Enterprise Products Partners LP (EPD) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Gulfterra Energy Partners first quarter earnings 2004 conference call.

[OPERATOR INSTRUCTIONS]

It is now my pleasure to introduce your host, Mr. Drew Cozby. Sir, the floor is yours.

Thank you, Rahim. Good morning, everyone and thank you for joining us for Gulfterra Energy Partners first quarter 2004 earnings conference call.

This morning, Bob Phillips, Chairman and Chief Executive Officer will begin our call with a review of the first-quarter highlights and 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'd like to detail a few regulatory-related items before we get started. First, performance cash flows, which we formerly referred to as EBITDA, is presented in this release, the attached tables and operating statistics, is also available in the Investor section of the Gulfterra Web site, and is calculated in the same manner as referred to in the past as EBITDA, to allow a consistent comparison of the operating performance with prior period.

In addition, reconciliations of non-GAAP measures to the most comparable GAAP measures are incorporated in the release, in this call, and are posted on the Investor's page of our Web site on a Tab entitled "non-GAAP reconciliations" including a reconciliation of performance cash flows 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 that 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 partners, status of the partnership's Greenfield projects, successful negotiation of customer contracts, and general economic and weather conditions and markets served by Gulfterra Energy Partners and its affiliates could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this release and call.

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's and its affiliates Securities and Exchange Commission filings for additional important factors that may affect actual results. I'll now turn the call over to Bob Phillips, Gulfterra's Chairman and CEO. Bob?

Thank you, Drew, and good morning to all of you. Thank you for joining us. We are very pleased to announce an outstanding quarter for Gulfterra, with performance cash flow of $110 million and net income of $56 million, or about 49 cents per unit.

Adjusted for merger-related costs, our cash flow was almost $115 million, and net income was nearly $60 million, both records for the partnership when adjusted for non-recurring items. This is one of the best quarters that I think we have ever delivered at GTM, and certainly shows that we are hitting on all eight cylinders as we move forward towards the merger with enterprise later this year. Let me start with some thoughts on the merger.

I'll talk a little bit about the midstream sector, and then point out a few highlights from the quarter that Bill and James will give you much more detail on in their presentation.

I think the merger transition process is going very well. We're making good progress with the FTC. We hope to file the S-4 with the SEC fairly soon.

And we're clearly ahead of schedule on the integration front. I'm now looking for better synergies than the original $30 million that we originally projected, and I'm very pleased with how the two partnerships are beginning to fit together.

We are in the design phase of the organization, designing the organization this month, and will start staffing the post-merger organization on a pro forma basis later in the month. We've had very good retention at Gulfterra during the transition period.

We have over 40 sub-teams actively engaged in the new company design phase. We think we're going to deliver an outstanding organization, once the merger is complete. There was a recent announcement that enterprise will acquire, at closing, an additional 40% of the general partner of enterprise after the merger, leaving El Paso with less than 10% ownership. I think this is a very positive transaction in a number of respects.

It clearly makes the FTC review process less complicated, provides, I think, the same corporate governance benefits as the Goldman Sachs structured deal that we put in place in October of 2003 without the uncertainty of future ownership, and it makes a definite statement about the long-term commitment that Dan Duncan and the enterprise management team have to Gulfterra, our employees and our assets. We're very pleased with the results of that transaction.

Turning to the midstream sector, overall I think it continues to perform very well. Higher oil and gas prices are generally driving what we see is impressive drilling rates, accelerated production rates, and some very interesting large-scale developments that are taking place in areas like the Barnett Shale in North Texas, the Deep Shelf along the Gulf of Mexico, and the Deepwater Trend of the Gulf of Mexico as well. Gulfterra's assets will be well positioned to benefit from all of these activities in the years to come.

I think we are well positioned with the right assets in the right places. On the demand side, customers are beginning to adjust to higher prices and we're seeing clear signs of fundamental demand growth for both natural gas and natural gas liquids as the economy picks up.

On the acquisition front, we've seen a number of majors continue to sell off high-quality midstream assets. In recent months, we've seen a number of large divestiture offerings that have come to market recently, indicating to me a steady diet and a good environment for acquisition opportunities in the future.

This was, of course, a strategy that was a key driver for our merger with enterprise, combining the two companies with a broad asset footprint, low cost of capital that should make us very competitive in the acquisition area in the years ahead. Now, let me talk specifically about some of our assets during the first quarter, from west to east.

The San Juan gas gathering system had another strong quarter volumetrically despite a tough winter in Northwest New Mexico that did cause some production shut-ins. As you may recall, our winter action plan that we put in place each year identifies and prioritizes freeze-offs in the field, reduces the response time to get production flowing, and it paid off for us again.

Our employees in the San Juan area did a great job under difficult conditions, and we're pleased with our throughputs in the San Juan. Moving to the Permian Basin, those assets also did very well in the quarter. We've seen a pickup in producer drilling activity in this prolific basin.

We think due to continued high gas prices. It appears that our new well completions are offsetting natural decline over the past few quarters and we're very pleased with the Permian Basin gathering, processing and treating assets, as well.

I want to spend a minute bragging on our Texas pipeline system. During the first quarter, despite a relatively moderate winter in Texas, particularly in the second half of the winter, we saw a slight decrease in throughput but our Texas commercial team delivered a very strong quarter by negotiating higher transportation rates across the state, higher interruptible storage sales and services at our Wilson storage facility, lower loss on unaccounted for volumes by tightening up the system and they virtually eliminated the system imbalances which had been kind of a nagging expense for us as gas price had increased over the past year or so.

So, we're very excited, as I said, about the increased drilling in the North Texas area, where the Barnett Shale is a play that is expanding south of Fort Worth, and we think we're in excellent position to capture more of that business.

On the NGL side, we saw better processing margins in the first quarter in South Texas, which led to higher NGL extractions, more throughput for our NGL T&F assets, and we saw higher demand for products from petrochemical users and refineries as well, so a good climate for that business. In the offshore, the news is all good.

Our Deepwater volumes are starting to come on-line to offset some of the natural decline from the shelf volumes. During the quarter, house continued to trend up.

Our Falcon and Typhoon system volumes were up. The Marco polo platform was installed during the quarter. We began to receive revenues from that at the beginning of the second quarter. The Anaconda pipelines were completed during the quarter and we're waiting for downstream tie-ins there.

We complete -- largely completed the Phoenix pipeline, which will be placed in service soon, and we made excellent progress on our Cameron Highway oil pipeline project. I'd also note I think we're on the verge of a new round of Deepwater projects, as we mentioned in our press release.

Drilling activity in water depths greater than 5,000 feet was at a record rate in the first quarter, so we're very pleased with that. We've spent a number of years positioning ourselves to be very competitive in the Deepwater Trend, and we think that's beginning to pay off for us as well.

In summary, the merger is on track. We're very excited about being a part of the enterprise team. Continue to think it will make a great combination of complementary assets and businesses, with a skilled management group and a low cost of capital, clear ownership and commitment to long-term growth. We continue to be excited about the opportunities with enterprise.

The midstream business climate is robust, due to sustained higher well head prices, strong drilling. We continue to see new infrastructure potential in several regions, and as I said, there are a number of high-quality acquisition opportunities in the market today.

Our assets continue to perform well across the board in the first quarter, onshore and offshore. We continue to have a distinctive blend of midstream assets, a lot of diversification out there, but we're pleased that our volumes were strong in most areas margins are improving, and our growth projects are on track.

And with that summary and overview, I'll turn it over to Bill Manias for the details.

Thanks, Bob. I've got several topics to cover today, in today's call, including a summary of the first quarter consolidated results, an update on the performance of our major business segments, a review of capital spending for the first quarter, and finally I'll give you a brief update on the balance sheet and other financial items of interest.

Let's start with the first quarter. For the first quarter of 2004, Gulfterra recorded net income of 55.6 million, or 49 cents per diluted common unit. That's an increase of 32% over the first quarter of 2003, performance cash flows, which we formerly referred to as EBITDA, was 110.3 million in the first quarter versus 105.9 for the first quarter of '03. That's a 4% increase.

But these performance cash flows results include certain one-time merger-related costs of approximately 4.1 million in the first quarter. If you add that back, they get our first-quarter performance cash flow number up to 114.4 million. That's a 8% increase over last year, but more importantly, that exceeds our previous performance cash flow record, which we set in the third quarter of '03 after we -- after adjusting for the $19 million gain related to the sale and the interest of -- on Cameron Highway.

The partnership recorded gross margin for the quarter of 155.9 million. That's a healthy 12% increase over the 139.3 recorded in the first quarter of '03.

The performance here was really driven by contributions from our Texas pipeline system, and San Juan gathering, Chaco plant, and our Deepwater offshore assets, particularly our Falcon platform and pipeline system, which I'll highlight a bit later.

Our operating and maintenance expense for the quarter was approximately $48 million, which was higher than the 40 million that we incurred in the first quarter of 2003.

However, when you exclude the 4.1 million in one-time merger-related costs, the O&M costs incurred in the first quarter of '04 are really in line with the average quarterly costs for 2003.

As I mentioned, we recorded earnings per diluted common unit of 49 cents. This is on an average of 59.2 million common units, which is up from 44.1 million units last year at this time. This increase of approximately 15 million units resulted from our successful activities in the equity markets last year, which was really driven by our goal of improving the balance sheet as we came off that record-setting $1.8 billion acquisition year in '02.

So if you take the 1.3 million, based on the 110.3 million of performance cash flow, Gulfterra's distribution coverage ratio on a LTM basis was approximately 1.04 times, and it's about 1.0 times for the first quarter in 2004. Now, let me talk a little bit about the segments. Starting with our largest segment, natural gas pipelines and plants, we continue to show strong results here.

Performance cash flow in the first quarter was 82 million. That's a 5% increase over the 77.8 million we generated in the first quarter of '03. The largest contributors here continue to be the San Juan gathering system, the Chaco plant, and the Texas pipeline system. All three of those accounted for approximately 75% of the total segment cash flow in the quarter.

The increase in performance cash flow is primarily attributed to the improvement in performance of our Texas pipeline business.

Higher liquids prices and a full quarter's contribution and additional first-quarter 2004 production volumes from our Falcon pipeline.

The Texas intrastate system saw improvement in base business through increased production from the Barnett Shell, about a 100,000 dekatherms per day increase over last year. We're making about 350,000 dekatherms a day out of the bar right, right now on our north Texas pipeline system.

Also saw higher transportation margins related to greater basis differentials across Texas and as Bob mentioned, the virtual elimination of our negative pipeline balances in the first quarter.

Offshore, Falcon gas pipeline flowed an average of 272,000 dekatherms a day for the first quarter, that's versus 30 for the first quarter of '03. The increase here was really driven by the startup of production from pioneer's Harrier field, which came on-line early in January this year.

In addition, we also had higher volumes on the East Breaks offshore system, which is up about 50,000 dekatherms a day, to 224,000 dekatherms a day, that's production from a new Deepwater well in Exxon Mobil's Diana Hoover field was connected to the system this past quarter.

Overall volumes in this segment were about 7.6 million dekatherms a day in the first quarter of 2004. That's essentially flat with the first quarter of 2003, although as San Juan, as Bob mentioned, system volumes were actually increased by about 10% to 1.25 million dekatherms, when compared with the same period last year.

When San Juan experienced lower volumes due to a temporary compression outage at the Blanco (ph) compressor facility.

The oil and NGL logistics segment, which includes all of our offshore oil pipelines - Poseidon, Allegheny, Typhoon and Marco Polo and our Texas NGL fractionation plants and pipelines business, generated 7.5 million in performance cash flow in the first quarter, and that's down from the 11.6 million for the same period in 2003.

The year-over-year decrease is driven by the reduction of distributions in 2004 from our Poseidon joint venture. As you may recall, Poseidon announced the Front Runner Oil pipeline project in September 2003 at a cost of 28 million, with an expected startup in late 2004.

And to fund the construction of this project, the JV partners decided to retain excess JV cash within the Poseidon partnership instead of distributing to its partners.

Somewhat offsetting the near-term losses of Poseidon was the first-quarter performance of the Texas NGL fractionation and the Texas NGL pipeline systems.

For the first quarter of 2004, throughput in the Texas NGL fractionation assets was up about 14%, which is about 76,000 barrels a day versus the 67,000 barrels a day in the first quarter of '03. Primarily due to increased FN recoveries from South Texas plants.

Processing plants in South Texas were really at full ethane recovery for all three months of the quarter, versus reduced ethane recovery for two to three months in the first quarter of 2003. Ethane margins averaged about five cents from gallon for Q1 '04 versus one to two cents for the same time in '03.

The driver behind the increase in ethane demand is the higher utilization rates for US ethylene facilities, which has increased from 78% in the first quarter of '03 to approximately 85% in Q1 '04 as the ethylene produced as a crack in ethane to maximize production.

Throughput in the Texas NGL system was up 45% in the first quarter versus last year, with the return to service of our Corpus Christi to Houston eight-inch pipeline. This pipeline was being re-furbished for the majority of 2003. This eight-inch pipeline allows Gulfterra to move excess propane supply from South Texas processing plants and refineries to the mountain Bellevue market, and as we enter the second quarter of '04, we should see a seasonal pickup in butane volumes from our two butane shuttle pipelines, which move butanes into our lease storage facilities of Markham and Almeda from refineries in Texas city and Corpus Christi in anticipation of the winter blending season.

Finally, Allegheny and Typhoon both had impressive volume improvements, year over year. Allegheny saw a 60% increase in system volumes, largely attributable to Westport's new well at south timber Lane 316 and Typhoon saw an 80% in increase from the incremental production from the Boris field in the green canyon area.

Our natural gas storage segment continues to show strong results, reporting performance cash flow of nine million for the first quarter versus seven for the first quarter of '03.

The change here is primarily driven by an increase in interruptible storage business, with several new customers at the Wilson facility.

In addition, Gulfterra's recently executed definitive agreements with British Petroleum in support of a new 1.85 BCF expansion at the Petal facility and James will talk a little bit more about that in his remarks.

Our platform services segment generated performance cash flows of about 6.4 million this past quarter, versus 4.2 in the first quarter of 2003. This quarter-over-quarter increase was attributable to a full quarter's result from the Falcon Nest platform and the addition of pioneer's Harrier discovery, which came on-line in early 2004, all of which increased volumes to approximately 272,000 dekatherms a day for the quarter. And we expect additional increases in the second half of '04 as pioneer brings on its raptor and Tomahawk discovers.

And partially offsetting this increase was the termination of demand payments at our East Chem 373 platform. In 1997, we entered into a contract with Kerr-McGee to construct the East Chem 373 platform backed by a 60-month contract, which guaranteed monthly demand payments and this contract expired last July.

In addition, our Marco Polo platform was installed in the first quarter of 2004, and in April Deepwater Gateway, the owner of the Marco Polo platform, of which Gulfterra owns a 50% interest in, began receiving demand payments on the platform totaling about 2.1 million a month. We expect first production and, thus, volumetric payments to commence at around mid-year.

I'd like to talk a little bit about related-party revenues. Revenues received from El Paso or its affiliates totaled about 29 million for the quarter. That's about 13% of total revenues, and that's essentially flat with last year. Given all the interest in El Paso's recently announced reserve write-downs including its reserves in South Texas, I thought you'd be interested to know that of the 29 million in related party revenues, only about 2.3 million comes from our business dealings with El Paso production company.

And that number has remained fairly constant over the past five quarters. And of that 2.3 million, less than a million dollars per quarter is related to transport volumes on Gulfterra's Texas pipeline system.

Now, let me move to talk a little bit about capital spending. Year-to-date, we've spent about 53.5 million on capital expenditures. Of that amount, 45 million was related to expansion projects. The majority of which are 24 million is associated with the final stages of the Marco Polo project.

The remaining 8.5 million is related to sustaining Capex, which we include well ties, maintenance, and pipeline integrity capital. This 8.5 million number is net of approximately 5.3 million in payments made by El Paso to Gulfterra under an indemnity provision included in the April $2,002, $750 million acquisition of the Texas pipeline assets.

And for the full Year 2004, we expect to spend protection $170 million in total capital, of which approximately 50 million will be sustaining capital. The remainder being growth capital related to either new development projects or equity investments in our joint ventures.

Now, this 170 that I just spoke of, this 2004 number, doesn't include any funds for unidentified acquisitions or additional development projects, and I expect that the final Capex number will increase as we have several projects where we're close to signing definitive agreements.

Lastly, I wanted to touch briefly on the topic of pipeline integrity. I know that's of interest to everyone. And we include this amount in our sustaining Capex account. Gulfterra operates about 1600 miles of liquid pipelines and 6100 miles of gas transmission pipelines, which are subject to state and federal pipeline integrity rules.

In 2004, we expect to incur pipeline integrity costs of approximately 12 to 14 million for make-ready in-line inspection hydro testing and remediation. This 12 to 14 million is after in de magnifications and reimbursements from joint owners.

Now, let me briefly touch on the balance sheet. As I mentioned to you in our fourth-quarter call, 2003 was a year of digesting 2002's nearly 1.8 billion in acquisitions. While at the same time reducing our leverage and improving cost of capital. And as we enter 2004 with a strong balance sheet, it continues to be the case today. We have a very strong balance sheet.

At the end of the first quarter, our total debt of approximately 1.8 billion represents 59% of our total capital base of 3.1 billion. Our debt divided by our annualized performance cash flow of 114.4 million, which excludes the one-time merger costs of 4.1 million, yields a debt to performance cash flow ratio of four times.

Our all-in weighted average cost of capital at the year at the quarter-end was 8.4%. That's up slightly from what it was at the year-end due to the termination of the $250 million fixed to floating swap.

And before I end, I'd like to end -- I'd like to cover a few financial transactions that we've executed at the beginning of the year.

At the end of March, we terminated our 250 million nixed to floating swap on our 8.5% senior notes, senior sub-notes. We entered into a eight-year swap in July in order to achieve a more favorable mixed of fixed for floating rate debt and given our view of interest rates at the time.

But knowing that the swap will be terminated when the underlying debt was refinanced with enterprise, we made the decision to terminate the swap early as rates had declined to a level where we could terminate at zero cost to Gulfterra.

Next, as we did in the fourth quarter of last year, we again took advantage of our equity claw back rights under the terms of our senior sub-notes to repay approximately 39 million in principal amount of those senior notes in April 2004.

And we expect to recognize approximately 4.1 million in additional costs in the second quarter, resulting from the payment of the redemption premium and the write-off of un amortized debt issuance costs.

Also in April, we took advantage of an opportunity to reduce sales tax associated with our 2002 expansion project at our Petal Gas storage facility by qualifying for certain tax incentives under the Mississippi business finance act.

Under this Act, the Mississippi Business Finance Corporation, or the NBFC, determined that our Petal project constituted a qualifying business and that a direct subsidiary of Petal was able to borrow approximately 52 million from the NBFC in the form of an industrial revenue bond in order to receive tax incentives of about 3.4 million. We completed this transaction in April, and this loan may be repaid after one year without penalty.

Finally, in April we initiated a full redemption of 175 million of our tenatriat (ph) senior subordinated notes due in 2009, the notes will be redeemed on June '01, at a premium of about 105.2%, and in connection with the redemption, we will recognize additional costs of 12.1 million in the second quarter, resulting from the redemption premium and the write-off of unamortized debt issuance costs.

Now, before I turn it over to James, I want to address the guidance for the remainder of the year. During the fourth-quarter conference call, I indicated that we expect to achieve performance cash flow between 460 million and 470 million, and based on our current run rate, and the business outlook, we continue to remain comfortable with this guidance. With that, I'll turn it over to James.

Thank you, Bill. I'd like to take a few minutes today to provide updates on our organic projects, but before I do so, I would like to clarify one thing Bill had mentioned related to our East Cameron 373 platform. Under the contract, Kerr-McGee paid demand charges for a 60-month period. Those demand charges ended last year, but our contract is still very active.

We did not terminate that contract, and we received commodity fees now on the MCF and barrels that we process on that platform, so just wanted to clarify that. Now I'll get into the projects. As Bill mentioned, we are creating a new 1.85 bcf of storage capacity at Petal by converting an existing Brian carbon to gas. We have signed an agreement for BP for 1.5 bcf of space for five years, and are in discussions with other parties for the remaining 350 million cubic feet of space.

The conversion of the cavern is anticipated to cost 16 to $17 million and is expected to be in service the fourth quarter of '04. Once up and running, we anticipate annual performance cash flows of 3.5 to $4 million from this project.

Offshore, we should see an increase in volumes soon at our Falcon platform and pipeline, as pioneer anticipates first flows from their Raptor and Tomahawk developments in late May or early June. Pioneer has indicated they expect volumes to increase to 350 million cubic feet a day once those new fields come online.

On our Phoenix pipeline, which connects the Kerr-McGee operated Red Hawk development to A&R, we have completed the pipeline and riser, and Kerr-McGee has completed the installation of their sales bar and deck. We anticipate first flows mid-year, and expect the field to quickly ramp up to 120 million cubic feet a day.

At the Marco Polo platform, Anadarko has completed the installation of their production risers and are currently completing the first well.

We have completed the installation and testing of the oil and gas gathering pipelines and risers, with the only work remaining being the connection of the gas pipeline to our Typhoon system, and connection of the oil pipeline to our Allegheny system.

We recently signed agreements with UNI, Conoco and Unocal under which they dedicated their 48% of production from their K2 field for processing on the Marco Polo platform. Anadarko's 52% share of K2 was dedicated under our original Marco Polo agreement. Anadarko has also indicated they're going to connect their green canyon 518 production to the Marco Polo TLP for processing. We expect first flows from the Marco Polo field in the third quarter, and the K2 and green canyon 518 fields to be connected to the platform in the first half of 2005.

Anadarko has indicated that once the K2 and green canyon 518 fields reach their peak rate in late 2005, the oil train of our platform, which has 120,000 barrels, a day of capacity should be full. This not only benefits our 50%-owned platform, but we receive an oil gathering fee to take the barrels to our ship Shell 332 platform and will also derive benefit from the oil moving on the Poseidon and Cameron Highway oil pipelines. We also will receive a fee for gathering the gas from the platform to our shelf face connection with A&R.

Poseidon will be begin laying its Front Runner oil pipeline in June, and an anticipates first flows from the Murphy operated of 60 barrel a day spar in October of this year. With the startup of Front Runner and the addition of Marco Polo barrels, Poseidon volumes should increase significantly and we should begin receiving distributions from Poseidon soon thereafter.

Finally, on our Cameron Highway oil pipeline, we have completed the installation of all the offshore pipelines, and are finalizing some burial work on our 24-inch pipeline near shore. We expect to complete our onshore pipeline work in June, and will be installing the deck our new ship shelf 332 (b) platform in May and the deck our shallow water Hylland A 5 junction platform in July.

We should begin filling the system with oil in August and September, and anticipate first flows from BP's Holstein development in the first quarter.

Upon completion of the pipeline, we will receive a $5 million employment from Valero as part of the consideration for their 50% interest in Cameron Highway. Finally, with the increase in Falcon volumes and the startup of Phoenix, Marco Polo, and Cameron Highway, we expect these projects to provide an additional 16 to $18 million of performance cash flow in the second half of this year, and increase from there as volumes ramp up on Marco Polo and Cameron Highway.

As Bob mentioned, we continue to work hard on several new Deepwater infrastructure projects, and are hopeful that we can get these finalized over the next few months. With that, we will now open the call up for questions.

Thank you.

[OPERATOR INSTRUCTIONS]

The first question is coming from Ross Payne of Wachovia Securities. Your line is live.

Hello? Good quarter, guys. First question is on Poseidon. You mentioned that you expect nice volume increases once these -- these other projects get tied into it. Can you give us an idea of when you expect that to peak?

Well, Ross, let me tell you our projections in 2003 we moved 127,000 barrels a day. We think in '05, we should see a 60% increase from -- in that number by mid-year '05 as these fields start to ramp up. Ross, there are an awful lot of new discoveries out in this green canyon area, so we think there's going to be additional volume, so we don't think these adds here will get us to our peak. We think there's going to be a lot more opportunity out here for Poseidon.

OK very good. On Marco Polo, it's obviously ramping up. Is that supposed to peak sometime in early '05 as well?

No. Marco Polo should peak in late '05, maybe early '06, and peak for it is basically it's -- it's limited by capacity, 120,000 barrels a day we do -- Anadarko has other acreage in the area, and I think, you know, as you see the initial fields fall off, were there's other drilling opportunities around that, and I know they've indicated that, you know, they'd like to -- to maintain that level of production out there.

OK. You guys mentioned freeze-offs. Can you explain what that is?

Yes. Ross, the -- as is typical of a normal winter up in the San Juan Basin, which is at a fairly high elevation, we get freeze-offs because it is essentially a wet gathering system, meaning that we typically don't have a lot of dehydration and separation at the well head. That's all located at the inlet of the two major processing plants on the system.

We're gathering essentially wet Volumes, and when ambient temps go below freezing and stay there for a number of days, we tend to see freeze-offs at the well head or through the small diameter gathering system out in the field.

We have a highly automated system up there with -- I think we have almost 9,000 wells connected to the system over a 6,000-mile pipeline system. It is a geographic area the size of the state of Connecticut, so we have a number of people that spend all their time during the wintertime going out on a daily basis to help relieve the production freeze-offs and keep the volume flowing.

We utilize a significant number of electronic flow measurement devices in the field, all connected to our microwave system, to highlight and prioritize the freeze-offs with the highest level of volume expectations, so that we are going to those sites and we're helping our producer customers go to those sites where they can best impact the throughput, and it's a process that we've used very effectively for the past several years. When we have a cold winter coupled with a lot of rain up there, the -- the terrain is such that it's very difficult to get around in.

On the margin, it doesn't seem like a whole lot, but if you can save 50 million a day, at the type of gathering and processing rates that we have up there, that's significant incremental cash flow for us, so we spend a lot of time working with our producers to keep their volumes flowing during those tough winter months.

OK. Thank you, Bob. Has anybody had conversations with the rating agencies recently?

You know, we're certainly having our normal conversations with them, but I mean that's -- the majority of the conversations going forward are going to be held with enterprise.

Sure.

And the rating agencies, and I'm sure they addressed this in their conference call but, you know, we talk to them and update them on our business as we normally do.

OK very good. Looks like a good second half. Thanks, guys.

Bill Manias Thank you.

Thanks, Ross.

The next question is coming from Yves Siegel of Wachovia Securities. Please go ahead with your question.

Yeah. Thank you. Good morning, everybody. Just a couple, one, for you, Bob: What makes you feel so confident in terms of exceeding that $30 million of cost savings? And what kind of magnitude are you thinking about?

Yves, we have run a -- a very rigorous process, starting back in late February. We engaged a third-party facilitator to come in and essentially map both organizations.

We called that the current assessment phase, and it was a process of digging down deeply into the bowels of both enterprise and Gulfterra and determining whether there was duplication, where there was opportunity to lower costs through the combination, where we could take the best of either company's processes or procedures and achieve lower operating cost, either through a -- a work reduction or a -- simply just instituting a new policy and procedure.

A perfect example would be communications where we have some communication assets that will benefit the -- the operations that currently exist in enterprise. And so we would see their pro forma communication expenses go down. We have a policy, for example, regarding -- and a process by which we procure materials. We think it is a process that, if implemented across the entire organization, pro forma that we might see some cost savings there.

In the support areas, like financial accounting and in a number of the engineering areas, we simply had duplication, and I think to the extent that we got into the organization, saw the quality of the people and designed I think a very efficient organization, we probably were a little conservative in our original estimates for the head count reductions.

All of those taken in the aggregate probably put us in the range of $38 to $40 million of potential cost savings today. We continue to work on the design of the organization. I think we're very hopeful there will be additional cost savings that will come out of the combination, and so we're continuing to look at that.

Any sense of how long it will take to realize that 38 to 40 million?

Well, the majority of the cost savings, of course, are head count reductions, and those would hope to be achieved largely right off the bat. With the head count reductions, there will be -- I don't have a number to really throw out there, but I would say the vast majority of those would be employee-related cost savings right off the bat. There will be some transition employees, particularly as we migrate computer systems, which might take several months, but we are looking at a very aggressive and ambitious system migration plan that effectively has the two companies' systems fully integrated by the end of the year, so of all of the mergers that we've been through at El Paso over the years, I've been very impressed with not only the way the two companies have worked together, but the very clear, distinct, and efficient plans for merging the two with a lot of those cost savings just right off the bat, which would inure to the benefit of the pro forma combined company, certainly, by the fourth quarter.

And if I could, just a couple of quick follow-ups. Walnut Shell, is there a -- what's your sense there in terms of expansion opportunities? I guess EOG yesterday sort of hinted that you need more pipeline take away.

Well, in fact, we do need more pipeline take away, and that's exactly where we see the opportunities is to not only optimize the existing capacity that we have running through the north Texas region by -- by adding additional compression, but also the potential for some major pipeline take away from the area. We don't know the extent of the Barnett Shale at this point in time.

The major players, of course, are Deven, Burlington resources has developed a strong position in there, EOG has developed a strong position in there, and then there's a handful of small independents that are not necessarily household names, many of which have been working in the Fort Worth basin for years. They all have access to the completion technology, the horizontal completion technology.

The trend itself appears to us to be much broader geographically than we originally thought. In fact, we've seen, I think, a -- a public presentation by Burlington Resources, which has the potential scope of the Barnett Shale running all the way out into the traditional Permian Basin area around Ohio and Midland, so we're very excited about that.

Our major pipeline system in the North Texas area, which we own 50%, in partnership with TXU, has run particularly full over the last few years, as Ohio gas or West Texas gas tends to want to move across the state into the Carthage market for transportation up to the east coast.

That gas now has to compete for capacity with the new organic Barnett Shale productions, which just to give awesome scale, three years ago we had zero production from there, and now we're, as Bill said, in the 350 -- we've been as high as 400 million a day from month to month.

So it's a significant source of new supply to for us, has certainly come at a good time as we've seen a bit of a slowdown in drilling in South Texas but because we have the largest footprint for a Texas natural gas pipeline system, we really have the flexibility to access new suppliers across the entire state and provide a lot of services for exporting gas for our producer customers as well, so we're very excited about that.

We look forward to for developing some capital projects in north Texas over the next year or so.

Last question, and hopefully it doesn't sound too silly, but given what you see in terms of acquisition opportunities, what kind of position do you think you're in to take advantage of those, or, you know, do you have to get this merger behind you before you could even think about that?

Yves, this is James. I will tell you we are -- we do have some-well I wouldn't call large acquisitions but some smaller acquisition opportunities that we're currently working on now. I think moving forward after the merger, certainly there will be opportunities for much larger acquisitions, but we do have some things in the hopper that I would put in the smaller acquisition type category.

Yeah. And Yves, in the larger acquisition category, I think what I'm impressed with right now is the amount of -- the number of opportunities out there. Seemingly all of the majors are looking at divestitures based upon return criteria. When we look at the -- just the four largest -- four or five largest majors, we see in excess of $10 billion of midstream assets in oil, gas, gas liquids, and refined products, that we think can hit the market over the next few years.

As I said in my opening comments, one of the key drivers for Gulfterra was to be able to access enterprise's historically low cost of capital, and with our combination of assets, our acquisition skills, our integration skills, and the low cost of capital, we think we're going to be a force in that market over the next couple of years.

And Yves, one more thing I want to add is, when I gave you that guidance of 460 to 470 that excluded any potential acquisitions that we might make.

Bill, what's your ability to access capital between now and closing the enterprise merger?

Sure. Well, we -- we certainly have certain provisions that we have to adhere to in the merger agreement, but that doesn't -- we -- in the merger agreement, we have the ability to go out and access a $100 million in equity and a $100 million in short-term debt, OK?

And to the extent we want to -- we exceed that or we need to exceed that for any reasonable business purpose, the companies will get together and discuss this and, you know -- and agree to waive certain provisions under the merger agreement.

So -- but we've got enough -- we've got enough capacity under our revolver right now, and with the cash flow we've got generated, to be able to accomplish all these things that I've talked to you about.

Great.

That doesn't mean we -- we won't go back for some additional capital, if other opportunities arise.

Thank you very much, everybody.

Thanks, Yves.

Thank you. The next question is coming from Mark Easterbrook of RBC Capital Markets.

Yeah. Good morning. Just a quick question on your maintenance Capex guidance of 50 million. Is that a net or gross number? You mentioned that El Paso was paying down some of that maintenance Capex of about 5 million in the first quarter.

Right.

And how long does that continue? Does El Paso continue to pay that over the next few quarters? Is that terminated?

Mark, we have an agreement, an indemnity agreement, that goes through 2006, and this was based on the acquisition we did for the Texas pipelines in April 2002, and basically what that agreement says is for those pipelines in that asset package -- OK?

We would only -- we, Gulfterra, would only be obligated for the first $5 million in pipeline integrity costs, OK? So anything over $5 million through 2006 is borne by El Paso Corporation.

I'm sorry. That's $5 million annually?

That's right.

OK.

So when I said we're going to do 12 to $14 million in pipeline integrity, which is part of that $50 million, there's another 13 million in well ties and the remainder is really just kind of their maintenance Capex. But that 12 to 14 million assume that I'm capped at 5 million on the GTT system or the Texas pipeline system -- OK?

And then I've got about 7 to 9 million of additional pipeline integrity for our liquids and other pipes that aren't covered by those indemnities. OK? So that's where the 12 to 14 million come in.

OK.

Does that help?

Yes, that helps.

OK.

And then next question. You mentioned a lot in the second quarter about paying down some -- or refinancing some debt. How much debt in total are you taking down?

When did I mention we were going to -

Well, I mean the redemption of -

Oh, I'm sorry, I'm sorry, yeah. The revolver, right, the 10 3/8 we called last week and we'll be paying -- we'll be paying that down on June 1st. And so -- and I think there's a -- there's a premium on top of that about $12 million--. So 12 plus to 175 and we'll using the revolver, and cash flow from operating activities, to refinance that. It just makes good economic sense.

OK. Thanks.

The next question is a follow-up coming from Ross Payne of Wachovia. Please go ahead with your question.

Yes. You talked about where rig counts are in the Deepwater and that it set a record. Can you just talk just a moment about what you see -- what you are seeing in the Deepwater, what you're seeing on the shelf, and what you're hearing about for the deep shelf?

Ross, this is James again. We are, as Bob mentioned, seeing record levels in greater than 5,000 feet of water, which we view very positively.

A lot of that is in the areas, you know, where we have infrastructure. Some of it is in areas where we're trying to develop new infrastructure. I think what we're seeing especially as these hubs get out there, the larger platforms get built and positioned, it's stimulating a lot of drilling in areas that -- where you don't necessarily need as much reserves to be commercial because you've got a hub to tie back to. We're seeing that around our Marco Polo platform.

We're currently working on a deal that's basically a gas play, but because our platform's there, it's commercial to tie it back to our facility. So we think it's going to remain active out in the Deepwater, and that the more infrastructure there is out there, the more activity it will stimulate.

As far as the activity on the shelf, you know, we are still not seeing, you know, the record type Jack-up level -- or Jack-ups drilling that we saw, you know, in the late '90s and in 2000. You know, we're seeing enough drilling around our Hylo system to kind of maintain volumes fairly level. We've got five or six deals, prospects along the Hylo system, either drilling or planned to be drilled, that we think will help us maintain those volumes.

As far as the deep shelf, I would tell you from a Gulfterra perspective, that activity has not been in and around our assets, and when we project out in the future, we -- we really haven't seen -- unless it starts getting out in the deeper locations on the shelf and more around our Hylo type systems, we don't see that adding any benefit to the partnership.

OK. Thank you. That's helpful.

OK.

Thank you. I'm showing no further questions at this time.

Thank you for joining us on the call, for Gulfterra's first quarter 2004 earnings conference call.

We look forward to talking to you at the end of next quarter.