Enterprise Products Partners LP (EPD) 2002 Q4 法說會逐字稿

Good morning Ladies and Gentlemen. And welcome to El Paso Energy Partners Fourth Quarter and Full Year 2002 Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. I would now like to hand the floor over to your host Sandy Ryan. Madam, the floor is yours.

Okay. Thank you Ashley. And good morning everyone and thank you for joining us this morning for our fourth quarter and full year 2002 conference call. This morning Bob Phillips, Chairman and Chief Executive Officer will begin our call with an overview; Mark Leland, Chief Operating Officer will discuss our operating results; and Keith Forman, Chief Financial Officer, will give an update on the balance sheet and some other financial items. We also have other members of management here to assist in the question and answer portion in the call.

And now I wish to make you aware that this call will include forward-looking statements and projections made in reliance in the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. El Paso Energy Partners has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual results to differ materially from the projections, anticipated results, or other expectations expressed during the call, including without limitation, oil and natural gas prices, continued drilling exploration and production activity in the United States and the areas of the Gulf of Mexico service by El Paso Energy Partners, and successful negotiations and customer contracts on its pipeline platforms and storage facilities. All our partners should make these 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 thank all of you that have joined us on the call this morning. We are obviously proud to report another record quarter and record-full year as EPN delivered cash flow of $78.5m in the fourth quarter of this year. That's more than the entire cash flow reported in 1998 by the way. And full year cash flow for 2002 was $267m; both of those numbers were up well over 50% from the prior period. This is in fact the fourth consecutive year and ninth consecutive quarter of increasing cash flows, period-over-period from this growing mid-stream business. And we are exceptionally proud of this achievement, and I am proud that the job that our people have done in making this possible.

I think the results speak for themselves. I think they illustrate the spot on success of our acquisition strategy, which really flourished in 2002 and the growing set of organic projects, which are going to drive the growth of this partnership over the next several years. And now last year was filled with a number of accomplishments. I would like to highlight at least a couple of those and draw them to your attention. We did in fact double our asset base in 2002, by completing more than $1.5b in obviously accretive transaction; all of those assets are performing well above our expectations and we expect them to continue to perform that way given the strong industry fundamentals that we see in 2003. I think personally adding the San Juan Basin in Texas pipeline assets to this already strong set of off shore assets and other assets that contribute importantly to our cash flow gives us the diversification -- a set of strong reliable cash flows in the internal investment opportunity that will begin to distinguish El Paso Energy Partners from the many other master limited partnerships out there.

Importantly, I would want you to know that our employees in 2002 received a number of awards that are special and recognize the commitment to safety and leadership in operations that we had in the mid stream industry. I'll just highlight a couple. We were recognized for our leadership in pipeline integrity, on our Natural Gas Transportation System in Texas. One of our off shore pipelines was recognized by the -- MMS for off shore platform safety in the Gulf of Mexico and one of our largest producer, customers BP Ammaco recognized us for our very efficient job of gathering and making new well connects in the San Juan Basin during 2002. We are proud of all those awards and very proud of the job that [Randy] West in his operations and engineering team are doing. Our employees are an important part of our success and I would want you to know that.

Importantly in 2002 we maintained our critical leadership position in the Deepwater Trend of the Gulf of Mexico. Where we are banking on the contributions of over a $1b worth of green field projects, which are underway. I would like to give you an update on several of those key projects.

The Falcon Platform and pipeline project is well along the way. Platform installations is scheduled to commence this weekend. Both the jacket and the topsides have been on barges headed for that destination. They are there. The weather is good. We'll start installations with first productions from the Falcon fields scheduled to commence in April of this year. Now coincidentally I would like to draw your attention to an announcement that Pioneer made earlier today, followed by our conference call by [Scott Sheffield] and his crew. They have announced a new discovery at the [inaudible] prospect which is near the Falcon field will be tied back to the Falcon field sub connection and brought up to our platform and will grow through our gathering system over the CTGS. That announcement included information about the discovery and I am reading from their press release; the well encountered over 350 feet of gas bearing sand in the single zone. Pioneer plans to develop the field as a single well subsea tieback to the Falcon field platform and expects postproduction in 9-15 months.

Yet another example of where we are building assets in the right places we're strategically located for producer development, exploratory activity to benefit [inaudible] on our pipeline in our platforms. We are very excited about Pioneers success there. Marco Polo is a very large project for us in the Central Green Canyon corridor, Platform Fabrication is well on schedule in Korea and in [Ingle Side] Texas platform installation schedule for September of this year.

We're on target. We're under budget. We are ready for service to begin in the fourth quarter of 2003, when we will begin to get the demand charges from Anadarko the primary producer of the Marco Polo discovery.

Production from the Marco Polo field is schedule to commence in the first quarter of '04. We would then begin to receive commodity fees for both our platform installation as well as our oil and gas export pipelines. Capacity at the Marco Polo processing facility on the platform is been increased to a 120,000 barrels a day for oil and 300mcubic feet per day for gas to accommodate several discovery step outs and frankly larger reserve estimates for some of the discoveries in this area. We are very excited about the continued commitment Anadarko has shown to this area. They’ve completed drilling all six Marco Polo development wells, which I think is pretty clear, and they have announced publicly better than expected results. Thus driving the expansion of our platforms before we had completed it.

There has been significant activity in the area of Marco Polo evidence by a second successful well in K2 field and the significant discovery at the [Shinzie] prospects drilled by BHP in 2002. Negotiations are ongoing and we are hopeful to bring both of those discoveries back to the Marco Polo platform as well. We are very excited about what's happening in the Green Canyon area.

Our large oil pipeline the Cameron Highway Project is well on schedule. We’ve had new discoveries again in the South Green Canyon region that could potentially flow in to the Cameron Highway Pipeline. Not only does BP continue to be excited about enthusiastic about their discoveries at Mad Dog, Holstein, and Atlantis. But we’ve had third party discoveries in [Shinzie] and [Tehidi] that present new upside for Cameron Highway.

And importantly we are in the process of completing our project financing there. We look forward to 2003 to be a particularly important year for the Cameron Highway Project. We remain incredibly enthusiastic about the potential of this project and its importance to the developing Deepwater Trend. Red Hawk Gas pipeline is on schedule to be installed in the fourth quarter of 2003. It’s a fairly, simple project for us. We are tying back to large natural gas discovery by Kerr-McGee and Ocean, and we are excited about the commitment they have made to us in that area. The blocks that they dedicated to the pipeline and their commitment to continue their exploration activity in this area.

And finally, the Medusa pipeline is, as you know, was installed last year. We have been waiting on the installation of the Medusa Spar by Murphy, it's run a little bit behind schedule. We are expecting first production now in mid 2003.

That's the bad news. The good news is Murphy has identified several key prospects in the vicinity of the Medusa Spar that they expect to drill and tie back to Medusa Spar for processing. We will benefit from that by gathering that gas to the Viosca Knoll pipeline system in our affiliated Tennessee Gas Pipeline system.

Let me turn away from operations and engineering and projects to some very important recent actions by El Paso Energy Partners' Board Of Directors to strengthen the governance and the independence of this Board. This is a very important issue for us. We have spend a good deal of time over the last few months working on this, and we'll continue to focus on governance and independence.

As we move throughout 2003, you can expect additional actions on our part. Let me just highlight for those that didn't catch up with our press release. We announced that we are expanding the number of independent board members from three to five. We are actively engaged in a search for qualified board members. We formed a new governance and a compensation committee, which will be chaired by Ken Smalley a long-time veteran of the industry.

Ken is -- he has agreed to chair that governance and compensation committee. His charge will be to ensure that the partnership's employees and its operating agreements with the general partner provide for all the protections needed by the partnership, and then our employees and their performance are reviewed and evaluated on an annual basis with respect to the performance of El Paso Energy Partners in not any other affiliated activities.

We think, that's a very important step, and we are pleased with the reception that we've received from investors so far. We also formally declared the independence of the Board. We formerly declared that we have a financial expert for our audit committee pursuant to the new [inaudible] and NYSE rules. We are pleased with those actions that is early compliance on our part.

I think all of these actions send a clear message to the investment community. This is a strong response from our independent Board Of Directors to respond directly to some of the negative criticism about partnership governance in general, and our general partnership affiliations specifically, in the master limited partnership sector. I hope the market recognizes how serious and how important these actions are, and we think that this strong response should improve, not only transparency regarding our activities, but overall investor confidence in our partnership and the MLP sector in general.

Let me close and summarize by saying, I think we are on track for another great year. It looks like industry fundamentals are going to be very strong. We are coming to out of a winner in and which I expect is to be supply short. Coming out of this winter of 2002-03 that should keep prices high and improve drilling activity for the balance of 2003. We are excited about that. Our assets are well positioned in all the right pipe supply basins to benefit from these strong industry fundamentals.

I think that the market will begin to recognize the great assets that we now own, the internal growth potential built into out portfolio, and the discipline with which we have managed this partnership financially over the past several years, and I expect this to be a much better year in terms of recognizing the true value of this partnership.

So with that overview, I'm pleased to turn it over to Mark Leland, our Senior Vice President, and the newly appointed Chief Operating Officer of El Paso Energy Partners, to review the financial operating results of the fourth quarter and the full year 2002. Thanks Mark.

Thank you Bob. As Bob mentioned cash flow as measured by adjusted earnings before interest, taxes, and depreciations for the year was $266.8m, that's up 65% from last year. Net income was $97.7m or 92 cents per Common Unit, that up 58% from last year, driving the year-over-year results, increasing cash flow, and income are the results from our significant acquisition we completed this year, I am going to talk a little bit more about those in a minute.

For the full year, our fixed charges totaled $263m, roughly. That gives us a fixed charge [per] ratio of about 1.01-1. Fixed charges consisted of $83m of interest expense, partnership distributions of $155m. And $25m of sustaining capital expenditures.

Turning to the quarter, adjusted EBITDA was $78.4m, up 58% from last year. Net income for the quarter was $26m or 20 cents per unit.

The natural gas pipelines and plants segment show the largest increase quarter-over-quarter. The primary drivers of this increase being the acquisitions of the Texas and Mexico assets, which contributed $26.5m this quarter, and one month contribution from the San Juan assets, which contributed just under $11m for the month of December. Both of these acquisitions are performing well above our expectations.

The Texas and the Mexico assets have contributed $84m from the 3 quarters that we have owned them, which puts them on a full year run-rate of over $110m. This is 10-15% above our original acquisition expectations. Also, contributing to then quarter’s performance compared to last year was improved cash flow on the Viosca Knoll system. This is due to higher volumes from the Canyon Express gathering system, which is owned by a third party, which connected to our system in the third quarter of this year. These volumes were up despite the impact of Hurricane Lily. Viosca Knoll throughput was 554m decatherms per day for the fourth quarter, and it is currently running at about 650m decatherms per day or 1000 deca pints per day, which goes very well for 2003.

Cash flow for HIOS system was down somewhat due to Hurricane Lily, also impacting throughput in that system is natural decline from slower drilling activity. However, if you look at the last three quarter at HIOS, you can see that the volumes have stabilized fairly well at around the 700-720m or 1000 decatherms a day. And we think that should hold steady throughout 2003.

EBITDA from the oil and natural gas logistics segments was down about $5m in the fourth quarter compared to last year. This is due primarily to lower distributions from Poseidon . Poseidon Oil Pipeline, which we own 36%, was impacted by Hurricane Lily. It also hit throughput limitations due top maintenance on the third party on shore takeaway pipeline. Throughput has improved on the Poseidon pipeline as a result of several new supply sources, the [inaudible] mentioned we should expect -- he mentioned that last quarter, they did come on and the current throughput on Poseidon is running about 155,000 barrels a day. That’s compared to the fourth quarter average of the 122,000 barrels a day. So, we believe Poseidon is on track for a little better year in 2003 than in 2002.

Our Texas NGO transportation fractionation assets were down somewhat during this quarter. This is due to the poor gas processing economics in south Texas, which resulted in lower fractionation volumes. Gas storage, however, continues to improve quarter-over-quarter with the completion of the pedal expansion and a full quarter of the southern firm storage contract.

CAPEX for the quarter, excluding the San Juan acquisition, totaled $58m, $11m of which was sustaining capital expenditures, and the balance is made up of capital expenditures on our growth projects that Bob mentioned, which include Medusa, Falcon, Marco Polo, Cameron Highway, and the final cost on the peddle expansion.

Looking forward to 2003, we expect we will do EBITDA totaling $420m. We are not going to highlight the details of that right now, but we will, in our analyst meeting on Feb 10th, so look forward to that. With that of review of the operations, I will turn it over to Keith, who will highlight our capital and liquidity situation.

Good morning and happy New Year, belatedly. I am going to take just a moment to highlight some of the balance sheet items at year-end. Our debt balances at year-end was $1.9b. This debt was comprised of the following type of announts of obligations. We had $855m of senior subordinated debt outstanding with various coupons between 8.5% and 10.75%. And maturities between 2009 and 2012.

We had $491m outstanding under our revolving credit at an average rate in the fourth quarter of 5.1%. We had a funded term loan of $160m related to our acquisitions in Texas. Transmission assets, we also had a funded term loan D in the amount of $160m. Lastly, we had an acquisition term loans in the amount of $238m, which was incurred in November in concert with our acquisition of San Juan assets. At yearend, our fixed floating rate mix and with respect to interest expense on that debt was 45% fixed rate debt and a 55% floating. Our weighted average cost of debt currently is approximately 7.3%. With respect to the San Juan acquisition loan, we expect to be able to refinance this debt -- the maturity of this is in May of 2004, but we expect to refinance this debt in the next 2-3 months with longer [tenured] debt or loan or in combination with some modest sized equity raise..

Our equity balance was approximately $950m at yearend, this of course includes not only the book value of the $44m of common units issued in outstanding, but also the approximate $350m of Series-C units issued to finance the San Juan acquisition as well as $158m of Series-D preferred units. The ratio of our total debt to our total book capitalization was 66.7%, which was down from 69.2% at the end of the third quarter. Our total debt, which is serviced by the consolidated cash flow to partnership -- our total debt, I just want to point out, is serviced by the consolidated cash flow of the partnership. There are no longer any of those one-off financings or project financings within wholly owned projects within our partnership.

Our pro forma cash flow, based on the lower end of our annual EBITDA, estimate of $116m to San Juan asset plus an annualization of our third and fourth quarter non-San Juan cash flow of $136m is $387m. So, using that as the denominator, the resulting ratio of total debt divided by this pro forma cash flow is 4.9 times.

Two points I would like to make when discussing our leverage; one, contrary to some concerns. We were able to complete the acquisitions of San Juan assets without weakening our balance sheet. Second, as the year 2003 progresses, our leverage ratios will sequentially improve as our new projects come on line during the year and cash flows, that are not fully reflected in the aforementioned pro forma cash flows, are fully recorded.

On the off-balance sheet side, you know, looking at our footnotes that will be forthcoming in our 10-K that we filed in March, you will see our [pesiden] term loan balance of $148m, as you know we own 36% of that asset. You will also see $27m outstanding on to our $155m Marco Polo Platform financing, which of course you know we own 50% with [Calguide], and I think this might be appropriate time to address the financing status of our Cameroon Highway Project. We have a consortia of our major lenders, half whom have indicated their commitment to financing that project, and we expect to have that financing closed by the end of the -- at the end of the quarter, and of course you know we own 50% of that project with the commitment from [inaudible] to be a 50% partner in that. So, you will see some positive news in this first quarter with regard to that financing.

The fourth quarter of 2002, as every other quarter in 2002, was a busy one for us in the capital-raising arena. Specifically, we raised $200m through issuance of a 10-year Senior subordinated notes through a 144 [inaudible] sale. The notes have a coupon of [10-58%] and were sold at a discount of 75 basis points. So the effective coupon is [10 and 3/4%].

We are of course pleased but not surprised to note that these bonds are trading significantly above par today. We also completed a $238m term loan with four institutions as I mentioned to fund the San Juan acquisition. During the year, you know, our plate was quite slow, our capital spending budget was over $2b, double our initially announced plans, and we worked hard from beginning to end to meet our goals of raising this capital in a manner such as our balance sheet was not weakened and that our future growth prospects were in no way jeopardized.

In 2002, we raised over $2b of capital significantly more than any other publicly traded partnerships. The weighted average cost of the capital we raised in 2002 was approximately 7.6%, which means that we were able to derive the cash flow accretion we targeted from each investment we made despite what I will just call skittish capital markets during the year. We know, we can continue to announce sequential positive financial results this coming year and hope that the capital markets provide the capital in the amount and at the right cost to take advantage of the dynamic mid stream market place.

With that I would like to turn the floor back to questions.

Operator, we are ready for questions.

Thank you. The floor is now open for questions. Our first question is coming from Ross Peene (ph) from Wachovia Securities. Please go ahead with your question.

Good quarter guys. Keith, this question is for you. What percentage of fixed versus floating would do you like to target? And second of all, what is your target debt-to-CAP and debt-to-EBITDA?

Okay, I think our target, you know, I think I will answer the last two targets first, because our target has been and remains to be an investment grade rated partnership. And to do that we believe that the most important ratio was the debt-to-EBITDA ratio. We think that has to be at a minimum in the low [4s] if not have a 3 in front of it. So, I would say [inaudible] to give you a hard number 4.0 would be our target, and I would like to be on the south side of that number. With respect to debt-to-total CAP, I believe that ratio has [inaudible] in front it. And, so I think our target would be to try to get that number to the 58% range as soon as possible. Yeah, at the end of the year. My boss is telling me by the end of the year. Here we go. Not a year from today, it is the end of the year. And then with respect to the fixed-to-floating, you know 50-50 sort of -- and I see the target does not get anybody upset, but the with the floating rates where they are right now, I think it is not a bad policy for us to be to have a little bit more floating, which doesn’t mean that you that [inaudible] [10-year] fixed money, it means that may be you look to swap some of that back in to the floating arena and maybe pickup a 100 or 200 basis points, and Wachovia has an idea, we can pick up 3 or 400, you know my number.

Okay, good. One final question, from an operational standpoint is -- are there any efforts to somewhat distance yourself from EL Paso, not that is highly critical at this point, but just from a comfort standpoint with some. Are there contingency plans in place to run these assets going forward if there were anything to happen to El Paso?

That's a great question. Well this is Bob Phillips and I am pleased to answer it. We, one of the specific charges of this new governance in compensation committee in addition to identifying and ensuring that we had separated and segregated, the separate equity plans and compensation plans associated with these dedicated employees that we have, was to charge Mark Lewin (ph.) and his staff with analyzing all aspects of the related party agreements or relationship between El Paso Corporation as the general partner and the management of the El Paso Energy Partner's assets, and he and his staff are underway and they are going to be preparing for this governance and compensation committee. A broad range of analysis associated with different scenarios that we certainly do not think is going to occur, but to the extent that it is even remotely possible that it could occur.

This new governance and compensation committee again formed up just at last board meeting 10 days ago and including adjusted three independent board members, will include the two additional new independent board members as we recruit them. Their job is to ensure that the partnership is absolutely unequivocally protected and that partnerships assets will continue to be operated in the same safe and efficient and low cost manner that they have been historically in any of that. And that is their charge and we expect to have that completed in a very short order and I would expect it to be analyzed and reviewed and voted on and actions necessary taken by the next board meeting.

Couple of steps that we have already taken are one, we have joined everybody else and requested credit assurance for those transactions and for the revenues that we receive from El Paso and that we have sent a demand letters essentially and we are negotiating pre payments and we expect to have those very soon for the variance related party revenues or activities that we have with El Paso. In addition we’re reducing the amount of revenue that we earned from El Paso, where it makes – set those. As we have discussed several times over several transactions that we regularly entered into, primarily selling hydrocarbons to El Paso, to their merchant company, just out of convenience. Well we have eliminated that and so we will be reducing the related party revenues that we receive from El Paso, and that will show up not so much this quarter, in the fourth quarter but definitely in the first quarter as many of those contracts were ended in the end of December.

Great going. Thank you guys.

Thanks for that question [Ross], that's an important part of our objectives for this year.

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

Yeah. Hi. First question, you know in Marks' comments he gave us some numbers -- some impressive numbers and their performance of Texas and Mexico assets and indicated how much they had beaten your internal expectations. And in your comments Bob, you had talked about good stable domestication from the off shore assets with these, which certainly I think a lot of us would agree with. I guess the first question -- first part of the question here is, can you give us some more color on the operations of these assets and why there are exceeding the expectations and what you know is likely, is a cause – is it volumes. Is it, you know, something else and what are we likely to see going forward from those assets?

Thanks for the question David. This is Bob. Let me make a couple of leading comments on that and then I am going to turn in over Jerry Langdon who is President of the EPGT Texas and runs that large pipeline system and I guess I would point out for some of listeners you haven't thought about it. My comparison for this Texas pipeline system to me is larger than all of our interstate pipelines except for Tennessee Gas pipeline. It is a very-very large system, the largest of its kind in Texas, in terms of miles of pipe, [inaudible] in our Texas transportation and storage business is -- it runs at 3.2Bcf/d with very few pipelines in America that large. The difference is this is a -- it's regulated by the Texas [inaudible] Commission as opposed to FERC. But this pipeline system has enjoyed some real breakthroughs in 2002 in the area of operations management and efficiency, terms of a contracting two independent power producers and rolling over and in fact extending the contracts for transportation and storage with our key customers in the state of Texas, such as Saint Antonio, such as Austin, and really benefiting from the significant growth in three different supply basins around the state. So, not only does Texas pipeline represent diversity in our partnership portfolio but within Texas pipeline there's a lot of diversity as well, both on the supply side and the market side. So Jerry, let me let me let you jump in there and tell them some of the specifics about what you accomplished in 2002, and where we see the growth coming from '03?

I think most specifically Bob covered most of the major issues in terms of sort of generic nature. We have submitted cemented long-term relationship; we got with the city of San Antonio for transportation of supplier into that key market on our system. That is a City Public Service Board of San Antonio. That has been our historic largest market. On the system we've made a long-term agreement with them fro significant portion of their capacity with a five year term and a storage of contracts to go with that. Similarly with the city of Austin – Austin Energy we have submitted a long-term agreement with them as well. We had developed new market out of the city of Texas with [Pimex] and others and we think that relationship is going to grow over time and as Bob, I think mentioned importantly I think we are unique in that -- we touch basically every producing basin in the state. Have good inter connectivity with the inter and intra state markets. We have exploited and developed a brisk 3 11 business -- section 3 11 transportation on our pipeline system and the combination of all those factors. I think it is going to give us some uplift that we have worked hard to achieve and I think is a bit unique.

And the part of the question you are taking and I'm -- the run-rate the full year rate there; what should we be thinking about in terms of your ability to continue to grow these assets, these earnings?

I am sorry. David let me just answer that as concisely as I can without going into a lot of detail that you can get from Sandy in terms of modeling that asset. This pipeline system generated a significant amount of cash flow and it is at a run rate right now at $110m-115m. The most important factor in that cash flow stream is that 60% of this pipeline system is under firm contract for 10 years and you know what that means.

Means we get prided demand charge whether they use the capacity or not. So rough -- you know we start from a point where over 60% of our revenues are virtually guaranteed every year, and that is a credit to the job that Jerry and his commercial team have done over the last couple of years in firming up the transportation and storage portfolio you remember, when we bought this pipeline 3 year ago from PGNA Texas. It being the old former [burial] pipeline. It was almost entirely an interruptible transportation system. And there was lot of power utility in that. We converted that by entering into these new contracts with our long term core LDC customers and new IPP customers that have built that in North Texas and in Huston and along the ship channel and down through the central part of the state.

That has allowed us to firm up the capacity. We now have tremendous leverage to increasing basis differentials across the state. So 60% of our revenues are basically locked in under term transport and storage agreements. The other 40% comes from our interruptible customers, which are largely producers and/or shippers that benefit from basis [inaudible] outs between [inaudible] [inaudible] and south Texas and the Huston ship channel which are the four relevant pricing points within the state of Texas. We are as Jerry said, we are the only pipeline system not be confused with another NLP that owns a pipeline system the state of Texas.

We are the only pipeline system that has pipeline extending from all those major hubs and therefore we are the ones that can capture the [inaudible] in higher interruptible transportation revenues from a blowout in bases. And we are going to talk in more detail again at the analyst meeting about the fundamentals in Texas and how we are well positioned to benefit from that.

Okay. A second question. You know as discussed stepping back after double the size of your company last year and – they have a number of – you know a large number of internal products that you are working on and I think you need to keep your eye on obviously. Do you see El Paso is having more assets to buy this year or is your plate pretty full absorbing what you have, what you are doing right now and is this a year that you are not likely to do substantially for the lack of acquisitions?

Well again thanks for a nice leading question and we will spend much more time on this issue when we get into the analyst conference in early February. This is a year of the digestion and optimization for us. Digestion I suppose being in the business sense I suppose to -- from a [culinary] standpoint. We have - we are extremely excited and enthusiastic about the assets we bought. We recognized 2002 was a huge year for us, beyond anybody’s expectations. I would want to kid you to say that -- doubling the size of you company in less than 12 months is an easy process. It’s a process that demands attention and discipline and so at least the early part of this year, we’ll be focusing on digesting those assets we have acquired bringing out the cost savings -- additional cost savings despite the fact that Randy and his team have done a great job in lowering cost over the last year. So we think there are most cost savings to [ring out]. We think there are more operational synergies to achieve with our existing set of assets. We gave a couple of those examples in the press release. There are many examples but those I think illustrate the type of integration that we are planning for and the work that we need to do in that area.

Having said that we will not miss an opportunity to acquire great assets at a great price. But again that depends largely upon the timing of those opportunities. We don't have any thing that we're currently looking at from El Paso Corporation or any other third party that is up significant size that would alter our view of our balance sheet and our financial objectives for the year that we clearly laid out and that is to achieve investment grade status by the end of the year. We may not get the rating but we want to be in the zip code and we want to be able to deliver to our investors an investment grade balance sheet and investment grade credit matrix and to the extent that we can eliminate or at least substantially reduce the background noise associated with our unit that comes from the negative head lines that seem to emanate from our general partner. We can reduce that background noise, then I think underlying that the market will see a fundamental sound company with triple B type credit matrix and we ought to get that kind of ratings. So those are our objectives, digest our assets that we acquired in first half of the year. Look for special opportunities. Not working on any right now with the parent but certainly aware of the parents divestiture plans. And then keep in mind those very important financial goals by the end of this fiscal year.

And the last question I'll ask you, I think you are in a great position to answer it -- we’ve all been watching the activity level in Gulf of Mexico and we really not seen it pick up you know, very much at all, in spite of strong pricing and strong cash flows that companies have. Wondering if you, we are seeing [inaudible] now and I am wondering interest in your thoughts, your views as you talked to producers, as with your systems out there, you know, and [inaudible] perspective. As to what might come out of the Gulf of Mexico this year in terms of increase exploration and drilling?

This -- I am turn it over to Bob Harman's who is hear [inaudible] he runs our offshore business. He is under the weather today I hope he is listening. But he wouldn't have sounded very pretty over the call so. We substitute him with Bard. He leads are Deepwater development team. He has I think the best relationships with Deepwater producers of anybody in the industry. Bard is largely responsible for our success in developing this world-class setup for organic opportunities out there. Bard spend lot of time with the producers. I would like for him to give you the benefit of what he is hearing and seeing in the market today. Particularly around some this strategically located projects that we have under way.

Hey good morning everybody. What we see in Gulf of Mexico is that -- especial in Deepwater Trends. The production is going to continue to increase; both the gas production and oil production. That’s also forecasted and projected by the MMS by the Mineral Management Service. If you look for some of Deepwater platforms at the moment are about 26 platforms in operations. There are 12 under construction and all those platforms are going to continue to supply the pipelines both in Deepwater and the continental shell with further the hydrocarbon, oil, and gas. What’s an interesting statistic is that [inaudible] 12 platforms are operational. We are El Paso Energy partners its going to be positioned together supplies from 50% of the Deepwater platforms, which is an important statistic because the deepwater is where the growth is going to come from. So we are going to be very well positioned, also [lack] of drilling activity in the Gulf Mexico and specifically in deepwater, it's very stable, and producers have been very successful in regions where we are positioned such as the south Green Canyon region with the latest discoveries, the Tahiti [inaudible] discoveries. The continued success that the producers have near the other big discoveries such as Atlantis, Mad Dog, and Holstein, and with our pipelines, and our platforms we are very well positioned to take advantage of those discoveries since they feed our complete value chain. Our pipelines platforms processing plans [HIOS] affiliates and to stabilizer that El Paso Energy Partners own. So I think, there are [11 of 15] Gulf Mexico and deepwater, is high and we expect, with the current conditions, that level of 50 to continue.

Great thanks [Bart].

David, those were great questions. Let's somebody else state a question.

Thank you.

Okay, thanks.

Thank You. Our next question is coming from [Scott Weller] from Morgan Stanley [inaudible]. Please go ahead with your question.

Thanks. And Bob, congratulations on the move towards -- maybe towards more independence from El Paso. , I think those are great moves for your investors. Couple of your questions, first of in terms of share cost with El Paso, what currently do you all have that [better] shared administrative cost or other cost with El Paso, and would you all move towards assuming some of those things internally?

Scott, this is Mark Leland. Let me just walk you through the relationship there from an operating standpoint. We, the employees of -- that work on the partnership, our employees of El Paso field services, but are paid for by the partnership. The partnership reimburses El Paso for all with direct operating cost in the field, the labor of the direct operating cost for people in the field. And the incidental expenses and the contractors and parts and suppliers are all paid directly paid by El Paso Partners. On the G&A side, we have an agreement with El Paso where they will provide us G&A and services, which essentially pays for the general and administrative activities of the partnership, which includes the executive team and includes accounting and includes MIS, and includes insurance etc. That number totals around $40m on top of the direct operating expenses. We think that’s about in line with the right numbers is two on the partnership. And we are though evaluating alternatives with regard to moving employees to the partnership or to an operating limited partnership or something to that effect to spike out more of the operating relationship with El Paso, to really more in line to alleviate concerns. We get this question all the time, and we are looking at what sort of things we might do to eliminate the question altogether, even though we don’t think it has a material impact on the partnership.

So, Mark, when you did -- you said you all had paid some -- El Paso field services employee cost -- when you met those, is that significantly less than a net of $40m?

When we….

When your net -- what you all pay for El Paso Corps -- field services employees net of the G&A services [inaudible] you just noted, does that mean. that your..?

No, it’s on top of the four -- -

Okay, I am sorry.

It’s the 40 plus the employees.

Okay. And one other question on CAPEX for ’03 and ’04, and could you all just outline two things for us. The sort of maintenance or sustainable in growth CAPEX you all have planned, and then when you all have done a good job of integrating the number of assets, or what kind of organic growth as a percentage of your total distribution growth -- goals are you targeting from organic versus acquisitions?

Well, I will give you some highlights on the CAPEX. CAPEX for ’03 should be around $230m, that’s the growth capital expenditures, that’s the Marco Polo, the Cameron Highway, Medusa, Falcon, [Red Hock] essentially that it. Maybe a few other small projects that have been identified sustaining CAPEX is in the $40-$45m range. That’s well [tied] -- that includes well [ties] includes pipeline integrity of which is becoming a bigger number with a new [inaudible], etc. And, so that kind of breakouts ’03 CAPEX -- ’04 is a much smaller in number from Gulf side, because we haven’t identified any projects that sustaining CAPEX have to run right in that $40-45m range. I think, with regard to organic growth in our percentage of distributable cash flow from [west coast] synergies, we are going to -- and then opportunities we have on our existing systems; we are going to save that for our February 10 meeting in which we will highlight some of those opportunities, we have some nice opportunities, particularly in the San Juan.

Okay. Thanks a lot.

Thanks for the questions Scott.

Thank you. Our next question is coming from Adam Leight from Credit Suisse First Boston. Please go ahead with your question.

Good morning. I think almost everything was asked and answered well. And one remaining is, can you give us a little color on the gas processing Texas NGL business, and sort of where that is now and what are you expecting in the next couple of months? Or going to see a, you know, continuation of weak environment?

Yeah, Adam. This is Mark Leland, and I was -- I meant to say that in the call , but you are right. We expect that TNF business to kind of lag a little bit. Currently in the first quarter due to the frank spreads being kind of blown out in the rejection of [inaudible] in the south Texas; however, we are saying that, you know, on a current -- you look at the forward curve, the gas prices being so high. NGL prices are up, [apparent] is up as high as the gas prices, but they tend to in [inaudible] roll forward, and improve and we could see improved operations in the TNF business, but we expect that, you know, ’03 ought to look a lot like ’02. Maybe a little improvement towards the last half of the year. But ’03 and ’02 are to be pretty consistent. And, we will have some good months and some good quarters and some kind of weaker quarters like the first quarter.

Adam, this is Bob, let me add on to that discussion about processing. That you were speaking directly to our NGL transportation and fractionation assets in south Texas, and those that we’ve recently acquired in the San Juan acquisition, they run-up into the Houston area. And processing in south Texas is directly responsible for the throughputs in our NGL assets, and Mark is exactly right that that’s going to be uncertain over at least the next quarter or so as gas prices remain high. But, let me say that in the partnership, we own 100% of two -- I am sorry, 100% of the Chaco processing plant in the San Juan basin and 42% of the Indian basin plant operated by Marathon, located in the [coals bed] area of New Mexico. Both those plants are percentage of proceeds plants, meaning that there is no key pole exposure and at that location, at those two locations we are benefiting from significantly higher natural gas liquids prices than we have seen in quiet some time, in fact, that was -- Mark and I were discussing recently that we reviewed in our 2003 plan, we were looking for average [ward] grade prices of about 38 cents per gallon for 2003. This includes all of El Paso’s processing plants. And right now, we are seeing 2003 [ward] grade prices in the range of the an average of 48 cents a gallon. So, a significant increase and to the extent that we can lock in some of those very high [ward] grade or NGL prices. They will near directly to the benefit of the partnership in terms of higher profits from those processing plants. So, I -- we are really excited about the pricing environment that we are in right now. And we think to the extent we can walk some of that in. That further solidifies the cash flow strength that we were expecting, and as Mark predicted, at about $420m for 2003. Thanks for that question.

Just to reiterate that, those higher NGL prices that we were experiencing today are not, you know, those are above our ’03 expectations. So the 420 of EBITDA that I mentioned in the call assumes a more average price.

Bob, anticipated by following question there. And I guess, lastly, can you tell us where cash was ended year-and …?

Yeah. It was $44m. Keith.

Yes it is 44m at year-end.

Okay. Thanks.

And operator, we have time for one more question.

Thank you. The last question is from Mark [Easterbrook] of RBC. Please state your question.

Hi. Good morning everyone. Just, really lot of my questions have been already asked, but just quickly what was a total CAPEX expected for this year? And then also what kind of, I guess, feeling do you get from El Paso and they are holding a lot of Limited Units? What kind of confidence do you have that they are going to continue to hold those units going forward?

Mark, this is Mark. Total CAPEX is about $330m and of that 45 is sustaining CAPEX for '03. Yeah, I think we gave the wrong number earlier.

It was -- Mark we gave little bit lower number earlier. This 335 total including 45 maintenance is close to right number.

Okay.

I think I subtracted sustained.. I will look it on.

The previously announced plan -- on February 10 -- [inaudible detail on all that stuff?

Now, with regard to corporations limited units that they own, they own 11m limited partner units, they own about 10.9m of the [Series-C] units. About half of the limited units they own are pledged in a minority interest financing, and so the other half of [3Q] collateralize other [ad] loans or sales or what have you. We do not have any indication that they have any desires to dump those on the market, what have you. They haven't in the past and we don't expect them to do anything in the future that would inhibit the value of their substantial equity value in the partnership, which includes GP interest of Series-C units and, Series-B unit 10, and the LP unit. Certainly, their desire to monetize some of those -- you could expect them they want to do that, but I fully expect them to if they would monetize those units, to do it in a very friendly manner to our limited units, and to overall equity value of the partnership of which they are substantial holder.

Okay. Thanks.

Okay. I thank you all for joining us, and we look forward to seeing some of you soon and hopefully the rest of you will be dialing in and listen for analyst meeting coming up on February 10th. We will have more information out in the form of the press release about that part at that time, and again thank you all for joining us this morning.

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