Enterprise Products Partners LP (EPD) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to El Paso Energy Partners Second Quarter 2002 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, Ms. Sandy Ryan. Madam, the floor is yours.

Thank you, Dante. And thank you all for joining us this morning. We have another excellent quarter, as I'm sure you all anticipated. This morning, we're going to be going over our second quarter results. And Bob Phillips, Chief Executive Officer, is going to lead us all. He is also going to discuss our recently announced San Juan gathering acquisition. Following Bob will be Mark Leland, Senior Vice President, and he will be discussing segment financial results; followed by Keith Forman, Chief Financial Officer, with an update on the balance sheet and some other financial items. Other members of management are here to assist in the question and answer portion of the call, which will be following Keith's part of the presentation. And now I wish to make you aware that this call will include forward-looking statements and projections made in alliance on the Safe Harbor provisioning 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 the restatements and projections are based on current reasonable incomes [lead]. However, a variety of factors could cause the actual results to differ materially from the projections, anticipated results, or other expectations expressed during the call, including without limitation on the natural gas prices, continued drilling exploration and production activity in the United States and the areas of the Gulf of Mexico service by El Paso Energy Partners, and successful negotiations of customer contracts on its pipeline platforms and storage facilities. El Paso [indiscernible] that may exceed statements and projections in good faith. Neither the partners nor its management can guarantee that the anticipated future results would be achieved. Reference should be made to El Paso Energy Partners and its affiliate Securities and 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 in fact, we did have another great quarter. We're pleased with the performance of all of our assets. We accomplished a lot during the second quarter despite a lot of volatility and uncertainty in the markets. Mark Leland will take you through all of the detail on our operating and financial results. And Keith Forman will take you through our financial plan and our balance sheet status. I think you will be pleased with the progress we're making, not only on the operating side but on the transactional side as well. And I'll cover some of those points. So second quarter was another record quarter for us. As Mark will tell you cash flow is up over 90 percent, net income up over 70 percent. I think that illustrates not only the great plan El Paso has put in place for its partnership but the quality of the assets that continue to be a contributor to the partnership and contribute to the strong cash flows and the increasing distributions to unit holders. We know that investor returns have been tough in this quarter -- tough in the first half of this year. We think we'll work our way through that, both as a sector of the industry as well as the energy industry in general. And we certainly are firing on all the cylinders right now at the El Paso Energy Partners. I think the market will begin to recognize that not only the strong cash flow nature of our assets and the dependability and reliability of our performance -- and I think, ultimately, before this year is out, we will be awarded for that strength and that reliability. Looking at the second quarter, I want to highlight the largest contributor to our performance that was our Texas intrastate natural gas pipeline system. Volumes were strong in that market, which has been [hot] down here, as many of you know.

That has led to increase power generation load particularly with the new Independent Power Producers, the IPPs, that we've signed out very successfully over the last couple of years in the Houston area, IPPs particularly in the Dallas-Fort Worth area in North Texas, as well as in South Texas. There are beginning to be significant users of the capacity on our pipeline system. We did announce during the quarter three new contracts. Those were all important. I'll highlight those for you significant with -- the most important contract being the new five-year contract with the City of San Antonio. That local distribution company sits [right square] in the middle of our pipeline system. The pipeline system is essentially configured to provide maximum transportation in storage deliverability service to San Antonio; and we're very, very pleased. We've been the principle service provider of San Antonio for several decades now, and this new contract is a new generation transportation and storage agreement provides San Antonio and the city environments with a lot of flexibility to manage their gas load and we're very pleased to re-up that contract and to provide that long-term firm service to the city. We've also entered into new contracts with Devon for the former Mitchell Gas, this is the big gas production in North Texas that feeds into the Dallas-Fort Worth market; and we are the primary and exclusive transporter of that gas into that growing market. We're pleased with that. Importantly, we've restarted an old relationship with Pemex. Along the border, we're currently transporting about 40 million a day gas into the Mexico under an interruptible contract. We're negotiating a firm long-term contract. We hope that we could increase those volumes up to about a 100 million a day. We see a lot of opportunity in North Mexico, both on the natural gas side as well as the natural gas liquid side.

When you look at the natural gas pipeline system in Texas and its contribution as well as the contribution of the Permian Basin gathering systems in Waha area, in the Carlsbad area -- in the quarter, we highlighted this in the press release. They contributed $29 million of cash flow to that $71 million total cash flow for the quarter. That's significant. We paid $750 million for these assets, closed the transaction in early April; and if you do the math, you can see that the multiple there on an annualized run rate of more than $115 million of cash flow is about 6.5 times cash flow at purchase multiple. So these assets are clearly outperforming our expectations and, I think, again is indicative of the type of assets that we've been able to acquire from El Paso Corporation. The quality of those assets, the quality of the cash flows, and the significant contribution it makes. Let me leave the onshore area briefly and go to the offshore area, lot of exciting things going on there. When you look at the volumes, you will see that shell base volumes are down, that is consistent with what everybody in the industry is saying along the Outer Continental Shelf due to powerful prices and lower drilling in the first half of this year. We hope that prices will improve and drilling will increase on the shell. Certainly, our affiliate El Paso Production Company is having a good deal of success in their deep completion shell drilling. We think other operators are gearing up to improve, increase their drilling in the second half of the year, and we hope to see a rebound in volumes on our house in our East Breaks system. I will say that the Viosca Knoll system in the second quarter held up very well because that's largely Deepwater gas and it is supported largely by Shell's production at Ram Powell. So, although house was off little bit, Viosca Knoll was strong. And we see hopefully a rebound in shell price drilling. Out in the Deepwater Trend, our Greenfield projects are removing along nicely. In the second quarter, we made significant progress on our Cameron Highway Oil Pipeline System that's a 500,000 barrel a day project. We are finalizing right away per meeting. We've actually ordered pipe, which is a long lead-time item for project of this significance and scope. And we have been negotiating with partners and hope to announce our partners in the next few weeks and then we would initiate our financing of that project. Our Marco Polo project, which is a pipeline oil and gas -- I'm sorry a platform in oil and gas pipeline project, we are building for Anadarko is also moving along very well slightly ahead of schedule.

During the quarter we formed a partnership with Cal Dive which is a strategic partner. We're very pleased to have Cal Dive in the platform project. They'll be our 50-50 partner and Cal Dive will bring not only capital to the project, but also their skill set in the Deepwater Trend of Gulf of Mexico, which is not only assisting producers with Deepwater Production and Development Services, but also sub-sea tiebacks and other services that will benefit us after we strategically position the Marco Polo Platform in August of 2003. We did make good progress on our financing of that project. During the quarter, we expect to close our $155 million Marco Polo Project loan by mid August. We've had some significant positive results from Anadarko as they continue to drill development wells at Marco Polo. They had an announcement during the quarter. They are very pleased with their progress. We are seeing reserves and hopefully production increase there. There is currently a significant satellite field called K2, which is adjacent to Marco Polo, [indiscernible] is very close to thorough development well which we hope will significantly prove up large additional oil reserves there. Our platform construction is almost 40 percent complete. Right now as I said, we're looking at an August 2003 deployment date, a little bit ahead of schedule so we are very pleased with our Marco Polo project. Also during the quarter we completed with [indiscernible] documents and announced a new platform in pipeline project called the Falcon's Nest project that project is over in the western Gulf of Mexico. It will be handling production on behalf of Pioneer, which is a very large and successful independent player in the Gulf of Mexico as well as Mariner.

They are developing, you know, Deepwater Trend discovery off the coast to Texas. There'll be sub-sea tie backing -- tying back that production up to the platform that would to construct own and operate on their behalf. This is a $50 million project again we're ahead of schedule there. We expect to install the Shell base platform in January of next year with an in-service date of production starting in about March of next year, so we're pleased with that progress as well. And most importantly, I guess, on the deal side, we just announced our largest acquisition in the history of the partnership. This is the $782 million planned transaction with El Paso Corporation whereby we will acquire the El Paso San Juan Basin gathering system, the largest gathering system in the industry as well as some very important and greatly located natural gas liquid assets in Texas and two gathering systems in the Gulf of Mexico known as the Typhoon systems, which will be fully integrated into our Marco Polo development and will help us really be a great position in the central part of the Gulf of Mexico going forward with oil pipelines as well as gas pipelines extending out into the Deepwater Trend. I want to take a couple of minutes to cover the San Juan Basin acquisition and then be happy to answer any questions that you might have. Again, we think that the partnership has made an excellent acquisition here. It has agreed to purchase these suite of assets, the San Juan gathering, the NGL assets in Texas, and the Typhoon Deepwater pipelines for $782 million. We expect cash flow from these assets to be in the $115 million to $135 million range for next year. That would compute to a consistent cash flow multiple in the seven times range, which is very consistent not only with what we have been able to acquire assets from El Paso and other sellers in the industry but also there's comparable transactions in the San Juan Basin, recent transactions, and that multiple is consistent with those as well. We expect to close this transaction in the fourth quarter of this year. It will be subject to satisfactory financing on our part. Keith will talk about our financial plan and how we expect to deal with that. These are absolutely critical assets to the partnership. It again continues our strategy of diversifying our midstream portfolio. The assets -- if you were looking at a map -- run from the Gulf of Mexico to the San Juan Basin of New Mexico and Colorado. It certainly accelerates our growth strategy, and I don't think that we contemplated the opportunity to complete two very large acquisitions this year along with our very significant set of Greenfield projects, but the opportunity did present itself as a part of El Paso's strategic repositioning plan, and we jumped on it. We put our team to work. They did a great job in performing due diligence and bringing a transaction together that made sense for the partnership as well as El Paso, in a very short period of time.

This transaction is absolutely accretive to El Paso Energy Partners. We think it's accretive in the range of 20 cents per unit, ranging up to possibly as high a 25 cents per unit in the out years as we reach some of the growth potential that these fine assets have. The San Juan assets are unique. As I said, it's the largest, contiguous gathering system in the industry. We expect it to generate very long-term cash flows but it does have some margin volatility, and I'll talk about that in a second. The NGL assets are complementary to our existing natural gas liquids transportation and fractionation assets that we acquired from El Paso back in January of 2000. We think they make those better assets. There's growth potential there. It gives us an opportunity to really exhibit some leadership in the natural gas liquids market from South Texas up to Mont Belvieu, and of course, the Typhoon asset, as I said, enhance our Marco Polo project. The San Juan Basin assets include more than 5,300 miles of gathering system over 250,000 horsepower of compression in one of the largest gathering systems in the industry and is really the critical supplier of gas to the Western US and the California markets. The San Juan Basin, as you know, was discovered back in the 1950s. We believe based on our estimates that we have more than 30 years of reserves under contract and dedicated to this pipeline system right now. The system is running at almost 100 percent capacity, so we have some planned expansions over the next couple of years. It's currently running at a throughput of about 1.1 Bcf a day, which is very, very close to capacity. There are more than 9,500 wells connected to this system. The system redelivers gas to El Paso natural gas, which then is transported to the California market. We have a number of producers that are very active in the area. The three largest producers are Burlington Resources, [Conico], and Bpamoco. They have been in that basin for more than two decades now and have been significant providers of gas supply to the Western markets. They continue to aggressively drill and develop their reserves, and they are maintaining their production profile year after year and we've been impressed with the good work that those three large producers have done over the years. The system does have the Chaco projecting -- processing plant on it. That plant, as you know, was acquired by the partnership in October of last year.

It processes is about 650 million a day. We're very pleased with Chaco's performance in the second quarter, and it is a key element of this transaction that we're re-coupling the Chaco processing plant and the ownership of the gathering system. Moving on to, I think, one of the key points I'd like to make about the San Juan Basin gathering acquisition and that is that approximately 80 percent of the throughput is contracted for under what we call a percentage of index contract. This is a gathering contract that calculates gathering rate or margin on a monthly basis based upon the actual index price established first of the month for production that's sold out of the basin. We have a range of contracts. They range anywhere from 6.5 percent of that first-of-the-month index to as high as 9 percent of that first-of-the-month index. As you know, the Western US markets have shown some volatility over the last several years. On balance, typically what we average in that gathering function is in the range of 19 to 20 cents per MMBtu to as high as 27 cents per MMBtu on some of our fixed fee contracts. So there is a measure of volatility in the calculation of our gathering rate that we charge producers on the San Juan Basin gathering index. We believe going forward that that gathering rate will have a reasonable amount of stability to it, and in fact, we have for the last number of years and will continue to risk manage or hedge that exposure from time to time when we can achieve our strategic plan rights.

Likewise on the processing side, we have percentage of proceeds processing contracts at the Chaco plant as opposed to peephole contracts, which are the type of processing agreements that we tend to steer away from. Those are percentage of natural gas liquid resale price contracts and typically those margins range from 5 cents per an MMBtu to as high as 15 cents per MMBtu for [inlaid] BTUs. And Mark will talk in more detail about how we're going to be recombining what currently is a tolling agreement between the partnership and field services, and I think that is another strong point of this transaction. Let me move on to the NGL assets running along the Texas Gulf Coast. We have a number of products, pipelines that run from the refinery markets in Corpus Christi all the way up to the NGL center of the universe at Mont Belvieu, and the refinery in petrochemical markets along the Texas Gulf Coast and into the Pasadena in Texas City areas. We are shuttling butane, we're shuttling propane in these pipelines. We also have storage. We are acquiring a 24,000-barrel a day fractionator located just South of Houston, which combined with our 90,000 barrels a day of fractionation located in South Texas, makes us absolutely the leader of natural gas transportation and fractionation in the South Texas and Texas Gulf Coast market. We're also acquiring a propane truck rack and loading terminal located in Hidalgo, Texas, which is along the Texas border, and is serving a growing natural gas liquids business in Northern Mexico. Moving on to the Typhoon oil and gas pipelines, we're acquiring a 35-mile 20-inch gas pipeline and a 16-mile 12-inch oil pipeline which runs from Chevron and BHPs Typhoon oil and gas field located in Green Canyon 237 area up to the shelf [indiscernible] both a number of oil pipelines including our Poseidon Oil Pipeline as well as our affiliated A&R gathering system.

There's more than 2,000 square miles of dedication to this project. We think the project is not only a good stand on it's own project to acquire but when integrated in with the Marco Polo assets, we think, it really gives us a leg up on the competition in the central Gulf of Mexico area. I think that covers this very important acquisition. We're very pleased with the results of the negotiation. We enjoy the benefit of UBS Warburg's council to our special complex committee, which worked hard on this transaction. We had a number of comparable transactions in the marketplace for similarly situated assets that gave us a measure of commitment to the values and the strategic nature of this acquisition. UBS Warburg did render a fairness opinion and we were very pleased with the results of that negotiation. We think that subsequent to the completion of the San Juan acquisition and the financing of this, El Paso Energy Partners clearly will move into a league of its own in terms of mid-stream assets. Although, we are clearly not as large as say Kinder Morgan, we absolutely believe we have the finest set of diversified mid-stream assets in the MLP space, and that leads me to my final point and I'll turn it over to Mark to cover the second quarter results. I'd like to spend a minute or two talking about the volatility that we've all experienced recently in the markets. I think we've been beat up unfairly at El Paso Energy Partners, unfairly on bad information. The management team has attempted to respond as quickly as possible each time one of the numerous media outlets has issued bad information or misinformation about El Paso Energy Partners. So I can tell unequivocally, we are not in the trading business. We are not in the power restructuring business. We're not going to lose our power-marketing certificate because we don't have one. We are not in those businesses that have come under such critical scrutiny over the last several months. We are a midstream company. We are a partnership by structure. Our unit holders that had been in this investment for numbers of years have enjoyed a very solid return year after year. We think it's unfortunate that the market, based on this misinformation, has attempted to really trade down the master limited partnership group as a whole and particularly El Paso Energy Partners. I can tell you, we just announced another record quarter. The fundamentals in our business are very strong. We think we have the best midstream assets in the industry, a solid balance sheet. I think that we are going to work our way through this problem, a great of set assets, a great strategy, a very committed management team to build in value for our investors, and we think we have the best return potential in the master limited partnership segment. So with that introduction to our quarter and where we are on all these very important strategic issues, I'll turn it over to Mark Leland to talk specifically about our second quarter performance.

Thank you Bob. Let me just reiterate again the partnership had a tremendous quarter of operations with adjusted EBITDA of 92 percent. It's just under $71 million, and net income of 28.7 million or 33 cents per common unit. That's up 70 percent from the same quarter last year. To see -- let me just highlight our operating stats package, but to see how each of our segments have done, I want to direct you to our web page at "elpasopartners.com" where we have full blown segment operating stats listed that are available 24/7, but I do want to highlight a few key points for the quarter. First, the key driver to our performance, as Bob mentioned, was our recently acquired Texas and the Mexico assets generating $29 million of EBITDA. This exceeded our expectations and let me give you a little color as to what's going on, what's at -- in those assets. The pipeline -- the intrastate pipeline in gathering systems are running right this minute about 4 billion cubic feet a day, that's a very solid throughput. Seventy-five percent of the capacity on the system is sold firm. All the capacity on our North Texas line is sold firm. Our Waha capacity is sold. We've got our storage facility that has 7 Bcf of capacity, that's sold. Our city of San Antonio contract, which we just re-upped, is very long term solid business. That city of San Antonio now is taking about 180 million a day. All very good news.

The gas plant that support -- that provide the supplies to the system are also running full at about 1.4 billion a day. So all in all, coupled with our long-term contracts that Bob mentioned, this business is doing very well and we expect it to continue. Some of the other businesses are also -- our other businesses are also doing well, in particular the Chaco plant which we acquired in October of last year compared to last year or just last quarter, excuse me, the first quarter of 2002, we've seen throughput on -- in that plant increase from 619 million dekatherms a day to 646 million dekatherms a day. That's essentially running wide open at these warmer weathers that we experienced in the summer and late spring which reduced plant throughput capacity temporarily. Also, we are seeing increased adjusted EBITDA on our oil and natural gas liquids segment compared to the first quarter of this year with volumes on our EPN Texas asset, that's our transportation and fractionation system in South Texas, up to 76 -- just over 76,000 barrels a day. That's up from last quarter of 70,800 or so. That's nearly 8 percent increase. And we're seeing parts of the processing environment pick up in the second quarter, which supports those volumes. The third quarter looks like it's going to be pretty solid. July is a little weak, but August looks good. So we expect continued good results there. We're also seeing some volumes pick up on the Viosca Knoll pipeline compared to last quarter up to 147,000 barrels a day, up from about 142,000 barrels a day. So all in all, we see our base businesses all running very stable with our acquisitions really giving us [our punch].

Now let me turn to net income. Net income was $28.7 million this quarter. After taking into consideration income allocated to the general partner and to our series B preference unit, earnings per common unit was 33 cents per share. This is on an average shares out -- units outstanding of 42.8 million. That compares to second quarter 2001 or 34.1 million units. So we've got definite accretion going on our earnings per unit. Net income exceeded our expectations this quarter and it really did because for three reasons. First, our operations exceeded our expectations somewhat. They are on the high-end of our expectations. We also benefited from lower interest rates and a lower depreciation expense. So looking forward, we would expect the level of net income that we experienced this quarter to continue. We had to see some improvement with the startup of the pedal expansion, which we previously announced. That ought to contribute several million dollars to the bottom line, so we are looking at roughly $30 million a quarter for the next couple of quarters. That will bring our total net income for the year our expectations to around $107 million or about $1 per unit. So we would adjust our expectations going forward on the net income of keeping our EBITDA levels stable. Gross CAPEX for the quarter was $805 million that included the $750 million Texas acquisition. We had $2 million or $2.1 million of maintenance capital offsetting our capital expenditures for the quarter with our -- to $190 million sale of Prince platform that also incurred in the quarter.

Now let me turn to just our relationship with El Paso. This has been a topic of discussion amongst many MLPs and let me just highlight what our true relationship is with El Paso. First of all, to remind everybody that El Paso owns about 11.5 million of our 44 million common units; that's around 26.5 percent. El Paso owns our series B preferred securities with $150 million power value. Our assets are operated by El Paso personnel, and we reimburse El Paso for that labor. That annual reimbursement is running at about $60 million based on the second quarter of 2002. Included in that 60, is a fee for G&A expenses of $22 million. We think there was a roll in the market and are comparable to what they would cost us to run that business on our own. We've acquired $2.3 billion of assets from El Paso also. El Paso does not guarantee our debt. We don't guarantee any of theirs. And our debt is non-recourse to El Paso. The partnership is accounted for by El Paso on an equity method and is -- so it's not consolidated for both the tax purpose. Now lets turn to the commercial relationships more on the revenue side and what I'm going to talk about is second quarter 2002 numbers which really reflect our true run rate where we are with respect to our Texas and Mexico acquisition. We can break our relationship -- our commercial relationship with El Paso into three areas. The first is the midstream services that we provide to El Paso field services. For the quarter, that totaled about $17 million. And those primary relationships there are tolling agreement at Chaco which I'll highlight here in just a minute and then the transportation and fractionation assets in South Texas which we fractionate and move NGLs four El Paso field services in both of those areas.

El Paso has the underlying contract with the producers to move their liquids or process their gas, and we are just processing -- we are just handling a sub service in that arrangement. We don't think there's any risk of disruption in those services. The other part of our business that we do with El Paso is that we move a lot of merchant companies and our production companies, gas on our gathering systems. That totaled in the quarter about $16 million. The most significant relationship there is our energy or firm transportation contracts on our intrastate system with merchant. We think those are good solid contracts. And the third area of our relationship is the fact that we sell any gas or natural gas liquid or oil that we have to our merchant affiliate at El Paso and that's just out of convenience. We could sell those to anybody. The total there is $21 million for the quarter. Excuse me, let me just make of couple of adjustments to those numbers that we can control very quickly and first those are the merchant activities where we sell our residues, some residue gas and liquids to the merchant company at $21 million that could be sold on any day to any third party and then also in the merchant services, we have a tolling agreement with El Paso and as Bob mentioned at the Chaco plant -- and as Bob mentioned when we acquire these San Juan assets, that tolling agreement, which total $8 million for the quarter, will just be subsumed in El Paso Energy Partners and that will go away.

So we have a total quarter revenues with El Paso about 54 million, when you make these adjustments that I just mentioned, that's $28 million or a net related party revenue going forward or on a regular basis is roughly about $25 million a quarter. And with that I'll turn it over to Keith.

Like you heard this morning, the second quarter was an active one at El Paso Energy Partners on the acquisition front and the project origination front and on the commercial front. Gladly, the financing front was no exception. I'd like to take a second and recap this very busy quarter. It helped pay for the acquisition of the Texas intrastate asset. We established a $535 million limited recourse term loan. This acquisition term loan was drawn down in full on April 8th to acquire the assets. Later in the month of April, we sold 4.1 million common units at a price of $37.86 and used the net proceeds raised of $150 million to pay down a portion of the acquisition term loan. As an [aside] El Paso Corporation purchased 1.1 million units in that offering to maintain its ownership of common units at 26.5 percent of the total outstanding. In mid May we were successful in selling $230 million of senior subordinated notes in a private placement. These notes, which are identical in every respect to our previously issued 8.5 percent notes, were sold at a premium so they have an effective interest rate to us of 8.19 percent. The notes are due on -- in June of 2011. We used $225 million from this sale to further repay the acquisition term loans. The net effect of these transactions aside from the business purpose of adding the Texas intrastate pipelines and their associated cash flows was to reduce the outstanding balance of the acquisition term loan to its present level of $160 million. Most recently we were successful in syndicating the Marco Polo project financing. Decisively, we received commitments for $155 million to finance the construction of the platform, which will go into service for Anadarko in the fourth quarter of 2003. The financing is directly to the joint venture we formed with [Caldi's] International and as such will be non-recourse for El Paso Energy Partners.

This financing will close next week. Regarding Cameron Highway, we will be initiating our project financing effort shortly once we are able to publicly disclose our partner in this project, which we expect in the next few weeks. At the quarter end, this is what our debt balances were: We had a $655 million of senior subordinated notes outstanding with the first maturity in June of 2009. We had $514 million outstanding under our revolving credit, which matures in 2004. And as I said, $160 million outstanding on the acquisition term loan which final maturity is in 2005. There was an additional $7 million borrowed under a subsidiary revolving credit. Our leverage ratios were as follows: Our total debt to total cap was 67.9 percent, up slightly from 66.4 percent at the end of the first quarter and 62.1 percent at yearend. The increase is almost entirely attributable to the remaining debt outstanding on the acquisition term loan. The more important ratio of our total debt divided by our proforma EBITDA yields a ratio of 4.5 times. This is calculated by dividing our total debt of $1.34 billion by our proforma cash flow of $295 million and let me just tell you how we got to the 295. We just annualized the $71 million generated in this most recent quarter. That's a good indication of what our current book of business is. That equals $284 million. We also, as it was mentioned earlier, have initiated service under the southern contract at our Petal facility. That will add another $15.9 million of revenue a year. So if you add that on top of the 284, you get in the range of 295 to 300, and we took the 295 number. It remains our intention, however, to reduce our leverage ratio further by yearend.

With regard to the targeted acquisition that we announced in late July -- that's the acquisition of the San Juan Basin assets, the selected Texas NGL assets and the Typhoon pipeline. I'd like to add a little color with regard to the financing plan. We expect to close the transaction in the early part of the fourth quarter. The closing is contingent upon us being able to finance the purchase price of $782 million in a satisfactory manner. That being said, we are highly motivated to complete the transaction given the attractiveness of the assets and their associated cash flows. Satisfactory means to us that financing net reserves, the cash flow accretion to our unit holders, typically maintaining our ability to grow our cash distributions to a level of, at least, $3.05 by the fourth quarter of 2003. Satisfactory also means we will not place our balance sheet under undue strain with too much leverage. We expect to raise a sufficient level of equity capital to fund this acquisition. In addition to common units there are other equity securities that we are qualified to issue to institutional investors which meet our needs of raising a significant amount of equity in the single offering and meet the investors' needs of providing double digit annual growth rates. The successful financing in a prudent manner will have significant positive impact on our balance sheet. I'd just like to finish up and add a little bit of color to what Bob said earlier. I'm not going to really get into the misinformation that's been published in the press and corrected on the second page in the metropolitan section the next day. But I will like to address the short position that we've seen in our stock. That's increased significantly in the last few months that put downward pressure on our stock. These shorts are being taken out by New York hedge funds, and I just want to caution the brokerage firms that are making available to these hedge funds the units that they borrow pursuant to our partnership agreements, the lending of units for such shorting purposes jeopardizes the tax deferral that those units receive.

We never usually talk about taxes on the phone call, but remember, we're a partnership for one reason; because we want to tax through to our investors directly the tax shield that unusually [ignores] to us if we were in corporate form. Therefore, our current distribution rate of 260 divided by yesterday's closing price of about $30.5 has a yield of about 8.7 percent to the non-informed. However, because we shield prospectively about 95 percent of that income stream, the effective yield to an investor is over 14 percent. So that's equivalent to [immunity] bond rates. So today there are still people reading the newspapers, out there purchasing 5-4.5 percent immunity bonds and there are NOPs and I'm really just selling mine today, like EPN that are offering 14 percent tax deferred yields. That's the tax deferral that's in jeopardy that those brokerage firms are jeopardizing by lending those shares to hedge funds. And I'm off my soapbox, and now, we're going to open the questions and put you guys on the soapbox.

Okay, Dante and we're ready for questions.

Thank you very much. The floor is now open for questions. If you have a question or a comment at this time, you may press "1" followed by "4" on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the "#" key. Our first question is coming from Adam Leight of CSFB.

Good morning guys.

Good morning.

Congratulations on a nice quarter. A simple question or two and a less simple one. On the financing for the acquisition, your unit prices recovered some over the last few days but obviously not where you'd like it. Is your -- just in general terms is your sense that at these levels you'll be inclined to do a greater or lesser amount upfront in equity for the financing of the acquisition in terms of, kind of, reaching your 50-50 goal?

Well, I think, Adam at first, I just want to point you that last week where our unit price swung by over $10. And there is at least three-months between now and the time we close. There is significant amount of positive news relative to new organic projects, which we're unable to announce today. There are also -- with respect to Cameron Highway, a lot of information with respect to dedications and partners there. So we believe that if the market calms down a little, pays attention, listens to the word that our value, because of our high yield that we pay, will be recognized in our unit price. That being said, we have done analysis on our unit price based on various mixes of debt and equity. We feel very comfortable meeting the accretion levels with a much wider range than you would imagine. And I can tell you that the breakeven analysis on this -- with this deal is no longer accretive to us, is below $20. So we have some legroom here. And we are not stupid. [indiscernible] once again we wouldn't jeopardize that accretion; we wouldn't jeopardize our balance sheet. And if the math does not work with both our goals, deleveraging and providing the accretion for dividend growth in the future, we will back away from the transaction.

I understood that. But I guess, assuming that you're -- you know, today's levels were, maybe, slightly better, no jeopardy to the transaction, but would you be inclined -- just general sense -- to do a full sized amount of equity or kind of wait for some of that...

Yes, I think Adam, we're going to see what the market says -- right, you know, the market is going to be the dictator here. If we're out there and we're trying to sell $32 or $35 or $38 equity, and we have a significant appetite to that, the same will be more heavily equity weighted. If it's not -- and if it comes too debt weighted, we back away. I mean we always have that option. I think we've opportunistically, we used to have that slide all the time opportunistically access capital markets. And I think if you look at the last few years, we have done that opportunistically and we will continue to do that. And I don't think you're going to have me put it in a spot. It would be unfair to our shareholders and to us. For me to say, Adam, at $32 the mix is 53.47, at $34 the mix is 51.49. We're not going -- we don't have that type of math. You know, I wish business was that easy, but business is gray it's not black and white.

Simpler question or two, if you don't mind. As the commodity sensitivity increases slightly in the business, any inclination to hedge some of that?

Yes. Adam, this is Mark. We have historically managed this business for many years in El Paso Field Services, and we traditionally hedge aggressively. There is rarely a time when we are not less than 50 percent hedged. This quarter, in fact, this business is 50 percent hedged, but a little less hedged in the fourth quarter, which tends to be fairly strong and where we've got about 20 percent, 25 percent hedge. So we will continue that discipline into the future and when we get to the prices that we think it's our numbers, keeps our accretion where we need, we will be hedging aggressively.

Okay, and could you -- would you mind filling in the blanks on the CAPEX last quarter? You got the larger acquisition in the maintenance CAPEX and then the remainder?

Yes, 735 was the acquisition. The remainder was finishing up the Petal expansion primarily. We've got some Marco Polo -- some, you know, starting up. Those were the two key features, and we didn't mention maintenance CAPEX for the San Juan acquisition, which I bet is your follow up question and that's going to be $15 million.

Okay doke. Annually?

Annually.

And cash at the end of the quarter?

It was 15 million in change.

Fantastic. Thanks.

Thank you. Our next question is coming from [Gary Shromvert] of Bear Stearns.

Hi, good morning. Can you just give us some idea of liquidity at the end of the quarter and how much room you have to stretch on the bank side if the high yield market is unavailable for this acquisition?

Well let me -- well, first up, you're assuming that we are high yield. I think, you know, we had made a few assumptions, first that we are high yield. And secondly, that we have liquidity demand like you have been reading about in the newspaper. As we said, we don't do a lot of trading. Our need for capital is for long-term growth of projects. At the quarter end, we had $86 million under our revolving credit. We had another $18 million available to us under a subsidiary revolving credit, which was adequate to meet our capital needs assuming that we don't close the San Juan transaction for the remainder of this year. And we have cash on hand at $15 million. And, you know, we had a positive current ratio in all that.

All right. I guess that you repaid the debt portion of the potential acquisition. I mean, how do you see financing that portion? Do you think it is banks initially?

No, we really are - we're not -- you know, we could be as optimistic as to think that, you know, we could do, you know, a significant portion of it in equity. I really don't want to say it's going to be banks or high yield or senior. You know, I think we're -- all those options are on the table, private placement. There's a cluster of opportunities offered by your investment bankers among others.

Okay.

Gary this is Bob Phillips, just to make a quick comment about the assets themselves. These are imminently financiable assets, and I'll raise that key point again. The San Juan Basin gathering system was initially constructed as far back as the 1950s. This is a very, very large system. It has a number of producers that have over 14 Tcf approved reserves dedicated to the system. And that is probably -- certainly, the large majority of the transaction values [attributable] to that San Juan Basin gathering system. We did, in fact, project finance the acquisition of the Texas natural gas pipeline system. I would argue or suggest to you that the San Juan Basin gathering system is even more easily financiable because of the long-term reserves dedicated to the systems than was the Texas pipeline system. Now, we've realized certainly that the markets are [indiscernible] right now. We realize that the high-yield markets are more expensive certainly than they were a few months ago. But this, sort of, partnership, I think, you will see by comparison, as Keith said, opportunistically access capital in the broadest and most diverse ways in any of the mass limited partnerships out there. Keith has been -- Keith and Mark have been very successful in financing the growth of the business that our development people have developed in storage and in the Deepwater Trend and our acquisition people business development, and we think we're going to be successful here. We can't give you a specific blue print as to what portion will be equity and what portion will be debt. We can't tell you which of the multiple markets we will access this time or what component parts of that financing plan it will be. But we can tell you that we expect the market will recognize the significant value and the significant accretion to this transaction. We think they will reward us in a stronger unit price, and we think we'll be able to effectively enter the equity markets at some point in time between now and the end of the year. And we will do that to our satisfaction or we will not go forward with the transaction. We absolutely will not put ourselves in a position of over leveraging this partnership.

Okay. That's great. Thanks guys.

Thank you. Our next question is coming from [Chip Rue] of [Slot Wiseman].

Good morning. Four questions, first one is the easiest and I'll just list these right in a row. I missed the maintenance CAPEX number, so if you could give me that? Second, can you expand on your comments the banks lending the hedge funds in jeopardizing the tax to [indiscernible]? I assume that's only on the units they lend. Can you just explain that in detail because I'm not familiar with them, I'm sure others aren't either? And third and fourth is really one question. The [need] of the question -- can you talk about the quality of the assets themselves in the San Juan area, you know, as EP you're just putting down it's lower quality assets to you, how do you know they are maintained and what kind of due diligence have you done to ensure there're the qualities you say they are? And secondly -- and this applies more to all your midstream assets, how do you deal with the decline rate issue of the producing basin that you complete to and how do you model and think about the higher sustaining CAPEX for completing extra completions well by well?

This is Mark Leland. I'll just answer the first question. Maintenance CAPEX for the quarter was $2.1 million and then...

With respect to the -- it is the lending of the shares to create the short and pursue into our partnership agreement. There's a pretty, you know, in your face paragraph in there with respect to that the lending of such shares may jeopardize your tax shield, and without a tax person on the phone, I am not going to go any further than that other than to refer everybody to the partnership agreement.

And let me just rest assure that the San Juan assets are not El Paso's core assets. These are -- this set of asset is the crown jewel of El Paso's midstream group. You can go back into El Paso's public documents and see a reference for many years. El Paso field services of which -- which operates El Paso Energy Partners has operated these assets for many, many years. The due diligence was thorough. Though -- even though, we only -- we have run the people in the partnership are the same people in field services, and they have run those assets for many years. They are very solid high return assets. As Bob mentioned, this is a huge reserve life index. I've been around these assets since 1986, and I think the reserve life index has been around 35 years ever since that time. With regard to decline, we have factored -- in the maintenance number that I mentioned for these assets there is assumed number of well connect that we make that will keep volumes flat or maybe even grow them. And the costs of those well-connects, to the extent we're obligated to pay them, is in fact [indiscernible] into our maintenance capital expenditures; and that's the way we look at all of our Gathering Systems. But we are very selective on the Gathering Systems that we're putting into the partnership. In that, we're looking for gathering systems with long live reserves that have traditional lower decline rates, have great producer bases, etcetera; and that's consistent with the MLP. And then the Texas assets -- the vast majority of those assets are intrastate pipeline assets. Those are like a just a big pipeline that moves gas from supply basins into the huge Texas gas markets.

Okay. Thank you.

Thank you. Our next question is coming from June [Glove] of Columbia Management Group.

Good morning. Just one further question to help box the risks to El Paso on the commercial side. The receivables due from El Paso, are those on normal 30-day terms?

Yes.

Thanks.

Thank you. Our last question comes from David Fleischer of Goldman Sachs.

Hi. And I need to apologize. I probably missed the first part of the comments, a good part of yours, Bob, and so you may have hit this but maybe not -- maybe not in the way I'm going to ask this first part of the question at least. I'm wondering, you know, how you view the current acquisition marketplace, the opportunities out there, you know, with some of the recent price decreases? And whether that changes your strategy, you know, over, say in the next six months or a year -- you know, as you are able to access capital markets and financially you've done already here in terms of -- maybe you're looking for bargains in the third-party marketplace instead of buying from El Paso? Is that an important, you know, focus or part of the strategy that should be here, and how do you trade off those -- you know, the two sides here?

David, this is Mark. And Bob just stepped out for a second. But I can answer that question. And basically, we've just had a tremendous opportunity to acquire assets from El Paso that we just can't pass up. But going forward, we will continue to have those opportunities. But to the extent that we can access capital markets, we will definitely start seeing more third-party activity, either a more quality asset at great prices on the market now and we expect to be on the market into the third, fourth, and into next year that -- we think that it is a tremendous opportunity for the partnership going forward. We expect to -- we do look at all third-party acquisition opportunities right now. We just have the best happened to be right in front of us and which we know the most about; but going forward, third-party acquisitions will be more and more a key part of our business strategy.

Well, what would you say in terms of, you know, there was a competitor that -- you know, Bob mentioned in his comments to you yesterday, you know, talked about in terms of [indiscernible] dilemma where prices are coming down? Do you buy now or do you wait and they keep coming down? And, you know, how do you -- you know, how do you evaluate the marketplace; and is this a good time to buy or does it get better over the next year?

Well, David, I would say that we're through buying for this year. We have our plate full with this recently announced transaction. Don't forget, we have over $1 billion gross capital of refill projects underway in the Gulf of Mexico, and in our storage business, we've got a very active Gulf of Mexico business. We certainly are not slowing down. In fact, we're looking at more Deepwater pipeline and platform projects today than we ever have them before. Likewise, in the storage area, we have recently completed our large pipeline system in the most recent saltwater cavern in our Petal storage facility. As Keith said, we're going to initiate. We are in the process of initiating our customer service to the Southern company under a 20-year contract. We have filed with the FERC a 7C application for another 8 Bcf expansion there. That should be approached sometime in early the mid 2003. We will start that project. We are working across the country on other Greenfield storage projects in areas where market demand and market volatility will acquire additional high deliverability [salt dome] storage. So I think in those two areas, in the area of Deepwater infrastructure and in storage, we're going to fill out a lot of our future growth capital requirements and our cash flow increase requirements from a lot of these very, very high return by comparison Greenfield projects. Now, we know the downside to the Greenfield project business; and that is you have to invest a lot of money for a long lead time period before you start seeing that cash flow come in. But we've always been able to successfully balance a certain number of acquisitions each year with a certain number of Greenfield projects, increasing cash flow in that particular period.

And we've got a great set of Greenfield projects that will come on in '03, '04, '05. We're working on others that will come on in '06 and '07. I think what our investors want us to do is to be constantly monitoring the market for acquisitions, add multiples that give us the kind of long-term stable cash flows. And then when coupled with these long lead time but very high return, highly profitable Greenfield projects in the Deepwater Trend and in storage that we lead the MLP segment in returns, and I think that's what our investors are looking for. We have been very successful in buying assets from El Paso. That's principally because we know those assets, and we've been able to acquire those assets at cash flow multiples that we're comfortable with and have generated in combination with those high return Deepwater project -- we've generated the kind of returns that we're looking to give our investors. Going forward, we're certainly not going to rush out and load up on more assets in 2003 if we feel like market values for midstream assets are coming down. I don't necessarily believe that the announcement today of Dynegy sale of northern natural to mid-American is indicative or illustrative of any significant decrease in midstream assets across the board. Talking about two separate segments of the market, those are interstate pipeline assets. There's a limited number of buyers there. In the midstream universe, there is a lot of midstream assets that are coming on the market. They are coming from the pipeline companies that have been under some level of [disaster]. Coming from major producers as those producers exit those businesses and move towards investing their capital in worldwide larger ENP projects.

And we're very pleased with our position in the market. As Mark said, we get to look at almost every deal that comes on the market. And so far the ones that have been most attractive to us have been the assets that we have known and owned and operated through EL Paso field services over the past six years. So we'll continue to look at those. We'll continue to look at every third party deal, but I don't want to miss the opportunity to highlight that point that our strategy and what's made us successful is balancing those large acquisitions, which generate long-term stable cash flows with those high return Greenfield projects in the Deepwater Trend in the Gulf of Mexico. I think that's what sets El Paso Energy Partners apart from a lot of our competition in the MLP segment.

I hear you in terms of what you've got going. You've got an often lot going there clearly, but also I know that your guys and particularly Bob who, you know, can always find a little room on his plate there but -- let me ask you a second question, may be directing more towards Keith. You know, with all the debt that you have in the -- little over 8 percent, you know, subordinate notes that you issued plus the term loan. Just wondering how you're looking at these still pretty steep yield curves, and how you view short-term versus long term debt and swapping perhaps, or how you balance off the short versus long which kind of [recovers there], Keith?

Yes, clearly, you know, the assets we acquire are long life steady cash flow assets. So we have always used it as our basic driver not the current price as much as, you know, matching the maturity with the life of the underlying asset and borrowing money on a revolver, you know, although it's currently, you know, that is about 350 basis point positive to our recent bond. You know, actually -- a lot of the questions you have actually asked -- you know, you have to look at in a macro viewpoint. The prices, which -- are -- you perceive to be cheaper because there are less buyers; there are less buyers because there is less capital. And there is less capital because the banks have stretched themselves with the Dynegy's and William's and the Enron's. So, even though it's twice appealing to jump in and say, "Well, why don't we just double up our revolver?" Clearly, our cash flow proforma for the San Juan acquisition will be in excess of $415 million, which gives us a borrowing capacity of over $2.2 billion given the covenants in all of our bank deals and indentures. That's a lot of capital more than we need to even acquire the San Juan asset. But is that the prudent thing to do, and is it doable? You know, the banks and now that [you used] Goldman Sachs -- since you work there as an example who, you know, participated in our acquisition loan and that was a strain for -- at that level for the banking community. So you guys know it first hand -- you sold off a good portion of that loan. So it's tough to say we can't -- just because mathematically we can raise a billion too short we just don't necessarily want it, you know, to do that because the price will actually go up because you're putting strain on that market. Now, with respect to swapping, clearly, we are evaluating taking some of the fixed rate debt and swapping it out and may be saving a couple of points or two. But it's the, you know, and they say it will a phone call we have two years from now. We aren't paying Libor plus 430 on my swap grade. And you know, because the economy is booming and green stand funds trying to rain it in and at near term -- short-term interest rates are over 9 percent, you will be double guessing me why I'm [indiscernible] paying 13 percent on short term...

No, no, I don't pretend to have the answer. I'm asking you the question because there is such a steep -- you know, it's intoxicating to think of long year interest costs, you know, via swap and yet there is certainly a risk in doing that?

No, we think the risk -- we think the benefits, you know, Mark and I have -- had an ongoing conversation about this with some other folks here, and we think it is appealing, and I wouldn't be surprised to see -- in fact, during the quarter or actually during the -- was it the first quarter I think we actually did swapped -- that were -- we took some of our Poseidon debt -- we took $75 million of that and swapped it out at 3.94 percent for three years, which was at the rate we couldn't pass up. So we've taken some forwarding into fix but not into -- we wouldn't mind taking some eights down into the high sixes.

Okay. Thank you and good quarter.

Ladies and gentlemen, we appear to have no further questions at this time.

Okay Dante, thank you very much and thank you all for joining us this morning. We look forward to reporting our third quarter earnings in a few months.

Ladies and gentlemen, thank you very much for your participation. This does conclude today's El Paso Energy Partners 2002 conference call. You may disconnect your lines at this time and have a wonderful day.