Enterprise Products Partners LP (EPD) 2003 Q2 法說會逐字稿

Good morning, and welcome to the GulfTerra Energy Partners second-quarter earnings 2003 conference call. At this time all parties have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. I would now like to turn the floor over to your host, Mr. Drew Cozby. Sir, the floor is yours.

Thank you, Laura. Good morning everyone, and thank you for joining us this morning for GulfTerra Energy Partners second-quarter 2003 conference call. This morning Bob Phillips, Chairman and Chief Executive Officer, will begin our call with an overview of the quarter. Mark Leland, Senior Vice President and Chief Operating Officer, will take us through the operating results. James Lytal, President, will provide a deepwater construction update. And Keith Forman, Chief Financial Officer, will present a review of the balance sheet and other financial items. Other members of management are also here to assist in the question and answer portion of the call.

I would like to detail a few regulatory items before we get started. First, GulfTerra's EBITDA number is the same number we used to call adjusted EBITDA, so there is continuity in our reporting. Second, a reconciliation of consolidated EBITDA to cash flows from operating activities is incorporated in the release and is posted, along with our release and operating statistics, on the For Investors page of our website at www.GulfTerra.com, through a link entitled Non-GAAP reconciliation. Also on this link is the balance sheet data related to our debt ratios that Keith will refer to later in this call.

And now I wish to make you aware that this call will include forward-looking statements and projections made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. GulfTerra Energy Partners has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based our current, reasonable, and complete. However, a variety of factors could cause results to differ materially from the anticipated results or other expectations expressed during this call, including oil and natural gas prices, continued drilling activity in the U.S. and areas of the Gulf of Mexico serviced by GulfTerra Energy Partners, and successful negotiation of customer contracts on its pipelines, platforms, plants, and storage facilities. While the partnership makes these statements and projections in good faith, neither the partnership nor its management can guarantee that the anticipated future results will be achieved. Reference should be made to GulfTerra Energy Partners' and its affiliates' SEC filings for additional important factors that may affect actual results. And I will now turn the call over to Bob Phillips, GulfTerra's Chairman and CEO.

Thank you, Drew, and good morning to all of you. We are pleased to report a very strong quarter second quarter of this year, with EBITDA of almost $110 million, and net income of almost $50 million or 50 cents per unit. These are the most substantial quarterly results in the history of this partnership. It illustrates the success of our strategy over the past several years, with a focus on building the leading midstream franchise in the industry. We've done that with a substantial and diverse set of midstream assets across a broad number of geographic regions and functions throughout the energy industry. I am very pleased that we have built this portfolio in the way that we have selectively over the last number of years. And I think that the track record we are building for ourselves as investors is beginning to be recognized by the market.

Year to date we have accomplished much more than just record financial and operating results. Our independence initiatives, as you know, have been very important to us. They included among other things in the second quarter the name change to GulfTerra, which reflects not only our roots onshore and offshore, but the significant opportunities that lie ahead for us. The new general partnership entity that was reconstituted is not an unimportant event, and a significant achievement for us in the second quarter that provides a lot of protections that many of our equity and debtholders were looking for. And as we promised, we have continued to expand the number of independent members on our Board of Directors. And this altogether has allowed investors to distinguish our business from that of our general partner, El Paso and has led to a much more appropriate valuation for our partnership, which has now become one of the leading master (ph) limited partnerships in the sector.

I think the market has recognized all of these achievements, both financial operating as well as structural. And we have delivered to our investors a total equity return of over 40 percent year-to-date. By my calculation, in the top five in the sector. So the market is beginning to recognize the significant set of assets that we have, the diversity of our portfolio, the ability of our midstream asset portfolio to earn significant cash flows on a steady and consistent basis. And our ability to manage our balance sheet on a disciplined basis that allows us to have significant room for growth in the future, not only for these assets that we own today, but assets that we will be looking at to acquire in the future.

Mark Leland, as you know, will give more detail on our segment performance. But let me just mention a few of the assets that I think are important for you to recognize their performance in this quarter. The San Juan Basin assets, which we acquired in the fourth quarter of last year, performed very well, above expectations. Strong gathering volumes out there on that gathering system. I talked to a lot of those producers out there myself. They are very excited about high gas prices and firming demand in the West, and they will continue their historically strong drilling and development programs out there, which we think will keep our pipelines full, and will keep volumes coming, as we complete a two to three-year expansion program out there on the San Juan Basin gathering system. Of course in the first and second quarters of this year, because some of our gathering fees are tied to index prices out there, we did benefit from higher San Juan index prices. And those results showed in this quarter.

The Chaco processing plant, the Indian Basin processing plant located in New Mexico, both ran full for the quarter and benefited from higher NGL prices. We think that is sustainable for quite some time. And as Mark will tell you, he is actively working to risk manage that level of cash flow.

In the offshore area I was very pleased to see the performance of our Viosca Knoll asset. That gathering system we've owned since the mid-90s. It has reached volumes that it hasn't seen since the early days of flex-trend (ph) volumes. These new volumes are coming on from the deepwater areas. Producers laying gathering systems to us. As well we have some expansions out there that will come on stream later in the year. Deepwater volumes added significantly to Viosca Knoll's performance, and we think that is sustainable for quite some time, as well.

Very proud of our installation of our Falcon platform and our Falcon gathering line over in the Western Gulf of Mexico during the quarter. That added significantly. We are very pleased with the performance and our partnership with our producer out there, Pioneer, who has had a great deal of success in opening up their initial field, Falcon field, and then discovering the Harrier field, which had come on later in the year.

So across the board onshore and offshore, our assets and our projects on track, very strong performance this quarter. We think in most cases it is very sustainable.

Let's turn to the balance sheet. Keith will talk about our balance sheet improvement during the quarter, but I wanted to compliment our financial team for the great job that they've done so far this year, in raising a significant amount of capital. Over $730 million of new capital raised for this partnership since the beginning of the year. In the early part of the year, of course, in difficult circumstances with the issues related to the general partner. But altogether, you see substantial improvement in our debt to total capital ratio. We've taken out short-term debt. We firmed up our balance sheet and lengthened the maturities. I think our balance sheet is an excellent shape right now. A little bit more equity throughout the end of this year, and we should certainly be in those investment-grade credit metrics territory that we've talked about and that we have aspired to by the end of the year. It continues to be a significant goal of ours.

Finally before I close and turn it over to Mark and Keith and James, I want to talk a little bit about future growth that you should expect from our partnership. Give you a little bit of perspective about where we think we are right now. We've put most of our issues with our general partner behind us. Their condition has certainly improved at El Paso, and we have completed most of our independence and separation initiatives. Again, I think the market recognizes that, certainly the analysts that follow the company have written on this subject. And for the most part we've received rave reviews in how we've handled a somewhat delicate matter, but a matter that was very important to the partnership. We've put a number of initiatives in place. We completed those. I think the market recognizes that this is for all intents and purposes a stand-alone entity, that is operating very much on its own. And we are being recognized in that regard.

We have one thing left to do in this area, and that is to sell 5 to 10 percent of the general partnership interest to an independent third party. We think this will finally delink the partnership from El Paso for ratings and credit purposes. We are in fact managing that process on behalf of the general partner. It is going very well. We would expect that sale of a 5 to 10 percent interest to an independent third party to be completed sometime in the third quarter. And that would, of course, add yet another independent Board member, one with a significant stake in the general partner, to our Board of Directors, and allow this partnership to be even further insulated from issues relating to El Paso Corporation.

Going forward, we have certainly digested last year's significant, more than $1.5 billion of acquisitions. We said at the beginning of the year that would be our strategy throughout much of this year. I think that we've accomplished almost everything we set out to do, in terms of digesting those assets, with only a little bit of work yet to do on the Texas pipeline system in terms of recovering more fuel and balancing our (technical difficulty) accounted for with our throughputs. I think we have largely completed most of the integration activities that we planned at the beginning of this year.

As you know, we have almost $1 billion of greenfield projects, almost all of which are located in the Deepwater Trend of the Gulf of Mexico. We are certainly on track there. We've had good drilling around most of our onshore assets. Prices have certainly worked in our favor for most of our business, with the exception of maybe processing, where our natural gas liquid transportation and fractionation assets are running a little bit lower volumes than we would expect. This is due of course entirely to the problems in the processing arena, which is upstream of our NGL assets.

So on balance I think our portfolio of assets are operating very well. In most cases above our expectations. In most cases above our acquisition economics. So I think we are set up to start looking at some significant new acquisitions. There are a number of assets that are available in the marketplace right now. Our business development team is actively pursuing a number of both regional additions to some of our existing assets, as well as some stepouts into some new areas to follow our diversification strategy.

We have had good access to capital markets this year. It has been very solid. And from time to time we've been able to opportunistically access the debt markets at a very low price. So we stay committed to reaching our investment-grade credit metrics. But at the same time I think with our integration of last year's acquisitions well underway, and our greenfield project on track, I think it is time for this partnership to start looking at continuing its diversity strategy and looking at some new acquisitions.

Our track record has been good in this area. I think investors trust us with their capital. We've had a good record of making accretive acquisitions over the past several years. The result has been a very strong quarter. We are proud of our results and pleased to deliver those to our investors. So with that kind of overview of where we are today and where we are going over the next six months or so, I would like to turn it over to Mark Leland to go into each of the segments and give you the kind of detail that you are looking for this quarter's performance.

Thank you, Bob. I have several topics to cover today. First I will summarize our consolidated results. Second, I will provide some details on some of the key performance drivers at the segment level. Third, I will discuss capital spending levels. I will comment on our related party revenues. And finally, I will update and revise our earnings and cash flow guidance for the partnership, based on the partnership's performance so far this year.

Before I go forward I want to remind everybody that a copy of our earnings release, as well as our detailed operating statistics and any reconciliation of non-GAAP measures to their comparable GAAP measures, can be found on our website at GulfTerra.com, as Drew had mentioned.

For the second quarter of 2002, GulfTerra reported net income of 49.3 million or 50 cents per unit. That is a 72 percent increase in net income over the same period last year. More importantly, cash flow from operations totaled 59.6 million, up 18.4 million from last year. And EBITDA, the key measure on which we evaluate our liquidity and performance, was 108.6 million this quarter, up 53 percent from last year, and up on a consecutive quarter basis also. GulfTerra recorded revenue of 310.1 million in the second quarter of 2003, up from 120.5 million last year, or a 157 percent increase in revenues. Gross margin was 151.6 million this quarter, up 63 percent from last year. This strong topline performance was driven by contributions from our San Juan acquisition and solid results from the Permian assets and from new deepwater offshore activity, all of which I will highlight a little bit later.

As I mentioned, earnings per unit was 50 cents. This is on an average of 48 million units, up from 41 point (technical difficulty) million units last quarter. This increase in units outstanding is a result of three equity sales that occurred during the quarter. Total common units outstanding at the end of the quarter were 50 million. For the first six months of 2003 we reported net income of 91.5 million, or 93 cents per unit, up 91 percent from last year. And EBITDA totaled 214.5 million so far in 2003, a 79 percent increase over last year.

The key drivers in this quarter's growth were the performance in the assets in our pipelines and plants segment, which was up 66 percent or to $78.3 million in the second quarter of 2003. The growth was driven by performance in the San Juan gathering assets, which we acquired in November of 2002. The Chaco and Indian Basin plants, which have had steady volumes, but benefited from higher NGL prices, and Permian Basin gathering systems, which had flat volumes but experienced higher gathering rates. Also contributing to the pickup was a 14 percent increase in volumes on our Viosca Knoll deepwater gathering system, which received about 135 million a day of throughput from the new deepwater Canyon Express gathering system, which is operated by Total. Viosca Knoll should continue to grow this year, with Medusa volumes expected in late third or early fourth quarter, and volumes from Total's Matterhorn discovery, which will come online in the fourth quarter of this year.

Partially offsetting these positive results were lower cash flow from our Texas intrastate pipeline system, which experienced higher O&M compared to last year, which was unusually low last year due to timing in expenditures, coupled with higher fuel costs, and the revaluation accrual of gas and balance payables, which has been impacted by higher gas prices. As with many intrastate pipelines, our Texas pipeline system from time to time undercollects the fuel used and gas lost or accounted for in our operations. This is what we've experienced in the first half of this year, which has been exacerbated by higher gas prices. We have identified several instances where we can improve accounting, measurement, and operations to mitigate this situation going forward. And in fact, we saw improved results in the latter part of this quarter.

Another key contributor for the quarter, which impacted the platform segment as well as the pipelines and plants segment, was the contribution from the Falcon Nest platform and pipeline, which was installed late last quarter. The Falcon facilities contributed EBITDA totaling 4.7 million this quarter, 1.5 million of which was in the pipeline segment, and 3.2 million in platforms. Falcon field has produced an average of about 190,000 dekatherms per day this quarter, well ahead of our estimates. Pioneer, the operator of the field, is developing the Harrier field which is expected to be completed and tied back to this platform at the end of this year, which should push throughput up over 300,000 dekatherms per day, and further increase overall contribution of this new deepwater asset.

The EBITDA from the oil and NGL logistics segment was up slightly from last year. The increase reflects contributions from the NGL facilities and the Typhoon deepwater oil pipeline acquired in November last year, which were partially offset by lower volumes on our South Texas TNF business as a result of poor price (technical difficulty ) economics, which has caused processors to reduce their NGL reduction. We also saw lower volumes on Poseidon oil pipeline, which has been impacted by natural production decline on some of the older deepwater fields, plus some production downtime at several of the new fields.

The big news in the oil and NGL logistics segment is the closing of the Cameron Highway Oil Pipeline joint venture with Valero. This event did not affect the second quarter, but will affect the third quarter. As part of this transaction Valero agreed to pay $35 million in fees to participate in the project, in addition to contributing their 50 percent share of all capital expenditures. Of the 35 million, 19 million was paid in the July closing, 5 million will be paid at the completion of construction expected in the end of 2004, and the remaining 11 million is to be paid no later than the end of 2006. Valero, also in July, contributed $50 million to true up the capital accounts, reflecting their share of capital spending to date. It is important to note that the 19 million cash received in July will be recorded as income and will be reflected in our third-quarter EBITDA amounts, as well as the balance of the fees received in '04 and '06.

Let's turn to capital expenditures. CAPEX for the first six months of the year totaled $204 million. As you recall, 82 million was spent in the first quarter, so that result is $122 million in capital expenditures were spent this quarter. This total is a little misleading in that it included 100 percent of the Cameron Highway Oil Pipeline expenditures, which began to pick up as pipe orders were filled in the second quarter. With the closing of the Cameron Highway joint venture, Valero, as I mentioned, contributed $50 million, that was to true up the capital accounts, and that will be credited against third-quarter capital spending.

James Lytal will give you an update on the progress we are making on several of our deepwater growth projects in just a minute. Of the $122 million spent this quarter, 106.4 million was on organic growth projects, and 15.6 million on maintenance CAPEX, which included 3 million for new well connect, which is about our expectations, as well as higher pipeline integrity costs, which were higher than expected. We expect maintenance capital to level off around 11 to $13 million per quarter for the balance of this year, bringing our total capitalized maintenance in 2003 to around 50 million.

Overall, our organic growth capital projects are on track and should total around 300 to 310 million. This year this is a little higher than the 290 million we indicated in our February 10 analyst presentation. This increase is due primarily to the timing of 2002 expenditures, which were lower in 2002 and ended up being spent in '03, and the expansion of the Marco Polo platform, and the inclusion of the San Juan gathering expansion we announced last quarter.

Our revenues with El Paso or its affiliates totaled $35 million for the quarter. That is about 11 percent of total revenues, which is consistent with the first quarter of this year, but down nicely from 57 million or 48 percent of revenues in the same quarter last year. Net revenues, which is revenues less cost of gas sold from related parties, was $29 million this quarter, up from 15 million last quarter. That is due primarily to the fact that we bought more pipeline supply gas from third parties as opposed to El Paso this quarter versus last.

Now let's talk about guidance. Finally, as a result of the strong performance of our gas pipelines and plants, and the receipt of the Cameron Highway joint venture fees, we are revising upward our expectations for 2003 EBITDA net income and earnings per unit. We now expect 2003 EBITDA to come in the range of 435 to $445 million, up from the previous guidance of 420. Net income is expected to total about 180 to 190 million, up from our earlier guidance of 165 million. And earnings per unit should come in at between $1.58 and $1.74 per unit on average units outstanding of 50 million.

Essentially we believe performance of our base business should track the first half of 2003, with the third quarter reflecting the $19 million Cameron Highway receipt. As a result, we would expect third-quarter EBITDA to be in the $125 million range and the fourth quarter EBITDA to be in 105 to $106 million range. With that I will turn it over or James Lytal, who will provide status reports on our deepwater construction projects.

Thank you, Mark. I do want to provide an update on several of our deepwater projects. I will start with our Medusa gas pipeline project. Our pipeline is installed, and now Murphy's spar is also installed, and they're getting out to work on their wells. We do anticipate first production from Medusa in the fourth quarter. This project does have upside. Murphy is currently out drilling their Stonemaker prospect, which is a direct to Medusa, and if successful would most likely be connected to Medusa and the gas would be dedicated to our pipeline.

As Mark mentioned, Falcon is performing nicely. Pioneer will be out in the Gulf later this year installing a second flowline to our platform. We anticipate first flows from that, which will be their Harrier development, that will come through that line, to be at the end of this year or early next year. And it should increase volumes to around 250 to 275 million a day. Pioneer also plans to drill two new exploratory wells in the area later this year, and should have a steady drilling program in the future on their 30-plus blocks in the area.

Our Phoenix pipelines, which will connect to Kerr-McGee and Devon's Red Hawk development, is scheduled to be constructed later this year. We still anticipate first flows from the Red Hawk development in the second quarter. I will say also that Kerr-McGee and Devon are out drilling on their Shiner (ph) development or prospect right now. So this project has upside from future development around the area of their Red Hawk spar.

Our Marco Polo project, the TLP hull is currently on a barge from South Korea. Is in the South Atlantic and scheduled to arrive in Corpus Christi the third week of August. In Corpus there will be some retrofit work risers added. The deck is currently being constructed just outside of Corpus, and it is going very well. It is on schedule. We should be out in the Gulf in October and November installing the TLP. This is about a month later than we originally anticipated. The schedule slid a little bit because our installation contractor Herma (ph) has got delayed on a current job that they are working on. We do anticipate though, and our producer Anadarko believes so, that the first production should still be late in the first quarter, even with this slide in the installation schedule of the TLP.

On Cameron Highway we still anticipate completion of that pipeline by mid 2004. We are currently out in Galveston Bay installing pipeline as we speak. And should be out on the outer continental shelf laying the larger, 30-in. diameter and 24-in. diameter pipelines in October of this year.

In closing, as it relates to Cameron Highway and Marco Polo commercially, we still see tremendous activity in the South Grand Canyon area that both these projects can access. Numerous announced discoveries. Significant reserves. So we absolutely believe that we are spending our capital in the deepwater, of which the major portion of our capital is being spent in this area, in the right location. With that I am going to turn it over to Keith Forman to discuss the balance sheet.

You have heard this morning that many of our businesses are performing well, at or above expectation and that our diversification strategy continues to pay off, providing stability to our aggregate cash flows, in a sector of the energy world, quite honestly, well known for its volatility. Our plan to strengthen our corporate governance and to implement our independence initiatives has also been working well. I'm glad to say we're not the only ones who have noticed the progress and the results. The capital markets have as well, and we thank you.

The response has been to invest in our equity and debt securities at a lower cost to us, the interest rates we pay on our debt have dropped, and the effective yield on our equity has tightened, as well, in stark contrast to our capital cost as recently as the fourth quarter of 2002. In the second quarter of 2003, we raised $181 million in equity capital and $250 million in long-term debt. A total capital raise of $431 million in the quarter, and a total of $731 million for the first half of the year. Our equity capital was raised through three discrete offerings at successively higher unit prices, culminating in a June offering at 36.50 per unit.

On the debt side, the highlight was the sale of $250 million of senior unsecured notes with a coupon of 6 1/4 percent. This was our first offering of senior unsecured notes, and needless to say we were pleased to do an offering of debt with a coupon a full 4.5 percent less than the one on the senior subnotes we sold last November, and 2.25 percent less than the senior subnotes we sold in March. We used the proceeds of our most recent debt offering to repay the last of our acquisition-related shorter tenure debt financings from 2002.

Our credit metrics improved significantly during the quarter. Our debt to total capitalization declined to 63.2 percent at the end of the quarter, from 67.6 percent at the end of last quarter, while our debt to annualized EBITDA ratio, calculated by taking our total debt of $1.9 billion as the numerator and doubling our first half EBITDA of $214.5 million as the denominator, was 4.4 times, down from a similarly calculated ratio at the end of the first quarter of 4.6 times.

Our liquidity was also improved, as the undrawn but available capacity on our revolving credit was $185 million at the end of the quarter, versus $101 million at the end of the first quarter. Our distribution coverage ratio, calculated by dividing distributable cash flow by our cash distribution fee-net (ph) holders, was 1.1 times for the quarter, the same ratio as in the first quarter.

I just want to point out to everyone that shortly after we closed our books on the quarter, we formed our Cameron Highway partnership with Valero, which resulted in almost $70 million of cash coming to us, which we used a large portion of to paydown the revolving credit debt. The bottom line, with all the number dropping I've been doing, is that our balance sheet was strengthened during the past three months, leaving us in great position to deliver on the deleveraging targets we established at the beginning of the year.

By the way, speaking of Cameron Highway, we not only formed our partnership, which we are pleased to have done, but we also closed on a nonrecourse project financing for the project. Loans totaling $325 million, which was well-received by the marketplace, as evidenced by it being oversubscribed. The financing includes $100 million of ten-year institutional money, which was attracted to the project itself and the investment grade credit rating the loan received. We occasionally get asked questions on these calls about our ratio of fixed-rate debt to floating-rate debt. Because of our success in the bond market this year, this ratio has shifted to greater than 3/4 percent fixed-rate and 1/4 in floating-rate at the end of the quarter. We thought this was a little skewed, and in July we entered into an interest rate swap, to swap fixed for floating on $250 million of our debt, effectively lowering our (inaudible) interest cost for the year and changing our fixed to floating ratio prospectively to 63 percent fixed and 37 percent floating.

So in summary where are we? Speaking with the theme that 2003 was a year to digest the record acquisitions of over $1.5 billion in 2002, I feel safe in proclaiming that they have been consumed successfully, resulting in a balanced mix of cash flows almost 80 percent higher than a year ago. And have left us a stronger balance sheet, one, if you'll forgive me for overusing the metaphor, which makes us feel pretty good about sitting down at the acquisition table again, while continuing to snack on our greenfield opportunities. And with that, I would like to direct any questions you may have.

(CALLER INSTRUCTIONS) David Fleischer, Goldman Sachs.

Great quarter, great year-to-date so far here. Wanted to maybe ask a several part question on almost the same subject, basically. James talked about the deepwater. And I would like you to maybe step back a little bit in starting this answer, and characterize on a more macro basis what's going on. Because it looks as if the rig count in the Gulf has been stuck. But curious as to what you can tell us about the deepwater and more interest there that you might see coming. We also keep reading about individual delays of projects. So curious as the first part of this question to understand what you see going on there.

Secondly, specifically on that Cameron Highway project, I would love to know, you said everything, Keith, but what the package was. What kind of rates you are paying on that. So I'd love to know more about that loan package, what you were able to do. It looks like your closing might have been timed at an awfully good time, given all the progress you've made. But curious as to where you are on that package, what you are paying. And then trying to understand the total fixed cost of that project, basically. What the breakeven volumes are and marginal profitability. And just if you can help us understand, given the first part of the question, what those initial volumes are likely to be, and when you're breakeven, when you are well above that. And help in understanding the metrics there. Thanks.

This is James, I will deal with the first part of your question. You know, we still see activity. I mean activity actually is a little higher than it was a year ago in the deepwater. There's around 34 rigs working now. Those are drill ships and semi-submersibles. It is off a little bit from an all-time high of around 42, but we still see activity. And it is a combination of activity. One, we (inaudible) what's going on around our assets. Falcon, we know Pioneer is going to be active drilling over there, South Green Canyon where Marco Polo and Cameron Highway are going to access crude oil and gas, there is significantly activity going on around there.

But we are seeing activity in other areas where we don't have assets. I will tell you that I've been here quite a while, David. We've seen it constantly keep probably anywhere from 300 million to $500 million of opportunities that we are working on or negotiating on or trying to do project with producers. And we are no different today. We have a portfolio of opportunities we are working on. They are in the early stages, but we do think we can continue to do projects.

And you know, one of the things that gets that capital number up to that level is certainly our platform business. Anytime you're looking at a deepwater platform you're going to be looking at anywhere from 150 to $250 million. So we think the industry likes the approach we are taking with these platforms. We've had a lot of interest from producers, a lot of questions. We are working on some opportunities as we speak, related to new hub-top platforms like Marco Polo. So I believe that we're going to be able to keep this going. We are so well positioned.

And also another thing to consider is when we look at these projects, we certainly don't have to fill them up to make the investment work. And we are in locations like Marco Polo, Cameron Highway, where we do think based on what's been discovered since we announced these projects we have good chances of filling these projects up. And doing better than ever expected.

Your other question I think was related to delays in projects. And Medusa certainly is probably going to ultimately end up almost a year later than we expected. And frankly Murphy just had some problems in getting their spar built, which caused the delay. I will say, and I am testing my memory, David, but since I've been here the only one that I can recall that had this type of issue, and if you'll remember Petronius, which was a Texaco development, they actually dropped the deck when they were installing it. And that was one we were getting the gas on Viosca Knoll. So that was the only one I recall that we actually had this type of delay.

So most everything we've done has come in on time or close to being on time. So going forward it is a risk we take, but I think our history and the way all our projects and well connects and things have gone there has been very few that have had that type of a delay.

Let me talk about the financing just for a second. We closed on, as I said, a loan or two loans that totaled $325 million. A $255 million bank tranche, which has a ten-year amortization schedule but a five-year maturity and that loan is initially priced at LIBOR plus 300. And then the ten-year institutional tranche, which has a ten-year maturity. And that has a swap equivalent spread of the ten-year Treasury plus 325 basis points.

And you asked about the breakeven analysis on this. I think, obviously, we got an investment-grade rating here, so there must have been some overwhelming results (technical difficulty) vision with respect to the dedicated reserves. So the pipeline has a capacity of 450, 500,000 barrels a day. It's about -- 20 percent of that capacity being utilized is sort of the breakeven analysis here, which is actually even less than -- lenders look at a T90 reservoir case here, which is probably 50, 45 percent of the total reserves that we see on our base case. And that level, the breakeven level was even below that threshold. So we feel pretty confident we will be hitting in the 300-plus thousand barrels a day range in 2006 going forward.

Do you have a number for us that you are expecting to start up, say, by the end of '04, what that number will be? Or to start up in '05?

David, it's going to be -- the fields are Holstein and Mad Dog that will come on first. So those are the BP deals. And it will be a fairly slow ramp up to '06 when Atlantis comes on, which is the largest field out there. I think start out around 50 and ramp up to ultimately 300 by '06. But we do have the chance. There are other barrels there that we do have the chance to access at Ship Shoal 332, that we can do better than expected.

We will be refining it. Because that is obviously a critical component when you are looking at our 2003 guidance, which we revised today, and what our 2004 guidance is, which we haven't really disclosed. And it is a critical additive part to that, particularly in '05. So we will get around to that.

One little question I would throw out and then I will stop and let someone else in. Are there construction profits also that you are able to record on the 50 percent of the product that is now owned by Valero?

No, that's not -- no.

Just those that we described.

Okay, thank you.

Donato Esay (ph), Royalist Research.

Thanks for the update. One request and then a question for you, Bob. The question is if we could get some more volumetric data on the release, it would be most helpful. And Bob, you mentioned that you like the diversification you have in terms of the EBITDA growth, how the pie if you will is sliced up here. Storage represents 7 or 8 percent or so of the EBITDA right now. And it seems to be the smallest component. Yet you've got a big position there and you've got all this gas flow and everything. When you talk about your asset mix, relative to your attempt or El Paso's attempt to sell a general partnership, what would you like to see as a general partner in there? Is there a hole to fill in terms of storage as well as someone picking up some marketing opportunities in the mix of GulfTerra, as well? Thank you.

Donato, I think you asked a couple of different questions. Let me take them out of order. The second question was who would we like to see as the 5 to 10 percent partner. And we are discussing and negotiating with and interviewing a fairly broad range of potential partners there. Some of which would be described as purely financial partners, which would bring financial expertise, additional access to capital. And potentially even project-financing type partners in the context of some of the type of projects that we long-term finance, particularly on a non-recourse basis. So we are cognizant of our long-term capital needs in looking at who might be a good partner.

Others who would describe as strategic partners, and they may bring some particular expertise to the midstream business, none of which are focused on the storage business. So if I understood your question, I wouldn't contemplate that a potential GP minority interest partner would be someone would bring us access to more storage fields or more expertise than we already have in the storage business.

Now speaking specifically of storage, yes, it is a little underweighted in our overall portfolio. There is probably a couple of reasons for that. We have a significant amount of capital invested in a couple of storage projects. They are good, solid, long-term projects with significant expansion economics that will accrete to our unitholders over time as we develop those expansion projects.

And we kind of feel like we are in a perpetual state of expansion at the Petal and Hattiesburg storage facility, because it is a large facility that will have an number of storage expansion opportunities over time. That is limited only by market demand for new storage capacity at a competitive price in that geographic region. We are well located in a growing region of the country, the southeastern part of the United States. So I would expect us to continue to have a storage expansion program underway over there for a period of time.

If the question is why we don't acquire more storage, we look at storage opportunities from time to time. Frankly, they are a little pricey right now, given the significant wintertime peaks and the summertime electric generation peaks that the industry has experienced. And it looks like we will continue to experience over time, as overall supplies find it more and more difficult to balance with growing demand. So storage becomes a more important aspect of the midstream infrastructure.

Having said that, acquisition of storage facilities is a little pricey. Development of large-scale storage facilities takes a lot of upfront capital that you have to put out for an extended period of time. So we are probably going to lean towards the acquisition opportunities as opposed to some upfront dilutive long-term investments in some of the major storage development projects that we've looked at around the country.

Having said that, we will continue to follow our diversification strategy, because we believe that there are a number of different services that we can provide producers across the four different commodities that we deal with in midstream, that being oil, gas, gas liquids, and refined products. Because we have a fairly decent interface with the refinery and petrochemical markets. So we are constantly looking for midstream asset opportunities that we can buy accretively in those areas. We tend to look for opportunities where we can expand on existing assets we have in the region and get some economies of scale, either through the sharing of operating cost or the consolidation and integration of assets into a pre-existing business or operation we have in the region.

And as you know, because of what has happened to the large energy conglomerate sector over the last several years, there is an enormous set of assets on the market right now. We are actively looking at a lot of those. So I think we will continue to follow a somewhat unusual, very broad diversification strategy. Because we believe that is the best way to ensure consistent and steady cash flows out of our businesses. All these businesses to some extent suffer some cyclicality from time to time. And we think the best way to offset that and to continue to grow cash flow and distributions to our unitholders is to be as broadly diverse as we can. So that's probably more than you wanted to know. If the question was just about storage, we like the storage business but we look for some unique opportunities to invest there.

Thanks, Bob, for saving, and your insight on your perspective is appreciated. Thanks, and congratulations on a good quarter. Good luck the rest of the year.

David LaBonte, Smith Barney.

This question might be for you. You have mentioned that you have been speaking to many of the producers in the San Juan Basin. I was hoping you could provide some color on what you're hearing? And then perhaps how you think about that might impact volumes in the next six to twelve months? Specifically, do you see gathering volumes increasing? And if so, by how much?

The next question, I think this might be for Mark, is it possible for you to be able to quantify how much higher natural gas prices may have helped the gathering volumes in the second quarter? Or the gathering rates in the second quarter?

David, let me give you some basic statistics that you can put into your model on the San Juan Basin. At about 1.2 billion dekatherms per day, that's essentially a 1.2 Bcf a day gathering system out there, 1.1 Bcf a day. Fairly rich gas. As you know the GPM of that gas is about 3.25 to 3.5 gallons per million BTUs in excess of 1100 BTUs per Mcf.

We typically see an annual decline rate of about 5 to 7 percent natural decline on that gross production. The typical well that is drilled out there is an infield development well in one of a number of different horizons. We are lucky in the San Juan Basin we have access to both conventional supplies, as well as coldteam (ph) supplies. In the conventional area we have production from the Mesa Verde, the Dakota, the Picture Cliff (ph), among other horizons. So it is a very prolific basin, which has a number of different horizon targets.

Different producers, Burlington Resources, BP Amoco, and ConocoPhillips being the three largest that produce on our gathering system, have different acreage positions. But the good news that I have to deliver to you is that in this market of very high gas prices, and I think that gas prices averaged on the index in the $4 to $4.50 range in the second quarter, finding costs for those producers is typically in the 25 to 35 cent per Mcf range. So there is no place in North America they have to the drill where they have more locations, infield locations, to more potential horizons, at the lowest finding cost to achieve that type of high price.

Now having said that, things don't move quickly in the San Juan Basin. There are Bureau of Planned Management issues. The producers have to file on an annual basis their drilling and development plans. And they simply can't deviate from that just because gas prices run up in a quarter or so. So, what we've experienced since 1996, when we took over these assets, is a very consistent number of new well that are drilled, that are hooked up to our gathering system, on the order of 250 wells per year. Those wells typically deliver on initial production about 300 dekatherms per day. When you multiply 250 wells a year times 300 dekatherms, it about offsets to slightly increases the annual production decline of 5 to 7 percent per year. And that is the reason why we have described it as almost a perpetual gathering system. As long as the reserve base is there, the producers' finding cost is low, the incentive is there to continue to dedicate development capital to the San Juan Basin, because of the high price and the significant return that they can deliver.

And the only limiting factor is the amount of capacity we have in our pipeline to keep it full. That is the reason why earlier this year we announced a $45 million or so capital budget to expand capacity in the pipeline system by as much as 10 percent over the next three years, say 150 to 160 million cubic feet per day of expanded capacity. What we hope that does, and what the kind of informal commitments I've received from the presidents of those companies or the heads of the geographic region for those three major producers, is that if you will expand the capacity we will increase above our traditional capital budget, that typically results in about 250 new wells per year being attached to the system, at about 250 to 300 Mcf per well, that we will expand our capital program. Because there is no place in North America that we can achieve a greater return, given that low finding cost and the consistently high prices that we all expect to experience in the San Juan.

So the good news is, we are expanding capacity by about 10 to 15 percent in the San Juan Basin. We expect the producers that may have committed to us verbally that they will increase their drilling. And I think of more than just on the margin. I think we're looking for a significant increase in number of infield wells and projects that they are going to drill up over the next few years. So that's very long and detailed answer to your question, but that is a substantial asset for us, one that we are very proud of how we've managed that asset over the years. We continue to look for opportunities to install compression, lower the wellhead production pressure, so that we can create uplift for these producers as the field matures. So we are very pleased with that. And, Mark, I think you have the second part of it.

Bob real quick, where do you think the well count could go to or may go to as producers try to expand that budget?

Just in our very informal discussions with them, and in fact I don't know if -- I'm off-site, so I don't know if Randy Hoover (ph) is there, Randy might be able to discuss. We have a cooperative effort going on right now with the three producers as it's really a one-of-a-kind effort. We are working together, not in a formal partnership, but in an informal partnership, to try to optimize the basin. And it wouldn't surprise me if we couldn't see that well count increase by 25 percent over the next couple of years, as we increase available capacity.

And one of the things that we are doing is, interestingly, we are creating a new market outlet for our producers out there. Historically they have been exclusively dependent upon El Paso natural gas as the outlet for the San Juan Basin residue gas from the plants. And we are creating an interconnect with Transwestern to give our producers more market flexibility, but also to increase capacity out of the basin. And I think that number is roughly equivalent to a couple 100 million a day. Is Randy Hoover or David Ertel (ph) there to expand on that?

I am right here. Keep in mind that the system is running basically full. And that our data shows that about 210 or so wells a year will actually keep the system full. At a rate of around 250 a year, we think that there is already some growth opportunity there as we expand that capacity by around 130, 140 million a day. So you're going to see an uplift based on existing gas in the system, that will have natural uplift because of additional capacity. And that additional 40 or 50 or 60 wells a day will provide some growth, as well.

In addition, you've seen some infield opportunity through down spacing of the Dakota, Mesa Verde, and Picture Cliff formations. So you're seeing multiple completions per bit of well bore, as well. A lot of these wells now are becoming dual completed wells.

And I guess to finish that particular question, as the new capacity comes on we do see ramping up of between 30 and 40 million a day fairly quickly. And then moving forward with the growth of the 200, 260 wells a year.

David, with regard to rates, gas prices are strong. As you recall, we hedged 30 million a day of our effective exposure at $3.52. At above $3.33 we are almost -- because there is a cap in one of our contracts, we are almost 100 percent hedged. So we really haven't seen a huge increase in earnings from the San Juan basin as a result of prices, though it has been significant, it doesn't take a lot to move. Our rates are averaging around 31 cents. That is a little bit above what we expected in our plan.

We've actually realized, if you convert our gathering rates and the gas prices etc., we have realized a rate of close to $3.60, which takes into consideration the hedges and the caps and what have you. So we've seen a pickup in volumes over what we expected, as well as the rates. We expect that to continue. And in fact, going into '04 you recall we've hedged 15 million a day of our exposure at $3.95, and that before long we will have the balance of that hedge, probably. The market right now is in the 425 to 430 range up there. So we will hedge the balance for '04.

But let me just tell you, we've mentioned liquid prices and gas prices impacting our results. It has had some positive impacts, direct positive impacts in the San Juan Basin and our gas plants, had some direct negative impacts as we've had to revalue some gas payables that we've had. When you net those direct impacts together, the quarter was impacted by about $7.5 million from the higher prices over what we had expect, based on kind of putting our plan together last year.

Would you say 7.5 million positive?

Yes, positive.

Also, you guys expect to get another $4 million from El Paso in the second half of the year, cash payment?

Yes.

What is the number for next year?

Mark Leland Two.

Thanks a lot, guys.

Adam Lee (ph) of Credit Suisse First Boston.

Can you give us some preliminary thoughts on your '04 capital spending and kind of how that might be impacted by potential acquisitions with regard to that, what kind of target sizes you might be thinking about and whether or not that might include some regulated stuff?

Most of our capital spending for our greenfield projects that we've identified will be winding down at the end of this year. '04, our greenfield capital identified is going to be, unless we identify new projects, is going to be fairly low relative to the 300 million that we are going to spend this year. Our targets, as we've said in the past, is probably in the $500 million a year in acquisitions. We feel that is consistent with our ability to raise easily $250 million of equity capital so that we can balance our acquisitions with 50 percent debt, 50 percent equity.

We will do those on an accretive basis. We like the regulated assets. We like assets that will further diversify our portfolio, add another leg to our stool. We kind of look at our business as being heavily San Juan, Texas and offshore, heavily weighted to gas. If we identified projects that would further diversify that, that is exactly what we're looking for. But I think we will stick with our plan of expect $500 million a year going forward, and that, of course, will be lumpy. Some years it will be bigger, like last year, and some years it will be less, like this year.

I guess with regard to that I'm also thinking about are you looking at individual acquisitions in the 500 million, or do you think the things you're seeing are smaller and would require multiple ones to get to that target?

Well, we are looking -- we have looked at several larger acquisitions and smaller ones. I think that in all likelihood it might be a series of smaller, not a lot smaller, but maybe two to three type a year.

And also I think Bob said something about more equity the rest of this year. Assuming no acquisitions, what is your thoughts on --?

We're going to stick to -- we have done 181, we gave guidance to getting you to 305, and I do not see any reason to alarm anybody and change that guidance. Which the delta there is 125. Which is another 3 million units we would like to do.

Thanks.

(CALLER INSTRUCTIONS) Kevin Gallagher , RBC Capital Markets.

Good morning. Good quarter. Can you briefly discuss the diluted number of units outstanding? At today's prices should we see that dilution adjustment look more like a 3 million unit number?

I don't know how price affects that. How does price affect the number of diluted units? (multiple speakers) A bunch of perplexed people here. We are here, we are just kind of trying to figure out. Are you trying to figure out where the number of units is going?

Yes.

The number of units outstanding right now, snapshot, is 60 million units. You're going to get to that point at some point as you roll off prior quarters and start factoring in. And you know we did three offerings during the quarter. So during the quarter were added 6 million units, plus or minus, probably 5.5 million units.

I was talking more about the series S (ph) converted units and how that is affecting your dilution.

Well, right now none is being converted. And it doesn't impact that at all. And they don't have a very long life to them, either.

Okay.

Think about the size relative, we have a $2.5 billion equity base, and the maximum of that exercise is 120 million. So it's not going to move the needle very much.

Have you changed your outlook for your distribution at all, with the higher guidance?

I think you would have heard that probably first and foremost.

We think we are right on track. Our guidance is in the 5 to 10 percent range distribution growth, that we will balance that growth rate with our desire to improve our fixed-cost coverages, our distribution coverages, and balance sheet. The distribution increase that we made this quarter was right in line with those expectations, and we don't see any changes.

Lastly, regarding the deepwater project, do you have updated estimates from the cash flows, the timing on cash related to those projects?

I think on our website we have several slides that depict what we expect average cash flows to come from those projects, and we really have not updated those as of yet. And as we move into giving guidance for '04, which will probably come later in the year, then we will start to reformulate those.

Okay. Thanks.

Ross Payne, Wachovia Securities.

Bob, I know you can't give specifics on this, but in terms of acquisitions, obviously, you guys are looking at those. Can you comment on the amount of properties you're seeing out there, relative to maybe your expectations? Do you think there will be additional properties coming on in the next six months, relative to what you are seeing now? And are you guys going to be looking primarily for intrastate, or gathering assets, or any specific types?

Yes, thanks for the question. I do know how you could see any more assets for sale than there are right now. There is what I would describe as almost a wholesale consolidation going on in the business. There is a frenzy, if you will, particularly amongst the younger, if that's an appropriate term, MLPs out there, who have yet to hit the high splits and are aggressively looking to acquire assets that would increase their cash flow. So that they could reach the same level of maturity, if you will, that some of the rest of us are at.

Having said that, we are very disciplined buyers. We don't get caught up in a lot of that stuff. And we have a broad base of assets. We know what we are looking for. We are looking for something that makes sense for us. And we will stay very, very disciplined until we get that.

I am pleased after, as Mark described, a very lumpy year last year, where we had just more substantial opportunities than we would have ever imagined in one year, and we had to stretch out there, the first six months of this year have actually turned out to be exactly the way we thought it was going to be. There is a lot of confusion in the market. People are not exactly how to price stuff. A lot of competition for it. So it was a good six months for us to kind of lay out. We needed to consolidate our gains anyway. We needed to digest the significant assets and let Keith and his financial team do exactly what we said we were going to do, and that is get our balance sheet back in shape. And we've done all those things. So that was a good time for us to lay out. We didn't see anything in the first half of the year that we felt like we absolutely had to have or that was to die for.

Going forward, I'm a little concerned about our exposure to just natural gas production decline. If we didn't have a San Juan Basin as what I described as a perpetual asset, I think it would be an even greater concern for us. We will naturally see natural gas supply decline in some areas. We are probably more insulated from that than others because we don't have a lot of assets in some of the higher decline areas. We've been fortunate, particularly in the Permian Basin, we've had good producers that have consistently drilled. In Texas we've had some really big discoveries that have endured to our benefit. We've been able to access new supplies like Devon or Mitchell before their predecessor big discoveries in the Fort Worth basin. Which just by way of example, in our Texas pipeline three years ago, we were getting less than 100 million a day from that supply region. We are now getting over 400 million a day and firming up those contracts into long-term firm demand type transportation agreements.

So we are fairly well positioned to maintain current throughput. But we are cognizant of the fact that, as the gas industry becomes more and more mature, we are going to be fighting this natural decline. And so we kind of want to move into some other areas. Mark mentioned regulated pipelines. That is an area that we've always had a lot of interest in. We don't have much in our current portfolio in the way of regulated pipelines. Some of our competitors do. Like Northern Border, for example, Kinder Morgan has a large portion of regulated liquid (technical difficulty) plant products pipelines. So there is certainly an area out there where the pipelines generate consistent cash flows, based upon fixed rates with little rate volatility and throughput is a function of market demand, as opposed to available supply, which depends upon price and producer drilling.

We would like to kind of evolve into that area. We really don't care whether it is in natural gas, crude oil, refined products, those regulated pipelines systems, the throughput of which depends upon market demand as opposed to supply is pretty attractive to us. We're going to be looking in that direction. That may lead us -- and I would just simply raise but not go into in any more detail, a consolidation in the MLP sector, where there are a number of substantial but not significantly large, compared to us, MLPs that have those type of asset attributes that would be attractive to us, where it may make sense to do some consolidating, where it would be accretive to both sets of unitholders. And we are interested in that, and we would be looking at that as well. I think there will be ultimately a consolidation of the MLP sector, in the top half of the sector. And that is pretty interesting to us, as well. So I hope some of that gives you some color on what we're thinking.

That's great. Very helpful. Thank you, Bob.

(CALLER INSTRUCTIONS) John Edwards, Deutsche Bank.

Good morning, great quarter. Just a couple follow-ups here. You mentioned about the quantity of assets you're seeing. I am just wondering if you could give us an idea of the approximate dollar value in aggregate of what you're seeing.

I think you have just asked a question I'm not sure we have thought about. Mark, you want to take a shot at that?

I think that there is to come several hundreds of millions of dollars of intrastate pipelines, I know, that are coming out. We've looked at several gathering type assets in the $100 million range. We see oil pipelines in the $0.5 billion range. Those are the types of things. We just haven't really totaled it up and said this is what the portfolio of opportunities are. But there is just substantial amount of movement around.

Is it safe to say that it is over 5 billion?

I think so, yes.

We look at things more specific on an isolated basis, and get focused and look at, okay, this is what we're looking at here. And then we move to the next one. And just don't take such a macro view, I guess.

Okay, and then on the guidance, it looks like you raised it by approximately the amount that you exceeded this quarter. So you are not assuming any improved outlook flowing through to the second half? That's obviously the logical conclusion here. And why would you assume that? Since you had such a strong quarter.

Well, maybe John you can help us with what is the upside of us putting numbers out there that don't translate into higher distribution levels. Because that's what we think our equity investors like. And you know, we just hate to see the press release, that we hit every target and we established am EBITDA target of 460, and we hit 457, and we missed our target. Which has no relevance to our distribution target levels. Which is the real return our investors are looking at. So why? We think that the prudent way we've been managing these disclosures is the right approach, consistent with the conservative way we hope people view this management team.

Furthermore, John, we have a portfolio-based model. And we have some things that are operating well, some things that are not operating as well. You know that will shift around. And we think that we are very comfortable with kind of the track that we've been on, the 105, 106. We did 108 this quarter. We think that's very achievable going forward, and that is just kind of where we want a stick. We think if everything works right, we've got some upside to that. But I suspect everything won't work right.

That's great. I was just trying to make sure that we are not missing something in terms of the way we're thinking about it. Because it looked like you might have -- it did look like you might have a little bit of upside in the second half.

We might.

Are there any other assets that would possibly be spun down from El Paso?

John, we have essentially completed our original goal of moving the midstream business, or selling, buying El Paso's midstream business. There is still the gas plants, which El Paso has 22 gas processing plants. Some of those are pretty attractive for the partnership. Others are very volatile. All of them have got a little volatility. Some are more volatile than others. I could conceivably see as those plants get more recontracted and better stability of earnings, those could come into the partnership. We are also standing ready, willing, and able to take a look at other assets that come out of El Paso. But we don't have any plans at this stage.

Thank you very much.

This concludes today's question-and-answer session. I would now like to turn the floor back to the presenters for any closing comments.

Thank you all for joining us. This wraps up GulfTerra's second-quarter earnings conference call. We look forward to talking to you at third quarter's earnings call. Thanks.

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