Enterprise Products Partners LP (EPD) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the GulfTerra Energy Partners third-quarter earnings 2003 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. It is now my pleasure to turn the floor over to your host, Drew Cozby.

Thank you, Ashley. Good morning everyone, and thank you for joining us this morning for GulfTerra Energy Partners third-quarter 2003 conference call. This morning, Bob Phillips, 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 Gulf of Mexico construction update and overview. Keith Forman, Chief Financial Officer, will present a review of the balance sheet and other financial items, and 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 related 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 the 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 balance sheet data related to our debt ratios that Keith will refer to later in the call.

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 are 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, successful negotiation of customer contracts on 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 as always to GulfTerra Energy Partners and its affiliate SEC filings for additional important factors that may affect actual results. 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. Thank you for joining us on this third-quarter call. We are clearly pleased to report yet another record quarter with EBITDA of $123 million, up almost 80 percent from the same time last year, and net income of $60 million or 62 cents per common unit. That is up more than 150 percent from the same quarter last year. The third-quarter was clearly a very successful quarter for GulfTerra on a number of fronts, and you will hear more detail about that and those achievements from my colleagues on the call.

What I would like to do for the group is to highlight five very important strategic themes that I believe illustrate our performance year-to-date and set GulfTerra up for continued growth in the future. So I'm going to highlight those themes, allowing you to really capture some of the detail from the other participants on the call. Theme number one, we have substantially completed our ring-fencing strategy for this year. We announced, as you know, in the early part of the year a number of independence initiatives to improve our corporate governance model and to separate the partnership from El Paso, our general partner. From a financial and a credit perspective, we thought this was important to our investors, to the rating agencies, to our customers, and it was absolutely critical in showing to those three constituencies the strength and the opportunities that we have here at GulfTerra in our midstream business.

We have completed a number of achievements throughout the year; a new name for the partnership, an expanded and independent Board of Directors, a restructured general partnership entity, reduced related party commercial activity with El Paso, and most recently we assisted El Paso in the sale of a 9.9 percent interest in the general partner entity to Goldman Sachs, which provides our public unit holders with what we think is an additional measure of protection. All of these actions taken together on a combined basis now allow our investors to evaluate GulfTerra's business on a stand-alone basis. We think it allows the rating agencies to evaluate our credit separately, and overall, it builds confidence in the long-term sustainability of our governance model and our partnership. I think these accomplishments have been one of the major drivers in our unit price performance so far in 2003. Very important achievements were largely done with our ring-fencing strategy.

Strategic theme number two, we have greatly improved our balance sheet, and I believe we have achieved our call of delivering investment-grade credit metrics by year-end 2003. Just as a recap, as you know in 2002, based on some very unique opportunities, we grew at an exceptional rate. We had capital expenditures of more than $1.8 billion last year, including acquisitions of more than $1.5 billion. These unique opportunities caused us to really stretch our capabilities to capitalize this growth in our business. It caused -- the expansion caused a temporary increase in our leverage up to a high of about 67 percent, but importantly it added a significant set of high-quality midstream assets to our portfolio which are now paying huge dividends to our investors. As you have seen quarter after quarter, these assets that we acquired last year have performed in excess of expectation.

So we believe that that strategy was right on. We viewed those unique opportunities as an opportunity to really grow the partnership. We took the chance, levered up the balance sheet. Now throughout this year, I think we have done a remarkable job of reducing that leverage with the recent completion of the $186 million equity offering, the redemption of our Series B preference units in the Goldman Sachs transaction, and the recent increase in our revolving credit facility to $700 million and the extension of the maturity of that facility. We have throughout this year in summary reduced our leverage now to below 60 percent, pro forma 58 percent, for that last equity offering. We have simplified our balance sheet by eliminating the Series B preference units. We have improved our financial flexibility for the partnership and really built a great platform for future growth. So I think our second theme is a very important achievement, and that is improving the balance sheet and delivering those investment-grade credit metrics.

Our third theme for the year is the deepwater Gulf of Mexico project. We have successfully funded and capitalized all of those projects. The projects are on track, they are on schedule, and we think this will be the most important growth driver for the partnership in the next few years. Going back a couple of years, as you may know, we have announced an impressive suite of organic or development projects, largely in the deepwater trend of the Gulf of Mexico where we have invested in and become the leader in independent infrastructure development, pipelines and platforms. This has been a strategy of ours since we acquired the controlling interest in the (technical difficulty) limited partnership going back to the third quarter of 1998.

Our commitment to building infrastructure in the deepwater trend of the Gulf of Mexico is now beginning to accelerate the development of a lot of projects. I think our leadership in that area has caused a lot of competition for new projects benefiting producers out there, and we are very pleased to see both the scope and the scale of the number of new oil and gas pipeline and platform projects that are coming onstream. We have invested a lot of our future in the deepwater trend, but we have done so with a very disciplined approach. We have mitigated our capital risk by attracting strong and value-added partners, and we have successfully financed these projects at the project level on very good terms.

I think there was some question at the beginning of the year, given our leverage and the situation that we had with our general partners, whether we could successfully move forward with these projects. I am proud to announce that we have done that, and that they have been fully financed and these projects are on track and on budget. We are very excited about the schedule of new projects coming on over the next year or so.

The Falcon platform and pipeline, as you know, was installed in March. It is already, obviously, contributing to our success. Marco Polo pipelines have been constructed and the platforms scheduled for installation at the end of the quarter. The Cameron Highway Oil Pipeline is on track for the third quarter of next year. Our engineering and our commercial teams remain quite busy, not only in developing these projects but looking at new opportunities. I think our leadership position in the deepwater trend is now well established in the market. The recent publication of Oil and Gas Investor highlighting GulfTerra's position in that trend and the importance of that trend to the nation's oil and gas energy balance, I think highlights our leadership position in the deepwater trend of the Gulf of Mexico. That is a major theme, a major accomplishment, and a big driver in the future of the partnership.

The fourth strategic theme illustrating our performance year-to-date is that our midstream assets have performed much better than expected. Mark Leland will give you some detail on this, but I would like to highlight the San Juan Basin and the Permian Basin gathering systems and plants which continue to benefit from strong prices, robust drilling, and in those areas we are attaching new supplies at a solid base. Our Texas pipeline is well positioned in a very competitive market. We have recently announced new contracts in the Central Texas area, and we are getting increased supplies from some of our producers like Anadarko in East Texas and Devon in the Barnett Shale.

Our Gulf of Mexico systems have experienced a modest decline in the shelf base volumes, but that is clearly being offset by new deepwater supplies. And our Petal storage facility is loaded with customer inventories for the winter, and we are set for another expansion project there. I touch on those four areas just to show that we have a balanced and diversified set of midstream asset. So we are very pleased with our competitive position in each of the markets that we serve, and again as Mark will indicate, these assets are all outperforming our expectations for the year.

I think the fifth strategic theme that I would touch on is the distinctive platform for growth that we have created here at GulfTerra. In comparing us to others in our peer group in terms of the size and scope of our asset base, the improvement in our balance sheet and the financial capacity and flexibility that we have, I think with this diverse portfolio of stable cash flow generating assets, the set of development projects that will begin to contribute significant new cash flows in 2004 and 2005, coupled with that flexible strong balance sheet, are improving competitive cost of capital and the clear access to the capital markets that we created for ourselves this year through the ring-fencing strategy and our successful management of our balance sheet.

All of these taken together position us to continue to generate higher distributable cash flows and greater returns for our investors. And again, I think creates a very unique platform for growth in the MLP peer group. So with those overviews and if you would keep those in mind, I am pleased to turn it over to Mark Leland, our Chief Operating Officer, to detail our third-quarter results.

I have several topics to cover today. First I will summarize the consolidated results. Second, I'll provide details on some of our key performance drivers at the segment level, and finally, I will summarize capital spending levels for the quarter. As you have read and heard the third quarter 2003, the partnership recorded net income of 60 million or 62 cents per unit. That is up 152 percent from the same period last year. Third-quarter EBITDA, a key measure on which we evaluate our liquidity and performance, was $123 million, up 78 percent from the $69 million reported in last year's third quarter. As we highlighted on our call last quarter, we closed the Cameron Highway oil pipeline joint venture in July with Valero, and as part of that transaction Valero paid us $19 million, which was included in our income and EBITDA this quarter.

GulfTerra recorded revenue of $284 million this quarter. That is up from $122 million last year or an increase of 132 percent. Gross margin in the third quarter of this year was $150 million, up 58 percent from last year, and operations and maintenance expense totaled $51 million, up 56 percent from last year. As was the case in previous quarters this year, our top-line growth continues to be driven by the results from our Texas and San Juan acquisitions we completed last year, as well as the startup of deepwater projects completed this year.

As I mentioned, GulfTerra recorded earnings of 62 cents per unit. That is on an average of 50.4 million units outstanding, up from 44.1 million units last year. This reflects the equity that we issued -- this increase in units reflects the equity that we issued so far this year. In the fourth quarter, primarily all in October, already this year we have issued through the Goldman transaction and a public unit offering an additional 7.8 million common units. We also redeemed the Series B preferred units. These will affect your calculation of our earnings per unit next year, which you should consider. For the nine months ended September 30, 2003, net income was 152 million or $1.56 per unit. That is up 112 percent. EBITDA for the first nine months was 337 million, up 79 percent.

Now let me provide some detail and more color on our segment results. Natural gas pipelines and plants segment is by far our largest segment and continues to show solid EBITDA growth. In the third quarter 2003, this segment recorded EBITDA of $80 million, up 80 percent from last year. We had strong contributions from nearly all of our assets in this segment. The growth from last year is primarily driven by earnings from the San Juan assets which we acquired in November. Pipeline throughput was about 7 million decatherms per day or about 7 Bcf a day in the third quarter. That is up from 5.3 million decatherms a day last year.

This increase is almost entirely due to the San Juan gathering system, which was not in last year's number. The San Juan system averaged about 1.3 million decatherms a day this quarter, up from the first and second quarters of 2003. We continue to see solid volume growth and well connect activity in the San Juan Basin, and James will highlight that in a little bit. Also contributing to growth in pipeline volumes was a 5 percent or 167,000 decatherms per day increase in our Texas pipeline system and about 190,000 decatherms per day moving on our Falcon Nest pipeline. Volumes on the Viosca oil pipeline system averaged about 704,000 decatherms a day, up about 121 a day as a result of deepwater volumes from the Canyon Express interconnect.

Offsetting these higher volumes were lower volumes on our HIOS system, primarily a shelf-based pipeline system which averaged 634,000 decatherms a day, down from 696,000 decatherms last year. This is primarily as a result of natural decline in our shelf-based volumes. Volumes on our Permian gathering system were also down lightly. Plant volumes were 790,000 decatherms per day versus 746,000 decatherms per day last year. The Indiana Basin plant volumes were essentially flat, so the growth is all in the Chaco volumes which continue to exceed expectations as a result of the strong San Juan Basin throughput and solid plant reliability.

The largest earnings contributors in the segment were the San Juan gathering system, Chaco plant and Indiana Basin plant. The Texas pipeline system showed improved results as the compressor fuel and gas loss problems we discussed last quarter have been resolved and earnings are trending back towards 2002 levels. The oil in the NGL logistics segment contributed $27 million this quarter, which includes the 19 million associated with the Cameron Highway pipeline joint venture. Excluding the 19 million, this segment contributed $8 million of EBITDA compared to 11 million last year. This decline in base business cash flow was due to lower volumes on our Poseidon and Allegheny oil pipelines.

The Poseidon volumes averaged about 117,000 barrels per day of throughput, down from 130,000 barrels a day last year. This decrease is due to decline on the older deepwater fields and problems at several of the new deepwater fields. James Lytal will highlight the improved prospects on this system in just a minute. The Allegheny volumes were 12,000 barrels per day versus 17,000 barrels a day last year. This was a result of mechanical maintenance on those wells, and we expect to see volumes to come back as that has been completed.

The Texas fractionation business also continues to be hurt by high gas prices, which makes extracting NGLs uneconomic for producers and processors, and as a result our volumes are down from last year by about 18,000 barrels a day or 26 percent. These lower than expected earnings were offset by contributions from the Typhoon oil pipeline and the Texas NGL system, which we acquired late last year. James Lytal will highlight in a minute the Poseidon and Allegheny systems, which will experience growth as a result of the Marco Polo and Front Runner fields as they come on next year.

Natural gas storage segment reported EBITDA of $7.5 million this quarter. That is up from $5.4 million last quarter. This increase was due to the completion of the Petal expansion, which was completed in September of last year, as well as increase in earnings from the Wilson salt dome storage facility at Texas, which we acquired with our Texas assets in April of 2002. Platform services segment EBITDA for the third quarter was $4.9 million, just slightly ahead of last year.

The new Falcon Nest platform which was installed in March of this year contributed $3.1 million this year. When you include the EBITDA associated with the gas pipeline at Falcon, this project contributed $4.4 million for the year. And James will highlight additional throughput we expect to see on this system later this year and early next year. Offsetting the Falcon Nest results were a decrease in demand charges at the East Cameron 373 platform, for which the contractual term has expired.

Now let me turn to the performance of our acquisitions. As you all know, 2002 was a transforming year for the partnership. We completed the $1.5 billion in acquisitions from the San Juan and the Texas businesses. This essentially doubled the size of GTM. The cash flow contributed from these acquisitions has driven, as we expected they would, the outstanding result GTM has posted so far this year. Because the assets we acquired last year are included in several of the segments, it is difficult to see their direct contribution. So I thought after three quarters, it would be helpful to get a feel for how these assets are performing.

First, the Texas assets which includes the GTM Texas intrastate pipeline, the Indian Basin gas plant, the Waha and Carlsbad gathering systems, have contributed so far this year $79 million in EBITDA. The San Juan assets which we acquired in November includes the San Juan gathering system, additional interest in the Chaco plant, the Typhoon oil and gas pipelines, and the Texas NGL system contributed $111 million of EBITDA in the first nine months of this year. If we add the two groups of assets together, they contribute about $190 million of EBITDA so far this year, compared to the $1.5 billion acquisition price. When you annualize those numbers, this indicates a very solid return in the 6 to 7 times cash flow, which is ahead of our expectations. We don't really see any change of that in the future.

Now, let me finally turn to CAPEX. So far this year, total capital spending is about 277 million, 236 of which was spent on expansion projects. In the third quarter, spending on growth projects was 69 million, most of which was on the Cameron Highway project, which is now being funded by the nonrecourse joint venture project financing that we closed last quarter, or in the third quarter. The remaining spending on announced deepwater projects is probably around $80 million, most of which will be completed in the fourth quarter and early next year.

A key take-away from our CAPEX to-date is that much of our announced capital is near completion, and spending rates will be coming down in 2004. Maintenance capital expenditures in the third-quarter 2003 were just over 12 million, which is in line with our projections. Nearly 3 million of the 12 million of maintenance capital were for well ties, the majority of which were in the San Juan Basin, and continues to be strong. Total maintenance CAPEX for the year is $41 million. With that, I will turn it over to James Lytal who will provide some more color on our various business units.

Our San Juan gathering and processing assets continue to perform well, with volumes on our gathering system averaging over 1.2 billion decatherms per day, and currently we're flowing over 1.3 billion decatherms per day. The Chaco processing plant is running at 99 percent availability for the year, and has recently seen throughput as high as 700,000 decatherms per day. In addition, we continue to see strong liquids prices for our share of the natural gas liquids we recover at the plant. We're on pace to connect 250 to 260 wells to the San Juan gathering system this year, and we are currently finalizing the engineering design work for our 130 million cubic feet a day expansion of the gathering system. We should see a stair-step increase in volumes as each day to the expansion is complete, with 130 million cubic feet per day reached no later than 2007.

On our Texas assets, we have seen a year-over-year increase in drilling of 18 percent in South Texas, 43 percent in East Texas, and 43 percent in North Texas. We continue to see significant volumes from Devon's Barnett Shale play in North Texas, which is averaging almost 400 million cubic feet per day into our pipeline. We are also seeing that play being extended to the south of the current area, and that will be in an area that is located closer to our pipeline. So we have some upside from that area. We have added incremental revenues to our GTT pipeline of approximately $1 million per year through a new ten-year transportation deal we have signed with the lower Colorado River Authority. Operationally on the pipeline, our Wilson storage complex is close to being full, and we have our winter action plan in place in preparation of cold weather in Texas.

Moving to the east at our Petal and Hattiesburg storage complex, we announced this quarter that we have signed a non-binding letter of intent with Southern Natural Gas to construct and sell them a new 5 Bcf cavern and an undivided interest in our Petal pipeline. GulfTerra would continue to operate the complex as well as this Southern Natural cavern and pipeline, and Southern Natural would reimburse GulfTerra for those operations. Southern Natural is currently out in the market conducting an open season with their customers on their pipeline system to provide this new storage service.

Moving to the offshore, our Falcon Nest platform and pipeline continued to perform well. We anticipate flows from Pioneer's Harrier development early next year, and that addition should raise volumes from the current rate of 180 million cubic feet per day to 250 million cubic feet per day. Pioneer has announced two new discoveries in the area that will be connected to their subsea system and to our platform and pipeline. They are called Raptor and Tomahawk, and they should be connected by midyear 2004. Pioneer expects volumes at that time to increase to 350 million cubic feet per day, moving across our platform and pipeline.

Pioneer has also indicated they have several other prospects in the area, and have a stated goal to keep production at these higher levels for the foreseeable future. As Mark indicated, our volumes at Poseidon have been lower than expected, but the future looks right for Poseidon. In the third quarter, Poseidon announced its new Front Runner pipeline project, which will be a new 36-mile, 14-inch pipeline connecting Murphy, Dominion, and Spinnaker's spar platform at Front Runner to Poseidon at Ship Shoal 332. First flows from Front Runner are expected in the third quarter of 2004, and anticipated peak rate from that field is 60,000 barrels of oil per day.

In addition to Front Runner, Poseidon is contracted for the Marco Polo barrels, which are anticipated to add 50,000 barrels a day of oil by the end of 2004. We should see volumes at Viosca Knoll increase in this quarter as a result of first close from Medusa and Matterhorn. Those fields should be coming on over the next few weeks. These two fields combined we believe should add over 100 million cubic feet per day of deliverability to Viosca Knoll.

At Cameron Highway construction remains on schedule for the first deliveries of oil in a third-quarter of 2004. We have laid the Galveston Bay section of the pipeline and are currently out in the Gulf laying the two 24 inch shallow water pipelines that will go up to shore where the oil can go into the Texas City area as well as the Beaumont, Port Arthur area. We should be commencing the insulation of the 240 miles of offshore 30 inch late this year.

We continue to be pleased with the number of discoveries in the South Green Canyon area with Kerr-McGee announcing their Constitution discovery. In Green Canyon, the Unocal’s recent announcement of their St. Malo discovery in the Walker Ridge area.

Finally on our Marco Polo project, Harimus installaion vessel will arrive on location today to commence the 35 deinstallation of a Marco Polo tension leg platform. The oil pipeline has been installed and we are finalizing the installation of our gas pipeline. We expect to turn the platform over to Anadarko to complete their wells by the end of this year and expect first production from the Marco Polo platform in late March or early April.

We're very excited about the activity around the platform. Last week Anadarko announced the discovery at what they are calling K2 North, it is located at Green Canyon 518, which is a Northerly extension of the K2 field. The K2 field is a recently announced 120 million barrel equivalent discovery. Anadarko indicated they expected to see both fields tied back to the Marco Polo platform by early 2005.

If we are successful in tying back these fields, we have a good chance of having our 120,000 barrels per day of oil capacity on the platform at or near capacity. These added volumes will also be very beneficial for our downstream oil pipelines. With that update I'm going to turn it over to Keith Forman.

We set goals for ourselves at the beginning of the year to achieve investment-grade credit metrics for our balance sheet and business and we believe these have been achieved. At the end of the third-quarter our total debt at $1.9 billion represented 62 percent of our total capital base of $3 billion. Dividing our debt by our annualized EBITDA of $443 million yields a ratio of debt to EBITDA of 4.3 times. These leverage metrics were further improved by the transactions which occurred in October after the end of the third-quarter.

The pro forma effects of these transactions, the Goldman Sachs equity purchase, the Series B unit redemption and the sale of 4.8 million common units is on our Website and shows that our pro forma debt as a percentage of our pro forma total capital was 58 percent and a ratio of pro forma debt to annualized EBITDA was 3.9 times.

We have done some comparative analysis of our leverage statistics with other MLPs which have investment-grade credit ratings and believe we compare very favorably. Are overriding desire to improve our balance sheet this year was driven by our need to reduce our cost of capital. We have reduced our costs and I will use an example our recent forays into public debt and equity markets. Last November we issued senior subordinated notes with an effective interest rate of 10.75 percent. In the early third-quarter we issued senior secured notes with an interest rate of 6.25 percent.

On the equity side as well there has been improvement. In April we issued in units having a yield to the investor of 8.6 percent, while a couple weeks ago we issue units with a yield to the investor of 7 percent. The cost of capital improvement is critical to being able to acquire third party assets into realizing even higher returns on our expansion projects.

We have pursued some liability management strategies such as swapping some of our high coupon fixed-rate debt into floating-rates to take advantage of low short-term rates. Our fixed to floating mix is approximately two-thirds fixed and one-third floating at the moment.

We continue to evaluate these strategies and may avail ourselves of additional ones in the future. Our capital raising goals have been achieved for the year. In fact, exceeded from an equity raising standpoint, we have maximum availability on our revolving credit, more than enough capacity to meet our current plans.

For the quarter our distribution coverage ratio was 1.25 times and for the nine-month year-to-date 1.14 times. I can't pretend to be smart enough to tell you that I know a specific reason for the dramatic improvement in our business year-to-year or which chicken or egg came first; record cash flows in earnings, a deleveraged balance sheet, a significantly lower cost of capital, attainment of our independence goals, or macroeconomics factors, such as persistent low-interest rates or an economy showing signs of life.

What I am smart enough to discern is that GulfTerra is about to enter 2004 with the strongest financial foundation it has ever had from every measure; cash flow diversity, cost of capital and leverage. A foundation which we hope to build a house upon of even greater returns to our investors next year. That completes our prepared remarks. We will take questions.

(OPERATOR INSTRUCTIONS)

Bob, in your comments you indicated that your projects are on track and on schedule. A lot of things going on and lot of moving parts obviously. Separately, we have seen some delays in deep water product development even though the volumes from a lot of those projects look like in time they will be even greater than they were originally announced.

My question to you is, is there any significant risk or any risk of significant impact let's say to you as your products come onstream and on-time and some of these projects might be delayed? Or is that something that you're not concern about?

David, I am going to give you a couple of general responses to that and then turn it over to Bart Heijermans who is our Vice President of Gulf of Mexico Commercial and Engineering Operations. My general response is all of our projects are on track and we can't be responsible for other people’s projects.

I have always said we got the best commercial and engineering team assembled to tackle deep water projects. In fact we have more projects going at once than we have ever had in the history of this partnership. We monitor our capital outflow on a monthly basis. We are on track. We have had some very positive things happen from a weather standpoint. Our regulatory permitting has gone very much according to plan. I would say that if anything, if there have been any delays at all in any increased costs it is because in a couple of these projects the producers have actually had better luck in developing properties around these projects and so we have been in the position of upsizing the projects or debottlenecking is the word that we will like to use which effectively increases to the maximum capacity these pipelines and platforms that we're in the process of constructing. That has been a positive thing.

As a general rule we have experienced very favorable economics in the marketplace by virtue of having so many projects out there at once. I think all of our engineering firms that are working for us have been doing a great job. We have hit the market just right in terms of materials and procurement costs. Our construction at various components of these projects has been on track. We hit the market just right for example in buying the large diameter pipe for the Cameron highway project. Hit the market in a way that allowed us to acquire that pipeline, that pipe, if you will at a much lower cost than we originally estimated. So I would say as a general rule, we are expensing very positive things. Now let me let Bart speak to what is going on in terms of the overall development of the deep water trend.

The first project that we completed was the Falcon project and we completed that a couple of weeks ahead of the targeted completion date and it was less than 12 months after we have executed our agreements with Pioneer. The other projects that James was talking about earlier, the Marco Polo project, the early start of that project was September, early start of the offshore installation phase was September. We have been waiting on the Harimus installation vessel to arrive. It has arrived now. What we have done in the meantime we have advanced the precommissioning of the platform onshore so we have done that in the months of September/Octobers. So really the first production is not going to be impactive. The first production is still going to be March, early April as also Anadarko indicated in their conference call last week.

Then the other projects like Red Hawk and Cameron highway are also on schedule so we have not really experienced any and really the first project that we delivered was ahead of schedule.

As far as the volumes coming to you from some of the producers where we have seen some delays on some of the projects offshore, I guess that is my concern that you're on schedule and some others might not be. Is that something that isn't significant to you?

No, I mean if you look at the projects that have been commissioned and that are producing such as the Canyon Express project that have been producing at higher volumes. So maybe some of the projects have been delayed but the volumes that have been produced at these firms and that these projects have been at higher volumes.

Okay. On the financial side, I am wondering as I look at your 10.75 percent debt, your 18 (technical difficulty) debt, some of these higher costs debts that you issued not that long ago. But with your cost of debt so much lower today, I'm wondering Keith, what is your ability to further reduce your cost of debt by buying and exchanging some of those offerings and what your plans are to do that?

That was sort of my liability management strategy and we are looking at all of that. I don't know if there is a trading aspect to this whole thing in a market timing and all of that. I don't want to sit here and say that we have come to a firm decision but we are looking at all of that. We do realize that it doesn't make much sense to take the equity proceeds which have of all in cost of around 9 plus percent and paydowns 3 percent revolving credit all of the time. So we're looking at getting something that actually is accretive maybe off of our books.

So we might hear something in the not too distant future on that score?

Yes.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Chris Campbell of Morgan Stanley Dean Witter.

Just wondering Keith if you could just perhaps give us a little bit of a quantifying some of the benefits of investment-grade status relative to where you are today because as I look at your business being what it is, it doesn't if I'm not overstepping hear it doesn't require an awful amount of collateral or working capital to support. And so I was just curious as to what type of benefits, you mentioned the acquisition front as one overall in terms of being able to reduce your cost of capital by a series of steps you have taken over the last year which I commend. But just curious on the investment-grade seal of approval, what exactly should we expect to come from that?

I think you are right about with respect to liquidity and working capital. We don't borrow like many of our peers in the business. But what it does do, Chris, is in two respects on the debtside, it makes our securities available to a much greater pool of capital. There is nobody around that would say that the total outstanding issues in the high-yield world approach that of the outstanding debt issues in the investment-grade world.

It also allows you some tenure (ph) flexibility. As you know, with a business like we have with very long lived and sound and predictable cash flows they do lend themselves in having longer tenured securities and look no further than Kinder Morgan or Enbridge, both of whom have 30-year bonds and that is not available in the high-yield market, so there is that depth.

We also think on the equity side that we think that the only generally available metric to a non-analytical person in the equity world is the credit rating. And we think that if a person is presented with an opportunity to buy an equity security that has a 7 percent yield and a sub-investment grade rating, and a 6.7 percent yield and an investment-grade rating for that 30 basis points they will gravitate to the lower yielding security because the rating is to them simply security.

We can sit here all day with financial people on the phone and in this room and say listen, my math is as good as their math, or my business is as good as theirs. But if you're sitting at home and you have a call from your broker and you're being asked to invest $5000 and buy 100 units of MLP, you are not going to go there, you're just going to take Good Housekeeping's safety rating is going to come from the rating agency. So it is really -- I don't know if it is very analytical because clearly in our bonds we have a lot of funds cross over type of investors, we traded yields that are comparable to investment-grade credit.

But I think we really just think that that is a bigger platform. We are a very big company right now and we're going to get bigger. To raise -- to date we have raise $2 billion of capital and we raised 2 billion last year, so I think 2 billion is sort of the minimum for next year and to continue to put those types of numbers away, we need a bigger pool of investors.

Have you had recent discussions with the agencies and if so, what have they --?

We are in ongoing discussions with them. Clearly it is to our benefit at this point in time to tie things together for them and kind of demonstrate where we have come in the literally at 12 months, and we will do that. But there is no deadline, no prescribed meeting, nothing like that. All we can do is to do what we are doing and put the numbers up there and then hopefully it will gravitate.

Okay. And a few housekeeping items. The 1.25 coverage, does that include the --?

Yes, it does include the $19 million.

Is your EBITDA guidance still in the same ballpark for the year of 435 to 445?

Yes, 435 to 445.

On the capital budget, last question. I think last quarter you had raised your capital budget on maintenance to 50 million? And I just wanted -- now you're saying it is going to be closer to 40 million?

No, I said year-to-date we are at 41 million.

41 million is your year-to-date number?

Yes, we're right on track for the 50.

Okay. Real quickly, what are the components of that 50 million, just to get a sense for the maintenance capital allocation?

About 10 million, about 15 million of it are well ties, and the balance is pipeline integrity and compressor overhauls and the like.

Okay. There was a call a couple of days ago where your partnership talked about some of the pipeline integrity costs they are having to pursue as far as a five-year program. Is that something similar here as far as your integrity CAPEX budget? Is there a program that you are having to go through and take a look at your pipelines?

Yes, we have spent almost $10 million on pipeline integrity so far this year and we do have an extensive pipeline integrity program just like all of the other pipelines. We have a lot of liquid lines and we have a lot lines in Texas, both of which have fairly stringent new rules that we have to comply with. We are in the process of doing all of our in-line inspection, smart picking, etc. and remediating as we need.

Some of our pipeline integrity costs are being -- we have a certain indemnification for certain pipeline integrity costs associated with the Texas assets from El Paso as we knew that we weren't sure what those costs were going to be going into the acquisition so some of that has been covered by El Paso, but we have an extensive program just like all of the rest of the guys.

Okay. Throughout the year say for instance in '04 that whatever guidance you laid out at the beginning of the year may move a little bit depending a little upon what you discover.

Exactly if you have a lot of problems then you're going to have to fix them. But the guidance, we are saying I think 50 million is probably pretty close to where we will come out with our guidance next year and that assumes a party big number for pipeline integrity.

Okay, thank you for your time.

Yves Siegel from Wachovia Securities.

Thanks and good morning. I have a couple of questions. I'm hoping you can address it. When you look at the cash flow stream longer-term, can you sort of reconcile your thoughts on the decline curves that you may see offshore as well as in the midstream Texas to San Juan Basin and tie that into what you are thinking on cash flow coverage of the distribution going forward?

Offshore, we see pretty stable volumes, our Viosca Knoll system is running at about 700 million a day and we have got two projects coming online that will impact volumes there on at system, the Medusa and the Matterhorn projects, those will come on this fourth quarter, sometime in this fourth-quarter and that will continue to add volumes there. That should stabilize in that $700 million a day range for a while.

HIOS is a bit of a wild-card. It is primarily shelf-based, but it is anchored by Exxon's Diana Hoover field which is we're starting to see a little additional activity in that field and that ought to bring volumes up a little bit hopefully will offset the decline. The HIOS system contributes about $15 million of cash flow so it is not a big cash flow contributor.

The balance of our offshore pipelines are really poised for growth as we see new volumes come online. And let me just move onshore. The Texas pipeline system is substantially demand-based. We are the biggest supplier of gas to Austin and San Antonio, a big supplier to the Dallas-Fort Worth area as well as many of the power plants along the system.

We see good drilling activity in the Barnette Shale area and South Texas continues to be fairly strong. We don't really see a demand -- a volume decline issue there. Remember, 58 percent of our revenues are based on firm demand charges. That is about 50 million a year whether the pipeline is used or not. So that business is very stable. good solid MLP business.

The San Juan Basin we think is going to stay party steady right about where it is. There is a natural decline there around 5 to 7 percent. At well connect rates above 200 wells a year we actually see volumes increasing. In the last three years we have been well above the 200 well connect rate and in fact, this year we are on track for about 270 and that is one of the reasons we have an expansion coming online. So our base business we see in the real core assets, San Juan, Texas very stable volumes and cash flows.

Off shore we will see a big pickup over the next couple of years as a result of these big projects coming online. And we won't distribute all of that increase because it will have a tendency to come on flush and decline a little bit so we will be very prudent in our distribution growth but we see continued strong results in all of our systems and there will be a real strong increase in '04 and '05 and ‘06 as these big deepwater projects come online.

If I could ask Keith, you mentioned $2 billion financings. What kind of acquisition opportunities do you have? I'm just trying to reconcile that big number.

The 2 billion that we raised, I am counting like an investment banker. If I refinance something I had to go out in get a new vote of security holders that we're counting the full 700 of the revolver.

So maybe you could just anybody talk about the landscape going forward in terms of investment opportunities that you see in front of you for '04 and beyond?

Let me talk about acquisitions for a second. I want to -- we know we sound like a broken record but our investors are buying this partnership unit because of our unique growth profile. So let me say it again. To achieve our '04 and '05 cash flow estimates our internal estimates, we do not have to make an acquisition.

We have projects in our plan and a key point we're making on this call is that we are almost fully funded, that we are into our nonrecourse project financings for the remaining capital on these projects and these projects are on budget and they are on track from a timing standpoint. And our track record over the last couple of years has been very good in terms of getting them installed on time and having these projects deliver the type of volumetric throughput in cash flows that we expect.

Our track record is very good there. That puts us in a very luxurious position of being able to be very selective on acquisitions. Being who we are in the market, being the third-largest MLP, people know that we are an active developer of projects. We have been a very successful acquirer of assets. We get to look at almost everything that goes in the market on the gas side, the gas liquid side, the oil and we are beginning to look at projects in the refined products and other side.

We have said consistently throughout the year that we would like to add another leg to our stool. That continues to be our strategy and we look for opportunities outside of our traditional natural gas business for growth. We have also said that we would like to acquire more assets that are market-driven as opposed to supply driven. The Texas pipeline acquisition was a key component in that strategy. The San Juan Basin long-term reserve acquisition was a key component in that strategy, yet significantly offset what we saw as potential higher than acceptable decline rates for the Outer continental shelf.

When combined with the new projects we have coming on from the deepwater trend gives our entire midstream portfolio a longevity and a sustainability that we think is unique in the MLP space. So we will remain disciplined and selective in our acquisitions. I think the great news that comes from this call is that our financial house is in better shape than it has ever been before as Keith said, our leverages low. Our financial flexibility is high. We have termed out, and I think if you look at our debt over the last four quarters, you will see a significant transformation from fairly short-term to fairly long-term. Our maturities are in great shape. We just have a great platform for another large acquisition to the extent we found the right one, I think we will take advantage of that. I think Mark has a revision to make on the San Juan Basin.

Just a clarification. So far this year for San Juan we have connected 217 wells. We are on track for 260 to 270. Excuse me, 250 to 260, wells which will have the tendency to increase throughput to the extent we had capacity, as you all know we are full in the San Juan Basin.

That does it for me, thank you.

Ross Peen from Wachovia Securities.

This is to Keith, any specific event do you see having to occur here to have the rating agencies take a look and revisit this because you would think given what you guys just did with raising equity that they would have revisited and taken you off negative outlook and possibly looked at an upgrade?

We are hopeful -- put it in context all of the specific events that have occurred this year and I think maybe, Ross, since they have been sort of strung out since the beginning of the year to now maybe it is contextual that we need to lay out the total common units raised this year, $500 million.

The elimination of the series B preferred, which had a cash impact to us in 2011 of about $42 million is gone. The independence initiatives -- and maybe it needs just some translation or explanation, but I am more optimistic with respect to this than I ever have been and you know I am a sour puss on this topic. So, can we just leave it at that right now and I don't want to set an expectation that we are having a meeting on this day and have everybody sit in anxiety. Did they call yet? Did they send us something over yet?

Let's just think that the stuff that we see, they see, and hopefully we can start checking some boxes as some other goals get achieved.

One last question. In general can you guys -- you guys mentioned the savings on the pipe given the timing of when you purchased it. Can you throw out a figure or do you want to throw out a figure in terms of what your savings might have been on the raw materials for the Cameron Highway Pipeline?

We acquired a significant portion of the (indiscernible) India from a 5 mill and the rest from the United States here at very good times and very hungry mills so we have probably have saved in the order of 20, $25 million on replacing these fibers (ph) .

That is very good. Thanks.

Mark Easterbrook from RBC Dominion.

A lot of my questions have already been asked but two quickly. Regardless of the rating agencies, where do you guys feel comfortable in your debt to cap or debt to EBITDA? Where do you want to see those metrics go down to? Secondly, you mentioned the $2 billion in potential raising for next year. Is there any consideration of the I-unit (ph) or is that definitely off the table?

The $2 billion, I'm using that as a gross number. As I told Yves, a lot of that was refinancing of old debt and next year if you look at our debt maturities we have 175 million attendance free coming due. We will be redoing some other things the Poseidon loan and stuff like that so I don't want you to put 2 billion anywhere. We don't have $2 billion worth of projects. As I said earlier, our capital raising for the foreseeable future with respect to additives, equity capital and the like is done until we come up with a public announcement with respect to an acquisition or a new project. What was the first part of your question?

The metrics on the debt to capital.

I think 4.0 or lower and 3.9 is kind of where we are on a pro forma basis right now. That is a good place to be. 3.8 is even better. And on the debt to cap, I think the mid-50s, 55, 53, 54. We do think as we have been doing them 50-50, you're going to get close to 50-50.

Thanks for clarifying that.

Sam Brothwell from Merrill Lynch.

My questions have been answered.

A lot of you guys must have read Gretchen Morgenstern. I don't hear any of that hey great quarter guys stuff anymore.

Chris Campbell of Morgan Stanley Dean Witter.

Two quick questions. I might have missed this, but what is your liquidity on hand to date including cash?

We had $58 million at the end of the quarter on our balance sheet and we have depending on if we use this quarter and factor it into our covenants -- the liquidity is a snapshot in time. We have over $500 million dollars available under our revolving credit.

I guess that is on the facility.

Right, and the 58 is cash --

Of course. When does that facility expire again?

The credit facility? In 2006.

I just wanted to -- I know we haven't talked about this in a while because you have been busy repairing your balance sheet or just improving it. The long-term growth goal for distribution I remember at one point was roughly 10 percent and just curious as to what you have on hand right now and the organic growth potential that you see in the '05, '06 time frame. Are you prepared at this point in time to reiterate that goal or --?

Last year if you remember, we came out with five to eight percent and we just sold some equity a few weeks ago where we made it clear to people that our goal for the foreseeable future was 5 to 7 percent. Chris, I think it is not correct just to look at that as the growth. There is a total return metrics that you have to use, assume some future yield, keep it flat if you like, but a 5 to 7 percent distribution increase per annum yields between a 14 and 22 percent total return to our investors every year. As you know this year they have received over a 50 percent total return.

Thank you for your time.

At this time I would like to turn the floor back over to the presenters for any closing remarks.

Thank you, Ashley, and thank you on the call for joining us. This wraps up GulfTerra's third-quarter earnings conference call. We look forward to visiting with you at our next regularly scheduled quarterly earnings call. Thank you.

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