects that we've talked about today the money goes out pretty much over the full course of the year. The Crystal capital will sort of wind down in the July time-frame, which we anticipate will be about $72 million this year.

So, that's sort of front end loaded. It's very fair to just straight line that over the seven months or eight months of this year.

With respect to Marco Polo, we're expecting to have to put in about $40 million to $50 million this year, and that will be toward the back end, but also, in very steady drips in draft.

And the Medusa that Bob mentioned is about $25 million. And that money is being spent as we speak. But it's pretty fair to put that in at $2 million per month or $1.5 million per month or whatever.

About 150.

Yes. About 150 in total capital what we've identified of the $200 million to $250 million that we were talking about.

OK.

And the one last question, I'm pretty sure I know the answer to this. But on the third party acquisitions as you describe what your parameters are, I presume that does not include, but given the change in valuation recently, anything that may or may not be available from EI.

I can't speak to specifically a transaction with EI.

I will tell you that and reiterate what we said earlier we're not going to put any trading activities in this business, we're not going to put any production activities in this business, and we're going to continue to look for high quality, fee based, pipeline platform, terminal storage fractionization and processing type assets. And I don't think EI has a whole lot of that.

Very good. Thanks a lot.

Thank you.

And our last and final question comes from John Tysseland of Raymond James (Company: Raymond James Financial Inc.; Ticker: RJF; URL: http://www.rjf.com/).

Hi, guys. Thanks for the question. A great quarter.

I just had one additional question. Bob, I guess, on the acquisition front do you think acquisition multiples will be affected by the interest rate environment, or will you be willing to pay more or less for an asset as your cost to capital varies over time?

John, that's a great intellectual question.

Fortunately, we don't have to ask ourselves that today because we have this tremendous dowry of assets within the El Paso Corporation that how we've been able to do it. We've been successful in acquiring at in the range of eight times cash flow.

To the extent -- and, of course, at current market rates for debt, which, Keith, on the short side is 3.5 percent?

Yes, about 3.5 to 3.75.

And on the long side, our bonds are performing -- our eight percent bonds are ...

Well, they trade about eight percent, yes.

They trade about eight percent. So, obviously in this market we've got a real nice, built in, arbitrage when we're acquiring assets in the seven to eight times cash flow.

To the extent, that the credit costs move up a little bit, I'm not certain at this point in time, given the significant set of assets that we have to work with internally and the large number of assets that are coming onto the market right now due to the several major integrated oil mergers -- Exxon Mobil stuff still coming out, Chevron, Texaco -- a number of assets that are out on the market today. We're looking at those.

You've got a Phillips Conoco (Company: Conoco Inc.; Ticker: COCb; URL: http://www.conoco.com/) merger that may or may not exist. There are others out there. And so, midstream assets are coming out of those mergers.

And then, we're seeing a healthy number of assets come out of the companies due to asset sales because of these balance sheet enhancement programs that are being announced. We think we're in a target rich environment, really kind of beyond our belief at this point in time.

And I think it lasts for a couple of years given that I don't think that we're going to be affected significantly by a big run up in interest rates over the next couple of years. I think our cost to capital and the arbitrage is fairly low right now relative to the price at which we have been buying assets and will buy assets for the next couple years.

So, if you're worried about an immediate up tick in interest rates affecting the stability of our cash flow, I wouldn't worry about that right now given the amount of assets that El Paso has that would fit nicely in this partnership profile.

All right. Thanks a lot, guys.

Thank you. There appear to be no further questions.

Do you have any closing comments, gentlemen?

OK. Thank you, , and again thank all of you for joining us today.

Thank you.

That does conclude today's El Paso fourth quarter and year-end 2001 conference call. You may disconnect your lines at this time, and have a wonderful and safe day.