Enterprise Products Partners LP (EPD) 2002 Q3 法說會逐字稿

Good morning, Ladies and Gentlemen. And welcome to the El Paso Energy Partners third quarter, 2002 teleconference. At this time, all participants have been placed on a listen-only mode. And the floor will be opened for your questions and comments following the presentation. I would now like to turn the floor over to your host, miss Sandy Ryan, Director of Investors Relations.

Thank you, Emma. Good morning, everyone. This morning, Bob Phillips, Chairman and Chief Executive Officer will begin our call with an overview of the quarter. And then Mark Leland, Senior Vice President will discuss operating segment results. Keith Forman, Chief Financial Officer will give an overview of financial matters; and James Lytal, President of El Paso Energy Partners will provide an update on projects and operations.

At that time, we'll open the calls to your questions. 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 a reasonable effort to assure that the statements and projections are current, reasonable, and complete. However, a variety of factors could cause results to differ materially from these projections or anticipated expectations, including without limitation, oil and natural gas prices, continued drilling and exploration and production activity in the United States and areas of the Gulf of Mexico serviced by El Paso Energy Partners and sucessful negotiation of custumer service in the platforms storage facility. While the Partnership makes these statements and projections in good faith, these cannot be guaranteed that the anticipated future results will be received.. Reference should be made to El Paso Energy Partners and its affiliate, securities and exchange commission for filing that may affect results. I'll now turn the call over to Bob Phillips.

Thank you, Sandy, and thank you, all, for joining us this morning. We're very excited about announcing another record quarter for cash flow income. As you know from the press release, cash flow was up 70%, earnings up 77%, compared to the same period last year, despite some unfortunate down time in the Gulf of Mexico, slower drilling a little bit of a slower processing business. But we offset that with a number of very important commercial and operational improvements and achievements during the quarter.

James Lytal will talk about a number of our projects and give you detailed information. Mark Leland will talk about our third-quarter performance. And go through the operating statistics information for you. Keith Forman will talk about our financings and our balance sheet. Before we go into that detail, though, I wanted to touch on some of the key issues that we think are affecting El Paso Energy Partners and master limited partnership sector in general. To start out with, an overview of the industry. We think the energy industry fundamentals remain very strong, particularly in this area. However, the MLP segment is posted a slightly negative return in the quarter. And I think that is due to negative factors in the press, more so than industry fundamentals.

MLPs have squarely outperformed other energy stocks, though and outperformed comparable high-yield investments. So we think investors will be looking at the MLP sector going forward. We think it remains an outstanding investment opportunity. As I said, the down quarter for MLP was largely attributeable to many headlines from the many of the GPs. In general, continued confusion about partnerships. We think these events have unfairly penalized MLPs at a time when investors should be looking at publicly traded partnerships as one of the best ways to invest in the energy space..

Our general partnership El Paso Corporation has shown support for El Paso Energy Partners over the past four years. As you know, they've endured a substantial amount of negative press in the past few months. At EPN, we responded quickly to misinformation and market uncertainty and we will continue to address those issues as they arise.. But let me tell you, quite clearly, we are proud of our association with El Paso Corporation. We will continue to benefit from that relationship. We think the interests are squarely in line between our general partner and our limited partner. We think it has a significant upside for our investors in the future. As these issues tend to subside and the overall equity markets improve, we think the MLP sectors poise for a rebound as investors begin to look very clearly at our solid growth prospects. Interestingly, the cause of theproblems face by the larger energy industry, we think MLPs have unprecedented opportunities to grow during this time period through the acquisition of high-quality midstream assets at values that are both accretive as well as financeable and continue to diversify our asset basis. Investors have overlooked this unique situation that we have in the industry today. Otherwise, I think MLPs would be trading at higher values.

As managers of El Paso Energy Partners, we would be remiss if we didn't actively pursue many of these prospects and the significant investment opportunities we have to achieve our growth objectives. So notwithstanding some of the uncertainty in the capital markets, we're going to continue to actively pursue acquisitions and growth projects when they become available to us. That leads me to our current efforts to acquire El Paso San Juan basin assets. As you know, we announced the transaction back in July. We followed a registration statement to finance a portion of the San Juan deal. We've been working on that process over the past few months and monitoring the IPO and the institutional markets, and we've determined unfortunately, that the current timing is not right to offer that type of equity security to the market.

We think traditional retail market for common units probably has a greater appreciation for the long-term nature of our assets right now and are largely or less affected by negative headlines from the industry in general. And are focusing on the assets and the cash flows that they generate. We plan to defer our IPO of our El Paso Energy management until conditions in that market improve. We think the I share market will be an affective way for El Paso Energy Partners to finance its business, raise equity capital in the future when the markets settle down.

In the meantime, we'll be looking at the common unit market, alternative forms of seller-equity financing to try to get this deal closed sometime in the fourth quarter of this year. Having said that, we think the San Juan assets represent a compelling value in this market and would become the crown jewels of our midstream portfolio. The San Juan gathering system, as you may know, has always been a high-profile, midstream asset, largest gathering system in the industry supported by over 14 trillion cubic feet of gas reserves. We've managed the asset for the last 6 years through put margins are consistent. Operating costs are predictable. We think it makes a perfect fit for our partnership. So we're going to move forward with this transaction subject to being able to finance it on appropriate terms that are accretive and balance sheet for the partnership.

The San Juan purchase will give us even greater balance to our portfolio of offshore projects in the Gulf of Mexico. We think this is one of the strategies that truly distinguishes El Paso Energy Partners from other midstream MLP investment opportunities. We've shown the ability to acquired good midstream assets and improve on their performance. And I think our Texas pipeline business is a good example of that, having outperformed our expectations for two quarters in a row now, in a difficult market. As the deep water developer of choice in the Gulf of Mexico, it provides our investors with not only solid cash flows that are accretive to distributable cash flow, but also great investments and greater future cash flow as well. In fact, the third quarter of this year was truly a high point for our deep water strategy. James Lytal will take you through some of it. But I can tell you that we are on target with some of our projects.

We announced a new pipeline project for gathering new gas discovered at the Red Hawk field. And we also announced importantly that Bolero would be our first 50/50 partner in our important partnership. We have become, as I said, the pipeline and platform player of choice in that area. A lot of opportunity to continue to add new projects that are offering high rates of return and are significantly accretive to our unit holders.

In summary, I think we have one of the best sets of midstream assets in the industry. We are close to financing. Finalizing another accretive acquisition that will also enhance our portfolio. And as you know, we have one of the most attractive sets of green field projects in the industry. I think that positions El Paso Energy Partners for another record year in 2003. And with that overview, I want to turn it over to Mark Leland who will review in detail our third quarter performance.

Thank you, Bob. The partnership had another solid quarter of earnings. Net income, as we mentioned, was up 77% compared tolast year. Amortization was up 73% compared to last year. And I'll go into some of the key highlights in those in just a minute. But before I do, I want to point you to our website at ElPasopartners.com, where our operating statistics can be found, which can provide operating details by segment.

As I mentioned, net income was up 77% this quarter compared to last year. And that's 21 cents versus 9 cents, or an increase of 133% on an earnings per unit basis. This quarter's performance was negatively impacted by a couple of things that we highlighted in our press release. But let me point those out in detail. First, we had a noncash charge of $1 million, related to a hedge that we put on for the San Juan basin. This was a negative market value of a natural gas hedge.

Our gas prices for 2003 for the San Juan basin rose to levels in excess of those assumed in our acquisition economics. So to lock those solid prices in, which have an impact on our gathering rates, we elected to enter into a swap transaction with an a-rated financial institution that trades energy. That will have an impact of locking in 50% of our gathering revenue at economics better than our transaction assumption, which total, assumed EBITDA totaling more than $115 million a year.

The swap is an effective hedge. It's a San Juan gas price fix or floating swap at $3.50 cents. This is the type of transaction that we've used at El Paso. It is accounted for on a market base. And once we own it, it will be a traditional cash flow hedge. Also impacting the quarter's results were the lower volumes due to hurricane Isidore. This totaled about a 1.2 million And it impacted essentially the natural gas pipeline segment, platform segment, and oil and engeal logistics.

When you total the two of those, 1.2 for the hurricane and the noncash charge of $1 million, that's about a nickel per unit which would have brought our earns per unit to right up around 26 cents, which is right in line with everybody's expectations. However, despite the weather-related disruptions and the continues low-drilling rate, the partnership realized a record third quarter adjusted EBITDA of $69 million, at 73% up from last year. Of course the loss on the hedge doesn't factor into cash flow.

As I discussed before, the increase in EBITDA, from last year, is really drive driven by the acquisitions we've made today that includes the Texas-New Mexico assets, the 50% interest in Ohio system. All of these primarily on shore acquisitions have balanced the partnership's asset base to the point that we truly have a stable quarter to quarter result compared to last quarter of 2002. Marginal is up this quarter for the sixth consecutive quarter in a row. This is driven by the strong performance of the Texas-New Mexico assets, which we acquired in April. These assets continue to operate at levels that exceed or acquisition expectations and generated about $20 million EBITDA again this quarter. O&M was up compared to last quarter. This was really due to a couple of things.

First, we had a bad debt writeoff, associated with Panico, which was a customer of ours. And we also had some nonroutine maintenance that was accelerated on the Ohio system. Both lowered our EBITDA. Those items totaled $2 million. Storage segment was a bright spot this quarter. It was up $3 million this last quarter. This reflects revenue from the expansion of pedal, which was fully placed in service towards the end of the quarter. It also includes billings on the city of San Antonio, contract at the Wilson storage facility in Texas. We should see additional increases in this segment as the full capacity of these contracts come on line for the full fourth quarter.

Now to provide some additional cash flow information, total project Cap Ex for the courteous quarter was $71 million. And James will highlight more on that. Maintenance capital was $10 million for the quarter and interest was $22 million. Distribution to our unit holders was $40 million. So for the first nine months, into September, maintenance capital totaled $13 million. That's right in line with what our expectations were. Interest was $56 million. Distribution store unit holders is $113 million, for total fixed charge of $180 million versus EBITDA of $188 million, giving us a fixed charge ratio, which is right in line of where we were last year at this time.

For the fourth quarter, we expect strong results, but we do have some impact from the hurricane Lili. It should be a record quarter for us in the $75 million range that brings EBITDA for the year up to $268 million, which is more than $100 million than last year. And we expect to keep the solid results in the extent that we closed the quarter ahead that will further increase our EBITDA. With that, I'll turn it over to to Keith, and he'll highlight where our balance is for the quarter.

Good morning. As you've heard from some of the others on this conference call, despite some of the most severe capital markets in history, we still experienced strong cash flow fronts. In combination with the $71 million adjusted EBITDA last quarter, our last six months of EBITDA, annualized into a run rate cash flow level of over $280 million. In simpler terms, the assets owned by our partnership today performed at an annual cash flow generating level in excess of $280 million. This is without the projects, toward which significant capital investment have been made.

At the end of the quarter, our cash balance was $22 million. Our debt balance is a total of $1 billion, 384 million. This debt balance divided by our run rate cash flow of $280 million, you have the total debt to EBITDA of 4.9 times. Our total debt is a percentage of capitalization with 69.2%, up slightly from 67.9% at the end of last quarter. It is almost exclusively attributable to borrowing from our lenders, most notably, the Marco Polo project and completion of the pedal expansion project. A couple of items can overguarding our capital structure.

At quarter end, our revolving credit was drawn to a level of $569 million. Shortly after the quarter ended, we successfully closed a five-year, $160 million term loan. The proceeds were immediately applied to repaying a like amount of our revolving credit down to $409 million,. Attaining this level of capital availability was not an easy task in this capital market place, but certainly a welcome outcome, justifying our effort. At the same time, we modified the terms of our EPN holdings which had a $160 million outstanding and made it part of our consolidated credit family. I know some of you out there were rooting for additional simplicity. And now I can say that all of our debt in our balance sheet has recoursed to all of the partnership cash flow. So this quarter, as I'm sure you've noticed there was no discussion of netting out,non-recourse debt, or prioritize cash flows. Let me just remind you that we weren't successful in putting in place a non-recourse project loan for our Marco Polo platform. This debt is at a 50-50 joint venture and therefore will not be in our balance sheet but instead, in our equity.

Next month, we will finish construction of the platform. Once the platform is in service in the first quarter of 2003, we will have five years to repay the loan. We intend to retain our financial flexibility. And therefore, it would not be prudent at this time to discuss in further detail some of our financing plans specific to the San Juan transaction, but you can take comfort that our goals of reducing our debt levels and growing and further diversifying our cash flows remain in tact. And we will act in such a way to best achieve these goals.

It would be prudent at this time to allow James Lytal to share with you some of our status, which of course, are the aspect of our partnership which differentiates us in a positive way from most of our peers.

Thanks, Keith. I'd like to review assets before providing an update on projects. Volumes were adjusted for hurricane outcomes, basically flat in the second quarter. On high oats, we expect an additional of 92 new supply in the fourth quarter. With the addition and expected increase in drilling because of favorable commodity prices, we expect to have the new volumes required to offset the declines.

Looking into the future, we are excited about recently announced discoveries. These are located to the south as you recall, Dina Hoover production. In addition to the dedicated production we are seeing, there is anticipated to be an additional 300 million cubic feet per day from that project. When you combine our new canyon express supplies with our meducea volumes, which are anticipated to start up in the first quarter of 2003, are anticipated to have first flows midyear 2003, that's a projected total of 270 million cubic feet per day of new deliverability coming into on the next front. Pipeline volumes are down due to the hurricane and natural declines from connected fields. We do expect the addition of 14,000 barrels a day of incremental supplies in November. In addition to these incremental supplies, negotiating on new connections that could add more into the year of 2004.

On the platform side, platform volumes were down a little over 10% quarter over quarter. Volumes should increase at the end of the quarter. We add 15 million cubic feet per day of new production. And have an additional 30 to 40 million cubic feet per day sloted to come on in November. I would now like to provide an update on our projects. Over the past year, we have announced approximately $900 million in the Gulf of Mexico. This should add significantly to the partnership cash flows in the future. These projects are Medusa gas pipeline, Marco Polo gas pipelines, and Falcon gas pipelines.

Medusa has been installed and is currently waiting on the installation of Murphy platform. We expect production from Medusa late in the quarter of '03. Construction has commence inside our Marco Polo platform and it is on budget and on schedule for the third quarter of 2003. The oil and gas pipelines are to be constructed in the summer of 2003. We should see first flows from Marco Polo first quarter of '04. We have finalized our partnership agreements with cal dot and are now 50-50 partners in a new company called Deepwater, Gateway, llc.

In the third quarter, Deepwater Gateway acquired 70% of the cost for the platform. We are very excited about the successful drilling in the platform. And Marco Polo is drilling out better than expected. So expect more reserves and higher deliverabilities using our economic analysis of the project. And just announced that they anticipate 100 million barrels of oil in reserves. K-2 is approximately six miles from the Marco Polo platform. And 50% owner in K-2. We believe we have a good chance to get this tied back to the Marco Polo platform. And in addition to Marco Polo and K-2, there are several wells that have been drilled or being drilled in the area, so we are having ongoing discussions with those producers about tying back to the Marco Polo platform. Needless to say, we're very excited about how this project is shaping up.

Construction on our Falcon platform is on budget and on schedule. We're currently out in the water right now, laying 14 miles of 18-inch gas pipelines to connect the platform to the central Texas system. And we anticipate first production from the platform in April 2003. Pioneered the 75% owner and operator and mariner is the 25% owner, have plans to drill wells in the next years on leases dedicated to the platform and the pipeline. We should benefit greatly from those plans, but we also should have additional upside in that. The platform is sized to be able to handle production from additional parties that drill in the area.

On our Cameron highway project, the pipe has been secured in contracts negotiated with the installation contractors and the project is on budget and on schedule for the first quarter of '04. We anticipate financing a significant portion on a nonrecoarse basis. We were pleased to announce this month that we selected Valero to participate as our 50% partner in the project. We received considerable interest from several parties that were interested in partnering with us. Valero is the nation's premiere refiner, and we believe they are a very strategic partner for EPN.

We are also excited about the number of other recently announced discoveries in the Grand Canyon area, such as Murphy's front runner discovery, Chevron Texaco's discovery, BHP's discovery and Neptune's discovery. This further proves that this area is successful to Cameron highway. Via the pipeline and Marco Polo and Allegheny pipelines is a world class oil basin that should provide supplies to not only our highway system but also our 36% on poSydon system for years to come. Our most recent is Redhawk gas pipeline. It's located in 5300 feet of water in the garden banks area. Carmegy and Ocean each own 50% of this project. Partnership will construct 86 miles of 16-inch pipeline to connect this field to A&R. The estimated cost to the pipeline is approximately $60 million.

Our first production is anticipated in the second quarter of '04. And Carmegy and Ocean. will develop the field with the [INAUDIBLE.] This [INAUDLIBLE] is designed to handle 120 million cubic feet a day but could be expanded to 300 million cubic feet per day. We are well positioned for Carmegy and Ocean's future plan activities in the area. With that, I'll turn it back over to Sandy.

Thank you, James. Emma, we are now ready to begin our question and answer part of the call.

Thank you. The floor is now open for questions. If you have a question or comment, you may press the numbers 1, followed by 4 on your phone at this time. If at any point, your question has been answered, you may remove yourself from the queue by pressing the pound key.

Please pick up your handset to provide optimum sound quality. Once again, that is 1, followed by 4 on your touch-tone phone at this time. Thank you. Our first question is coming from Adam Leight of Credit Suisse First Boston. Please go ahead with your question.

Good morning. Couple of different kinds of questions. First of all, on the announcement regarding the board, are you going to be replacing the members that resigned? Or is it just going to be smaller? And then second of all, does this have any impact on management structure? Is there going to be any changes in whose employees you guys are? And then following up, I don't know if you can answer, but just speak to in general, you've mentioned many times in expectations of 50-50 financing, your changes in acquisition strategy, how that might be impacted? And last, if the downtime, related to hurricane, other people have said, kind of twice as many days as implied, does that impact the days in the fourth quarter?

Adam, that's four questions. You may win the award today. We'll try to answer all four as quickly as possible. Thanks for asking the question about the board announcement.

The simple answer is we have been contemplating those changes for some time, given the focus on the renewed focus on the board independence and conflicts of interest. Certainly there have been an increase in headlines and media discussion about those issues as a general matter. They've never really focused on El Paso Energy Partners and as you know, we've gone above and beyond the call of duty over the last four years as general partner of this partnership, both to ensure the alignment of interest between the GP and LP and to ensure an absolute and totally thoughtful approach to conflicts of interest. And that is the reason why we have such an outstanding set of independent board members that have historically comprised our special conflicts committee or our audit and conflicts committee. And the work that they've done over the last several years in ensuring propriety of our transactions has been exemplary, and has never been challenged.

We have full faith and confidence in them now. And they have plenty of other things to be focused on at this point in time. It made sense from the standpoint of their need to concentrate on the issues that they faced. But most importantly, and in response to the new rules that the New York Stock Exchange are currently promulgating with respect to board independence and board governorance. Prior to these board changes, we had essentially a board that had more insiders than outsiders. We've now rectifyed that situation. We now have three outsiders and two insiders.

At this point in time, we don't plan on changing the number or the construction of the board. I think we're satisfied to be in compliance with the new rules set forth by the NYCE, having them be unaffiliated with either the workings of the partnership or the general partner. The second issue is the issue of whether or not those further changes as far as the overall independence and separation from El Paso corporation. The answer is we do not contemplate any other changes associated with either management or the management. Partnership by the general partner.

As you know, all of the employees, midstream employees are employees of El Paso corporation and there is a services agreement by which the partnership compensates El Paso corporation for the management and operation of its assets. There have been no changes made in that arrangement. We have been very happy with the arrangement. We think we get great operations with the partnerships assets at a very low cost. And I think the corporation is very happy with the arrangement as well.

Our midstream business and their ownership in El Paso Energy Partners continues to be a materially important part of El Paso's head to strategy. And I know that the change in the board membership is in no way a reflection on El Paso's commitment to operate these assets at an industry-leading or best in class level. And it in no way should confuse El Paso's continued commitment to the partnership. They are squarely behind the partnership. They strongly support our strategies. And I can assure you that there will be no changes on that basis. As far as our strategy of financing acquisitions on 50-50 basis going forward, I'll let Keith talk to that.

Yeah, Adam, that remains our goal. I think whatever we come out of the box with on this, it will immediately be balance sheet enhancing. And I'm not being coy here. But I think you can expect if it's not going to be 50-50, it's going to be 40-60, somewhere in there, that's kind of what we're shooting for. And there would be an immediate path of corrective actions that would get it to the 50-50 in short order. So the 50-50 is kind of what the management is committed that we actually see the path to 50-50 or better. And quite honestly, we'd like to get to the math that was that was picked up on the filing in the i-share.

We'd like to get to the same sort of math which is the significant deleveraging. And I think we have the options available to us, even though we've admitted the i-share is not a valid security. And remember, Bob said it's not a valid security for us at this point in time. It remains a valid financing source for us down the road.

Yeah, let me just accent that point. Because I don't feel like I've put enough emphasis on it in my opening remarks.

We still believe that the i-share market is not only available to us but will, in the future, when the equity markets in general rebound, it will be a very, very valuable way for investors to invest in the continued significant growth and solid returns that are going to be return said by the mlp segment to investors in general. We're excited about going forward with that, probably in the spring sometime. When the markets rebound. But having been triple-dipped over the last couple of months, with September being, I think, the only month on record in recent memory where there were no IPOs in the market and the third quarter in general being one of the lowest IPO markets in years, it just isn't the right time for us now. We don't want to try to cram it in at the end of the year.

We're going to be patient, discipline and we're going to come back to that market in the spring. And we think it will be a very effective way for us to raise large amounts of capital going forward to support our acquisitions in our growth markets. Mark?

Yeah, Adam, though we need a few more days for the Lili hurricane, we see the impact being right around a million, two, or a million five, not a huge increase from last quarter.

Great. Thanks. Very complete.

Thank you. Our next question is coming from David Fleischer of Goldman Sachs. Please go ahead with your question.

Yeah, hi. Very nice quarter to see. Several things here. Let me first ask you more on the writeup of the press release talked about the days of the hedge. But then on your call, you talked about having locked in half or so of your revenues at a level greater than you had assumed. You know in the original economics.

I'd like to see how much you can help us, go further with that, if you would, wondering you know, you talked about 115. And actually, you had given us a range of EBITDA from the San Juan assets. So wondering if you could give us any sense of what you've locked in, what range, perhaps, you've locked in for that half and how far out you've gone. That would be my first question.

David, this is Mark. We've gone first full year of 2003. We hedged 50% of our gathering revenues, not necessarily the revenues. But the rates essentially are 50% locked in at the levels that would generate the 115 -- $115 million.

There is upside in natural gas prices to some extent. And there's also upsides to natural gas liquids. That's where you get the higher levels. But basically, it's a straight swap of 30 million a day, which is effectively 50% of our exposure at the San Juan basin.

Okay. Let me just throw a few questions together here, like Adam. And the bad debt writeoff that you announced, can you tell us, you know, how well reserved you might be against any other bad debt that might be considered at risk to become bad debts? Should we worry about more of those coming? Can you give us some assurance that's not the case?

Secondly, can you tell us what the average interest rate was this quarter versus last year and what is your current position after any swaps for short-term versus long-term and what percentage of your interest expense is in each of those categories. And then lastly, on the same subject, can you just tell us about conversations you've had with the rating agencies. And given that your debt has increased here and it's higher than you want, higher than they want. And you have good assets behind it. How much flexibility? And what are they telling you, basically?

First, David, this is Mark. The writeoff for Panico was $7,000. We're reserved adequately for the rest of our accounts receivable exposure. We we don't do a lot of business with the Dynegy's or the Williams' of the world with our business. And you know, we have been inching the reserves up, as you'd expect in this environment, but we think we are fully reserved and don't expect any problems going forward.

Okay, David. Regarding the interest rate questions, our revolver floats a spread our term loan "B" and I've calculated sort of based on today's rates, a weighted average, about 6.4%. You know, that would be a good number to augur in for this quarter. What we've done with respect to hedging, we've hedged in one of our joint ventures.

Right now, our mix of fixed versus float suggest about 50-50. And on our floatings, you know, it's kind of hard to resist a 170, 30-day libel rate, so we've kind of extended many of those to long duration trauvrns to into a good part of next year. So take advantage of those rates.

With respect to our strategy on longer term fixed versus floating, I think that's really going to be impacted on how we do determine to finance the San Juan acquisition. Obviously there's a debt component associated with that. And that will probably be, if I'm just handicapping that here, 50% floating also. Which also isn't going out on a limb. But I also think that's the way it's going to shake out.

With respect to the rating agencies, we have been keeping them involved with respect to our ongoing efforts to acquire the San Juan. We have turnovered the partnership. We did talk to them as recently as three weeks ago with the specific transaction with the "B" loan, I guess we talked to them about that. And the case of moody's actually getting rid of a negative watch and getting us on a stable. And the "B" loan rating came right where you would expect it to be with regard to our capital struckure. So we have been in contact with -- structure. So we have been in contact with them. We are cognizant of our bondholders' concern, our debt-equity holders' concern. And I wish we could see the final score card as to how we're going to finance this acquisition. And you'll see that those goals are achieved.

One other question, if I can. You've done nonrecourse debt for Marco Polo, and you mentioned that if you were going to do a fair bit of nonrecourse debt for the highway Cameron project. Just wondering what it takes for major projects in terms of contracts and guarantees and to do this nonrecourse debt. And if that's what we'll keep seeing and maybe see more of?

I think what you need to do is see in this market, the overwhelmingly positive economics. And both of those are a little different in respect to Marco Polo. There are two different aspects that a lender looks for.

There is the fixed component of revenues, which comes from Ana darko, which is a very good credit that comes in a hell-or-high water scenario and there is a reservoir analysis that looks at the marco polo field and if others such as K-2 and others, and those all are factored in. And then, you know, there's overwhelming credit coverage from those multiple storages. On Cameron highway, you have a little different scenario. There there is no fixed component. If there is no volume produced by British petrollium or in other words, they spent $6 to $8 billion and got nothing in that spending. After that, you'd probably turn to us. But there, you're overwhelmed by the actual magnitude of the reservoirs.

In the case of Atlantis, the public announcement of 500 million barrels. And the lenders know our tariff. They know the production profile from those producers. And they get very comfortable, you know, in front of the most -- in the vain that they get comfortable lending money to a production company that, you know, they take pretty standard black and white hair cuts, based on the different levels of proof, probable and possible reserve. And that's how they got comfortable. And clearly that's the same methodology we went through to get comfortable.

In this environment, the credit markets are demanding simplicity. Actual to get it snug, the project loans, believe it or not, are actually, that market is relatively open by definition, that's where you are. You're right on top of the aspect, there's no other noise coming from who owns you or who is invested in you. There's no other pieces of debt. There's just one simple slug of equity and one simple financing. And one simple resourceive repayment. So that market has remain said open. I'm not going to tell you a deal that we could solicit bids from 10 banks would be the same 10 banks that we solicided. We have to go out in the universe. We now have twice as many banks.

The whole banks have been changed by the events in the energy space and particular the Telecom space. And so gone are the days where two guys are going to come in and pay $$175 million. Now $155 million is syndicated to 10 banks. And if $300 million like we're talking about financing for Cameron highway, will probably be syndicated to 20 banks.

Okay. Thank you. That's very helpful.

Thank you. Our next question comes from Anatoll Sagan.

I want to go back to the San Juan project. You guys were kind enough to provide that kind of detailed finances. And the performance of the San Juan assets, I think, was below what we're expecting in terms of the economics. And I appreciate that the hedges are only in place for '03. If you could talk to us about what's going on there, the major shortfall was sort of at the grose profit line, which is about $100 million for the profit line, which was about $100 million and then below $70 million for the quarter ending. So who could discuss what went on there and what the hedge was to do?

This is Mark. Basically, in the first half of the year, gas prices and NGL prices were substantially depressed from 2001, 2000, as well as what is expected in 2003. We were not hedge said -- hedged as a matter of corporate policy. So we did see gross profits down in the first half of the San Juan assets.

We also were seeing the typhoon assets ramp up. And our NGL assets were down as a result of maintenance works. So those three factors are driving the performance in the first half. We do not expect that to be in 2003. We've seen results improve in the third quarter there. And in fact, it hedges definitely aimed at securing the forward revenues on which we acquired or are planning to acquire the transaction.

Thanks, Mark. And can you provide maybe just a ballpark estimate of had this hedge been in place, I think you said roughly a $3.50 level on the gas prices. What the gross profit line would have looked like, what it would have been, let's say brown numbers down 30% or so. It would have been down only 10 or 15%? Is that kind of the ballpark?

Yeah, I think it would have been down even less. It probably would have been equal with 2001.

Okay. Great. One kind of philosophical question to all of you guys, I guess. As we navigate this market, there obviously is a opportunity to pick up assets from others. And you guys are consolidators. And I was wondering how you're going to balance the growth opportunities with the obvious stress on the balance sheet that it's having because the growth opportunities, almost by definition are coming out of the equity markets not being very hospitable these days?

Well, Anatole, let me take a quick stab at that and then I'll let Mark and Keith in on that. We have already started looking at our offshore portfolio in light of the uncertainty in the capital markets. We have two conflicting positions out there.

One is from a commercial standpoint, as I said, in my opening remarks. We are the midstream player of choice out there. Our competitors have largely pulled back. Which has allowed us an open field to aggressive pursue projects that otherwise we hadn't in years past. And you're starting to see some of the that performance come to the surface with some of the these newer announcements and add-ons to a lot of the projects that we have already announced and are in construction on. So we're not going to step back from the leadership position that we had in that market. Having said that, we certainly realize that the capital markets are uncertain. It's not a perfect world for financing $1 billion of capital projects out there. So we made the strategic decision to start taking partners. I think that's what you'll see from us as we announce more projects going forward.

We're going to be looking at bringing more partners on these projects. We're going to be really concentrating on the project financings that Keith talked about. And I think he might have understated what we believe is a great opportunity to bring new banks into a financing market that not only gives them a place to put real capital into the market, but does so with a lot more certainty than there is in some of the other capital markets.

Banks clearly recognize the value of being able to invest through us or lend to us into these solid critical infrastructure projects that are hugely supported by new reserves that are out there. They recognize the significant amount of capital that investors have already spent in retails and seismic interpretation and drilling and the number of platforms being built around the world right now that will go into the deep water trend in the Gulf of Mexico over the in, couple of years. By comparison, our pipeline and when we have an opportunity to build a platform, those platform expenditures pale in comparison to the money that others have made in advance of needing the infrastructures. So we think we are very well position said to move forward with the momentum we have out there and to get the deals financed. But we've taken the additional step of starting to take each one of these projects and look for project partners to the extent that it makes sense foritous bring in a strategic partner. Oftentimes, that may be a producer. And oftentimes, we'll look at our project as potential partnerships with producers, other mlps or other financial players.

Now, having said that, we know more than anybody else, how many new assets are on the market right now. One of the reasons why we want to get the San Juan deal done is because that really increases our ability to have more capital flexibility in the future to execute on some of these really premiere assets that are coming to market because of the uncertainty around the general energy industry right now. And I'll be happy to let Mark or Keith talk specifically about plans there. But we see this as a huge opportunity, which as I said in my opening remarks, we don't think the marg is properly valuing right now, -- marketing is properly valuing right now. Even though capital has been different than the last few months than ever before. It does not mean that we're not going to cycle out of that. And we're not going to have the opportunity to effectively acquisition the others. So I look forward for increased growth over the next several years, accelerated growth because of this unique opportunity we have to make some large-scale acquisitions, world class assets that will go into these mlps and push growth in cash flow and continue to push growth in distributions. Keith, do you have anything you want to add to that?

No. I thought maybe I would expand a little on the partnership aspect because Bob focused on all the green field deals. But I think so we're looking at partnerships and sharing risk and down side or upside. Even on existing assets that we have. Here at the partnership. So there are many ways for us to monetize some of the other investments we've maybe just completed on the deal that is already in the hopper or already on our balance sheet.

Terrific. Thanks very much for those thoughts.

Thank you. Our next question is coming from Scott Solar of Morgan Stanley. Please go ahead with your question.

Good morning. I've got a couple of questions. First, regarding, if and when the San Juan deal gets closed, I think you guys will still be looking at a debt-to-cab in the ballpark of high 60% range. So I guess what I want to know is when you all target debt to cap and what you want to get down to and allow yourselfs to be more opportunistic, how do you plan on getting there, if you could just color that in a little more for us. Then I'll ask my second question.

Scott, first, I think the math I did for Adam earlier, I think, we expect that at the close of such a transaction that our debt to cap would actually be in the mid to low 60% ratio. But that's a nice ratio. And it's something that we do pay attention to, although the debt to EBITDA ratio, which I said was, you know, in the high 4s is the one that we really focus on and are attempting to bring back to the low 4s or the high 3s. So that's the ratio that we are most focused on here is the one that's tied to cash flow. And that's where Bob is saying and Mark was saying the most important -- that's why the San Juan is so important to us, because it immediately adds a going forward cash flow of about $115-plus million.

When you ashor that in with the 40, 45% -- arbor that in with the 40, 45% equity and 55% debt, you can see that is compelling in the ratio of 4.2, 4.1 ratio. And that's why we're trying to get to this deal here. It may sound nuts because we're saying the equity and capital are kind of feisty right now, why are we pushing full steam ahead on the acquisition that we have the right to walk away from? And the reason we're notuck walking away is because this deal is so compelling, the familiarity we have with these access for customers, the operations of business is such that we feel very comfortable with the growing forward prospects of that business, despite the anomaly disclosed in the ak.

Okay. My second question is regarding San Juan. I had two questions on that. Is first off, obviously you all felt your equity is a bit undervalued right now, as did your peer group. Would you be willing to equity at the retail leve?.

My second question, and then I'll let other people ask questions is what underlying commodity risk, so what is sort of commodity, versus feed based on that asset, if you weren't hedged at all, so we can understand the nature of the basic contracts on the San Juan assets.

Scott, this is Mark. I'll hit the San Juan contracts. Totally unhedged. About a dime change in San Juan gas means about 2.2 million a year in cash flow. A penny change in ngl means about 1 million in annual cash flow, unhedged.

Yeah. And I'll pick up on the equity question.

Clearly, Scott, there's not just two moving pieces. It's not just simple algebra. There is minimum or price that our equity is worth. But I can assure you that we will note issue equity at a price that does not deliver the level of accretion that we've indicated or expect this transaction to generate. So there's the price level of the equity does affect the equity-debt mix in that map. But also we just don't look at this transaction as a one-off transaction.

Doing this, and the math on the deal works, issues a tremendous amount of equity in a market that doesn't want to buy equity. It could affect our ability to go in that same market in the future. To finance some growth projects that we're already working on. So for next year and the year after. So I'm not going to ever admit that we have a level of price of equity that will never issue equity, because clearly equity is a valuable component of our capital mix with respect to our lenders. And we will do what's right. And don't lose sight of the fact that we will not do what's wrong because we don't have to do what's wrong.

We have the option not to struggle to complete the transaction. But we don't think we'll be struggling. We think we have had some great sdrugz discussions with respect to, you know, placing some equity at an appropriate price.

Right. Okay. Thank you.

Thank you. Our next question is coming from Yves Siegel of Wachovia Securities.

Good morning. Just to beat a dead horse, Keith, when you rank the projects going forward, can you talk about the returns that you expect on greenfield versus acquisitions, and philosophy that says that, you know, the fact is that, you know, the capital markets aren't infinite in terms of how much you can finance, even though you can probably do a heck of a lot of stuff that would exceed your cost to capital?

Could you just sort of put that in a framework of how you look at these things? And then also, you mentioned it a couple of times. Could you talk about what the potential is for green field projects above and beyond what you have on the drawing board right now? And then finally, sort of trying to wrap this all into one question. When you look at the acquisition market, what's your thought on assets outside of El Paso Inc.?

Yves, this is Mark. We've done some on the 13% on cash return. Our green field have a substantially higher return in the three 1/2 times multiple range. The down side of the green field project is it takes two years to build them. So you have two years of capital going out that's essentially stranded. So the strategy that we've employed is a balance strategy of trying to do acquisitions and green field.

The acquisitions give us the financial capacity to do the green field projects which give us a higher return. So that's our balance. That's the real strategy between the balanced approach. I think going forward, we'll continue to do that. I think the Greenfield projects offshore, we've had a huge run this year. They kind of come in spurts, although we continue on the horizon.

We don't see a whole lot more coming down the pike. However, six months ago, we would have said that and we just announced a red hawk. So these things come and go as we see. And I think that's kind of the philosophy. See the growth through acquisitions. And greenfield project. We'd like to do some acquisitions outside of El Paso corporation. However, it's tough to justify going outside and doing a third-party acquisition when you're buying assetss at very attractive multiple ate sets that we know -- assets that we know very well.

We run the assets and we will, over the years or coming years will definitely see some third-party acquisitions. We mentioned in n this press release, the big thicket acquisition. That was a small gathering in Texas that complements our Texas pipelines. These are things we'll see a lot of going forward.

Our historical last year and this year are mixed between green field and acquisitions about 75% acquisition and 25% Greenfield. And you know, the capital markets are going to impact, you know, not -- not what our green field expenditures are anticipated to be in 2003, but what our acquisition expenditures are going to be. And I agree, you know, there's a lot of assets for sale. But some of those assets are for sale because companies can't access capital markets so they need to access cash. So unless we're in a position and San Juan gets us a long way there, to be able to access capital base on the our existing assets, you know, we're in sort of a little Catch-22 situation here. Yeah, there's things we like to buy but the monto buy them is not necessarily -- we're not able to do it.

And if I could just follow up with two quick ones, in terms of looking at joint venturing, going forward, I think you mentioned that you're looking for strategic partners. Are there financial players that are getting interested in the space as well? That's the first part. But then the second part of it, like on the Marco Polo project, are you able to promote based on the fact that it's your project and you put all the pieces together?

Yves, let me take a shot at the first part and I'll let James talk about the second part since he negotiates all our efforts out there. You have been following this partnership for a number of years. In the old days, prior to El Paso taking over the management of this partnership, the partnership had a strategy of bringing in a lot of partners of diversifying its investment exposure to investment opportunities in the Gulf of Mexico. I think that was driven more so by limited access to capital markets than it was really a strategy of wanting to be fully diversified across the broad range of projects.

Uniquely, over the last three or four years, after El Paso took over management, we consolidated that strategy and really attempted to invest as much equity as possible in a number of these projects because the rates of return were so strong that we felt like the opportunity to blend acquisitions on an annual basis, which brought in immediately accretive cash flow with long-term, very high return pipeline projects was a more compelling strategy for investors to get their arms around. Now we're faced with relatively uncertain markets and what you're seeing this management team do is go back to the former strategy, which in uncertain capital markets, we want to continue our momentum on the commercial side, continue our leadership on these new projects but diversify, simply because of the uncertainty in the capital markets, the amount of equity we put in a lot of these projects. So we'll be taking more partners more out of necessity, given the uncertain certain -- unssht -- uncertainty in the capital markets. Hopefully we'll be able to achieve the same growth in cash flows and distributeable cash flows that we otherwise wouldn't have with a more robust, 100% equilty investment strategy. But at the same time, we live in uncertain times. Now, we think this is very cyclical. And we think the market begins to pull out of this sometime next year. And investors return to the master limited partnership sector as a primary investment because of a high yield and growing asset base in the sexor.

We think investors will see that. And certainly fall in the category of being the top two or three fastest growing. When that market returns and we have greater access to the equity capital markets, then I would expect us to begin to move back towards a higher level our investment in these projects.

Now, as far as whether we get a promote or not, I'm not sure James would want to open up Pandora's box there. But given the opportunity, we'll negotiate reimbursement in the projects. James?

I'll comment on the Marco Polo. We did partner with cal dot. But we have been in definitive discussions for a while and they have a similar philosophy. That wasn't necessarily a project we went to them and put together the project and asked if they wanted to go in on it.

As I indicated, the Cameron highway, there was a significant amount of interest from parties out there. I can't comment on what the deal is with valero. But I believe, you know, in future deals, you do have a good chance to get a promote.

I just want to add, with respect, Bob did state that we have a preference for industry partners, but financial partners have approached us. No doubt recognizing the fact that this business is cyclical. That we're in a stress capital environment. And as usual, they have shown up.

Financial partners are fine. There is a passiveity factor that we like. So the control of the assets and the projects remains with us. But we have had a great history of finding partners who bring something to the table. And I think look no further than the arrangement of marco polo, their expertise in the deep water with platforms and subsea technology and look no further than finding valero for Cameron highway with their integrateive access to the gust coast and terminal facilities, their -- gulf coast and terminal facilities. Their demand, actually, will enhance the economics of that project. And in Poseidon we have producers who were encouraged and economically incented to come to the table.

Wachovia Securities as our partner, is great because it gives us the dollars we need. But Wachovia isn't going to produce the barrel of oil to ship on our pipelines. So we like having industry partners as a preference. But as you can imagine, in this market environment, financial partners have emerged and we do lynch to them. We never have not listen -- we do listen to them. And we never have not listened to them. And maybe something will happen there.

Okay. Thank you.

Thank you. Our next question is coming from John Edward of Deutsche Banc.

Yes. One quick question on San Juan. And perhaps you touched on this a little bit. If you see outside of San Juan that look compelling versus, would you consider changing the priority in terms of making a transaction?

Well, I think so, yes. We have a transactions document. We've signed an agreement with El Paso Corporation. It gives us some flexibility in terms of financing out. But we are committed to doing the San Juan transaction, but only if it's financed properly. So if there are other alternatives that are prohibited from financing the San Juan transaction in an efficient manner, then we definitely would look at alternatives.

We haven't seen any better deals in the last months. That is a fantastic deal. We know because we've operated it in the last six years. We know the operateability of cash flows and operating expenditures out there. It would be difficult to find a better deal for us. And that's not to sigh that it wouldn't show up tomorrow. And we certainly would do what any good management would do. And that is in times of limited capital, you prioritize. And we certainly would do that.

And the other question is, in terms of bringing on partners, that sort of thing, are you other thaned -- are you condition said -- concerned about the perceived demand today?

Yeah, that's one thing that we talked about. We're not talking about structures. We're talking about industry players and project loans that are very visible. But we are definitely cognizant of if structure is bad kind of feel out there today.

John, in a perfect world, we would have a perfect access. But it's not a perfect world out there right now. And we would spread across a number of different investment fronts and diversify risks, continue to have momentum in growth and cash flow. Momentum in our green field project opportunities in the Gulf of Mexico. And we expect that this market uncertainty for the capital markets will cycle back out again, will be in a position to sell a lot of equity, and to fix the balance sheet and to fully invest in our green field projects sometime next year. Absent that, we're still going to continue to grow our cash flows at a historically high rate. And be known as one of the high-growth mlps in the industry.

Okay. Thank you very much.

Thank you. At this time, I would like to turn the floor back over to management for any closing comments.

We have no further comments. But we would like to thank you all for taking the time to participate with us in our call. And we look forward to talking with you with our fourth quarter results sometime in January. Thank you.

Thank you very much.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.