Enterprise Products Partners LP (EPD) 2004 Q2 法說會逐字稿

Welcome to the Gulfterra Energy Partners second-quarter earnings 2004 conference call. (OPERATOR INSTRUCTIONS) At this time, it is my pleasure to turn the floor over to your host, Drew Cozby.

Thank you, Autumn. Good morning, everyone, and thank you for joining us for Gulfterra Energy Partners second-quarter 2004 earnings conference call. This morning, Bob Phillips, Chairman and Chief Executive Officer, will begin our call with a review of the second-quarter highlights and provide a strategic overview. Bill Manias, Chief Financial Officer, will take us through the operating results, balance sheet, and other financial items. James Lytal, President, will provide a commercial activity review and update you on our 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, performance cash flows, which we formerly referred to as EBITDA, as presented in this release call, attached tables, and operating statistics, are available in the investor section of the Gulfterra website, and are calculated in the same manner as referred to in the past as EBITDA, to allow a consistent comparison of the operating performance with prior periods.

In addition, reconciliations of non-GAAP measures to the most comparable GAAP measures are incorporated in this call release and posted on the investors page of our website 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 Products Partners, status of the partnership's greenfield project, successful negotiation of customer contracts, and general economic and weather conditions in markets served by Gulfterra Energy Partners and its affiliates, could cause actual results to differ materially with the projections, anticipated results or other expectations expressed in this call and 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 Gulfterra 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.

Good morning and thank you all for joining us. We're very pleased to report another successful quarter as we prepare for our pending merger with Enterprise Products Partners. In the second quarter, Gulfterra had performance cash flow of about $114 million, or over $120 million after adjustments for one-time charges. This is a significant level of performance for us.

Net income during the quarter was $47.5 million on a reported basis, or almost $70 million on an adjusted basis. That's the highest level of quarterly net income in the history of the partnership, and we are very proud of that feat.

We had a very good quarter across all of our businesses, with each of the major assets making a strong contribution. Bill Manias will give you much more detail on the performance in our quarter.

Year-to-date, let me touch on that -- Gulfterra reported performance cash flow of $224 million, or almost $235 million after adjustments for one-time charges. At this level and with the additional cash flow coming from the new projects that will come on in the second half of this year, we should be near the top end of our range for cash flow and earnings in 2004. And this will give us a great platform for growth in 2005 as we become an important part of the new enterprise organization.

We also reached some major milestones during the quarter, and recently bringing the Phoenix gas pipeline Marco Polo platform and oil and gas pipelines onstream. And we also announced a major new project to build oil and gas pipelines to gather from the Constitution and Ticonderoga fields in the central part of the gulf. Our offshore strategy is beginning to take shape; it's looking very good and will be a major contributor to our bottom line in the quarters ahead. James Lytal will take you through quite a bit of detail on the progress for our offshore projects.

Turning to the quarter, let me highlight a number of things that occurred that I think are worthy of mention. Clearly, higher natural gas prices drove strong drilling activity in Texas and New Mexico, leading the stable throughputs on our pipelines and plants. We saw new dedications of supplies in Texas and improved gathering margins in the San Juan Basin. As you are all aware, our San Juan Basin gathering fees are indexed to natural gas prices. And in 2003, we hedged about 75 percent of our 2004 exposure, following our traditional policy of locking in gains against our budget estimates. And given the rise in gas prices of the last year, we clearly left some money on the table, but delivered on our cash flow estimates. Importantly though, we are unhedged in 2005 and this long position will serve as a natural hedge against Enterprise's fuel and shrink requirements after the merger.

Let's turn to oil prices. Strong oil prices have accelerated, bringing significant new deepwater trend oil discoveries into production in the Gulf of Mexico. We think we're in a new phase in the deepwater trend, as infrastructure projects for the sanction discoveries, the larger discoveries which are anchoring these pipelines and platforms, begin to come on-stream and drive the acceleration of development of satellite prospects.

In the natural gas liquids area, prices are up due to increased petrochemical demand for feedstock as well as higher crude oil prices. This has improved the outlook for gas processing margins, and positively impacted our South Texas throughput in our South Texas natural gas liquids assets. Similar to our gas hedge strategy, we have typically locked in our margins on natural gas liquids equity production. Again, we did that in 2003 by selling forward about 6,000 barrels a day of NGLs through September of 2004. And again, we clearly left some money on the table as prices have risen in excess of our forward sales. But again, we delivered on our promised cash flow estimates. We are unhedged in the fourth quarter and in 2005. We should see a significant benefit in that period if prices stay at this level.

In summary, strong fundamentals, combined with improved operating efficiency across all of our assets, have created a very strong base of stable and recurring cash flows with significant upside potential. We see the operating environment staying strong in the second half of this year and well into 2005.

Now, some progress on our growth projects. Gulfterra, as you may know and many of you have talked about, has a very unique growth profile in the MLP space due to the significant portfolio of organic projects that we have been working on for the past several years and which will come onstream in the 2004 to 2006 time period. These projects offer exceptional returns and cash flow accretion to drive our future distribution growth. Strategically, these organic projects allow us to be more competitive. As competition for acquisitions for midstream assets become more competitive, our greenfield projects clearly distinguish Gulfterra (and of course, Enterprise postmerger) from the other MLPs from a growth standpoint. So we'll continue to pursue this strategy. We have been very successful at it.

Let me just summarize the history of where we are. As the leader in the deepwater development of midstream infrastructure for the deepwater trend in the Gulf of Mexico, we currently have over $1.1 billion in new pipeline and platform projects underway. This has been a monumental effort for a company our size. But our engineering, commercial and operating teams have delivered on these projects, they have delivered to meet the producers' schedules and the budgets, given the scope of the projects, and we are very pleased with where we are in the leadership position that we have in the deepwater trend. We have a long history with this strategy; it didn't just start last year. In fact, I'd take you all the way back to the first generation of offshore projects, built by Lebiafid (ph) in the mid to late '90s. Those projects attracted us when we acquired control of the partnership in August of '98. And in that first generation of projects, they built pipeline header systems and hub platforms along the edge of the outer continental shelf to serve new developments in the flex trend, which was the deeper portion immediately down from the edge of the shelf. They were very successful and they built interest in pipelines that continue to serve us today strategically.

From that position, we started on the second generation of projects, which included both Gulfterra-owned and producer-owned gathering systems, tied back to our headers and hubs, which extended out into and gave us a competitive reach into some of the more prolific areas of development in the deepwater trend. And those successes led to where we are today, and that is executing the third generation of deepwater projects by interconnecting these systems with even deeper pipeline extensions and new hub platforms that we are installing in the deepwater areas, as well as new hub platforms installed by our producers, to create a seamless infrastructure that will benefit from strong initial production from the anchor fields, accelerate the development of satellite fields, and competitively position us for the next generation of deepwater discoveries.

I thought that strategic overview would be helpful to explain the significance of many of these projects that are coming on-stream. James Lytal will give you a detailed update on these projects. I just want to touch on some of the highlights that have led to improved performance year-to-date, and will lead to the significant increase in performance cash flow in the second half of this year and 2005.

Back in March of 2003, we had a significant installation of the Falcon Nest platform and pipeline in the Western Gulf. In November of 2003, we installed the Medusa and Matterhorn deepwater systems, which were connected to our Viosca Knoll pipeline system in the eastern Gulf of Mexico. In July 2004, our new Phoenix pipeline saw first production from Kerr-McGee's Red Hawk field in the Southeast Garden Banks area. That is in the central part of the Gulf. And the Marco Polo hub platform and pipelines were placed in service for Anadarko's production from the Marco Polo field in the South Green Canyon quarter. And we will see additional production next year from the K2 and K2 North fields, which will be tied back.

Construction is now complete on the Front Runner pipeline system. That's an extension of our 36-percent-owned-and-operated Poseidon pipeline system. And it is tied in to Murphy, Dominion, and Spinnaker's new discovery of Front Runner, with first production expected in October of 2004. Construction is nearing completion on our largest offshore project. That is the Cameron Highway oil pipeline system, which will start line fill in September and October, and we look for first production from BP's South Green Canyon fields in late 2004.

We recently announced the Constitution project, where we will lay a new oil and gas pipeline to their hub, which will bring in production from Constitution and Ticonderoga. All in all, I can say this is a major strategy. It has been a significant success. We think the future looks very bright for Gulfterra in the Gulf of Mexico as we continue to expand our franchise for deepwater infrastructure.

Now let me turn to our pending merger with Enterprise Products. As you know, there were several steps to complete the merger and we're almost done. We are in the final stages of FTC review for the merger and should be on track to gain approval in the third quarter of this year. We received resounding approval of the merger from our unitholders at the special meeting that was held on July 29. And I would like to thank all of you who took the time to vote and support this great combination of midstream businesses. And we have largely completed the merger integration process and achieved all of our goals, cost savings from the combination that are above our original targets. We built a solid platform of complementary assets for future growth. And we have created a strong organization with the best from both companies to drive the company in the future.

We are excited and enthusiastic about this merger. It combines two of the industry's best midstream companies into a world-class midstream organization that will have diversification, compatibility, and significant growth potential in the Gulf of Mexico, the Rockies and across New Mexico, Texas and Louisiana. The stronger balance sheet will allow us to make larger and more strategic acquisitions, which the smaller MLPs can't compete for. And I think it will position us to take greater interest in the organic projects in the Gulf of Mexico that will drive the company over the next few years.

Let me summarize by saying that the industry fundamentals remain very strong for our business. Gulfterra has reported another solid quarter. We are on track to deliver the high side of our expectations for 2004. Our growth projects are the best in the business, the best in our peer group, and very much on track. And we look forward to completing the merger with Enterprise sometime in the third quarter. So with that background, I'm pleased to turn it over to Bill Manias, who will review the quarter in detail. And then James Lytal will talk in more detail about our projects in the Gulf of Mexico. Bill?

Thank you, Bob. What I would like to do today is discuss the second-quarter consolidated results, update you on the performance of our major business segments, review capital spending for the quarter, and then finally give you a brief update on the balance sheet and other financial items of interest.

So let's start with the second quarter. For the second quarter of this year, we recorded net income of 47.4 million or $0.37 per diluted common unit. That's compared with 49.3 million or $.50 per common unit in the second quarter of 2003.

Our performance cash flow was 114 million in the second quarter versus 108.7 for the second quarter of 2003. That's a 5 percent increase year-over-year. More importantly, included in the second-quarter results were certain one-time costs associated with our early retirement of debt, and that's approximately 16.3 million. And one-time merger costs and other one-time items were approximately 6.1 million. If you add these back, that moves our second-quarter net income to 69.8 million, or $0.68 per diluted common unit. And performance cash flow up to 120.1 million. This represents an increase over the second quarter of 2003 of 42 percent, and 11 percent from net income and performance cash flow respectively. These results are solid confirmation of how well our base businesses are currently performing.

If you look at the first half the year, our net income was 103 million, or $0.86 per diluted common unit. That is 13 percent higher than the same period last year. Performance cash flow was 224.3 million in the first half, compared with 214.6 for the first half of '03. That is a 5 percent increase. Once again, adding back certain one-time costs of approximately 26.5 million for the first half, that includes the 16.3 million related to the early retirement of debt and 10.2 million in one-time merger related and other one-time items, that moves our first-half net income up to a record $129.5 million or $1.23 per diluted common unit. And the performance cash flow number up to 234.5 million. And as Bob indicated earlier, we believe this strong performance will be further enhanced in the second half of the year by the progress we have made on our major growth projects, which James will talk about in more detail.

The partnership recorded gross margin for the quarter of 165.2 million. That is a 9 percent increase over the 151.6 million we recorded in the second quarter of 2003. The increase is attributable to increased operating margins on a Texas pipeline system, and also increase process and transport margins on our Falcon platform and pipeline systems, as well as continued strong performance from the San Juan assets.

Our operating and maintenance expense for the quarter was approximately 49.8 million, which was slightly higher than the 48.6 million that we incurred in the second quarter of 2003. This slight increase in expenses was driven primarily by additional one-time costs related to the merger. And as I mentioned, we recorded earnings per diluted common unit of $0.37 for the second quarter. This is on an average of 59.9 million diluted common units, which is up from 48.5 million units this same time last year. The increase of 12 million units resulted from our successful activities in the equity markets during the latter part of last year.

Finally, Gulfterra's distribution coverage ratio on an LTM basis was approximately 1.05 times. It actually increases to 1.13 times for the quarter when you add back the certain one-time costs that I discussed earlier.

Let's move to the segments. Our largest segment, which is the natural gas pipeline and plants, continues to show strong results in a very favorable operating environment. Performance cash flow was 83.9 million. That's 7 percent up from the 78.4 million we generated at the same time last year. The largest contributors here are the Texas pipeline system and the San Juan gathering and processing asset. Together, these two businesses account for approximately 81 percent of the total segment performance for the quarter. The real story here is the improved performance of our Texas pipeline system. This had a significant positive impact on our overall profitability for the first half of the year versus last year. While overall volumes on the Texas system were down slightly quarter-over-quarter from approximately 3.3 million dekatherms per day in the second quarter of this year versus 3.4 at the same time last year, a significant increase in margins over the system more than offset this volume decrease.

In the second quarter, for example, 2004 system margins averaged 12.1 cents per dekatherm versus 8.7 cents for the second quarter of 2003. In fact, what we have seen is a steady increase in systems margins on the Texas pipeline system, beginning in the first quarter of 2003 when margins were at their low of approximately 6.4 cents per dekatherm to the 12.1 cents that I just mentioned for this past quarter. There are a number of factors driving this, and they include -- we're seeing higher transportation fees on new and renegotiated contracts over the system; we've seen a significant reduction in system imbalances; we've seen lower fuel use and overall improved operating efficiencies; and we also benefited from higher interruptible transportation rates, resulting from a wider base of spreads across the system this past year. And five contributions from our new contracts.

In addition, as always, San Juan gathering and processing assets continue their strong contribution to the performance cash flow bottom line, benefiting from strong prices at the Chaco plant and continued high throughput at the San Juan gathering system, which is averaging about 1.26 million dekatherms a day for the quarter.

Offshore, Falcon gas pipeline flowed an average of 280,000 dekatherms a day for the second quarter. That's versus 190,000 dekatherms a day for the same time last year. This increase was driven by the production from Pioneers Harrier field, which came online in early January this year. We're really pleased with the continued strong performance of Falcon. We are currently seeing volumes in the 315,000 to 320,000 dekatherms a day range, attributable to first production from Pioneer's Tomahawk and Raptor fields, which just came online in June.

In addition, we also had higher volumes on the East Breaks and HIOS offshore systems. That was driven by production from ExxonMobile's Diana Hoover field and by several new deepwater wells brought online from the Alaminos Canyon block during the quarter. Overall, for the segment, volumes were about strong at about 8.0 million dekatherms per day versus 7.8 for the second quarter of 2003.

Let's move to the oil and NGL logistics segment. This includes all of our offshore pipelines, which is Poseidon, Allegheny, Typhoon, Marco Polo, and also our Texas NGL fractionation plants and pipeline businesses. These businesses generated the 13.3 million in performance cash flow in the second quarter versus 12.9 million for the same period last year. What's important to note here is that we achieved this increase in performance cash flow despite not receiving any distributions from our 36 percent interest in the Poseidon partnership. As I mentioned last quarter, Poseidon GAV (ph) partners have decided to retain excess cash within the partnership in order to fund the $28 million Front Runner oil pipeline project, which we expect to be in service in the fourth quarter of 2004. More than offsetting the loss of distributions from Poseidon was an extremely strong second-quarter performance from our NGL pipeline systems in Texas and our fractionation plants in Texas.

Our throughput to the NGL system in Texas was up to 39 percent in the second quarter versus last year. Roughly 52,000 barrels a day for this past quarter versus 37,300 barrels a day in the second quarter. This increase in volume is attributable to the return-to-service of our Corpus Christi to Houston 8-inch pipeline. This pipeline was out of service in the second half of 2003, really limiting our ability to move excess propane supply from South Texas processing plants and refineries to the Mount Bellevue market. As we expected, we also benefited from the seasonal pickup in butane volumes from our two butane shuttle pipelines. These pipelines move butanes into our leased storage facilities at Markham (ph) and Almeada (ph) from refineries in Corpus Christi and Texas City, in anticipation of the winter motor gasoline blending season.

For the second-quarter of 2004, throughput in the Texas NGL fractionation assets was up about 18 percent. That's about 69,500 barrels a day this past quarter versus 58,800 barrels a day for the same period last year. And this is primarily due to the increase ethane recoveries from the South Texas gas processing plants. We recovered ethane -- full ethane recovery for all three months of this past quarter versus reduced ethane recovery for the same time last year.

Moving to our gas storage segment, performance cash flow there was essentially flat quarter-to-quarter. 7.7 million in the second quarter of 2004 versus 8.1 million over the same period last year. But more importantly here, we recently executed a 5-year firm storage agreement with BP for a new 1.8 BCf natural gas storage cavern at Petal. This new expansion project cost approximately 17 million, and we expect it to be operational in the fourth quarter of this year.

Our platform services segment generated performance cash flows of about 5.8 million this past quarter. That's versus 6.3 in the second quarter of 2003. This quarter-over-quarter decrease was attributable to lower platform processing volumes and demand charges on our East Cameron 373 platform. As well as scheduled -- excuse me -- compressor maintenance on our Garden Bank 72 platform. Partially offsetting this decrease were higher contributions from the Falcon Nest platform, as a result of increased volumes from the Harrier discovery which was added in the first quarter of this year.

The highlight in the segment, though, which Bob mentioned, was the installation of the Marco Polo oil and natural gas export pipeline, which we tied into the Marco Polo tension leg platform. The Marco Polo platform is held in the Deepwater Gateway partnerships, of which Gulfterra is a 50 percent partner with Valero. Deepwater Gateway began receiving demand charges of 2.1 million per month in April 2004, and first production across the platform in July. Now, we expect to begin receiving cash distributions -- we, being Gulfterra -- from the Deepwater Gateway partnership in 2005. And James will talk a little bit more about this.

Capital spending. Year-to-date, we've spent about $96 million on CapEx. Of that, 73 million was related to expansion projects, the majority of which -- 40 of that 73 -- is associated with the final stages of the Marco Polo project. The remaining 23 is related to sustaining CapEx, in which we include well ties, maintenance CapEx and pipeline integrity capital. We expect to spend $217 million in total capital for the full year 2004. And this includes approximately $50 million of sustaining capital. Now, included in that $50 million, we expect to incur pipeline integrity costs of approximately $10 million -- 10 to $11 million -- from make-ready (ph) in-line inspection, hydrotesting, and remediation. Now it's important to note that this 10 million for pipeline integrity is net of payments we will receive from El Paso, related to an indemnity provision that was included in our April 2002 purchase of the Texas pipeline assets from El Paso. The remainder of our capital program is growth capital and related to either new development projects or equity investments in our joint ventures. It's also important to note that this 217 million does not include any additional capital for unidentified acquisitions or development projects.

At the end of the quarter, our total debt of approximately 1.9 billion represented 59.9 percent of our total capital base of approximately 3.2 billion. Our debt, divided by annualized performance cash flow of 469.0 million, which includes the one-time cost of 10.2 million, yields a favorable debt-to-annualized performance cash flow ratio of 4.0 times.

Now, before I end and turn it over to James, I would like to summarize two financial transactions that we executed this quarter. In April, a direct subsidiary of Petal borrowed approximately $52 million from the Mississippi Business Finance Corporation in the form of an industrial revenue bond, in order to receive tax incentives of about 3.4 million. This allowed us to reduce our sales tax associated with our $202 million -- excuse me -- 2002 expansion project with Petal. In June, we initiated (ph) the full redemption of 175 million of our 10 and 3/8 senior subordinated notes that were due in 2009. We redeemed these notes at a premium of about 105.2 percent. And in connection with the redemption, we recognized the additional costs of 16.3 million, resulting from redemption premium and the write-off of unamortized debt issuance costs. Now, we used a portion of the proceeds of our $200 million B-loan (ph) offering to fund this redemption.

With that overview of our current performance, I'd like to add some color to Bob's earlier comments on performance cash flow for the remainder of 2004. We continue to expect we'll achieve performance cash flow near the high end of our previously-stated guidance of 460 to $470 million. We think we will see continued strong performance from our base businesses and expect additional contributions from several of our growth projects. In natural gas pipelines and plant segment, we expect to see contributions from the Marco Polo and Phoenix gas pipelines, and a full-year's impact of the Falcon Nest pipeline. The oil and NGL logistics segment should benefit from the Marco Polo oil pipeline. Finally, the platform services segment should be positively impacted by incremental volumes flowing through the Falcon Nest platform. Again, this is all based on our expectations of continued positive industry fundamentals and continued high operating efficiencies.

And 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 some of our core assets, as well as our offshore organic projects. Our San Juan basin gathering system and Chaco gas plant continued their strong performance in the second quarter. Drilling in the area of our gathering system remains strong and should remain strong for years to come because of the low finding costs of the reserves in the area. We have connected 149 wells year-to-date and are well on our way of achieving our goal of connecting 260 wells this year.

As we have mentioned in this call, a portion of our gathering fees are based on a percentage of the San Juan Basin gas index. We have hedged approximately 75 percent of that exposure for 2004 at $4.23 per dekatherm. We are unhedged after 2004, and each 10-cent movement in gas price has approximately a $1.4-million-a-year impact to performance cash flow. With the current San Juan index strip for 2005 as of last Friday at $5.74, you can see we have the potential for an increase in performance cash flows from this asset in 2005.

Under our Chaco plant processing agreements, a substantial portion of our revenue is derived from receiving a percentage of the liquids as a fee. For 2004, we have hedged approximately 50 percent of our liquids exposure at $0.45 to $0.51 a gallon for the first three quarters of '04. We are unhedged after the third quarter of 2004, and each 1-cent movement in NGL price has an approximate $1.3-million-a-year of impact to performance cash flows. With the current San Juan NGL strip as of last Friday for 2005 at 62.2 cents a gallon, you can see we have the potential for increasing performance cash flow at the Chaco plant also. In addition to potentially higher future performance cash flow due to higher commodity prices, we continue work on our San Juan expansion, which we believe will ultimately add an additional 130 MMcf in volume by 2006. And this will certainly have another positive impact to cash flows from these assets.

We were very pleased with the performance of our Texas pipeline assets in the second quarter. Improvements over last year have come from the renegotiation of approximately 600 MMcf a day of transportation to higher fees and higher fuel retention -- the reduction in imbalanced payables from 6 Bcf in 2003 to 200 MMcf per day and the reduction of our lost and unaccounted-for volumes from 0.23 percent in 2003 to a year-to-date 2004 number of 0.13 percent. Our operations and measurement group deserves the credit for the reduction in this lost and unaccounted-for number, which at 0.13 percent, is significantly below the industry average of 0.25 percent.

We continue to be excited about the drilling activity in the Barnett Shale area of North Texas. We are currently transporting over 400 MMcf a day from the area, which represents almost 50 percent of the basin's production. Over 75 percent of that volume is flowing under firm transportation agreements with Devon, who is the major producer in the field. The Barnett Shale plate continues to move south, and we have been able to take advantage of that by establishing four new interconnects with independents that have discoveries in the play. We believe these new interconnects should add 50 to 60 million a day to our system over the next twelve months.

We also see growth in that we believe we're going to be able to have the opportunity to expand our pipeline serving our major Central Texas markets, which will allow us to provide additional gas to these major growing markets. Also in Texas, our NGL pipelines have seen improvement due to higher ethane recoveries from the Texas gas plants. These are the gas plants that will be acquired by Enterprise upon completion of the merger. We also have benefited from the return-to-operation of our Corpus Christi to Houston pipeline that was being repaired last year.

Now, I would like to provide an update on our offshore organic growth projects. In our Falcon Nest platform, Pioneer initiated production from their Tomahawk and Raptor developments, which increased production to 320 MMcf a day on our platform and gathering pipeline. Pioneer has plans to drill additional wells in the area in the second half of 2004, so we expect to maintain those volumes for the foreseeable future.

On our Phoenix pipeline project, Kerr-McGee and Devon initiated flows from the Red Hawk field into our new 76-mile, 18-inch Phoenix pipeline on July 15. And the field is already ramped up to its projected peak rate of 120 MMcf a day. Kerr-McGee operates the 120 MMcf a day cell spar, which is capable of being expanded to 300 MMcf, as required for future tiebacks. Our Phoenix pipeline has capacity of 450 MMcf a day, so we're well-positioned for future activity in the area.

We were pleased to announce recently the execution of definitive agreements with Kerr-McGee, under which Gulfterra will construct and own the oil and gas gathering export pipelines for Kerr-McGee's Constitution development. The Constitution field is located in 5,000 feet of water in Green Canyon Blocks 679 and 680 in the Central Gulf of Mexico. Kerr-McGee's platform will have capacity to process 70,000 barrels of oil per day and 200 MMcf a day. Our new 32-mile, 16-inch gas pipeline will have capacity of up to 200 MMcf a day, and will connect to and become part of our Anaconda gathering system. Anaconda is the combination of our Typhoon and Marco Polo gas gathering system. Once Constitution is connected, Anaconda will be connected to three major hub platforms, which are Marco Polo, Typhoon, and Constitution. These platforms combined have gas processing capacity of 550 MMcf a day, which we believe puts our Anaconda gathering system in an excellent position to benefit from future tiebacks to these hub platforms.

The new oil pipeline will be a 70-mile, 16-inch line that will connect to Cameron Highway and Poseidon at the new Ship Shoal 332-B platform. The capacity of the oil pipeline is 80,000 barrels a day, but can be expanded to 150,000 barrels a day with pumping and drag reducer. This new oil pipeline provides another gathering pipeline into this prolific oil region that can access our Cameron Highway and Poseidon pipelines. And brings the total upstream gathering capacity into Poseidon and Cameron Highway from this area to 1.1 million barrels a day. We plan to install the pipelines in the summer of 2005, with first production anticipated in mid-2006. Estimated capital for the two pipelines is $120 million. Kerr-McGee has dedicated production from its Constitution and Ticonderoga discoveries, as well as future potential production from several undeveloped blocks in the area for gathering on our oil and gas pipelines.

In a separate transaction, our Cameron Highway pipeline has executed agreements with Kerr-McGee, dedicating Kerr-McGee's production from Constitution, Ticonderoga, and surrounding undeveloped blocks from movement on the Cameron Highway pipeline for the life of the reserves.

On another oil-related project, oil pipeline-related project, Poseidon has completed construction of the 36-mile, 14-inch Front Runner oil pipeline, which connects Murphy, Dominion and Spinnaker's Front Runner production to Poseidon at Ship Shoal 332. The Front Runner spar has been installed and first production is anticipated in the fourth quarter. As Bill mentioned, we have not been receiving distributions from Poseidon, as the cash been used to construct the Front Runner pipeline. We are starting to see volumes on Poseidon ramp up with first flows from Marco Polo, and should continue to see volume increases as Marco Polo ramps up and Front Runner begins flowing. We should start seeing distributions again for Poseidon in late 2004 or early 2005.

We reached a major milestone with first flows from Anadarko's Marco Polo field on July 12. Anadarko is currently producing from three wells, and anticipates having all 6 Marco Polo wells flowing by early 2005, with an anticipated peak rate of 50,000 barrels per day of oil equivalent. During the second quarter, Anadarko announced a successful down-dip (ph) delineation well at its 100-percent-owned K2 North prospect in Green Canyon Block 518. This well extended the down dip limits of the field and increased the size of the discovery. The K2 North field, along with the adjacent K2 field, will be subsea connected to our Marco Polo platform. And first flows from these two fields are expected in the first half of 2005. Once K2 and K2 North ramp up to peak capacity, which is anticipated in late 2005 or early 2006, we expect the 120,000-barrel-a-day oil processing train of the platform to be at capacity. This'll not only benefit the platform, but will also benefit Gulfterra's oil and gas export pipelines, as well as our Poseidon and Cameron Highway oil pipelines. We do have over 100 MMcf a day of gas processing capacity available on the platform, and are currently working on opportunities to fill that capacity.

On Cameron Highway, the pipeline and platforms are installed and we are doing final hookup work, both onshore and offshore. I mentioned our recently-announced dedication of Kerr-McGee's Constitution and Ticonderoga fields to Cameron Highway. This dedication, along with our dedication from BP, BHP and Unocal of their Holstein, Mad Dog, and Atlantis production, provides an excellent book of business for Cameron Highway. We expect first flows from BP and Shell's Holstein field in the fourth quarter.

To provide an update on Holstein, Mad Dog and Atlantis, I would like to read from a BP release that came out last Friday. And I quote, "the Holstein field comprises 15 wells and is set to come online at the end of 2004 with 100,000 barrels a day of crude and 90 MMcf of natural gas per day. The Mad Dog field comprises 18 wells and is expected to begin production in early 2005 with crude output totaling 90,000 barrels per day and gas output estimated at 40 MMcf per day. The Atlantis field comprises 20 wells and is set to come online 2006 with crude output totaling 150,000 barrels a day and gas output about 180 MMcf a day."

For all those developments combined, that is 340,000 barrels per day of deliverability from 53 wells, with all the production from these fields dedicated to Cameron Highway for the life of the reserves. These fields will also benefit Enterprise in the projected 310 MMcf a day of rich gas deliverability, is dedicated to their Manta Ray Nautilus Pipelines and Neptune plant.

Finally, with the completion of that Cameron Highway system, this marks the completion of approximately a billion dollars of new offshore projects. I would like to compliment our engineering staff on a job well-done as these were very involved projects ranging from building and installing the world's deepest water retention lake platform to making a (indiscernible) connection in 3,000 feet of water. All projects were installed on a timely basis and were done only slightly above budget. And that was only due to project scope changes, such as expanding the Marco Polo TLP capacity and building a second platform at Ship Shoal 332. Both of which have enhanced the value of these assets.

Although we have just completed several projects, we believe there is a lot more opportunity to make good investments in the deepwater. The current production from the deepwater of Bcf a day and 1 billion barrels of oil a day comes from only 5 percent, or 234 of the 4,390 deepwater leases. 3 percent, or 142 of those leases, have known or suspected discoveries in various stages. And 8 percent, or 357 of the leases, have some indication of near-term exploration (ph) plants.

Seismic technology continues to improve. Drilling in the deepwater to date has mainly been above salt. Half of the prospective acreage in the deepwater has subsalt potential. The industry has only recently begun to resolve seismic imaging in most of that area, well enough to consider drilling below the salt. We believe the industry will continue to go into deeper waters. 62 percent, or 1,893 of the 3,036 deepwater wells drilled to date, have been drilled in water depths of less than 2,500 feet of water. Only 10 percent, or 296 wells, have been drilled in greater than 5,000 feet of water. We believe that we're well-positioned with our current assets, as well as our commercial and technical experience, to continue to participate in the expansion of the deepwater. We're currently in discussion on over $700 million of new projects, and believe that trend of having a large portfolio of opportunities in the deepwater will continue for many years to come.

With that, I will turn the call over for questions.

(OPERATOR INSTRUCTIONS). Yves Siegel, Wachovia Securities.

Just a couple of clarifications. One, Bob, can you discuss, in terms of the cost savings, what you see and what's coming in better than what you had originally planned? And then I have a quick follow-up.

Yes, Yves, we're probably on track with the number of people that -- headcount reductions that we thought. So I think we did pretty good planning right up front. What we're seeing are synergies and savings in some of the administrative and operating functions. I'll give you one example and you can extrapolate from there. In the area of materials management and procurement -- or supply chain management is another description of that -- we're going to be combining two systems that'll have a spend potentially in excess of $1 billion a year. And we have brought in some experts to give us their view of the current systems, both computer systems as well as the strategic source management, if you will, or sourcing management. Those experts have determined that, based upon their initial analysis, there could be a significant additional savings in terms of spending less on everything from rope, soap, and dope, pipelines, valves and fittings, all the way up to significant steel products, fuels, fluids and those sorts of things. So kind of a classic example of where we have uncovered significant opportunity to reorganize, restructure and potentially even bring in some new leadership in an area that is going to be very important to us, particularly because of the scope of our organic projects, the expansion opportunities within the portfolio after we combine the two businesses, and then pipeline integrity is another big issue there where we are going to see some savings in the areas where we acquire and test and remediate pipeline systems.

Is there any way to ballpark what you're looking for now? I think before it was in the 30 to $40 million range. Right?

I think Enterprise, in their second-quarter call, said 40 to 50, and we're certainly very comfortable with that number.

And then, just a follow-up. The 6.1 million of one-time merger-related expenses -- where does that show up in the income statement? And what are those expenses?

Hold on one second. Okay, Yves, the 6.1 million in merger-related expenses -- well, they're not all merger-related expenses, but some have to do with -- we set up a retention program here. We set it up in February, and we're amortizing the cost of that over, I think, about 7 or 8 months through September. And that's about 2 million and some change -- 2.2 million of the 6.1. We also, as you would imagine, had additional costs associated with legal fees and audit fees, etc. And for the second quarter, we estimate that those are about 1.4 million.

The other item is a one-time item. We had accrued for some uncollected fuel on our system, and we made a determination that a portion of that will not be collected. And we've run that through PWC and we all agreed that it makes sense to just take that one-time write-down now, and that's 2.4 million. That was for the first quarter, and that 6.1, that roughly totaled 6.1 or $6 million, that expands to $10 million for the full six months. Again, you have additional retention, obviously, and additional legal fees associated with the merger.

That's all on a corporate line, rather than -- it doesn't show up in the segment lines, right?

Yes, the 2.4 million shows up in the cost of natural gas and other products. And the remainder would show up in O&M.

And the last one, if I could -- in terms of full-year guidance of 460 to 470, is that off the adjusted base of 235? Or is that off the reported base of 224?

I'm sorry, it's off the 234.

And then the question is, shouldn't you have a stronger second half than what you had in the first half, based on the projects coming online? So I guess what I'm saying is that it seems to me that you may be conservative. Maybe I'm missing something.

I talked about this in my -- the cash, the performance cash flows that we experienced this quarter -- I mean, we've got extremely high prices, right? We've got extremely high liquids and gas prices. We're operating our assets at high efficiencies. And there can be things that happen. You know, in the Gulf of Mexico, you can have a few hurricanes come through, you can have prices drop. So, we're just being a little conservative.

All right. Thanks. I will pass it on.

Ross Payne, Wachovia Securities.

My first question is -- you know, you obviously have a lot of projects coming online right now. Can you give us an idea of the time frame of when you will start to receive cash flow from those projects after taking care of the banks and whatever else you may need to do? And just give us an idea of when that will start hitting your P&L and your cash flow statement?

Ross, this is James Lytal. I'll answer that for you. I can tell you our projections from the projects that are coming on this second half of the year, which were Marco Polo, Phoenix -- obviously, those two are on. And then Cameron Highway will be coming on later. We are projecting for the second half of the year an incremental 18 to $20 million of cash flow, for performance cash flow from these projects. That is after project debt amortization, and interest payments also. I will tell you in that number is a $5 million payment from Valero related to their participation in the Cameron Highway project with us. That is in that 18 to $20 million. For 2005, from the same projects, we are projecting 70 to $80 million of performance cash flow.

Okay.

And I will also tell you that we are currently not projecting any performance cash flow from Cameron Highway in 2005. As the wells ramp up, we will be paying -- amortizing our project debt and paying interest on that. So we currently do not have any projected distributions from Cameron Highway for '05.

What is your expectation on Cameron Highway once it is ramped up, maybe in '06?

Well, let me give you a feel this way, if it's all right Ross -- our projection for a 4-year average from '05 to '08 for these projects is between 100 and $105 million per year. And that is after our project debt service and interest payments.

That is with all the projects?

Well, that's the three we have talked about that have just come on this year. If you include Medusa, Falcon platform, Falcon pipeline for that 4-year period, '05 to '08, we're looking plus or minus $120 million.

One final question. Poseidon is obviously down as they move the free cash flow over to the expansion program. What is that costing you guys, do you estimate, during the quarter?

The distributions that we were getting last year, Ross, it's about 2.5 to 3 million a quarter. Is that correct?

Yes.

Yes, about 2.5 to 3 million per quarter. So you can see, we actually had an increase in oil and NGLs logistics, and that was after -- you know, we were not receiving the Poseidon cash flow, so we had good performance out of those assets.

Okay --

And we expect that to be up next year, because we've got Front Runner coming on and Marco Polo, etc.

And you do expect to be receiving cash starting what? The first quarter?

The beginning of the year sometime, yes. First quarter.

Yves Siegel, Wachovia Securities.

James, the 105 million of incremental cash flows -- what CapEx is that off of? How much did you actually spend on those projects?

Yves, on that number, our equity capital is around $300 million.

Do you know what the total CapEx that you spent on those?

The total CapEx gross?

Yes.

It's around -- I've got to back a little bit out of here, it'll take me just a second. It will be around $900 million, plus or minus.

I'll also ask another one, since -- Bob, James, what is your thought process on the outlook for acquisitions, especially in light of some of the high multiples that have been paid recently? And could you continue to increase exposure in Texas and not run into antitrust problems?

Thanks for the question, Yves. You're right, some of the recent transactions have had increasingly high multiples associated with them. They have been fairly small deals, although the last two Shell deals had pretty strong multiples on them as well in the refined products area. So, my answer to that is the following -- we continue to look at every major acquisition opportunity that comes along. We haven't seen anything that we just felt like we absolutely had to have. We know that there are a number of areas where we think assets will be for sale, post-merger, and we are excited about that opportunity and we will look at those. Texas is one of those, where I think there are some assets that may go on the market that we would be a very strong interested party in.

I can't begin to imagine how strong the competition would be, because it's a fairly big transaction. And our rationale is that once we've completed the merger with Enterprise, we will be large enough and strong enough financially to be able to compete for strategic acquisitions that most of our smaller competitors would not be. So that is a real competitive advantage for us.

The larger balance sheet, the larger cost-to-capital, you know, there's really only one real competitor for the major acquisitions in the MLPs basin -- that's Kinder (ph). And we will have a lower cost-to-capital because of our 25 percent incentive distribution to the general partner versus Kinder Morgan's (ph) 50 percent incentive distribution. So that should work to our benefit.

We will continue to work hard on organic projects, particularly in the Gulf of Mexico. And what will make us much more attractive, from an investment standpoint, is that balance we will have in our portfolio with a much stronger balance sheet and the ability to grow through acquisition. But offset that, balance that with what James just got through telling you, is about every two to three years, we're putting $1 billion plus of projects onstream and they are generating cash flows. If you did the math like I did, it's significantly higher returns than typically people can get out of acquisitions. So we are going to continue to maintain that balance between good, solid acquisitions and good, solid greenfield projects with higher returns.

When you all look at your dominant position in the Gulf of Mexico, do you get any push back from the customers? From the major producers out there saying, "gee, we like another competitor out there," rather than just having all their eggs in one basket with you?

We don't have a dominant position out there, Yves. We have a very competitive position in the Gulf of Mexico. And that comes, as I said in my comments, from years and years of strategic planning and putting assets in the right place to be able to tie all these assets together in a seamless fashion for our producers. Our producers really like what we have put together for them in the Gulf of Mexico. And the evidence of that is the acceleration of satellite development projects that are beginning to occur around the pipelines and the platforms that we have installed. But I can tell you, there is serious competition in the Gulf of Mexico. And don't kid yourself, not only are there pipeline competitors out there for many of these projects, but producers themselves are the most competitive parties to any transaction. And because of their abilities, both financially and technologically to build their own pipeline and platforms infrastructure, we don't have a free drop on anything out there. We have worked very hard, we have taken a lot of risks, the market is very competitive. And we are just beginning to show the world that we can be very successful with this strategy. So I would kind of give you that. James, do you want to add anything?

I think Bob covered it well. We've worked on these things for years and I don't remember one that wasn't very competitive. And as Bob mentioned, we are competing against the producers building it themselves. So, aside from our peer group competitors, we are competing against the producers also.

Yes, it is very competitive. And I think what we have tried to do here is show you that we don't have a series of discreet investments out there. That we really have a long-term, broadbased across-the-Gulf strategy that is now in its third generation heading towards the fourth generation of new projects.

Mark Easterbrook, RBC Capital Markets.

A lot of my questions have been asked already, but just two minor things. Can you review the hedge positions that you guys have on for 2005? I know for natural gas, you said that you were unhedged, but the positions that are hedge for natural gas liquids? And then secondly, what was the sustaining CapEx for the quarter and for the first half again?

Mark, we don't have any hedge positions in 2005. We are totally naked on both gas and gas liquids, and we will remain that way. As you know, our policy was always to basically lock up about half of our exposure because we were driven by setting out a very solid budget estimate at the beginning of the year, and then really achieving that. And if you look back over the last 4 or 5 years since we have managed this business, we've done that almost every year. We've done that by being pretty discipline and patient with our hedging strategy. Going into the post-merger period, though, we clearly see this as an opportunity to add real value to the combined company. Because of our long position, it is a natural hedge or a natural offset to Enterprise's natural short position, given the fuel requirements of their various pipelines and plans. So, in the post-merger world, we will be looking at those exposures and managing those very conservatively with a good deal of discipline. And so, going into the merger, we are naked in '05, and continue to remain that way. Bill?

Yes, Mark, through the first half of the year, I mentioned we were targeting around 50 million for sustaining CapEx for the year. We're right around 25. And about 5 to 6 of that is well ties, and the remainder is general maintenance CapEx and pipeline integrity.

(OPERATOR INSTRUCTIONS). Gentlemen, we appear to have no further questions at this time.

Thank you. Let me make a quick comment before we close. This may very well be our last quarterly call. And I just wanted to thank all of you for your support, your following over the years. We're very pleased to have delivered another strong quarter, and we're very proud of our team here and what we have been able to accomplish at Gulfterra. We're also extremely excited about the opportunities that the merger with Enterprise presents. So given that, we look forward to seeing you as part of the Enterprise organization. Drew?

This concludes the Gulfterra second quarter 2004 earnings conference call. Thank you.

Thank you. You may disconnect your lines at this time, and have a great day.