Enterprise Products Partners LP (EPD) 2003 Q4 法說會逐字稿

Good morning and welcome to the Gulfterra Energy Partners fourth-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 following the presentation. It is now my pleasure to introduce your host for today's call, Mr. Drew Cozby. Sir, you may begin.

Thank you, Stephanie, good morning, everyone, and thank you for joining us for Gulfterra Energy Partners fourth-quarter 2003 earnings presentation conference call. This morning Bob Phillips -- Chairman and Chief Executive Officer -- will begin our call with a review of 2003 highlights in a strategic overview. Bill Manias -- Chief Financial Officer -- will take us through the operating results and present a review of the balance sheet and other financial items. James Lytal -- President -- will provide a commercial review and update you on our commercial projects. Other members of management are also here to assist in the Q&A 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 for the continuity in our reporting. This is also covered in the press release and web site issued this morning. In addition reconciliations and non-GAAP measures used in this presentation and call are reconciled to the most comparable GAAP measures and are incorporated in the release and posted along with our release in operating statistics on the investors page of our web site at www.Gulfterra.com on a tab entitled "Non-GAAP Reconciliations, including a reconciliation of consolidated EBITDA to net income".

And now I wish to make you aware that this call will include forward looking statements and projections. Gulfterra Energy Partners has made every reasonable effort to ensure the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However a variety of factors including the integration of acquired businesses, our pending merger with Enterprise, the status of the partnership's Greenfield project, successful negotiation of customer contracts and general economic and weather conditions and markets served by Gulfterra Energy Partners and its facility could cause actual results to differ materially from the projections and anticipated results or other expectations expressed in this release.

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 the partnership and its affiliates, Securities and Exchange Commission 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. Bob.

Good morning to all of you and thank you for joining us. I am very pleased to announce Gulfterra's full year 2003 results with EBITDA of $435 million net income before one time charges of $200 million in net income after the non-recurring charges that were attributable to our debt retirement activities in 2003 of $163 million. All of those are records and we're very pleased with our full year performance.

In the fourth-quarter our results were skewed a little bit by the majority of the debt redemption charges that occurred. But I would characterize our fourth-quarter performance as solid but coming in slightly under our expectations and Bill can talk to you about some of those details.

We will take a slightly different approach today in this call since we do not plan to hold our traditional annual analyst meeting which we always have in the spring of the year. We are combining some of the aspects of that analyst meeting with today's earnings call to give you a broader review of both our performance of last year as well as where we expect to head in 2004. And I would note that we have posted a healthy number of slides that you can follow along with us. They're on our web site and we will be referring to those slides. So I would recommend that if you're not there that you get those and spend some time with those. There's a lot of information and it is typically the type of information that we would provide in our annual analyst meeting.

Before I start, I would also like to very quickly thank a couple of our compatriots here -- Mark Leland and Keith Foreman. I want to thank them for the many contributions that they've made to the success of Gulfterra over the years. As you know Mark and Keith have recently taken new executive positions with El Paso. I am very proud of the opportunity for them and very excited about what they bring to El Paso. I've worked with them shoulder to shoulder for a number of years and I attribute a lot of our success to the hard work and contributions they make.

Very fortunately however we have an extremely deep bench here at Gulfterra. And on an interim basis in both as we move forward in completing the merger with Enterprise later this year, I want you to know that this very deep bench ensures that this partnership is in great hands. We will move forward and continue to be successful in managing our business.

Now if you would I want to turn to slide 5 which lets us begin to recap 2003.

Clearly our most significant achievement in the year was suggesting the prior year's acquisitions. The San Juan and Permian gathering systems; the Chaco and Indian Basin processing plants; the Texas pipeline systems. All of those assets performed very well in 2003. They now form the core of our partnership business. They provide the stable cash flow from which we will use as a platform to grow with our organic projects.

Of course the performance of those assets and our ability to digest them properly allowed us to achieve record cash flow in earnings for the year and as I said provides Gulfterra with that diversified base of stable cash flows for our 2004 objectives.

Importantly, our independence initiatives and our name change which were accomplished throughout the year were important steps. Early in the year to allow us to separate from the confusion of our general partner, and I think they played a large role in producing a record total return for our investors in 2003.

We did greatly improve our balance sheet in 2003 with more than $2 billion in new financings and refinancings that resulted in lower leverage. We clearly met our goal that we laid out for you in February of last year of coming in at the end of the year with leverage below 60 percent. We've done that.

We also importantly improved our cost at capital which will create more accretion as our organic growth projects move forward and begin to contribute significant cash flow in '04 and '05 that lower cost to capital will be very important to the earnings generation of this partnership.

We did deliver on our distribution promise for the year. It was on below end of the distribution range. We said at the beginning of '03 we were going to concentrate on managing our balance sheet, improving our credit statistics and our credit profile, and I think we did that. But I also feel good about honoring our promise to our equity unitholders as well.

All of these taken as a group contributed to the most important events of the year for us and that was the opportunity to merge Gulfterra with Enterprise Products to create the industry's leading midstream company. We're very proud of all these accomplishments. I think from my perspective the merger with Enterprise would not had been possible but for all of these other achievements that we laid out as objectives in the early part of the year and then accomplished throughout the year -- many times against a very difficult challenging background.

Turn to the next Slide -- as you can see on slide six we were extremely busy during the fourth-quarter. I thought it was important to highlight a number of the achievements that we had during the quarter as we negotiated and completed the Enterprise merger. A number of things accomplished all had important effects both on our 2003 performance as well as where we expect to go in 2004. I'll just mention a few of those.

We did complete a very important 9.9 percent interest sale in the general partner on behalf of El Paso to Goldman Sachs, and as a part of that transaction we redeemed the Series B preferred units that was all part of our (indiscernible) strategy that we had announced in the spring to 2003. The sale of the GP interest of course was unwound when El Paso completed step 1 of the Enterprise merger by selling 50 percent of the GP interest to Enterprise on December 15.

That was a challenging transaction -- one in which I thought that we accomplished a lot, was an important transaction. We are pleased to have accomplished that as a credit to the Enterprise deal. We did complete two important equity offerings raising almost $300 million in new equity and lowering our leverage completed in the fourth-quarter.

We initiated service from two new sources -- deep water gas production, Matterhorn -- a third party gathering line, Medusa -- a gathering system that we had completed construction on during the year.

We redeemed almost $270 million worth of high coupon debt which was an important aspect that led to the nonrecurring charges that we took in the fourth-quarter but it will also of course result in lower interest savings and lower cost of capital for us as we go forward. And importantly in the fourth-quarter we expanded our term loan B facility while at the same time significantly lowering the cost of that facility. So that will be important in our cost of capital calculations and our debt capitalization as well.

And for the finance guys I threw in an important note. They received a significant industry award due to the creativity and structure of our Cameron Highway project financing of a industry publication awarded them -- the Oil and Gas Deal of the Year for 2003 -- we thought that was important for you to know.

Turning to slide 7 let me talk a little bit about the planned merger with Enterprise -- I'd like to update you on our progress. Of course we did announce on December 15, this three-way multistep transaction, which will result later in the year in the merger of Enterprise and Gulfterra. The Hart-Scott-Rodino filing was made in January. We're making good progress on that front. We continue to work on the form S4 which should be filed in March. We have commenced the integration planning process and I'm very pleased with our progress there. It's going very well at this point. We have announced just this morning a portion of the postmerger executive team, focusing on the commercial and operational sides of the postmerger team.

I'm pleased that we will have a solid combination of executives from both partnerships to lead this Company going forward.

All those taken together, I think we're on track to close the merger in the second half of the year and I'm very pleased with the progress that we have made so far.

I would also hesitate to miss an opportunity to talk about the rationale for the merger. If you'll turn to slide 8. Just to look at the map you can see that the combination creates North America's leading midstream company. The assets -- we're very proud of the footprint of this combination. They touch all of the major supplied basins in the country -- several of the significant gas and natural gas liquids markets. And we believe this combination most importantly will allow us to greatly enhance the services that we can provide to our customers, both on the supply side and the market side. We're very pleased with that.

The value drivers as we have discussed previously in some presentations include a lower cost of capital due to Enterprise's 25 percent cap on their general partner and semi distribution which when combined with the significant organic growth projects that we bring to the combination would create more accretion from those growth projects and also result in a significant transfer of value from the GP to the LPs and we're very pleased with that.

Postmerger we would expect -- I think -- that the combined companies would expect to see substantial synergies from the combination. We're targeting a non heroic level of $30 plus million in cost savings. We expect to see potential interest savings as we consolidate the debt of the two partnerships. And of course, we would expect to see incremental organic growth opportunities as well.

I think we're in excellent position to complete this merger on the timing and the schedule that we talked about. We remain very excited about the prospects for the combined entity and the opportunities for growth going forward. We think it's a perfect match of a great financial structure with a tremendous platform, a stable cash flow, generating assets and tremendous growth opportunities. We expect to be one of the leading midstream companies and of course one of the leading master limited partnership or publicly traded partnerships investment opportunities going forward and we are excited about this opportunity.

With that overview of our 2003 accomplishments and some background on kind of where we are headed going forward I'm pleased to turning over to Bill Manias who is our newly appointed Chief Financial Officer. As Drew said, Bill will give you some details on our earnings and our balance sheet as well as our 2004 standalone objectives and then we should look forward to James Lytal giving us an update, not only on performance of our core assets in 2003 but also an update on our numerous projects in the Gulf of Mexico. Bill.

Thank you, Bob. I have a number of topics I want to cover today. First I'll summarize the earnings drivers for our business and consolidated results for the fourth-quarter for the full year. Next I will provide some details on our performance drivers at segment levels and summarize capital spending levels for the year.

Third, I will present a review of our capital scorecard, balance sheet and other financial items. Finally, I will update EBITDA guidance for 2004. Let's turn to Slide 10.

Earnings drivers. 2003 was another record year for Gulfterra in terms of overall business performance and EBITDA. I want to touch briefly on several factors which were the primary drivers in 2003's solid performance.

First was the continued topline growth from the assets we acquired in 2002. That's namely the Texas and Mexico assets which we acquired in April 2002 and the San Juan Basin assets which we acquired in November 2002.

Second was the EBITDA contribution of our offshore projects. We benefited from a strong performance of our Falcon Nest platform pipeline which received first production in March of last year as well as strong results from the Austin [indiscernible] gathering for the addition of volumes from Medusa and Matterhorn. Both of which came online for the fourth-quarter 2003. In addition we benefited from throughput and margins in our San Juan and Texas pipeline businesses.

And, finally, we recognized full impact from our expansion project which we completed at midyear 2002 at our Hattiesburg natural gas storage facility.

Let's turn to slide 11 to talk a little bit about the fourth-quarter. Gulfterra reported net income of $11.4 million or a loss of 13 cents per unit. When you exclude the impact of the early retirement of debt in the fourth-quarter net income was 43.3 million or 32 cents per unit. That's a 52 percent increase in net income over the same period last year.

EBITDA -- a key measure on which we evaluate our performance -- was $97.7 million. That's up 25 percent quarter-over-quarter from 2002. The total common units outstanding at the in the quarter were 58.4 million and that's a result of equity we issued in October to the Goldman Sachs transaction and a public unit offering which counted for an additional 7.8 million common units. Let's turn to Slide 12.

The full year 2003. EBITDA totaled 435.1 million. That's up 168.3 million or 63 percent increase from '02. In addition we reported net income of 163.1 million or $1.32 per unit -- up 67 percent from last year. If you exclude the impact of the early debt requirement during the year, net income was 200 million or $1.94 per unit which is 100 percent increase over last year. The annual distribution coverage ratio was 1.07 times on that basis.

Now I'd like to provide you some details on the segment of results but James will also give you more details during his portion of the presentation.

Slide 13. Starting with the natural gas pipeline and plant segment -- this is by far our largest segment -- continues to show solid EBITDA performance. In the fourth-quarter of 2003, this segment generated EBITDA of about $75 million which is up 35 percent from the same period of 2002. While we had strong contributions from all of the assets in this segment, the largest cash flow contribution came from our San Juan Basin gathering system and the Chaco plant. Both of these assets we acquired in 2002.

The oil and NGL logistics segment contributed $7.8 million of EBITDA, compared with 9.4 million in the fourth-quarter of 2002. Much of this decline based cash flow was attributable to lower distributions from Poseidon related to lower volumes and the decision by the Poseidon JV partners to retain near term cash flow to fund the front runner project. The lower volume at Poseidon, however, were offset by increases in volumes at our Typhoon and Allegheny Oil pipeline.

The natural gas storage segment which is comprised of our Petal and Hattiesburg facilities in Mississippi and are Wilson storage in Texas contributed approximately $7 million this past quarter. That's up from the 6.4 million during the fourth-quarter of '02. But for the full year this segment contributed approximately 29.6 million, which is a 78 percent increase over 2002.

And this year-over-year increase is driven by the full impact of 2003 of our twenty-year contract with the Southern Company at the Hattiesburg facility, in addition which went into effect on June 2002 and additionally we had new interruptible transportation contracts at our Wilson facility.

Turning to our platform services segment. That was flat quarter over quarter but down year-over-year. 20.2 million for the full year 2003 versus 29.3 million in 2002. This year-over-year decrease was primarily related to the sale of the Prince platform in April 2002 and to a lesser extent lower demand fees associated with certain of our platforms. Partially offsetting these decreases were the contributions from our Falcon's Nest platform which went into service in March.

Now let's turn to Slide 14 -- talk about volumes. Our total gas pipeline throughput on the Gulfterra system was approximately 7.6 million dekatherms per day fourth quarter versus approximately 6.9 million dekatherms per day for the same period 2002. The San Juan gathering system averaged about 1.3 million dekatherms per day this past quarter and we continued to see solid growth here in well connect activity. Also contributing to the growth of pipeline volumes was a nominal 180,000 dekatherms per day moving on our Falcon's Nest pipeline which came online in March 2003.

We are extremely pleased with our performance of our Falcon Nest project. Just last month in January production from Pioneers Harrier Discovery started flowing to Falcon and current production to Falcon is approximately 270,000 dekatherms per day versus 167,000 per day at year end. In addition volumes on the [indiscernible] gathering system averaged about 16 -- 618,000 dekatherms per day. That's up from approximately 550 for the same period of 2002.

This increase [indiscernible] is attributable to the Canyon Highway station volumes which have increased over the year and the November 2003 first production from Matterhorn and Medusa.

Volumes on the Texas pipeline system were essentially flat year-over-year at approximately 3.2 million dekatherms per day. Finally plant volumes increased slightly to 790,000 dekatherms per day. The majority of these volumes are attributable to the Chaco plant.

The oil pipelines -- quarter over quarter -- volumes were up about 16 percent. They were up as a result of a full year's contribution from the Typhoon oil pipeline which we acquired in November 2002. And the Allegheny oil pipeline -- both of which more than offset the decline in volumes on the side.

Poseidon volumes were down approximately 18,000 barrels a day quarter over quarter primarily due to lower than expected volumes and natural decline. But we expect the volumes of Poseidon to increase in the third quarter of this year as first production from the Front Runner project comes online.

Finally, our NGL volumes were up quarter over quarter by approximately 23 percent. The primary driver of this increase was the acquisition of the Texas NGL assets in November 2002, partially offsetting the impact of this acquisition were lower volumes attributable to the Texas fractionation business as high gas prices in 2003 made the attraction of NGLs by producers and processors (inaudible) [indiscernible].

Now let's turn to Slide 14. Capital expenditures -- excuse me -- 15. Capital expenditures. For the full year 2003, we spent approximately $279 million in growth capital. This is primarily related to our offshore projects -- the Cameron Highway project, Marco Polo, Phoenix, Falcon Nest, and Medusa. It also includes the expansion of our (indiscernible) Texas NGL business.

James is going to give you more details on the progress we're making on several of our deepwater growth prospects in just a minute.

Also in 2003 we spent approximately $13.5 million on the well side. With this money we added 343 new wells to our system -- the majority of them, 259 in San Juan Basin. Which increased volume and throughput throughout the system. In addition, we spent approximately $6.6 million in our pipeline integrity program related to inspection and repairs. As you all know, pipeline integrity and safety is an issue of great concern to the industry. Under the regulations adopted by the Texas Railroad Commission and the Department of Transportation pipeline operators must have completed a detailed integrity assessment covering 50 percent of their total pipeline systems prior to September 30th, 2004, for liquid pipes and January 1 2006 for gas pipelines.

Rest assured we have been working on this issue since 2001 and we're on track to meet these stringent requirements and deadlines.

Our maintenance capex assets amounted to approximately $32.3 million in 2003. Now sustaining capex which we defined as the sum of well type capital, pipeline integrity and maintenance capital was 52.4 million for the full year of 2003 and this was in line with our expectation in our earlier guidance.

Now let's talk about our capital raising activities in 2003 and what impact these activities had on our balance sheet. Turn to Slide 16 please.

As you know 2002 was a very active -- we were very active on the acquisition front as Bob mentioned trading over 1.5 billion in acquisitions. As a result we ended 2003 with more leverage than we would've liked. Our goals for 2003 on the financial side were simple.We told you we would reduce our leverage, improve cost of capital and all at the same time continuing to fund the organic growth project.

I think as you look back in 2003 you'll see that we accomplished these goals. Throughout 2003, we opportunistically accessed both debt and equity markets raising a little over 2 billion in capital. We refinanced the acquisition loans for both the Texas and Mexico and San Juan Basin acquisitions with long-term debt at favorable rate. In the fourth quarter of 2003 we refinanced our Term B Loan facility and upsized it from $160 million to $300 million for the pricing of LIBOR plus 225 basis points. That's a reduction of 125 basis points from the previous Term B Loan.

For the full year we've raised nearly 500 million in new equity -- almost 300 million of that in the fourth quarter alone.

Turn to Slide 17. In addition to these capital raising efforts we were active in both the debt redemption and swap markets. As Bob mentioned in December we're retired approximately 270 million of our higher coupon bonds ranging from 8 1/2 to 10 5/8. These redemptions in the fourth quarter resulted in a onetime charge of 31.9 million related to the write-offs of the unamortized debt issuance cost premiums and discounts attributable to the early retirement of bond debt and the refinancing of our Term B Loan facility.

Also earlier in the year we retired our San Juan acquisition loan and reported a charge of 3.8 million in unamortized debt issuance costs and another 1.2 million charge in July when we retired the EPN holding term loan that was for the Texas and Mexico acquisition. These non-recurring expenses totaled approximately $37 million for the full year 2003. We expect the net effect of these redemptions to result in approximately $24 million in gross annual interest savings in 2004 forward.

Finally in July we executed a fixed or floating swap for $250 million of our 8 1/2 percent bonds which mature in 2011. This swap is accounted for as a fair value hedge with an effective rate of 5.32 percent. The end result of all this activity was a fixed floating mix of 51 percent fixed and 49 percent floating. And a reduced weighted average cost of capital -- excuse me -- a reduced weighted average cost of debt of approximately 6.1 percent.

Now I'd like to skip over to the balance sheet which is Slide number 19. We ended the year with approximately 1.8 billion in total debt -- a decrease of approximately $100 million from year end 2002. Our equity balance at year end was approximately 1.25 billion, an increase of approximately 302 million over 2002.

As a result of all of our capital financing activities this year we were successful in reducing our ratio of debt to total capitalization to approximately 59 percent, which is down from approximately 67 percent at year end 2002. In addition our debt to EBITDA ratio improved to 4.2 times vs. the 4.9 times at year end 2002 but equally as important we were successful in decreasing our weighted average cost of capital to approximately 8.3 percent. And that's down from almost 10 percent at year end 2002.

Now with that I'd like to say a few words about our expected guidance for 2004 -- that's like 20. As we look forward to 2004, we expect that we will achieve an EBITDA totaling between $460 and $470 million. Now this is a 13, 15 percent year-over-year growth rate on our base business. While we see further improvement in the base business EBITDA in the San Juan and the Texas pipes we expect our 2004 performance to be driven by contributions from several of our growth projects.

In the natural gas pipeline and plant segment, we see contributions from the Marco Polo and Phoenix gas pipelines which are expected to be online at midyear and a full year impact of the Falcon Nest pipeline. Falcon's volumes are also expected to increase further in the year with the addition of the Tomahawk and the Raptor discoveries which are anticipated to begin producing in the third quarter.

The oil and NGL logistic segment will benefit from the Marco Polo pipeline and the impact of the Front Runner project which is scheduled to receive production in the third quarter. The platform services segment will be positively impacted by incremental volumes flowing through both the Marco Polo and the Falcon Nest platform.

Finally, given that many of these projects are coming online over the next two years, we believe it's reasonable to expect a 13-15 percent year-over-year growth rate in EBITDA for 2005 also from these organic projects. I guess the critical takeaway here is that the growth we're talking about here in 2004 and 2005 does not include any new acquisition.

This future growth is based solely on the organic projects which are currently underway or where we signed commitments to proceed.

Now that I'll turn the call over to James Lytal who will provide you with a review of our commercial assets performance and update you on the status of our deepwater construction projects.

Thank you, Bill. I'm going to take a few minutes today to provide highlights on some of our core assets as well as provide an update on our organic growth projects. Hopefully, I can give you a good feel where the growth Bill talked about will come from the next couple of years. If you could go to the map on Slide 22 -- the map of our midstream assets.

I think this slide shows the diversity of the midstream services we provide as well as the location of our assets in relation to excellent supply basins such as the San Juan Basin, Permian Basin, South Texas the Black Warrior Basin and the deepwater Gulf of Mexico. If you could go to slide 23.

This shows our San Juan Basin gathering assets which include over 6,000 miles of pipeline connected to almost 10,000 wells. Producers in the basins are maintaining a very active drilling program that's seen from our 259 oil connection in 2003. This is above our 5 year average of 242 wells connected per year.

Our gathered volumes for 2003 on the San Juan gathering system averaged 1,000 227,000 (ph) dekatherms per day. This is in line with our average of 1234 thousand dekatherms per day and I will add the 2003 included a period of reduced volumes of approximately 100,000 dekatherms per day in the first quarter due to a compressor overhaul so we expect to see a higher average volume in 2004.

A portion of our gathering fees are based on a percentage of the San Juan gas index. We have hedged approximately 75 percent of that exposure for 2004 at $4.23 per dekatherm. In 2003 we hedged a similar percentage of our exposure at $3.53 per dekatherm so we should see cash flow increases in 2004 from this higher hedge price. We processed 665,000 dekatherms per day at our Chaco processing plant in 2003. This is above our 5 year average of 641,000 dekatherms per day processed at that plant.

Under a substantial portion of our processing agreements, we received a percentage of the liquids as a fee. We have hedged approximately 50 percent of our liquid exposure from 45 cents to 51 cents per gallon for the first three quarters of 2004. Using the current NGL strip for our unhedged (ph) NGLs we should see an average NGL price in 2004 comparable to our 2003 prices.

We have begun the $43 million system expansion on our San Juan gathering system that we discussed at last February's analyst meeting and have already seen a 20,000 dekatherm per day volume uptick from modifications to existing field compressions. We are behind the expansion schedule that we laid out last February as the engineering for the optimization took a little longer than expected. If you go to Slide 24 this shows the new schedule.

The differences from the previous schedule are that we expected -- we were expected to have capacity of 80 MMcf/d in 2004 as opposed to the new projection capacity of 40 million cubic feet a day in 2004. And we also inspected (ph) to have capacity of 130 million a day by 2005 and you can see now we expect to reach that capacity level in 2006.

Once we're up and running at maximum volumes, we expect this system optimization to add approximately $20-$25 million a year of incremental EBITDA to the partnership. Now if we could go to Slide 25.

This shows our Texas pipeline and its strategic location to major markets and supply basins. This asset was negatively impacted by $18 million in 2003, due to lost and unaccounted for gas expense and revaluations of payables under pipeline shipper imbalances. We believe we have dealt with these issues and if there's any impact in 2004 it should be minimal.

This puts us significantly ahead of the curve already in comparing 2004 to 2003. Our average gross volumes on the system for 2003 were 3.4 Bcf a day. Our transportation revenues in 2003 without the impact of the gas loss and in balance for revaluation increased approximately 6 percent as compared to 2002. We were able to re contract 325 million a day of capacity in 2003 for an average term of three years and were able to increase our transportation fees by 20 percent.

We also increased volumes from the prolific Barnett Shell plate in North Texas to 400 million a day. This was a field that was connected a couple of years ago so if you look back two or three years ago we had no volume coming from this field so we've seen a significant increase of volumes from this area.

For 2004, we believe we can increase transportation revenues by recontracting 360 million a day capacity that increase transportation and fuel rates. Also with projected increases in Barnett Shell volumes we will be pursuing an expansion of our North Texas pipeline. This 36 inch pipeline can access both Carthage and Waha and as competitive alternatives for this additional supply we believe expansion in this system will be the most cost-effective alternative.

We were also working on expansion opportunity to provide additional volumes to Mexico.

If you could go to Slide 26, please. Our Petal and Hattiesburg storage facilities are strategically located in the Southeast with a total combined capacity of 3.5 Bcf. Or 13 excuse me, 13.5 Bcf and connections to multiple pipeline outlets. In 2003 in addition to revenue generated from our firm contracts, we were able to generate interruptible revenues of $3.5 million.

The facilities are currently 100 percent subscribed on a firm basis and over 50 percent subscribed looking out to the year 2021. We have FERC authority to expand the Petal facility by 8 Bcf. 1.8 Bcf would be for the conversion to gas of our existing [indiscernible] at our propane caverns. We are finalizing commitments for over 80 percent of this capacity and expect to move forward with this project with initial service in the fourth quarter of 2004.

We have announced a letter of intent with Southern Natural under which Gulfterra would build and sell Southern National a 5 Bcf cavern and undivided interest in our Petal pipeline. Southern National is currently holding an open season for the space and there appears to be considerable interest from their customers.

The additional 1.2 Bcf puts space to get to the total of 8 Bcf would be developed by expanding an existing cavern. If we could go to Slide 27, please.

This shows our offshore gas pipeline. Our Hios (ph) and East Breaks volumes for 2003 remain very stable and even there was a slight increase from the fourth quarter 2002 to fourth-quarter of 2003. We believe we're seeing enough activity on the shelf that we can keep these volumes stable for 2004 on our highest system.

We also seek opportunities in the future with what appear to be major discoveries in the deep water south of the Dina Hoover development. At [indiscernible] Knoll, we initiated flows from the Medusa and Matterhorn developments and expect combined flow from these fields to ramp up to close to 100 million a day by midyear 2004.

We are also seeing development drilling around platforms connected to Viosca Knoll (ph) that should add volumes in 2004.

Finally to our Phoenix pipeline, we have completed construction on that pipeline which will connect Kerr McGee (ph) and Devon's Red Hawk development to A&R. The producers are expecting to install their spar (ph) production facility in March of this year and expect first flows in mid 2004.

Kerr McGee and Devon expect to ramp up quickly to a flow rate of 120 MMcf/d and also expect to do additional drilling in the area surrounding the spar. We could go to Slide 28.

You see our Poseidon system and our new plant Front Runner pipeline as well as our Marco Polo pipeline. Volumes on Poseidon were down in 2003 as they averaged 127,000 barrels a day. The future does look bright for Poseidon with the initiation of flows from Marco Polo in mid 2004 and Front Runner late in the third quarter of 2004.

We are also finalizing a commitment of a shelf-based field which should add 15,000 barrels a day in 2005. Poseidon should also have the potential of moving undedicated barrels that come in from the Caesar pipeline which is a new producer of pipeline from Atlanta's Holstein and Mad Dog. With these new additions we expect a 60 percent increase on volumes on Poseidon by 2005, as compared to our 2003 average volumes. If we could go to Slide 29.

This cartoon depicts Pioneer subsea wells in the Falcon corridor connected to our new platform and pipeline. Our platform and pipeline were installed ahead of schedule and first production began in March 2003. Pioneer connected their Harrier field to our platform in January 2004 which increased volumes to their current level of 270 million a day. Pioneer's Raptor and Tomahawk fields are planned to be connected in the third quarter of 2004 at which time volumes on the platform are expected to increase to a rate of up to 350 MMcf a day.

Pioneer also plans additional exploration on their significant acreage position in this area. If we could go to Slide 30.

You see on the map, you see the location of our Marco Polo platform and oil and gas pipelines. The installation of the platform was completed on January 12, 2004. It was originally scheduled to be installed in October 2003, but was delayed due to the late arrival of the installation contractor and weather conditions once the contractor was on location. We have handed the TLP over to Anadarko and they are currently installing their completion rig. The oil and gas pipelines have also been installed and we expect first production from Marco Polo in mid 2004.

If you go to Slide 31, you see the significant amount of activity in the area of our Marco Polo platform.

Anadarko has indicated that they expect Marco Polo to ramp up to 50,000 barrels of oil per day by the end of the year 2004. And that their K2 and Green Canyon block 518 developments will be subsidy connected to the Marco Polo platform. First flows from these subsidy connected fields should be midyear 2005 with ramp up to full rate by the end of 2005.

These additional volumes will also be beneficial to our downstream oil and gas pipelines. There are also producers in the area that plan to drill for gas and we believe Marco Polo will be the best option -- tieback option -- for those developments.

We have included some pictures of the Marco Polo platform if you go to slide 32. This shows the Marco Polo hull (ph) as it's entering Corpus Christi. You can also see in the background there that's the Marco Polo deck. If you go to slide 33 you see the installation barge lifting the vig (ph) in preparation of setting it on the hole (ph) and go to slide 34 you see the completed Marco Polo platform with the installation of barge still on location.

If we could go to slide 35 now. This shows our Cameron Highway pipeline system, oil pipeline. On the construction site on Cameron Highway the shift shelf 332 B and high (indiscernible) platform jackets have been installed as well as the bifurcated 88 miles of offshore 24 inch pipeline. The ride away has been purchased with the onshore pipeline and construction is in progress to connect to the Beaumont/Port Arthur facilities in Texas City facilities.

We're currently installing the offshore 30 inch pipeline and are 36 percent complete. We expect to be completed with the installation of the Cameron Highway pipeline in the third quarter of 2004 and expect first flows in the fourth quarter of 2004.

If we could go to Slide 36. This shows you the significant number of discoveries in the deepwater in relation to our Cameron Highway pipeline. For reference, Gulfterra has ownership in the green pipeline's third parties on the white pipelines and the red pipeline is our Marco Polo gas pipeline. Cameron Highway received LIBOR reserve commitments from VP, BHP and Unocal, their production from Holstein and Mad Dog in Atlantis (ph). We believe these fields combined contain over 1 billion barrels of oil. Of the discoveries you see on the map, Tahiti, Shenzi (ph) and Neptune have been announced as potentially significant discoveries.

If you look at the gathering lines that come up to our [indiscernible] 332 platform they have a total capacity of 1 million barrels per day. We believe that puts Cameron Highway as well as our Poseidon system in an excellent position to access supplies from this prolific deepwater area. We also believe that with the number of discoveries we may have the opportunity to build new oil gathering pipelines into the area.

If you could go to Slide 36 we also have some pictures of the Cameron Highway installation, which you see on -- Slide 37 -- excuse me -- is the pipeline vessel, the Solitaire Subseas pipeline vessel that is currently out laying the 30 inch pipeline and then the next slide you a directional drill being made. This is in Galveston Bay and we're going under the Texas City die and ship channel.

Finally, Slide 39 shows the deepwater discoveries that are currently awaiting development. You can see that we're well-positioned to offer services on all these developments. We are currently in discussions with producers on over $700 million of new projects in the deepwater. We are proud of our accomplishments today and strongly believe that we can continue our growth in the Gulf of Mexico. With that, I'll turn it over to the operator for questions.

The floor is now open for questions. [Operator Instructions]

[Operator Instructions]

There appear to be no questions at this time.

Stephanie -- thank you all for joining us for our fourth quarter earnings call. This wraps up Gulfterra's fourth-quarter earnings call. And we look forward to talking to you at our next quarter at our regularly scheduled earnings call. Thank you.

Thank you for your participation. That does conclude this afternoon's teleconference. You may disconnect your lines at this time and have a great day. Thank you.