Enterprise Products Partners LP (EPD) 2004 Q3 法說會逐字稿

Good morning and thank you for waiting. Welcome to the Enterprise Products third quarter 2004 earnings release conference call. All participants will be able to listen only until the question-and-answer portion of the call. (OPERATOR INSTRUCTIONS). This conference is being recorded. If you have any objections please disconnect at this time. I would like to introduce your speaker for today's call, Mr. Randy Burkhalter. Sir, you may begin.

Thank you, Grace. Good morning and welcome to the Enterprise Products Partners conference call to discuss third-quarter earnings. Dub Andras, Enterprise's Vice Chairman and CEO, will lead the call, followed by Bob Phillips, Enterprise's President and Chief Operating Officer, and Mike Creel, the Company's Executive Vice President and CFO. Also included on the call today from Enterprise are Dan Duncan, our Chairman and co-Founder, and several senior members of our management. Afterwards we will open the call up for your questions.

During this call we will make forward-looking statements within the meaning of Section 21 E of the Securities and Exchange Act of 1934 based on the beliefs of the Company, as well as assumptions made by and information currently available to Enterprise's management. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the Securities and Exchange Commission for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call.

Before I turn the call over to Dub, I'd like to mention that the results for Enterprise for this quarter do not include the results of GulfTerra Energy Partners, which was merged into Enterprise on September 30th. Beginning October 1, 2004, the financial results of GulfTerra will be included in the reported results for Enterprise.

With that, I'll turn the call over to Dub.

Good morning and thank you for joining us to review our third quarter and the completion of our merger with GulfTerra.

First, in looking at the quarter, business conditions were excellent for both Enterprise and GulfTerra during much of the third quarter and into the fourth quarter. Enterprise reported a record $138 million of gross operating margin for the third quarter. Volumes were up substantially at all of our major pipelines and plants. The strength of both the domestic and global economies has driven strong demand for all forms of energy and feedstocks despite the high prices. Our large consuming customers in the ethylene industry have seen strong demand for their products, and have been able to pass through their higher fuel and feedstock costs to their customers.

With the high price of crude oil relative to natural gas, ethane and propane are the preferred feedstocks. Demand for ethane by the ethylene industry in the third quarter increased by 22 percent, to 809,000 barrels per day, from the depressed levels of 661,000 barrels per day in the third quarter of last year. Preliminary reports from Pace Hobson (ph) for the month of October show ethane demand up another 3 percent to 832,000 barrels per day.

Propane demand by the ethylene industry has also been strong. Demand for the third quarter averaged 350,000 barrels per day, which is an increase of 23 percent from the third quarter of 2003. October demand is up another 7000 barrels per day. Even with the ethylene industry producing an annual rate of 58 billion pounds per year, we have not seen a build of inventory in either ethane or ethylene supply chains. Our customers are expecting high utilization rates throughout the fourth quarter and into 2005. The strong demand for natural gas, NGLs and crude oil has benefited both Enterprise and GulfTerra. Bob will speak to this in a few minutes.

Hurricane Ivan did have an impact on earnings in the third quarter and will have (indiscernible) in our fourth quarter. Ivan shut down the majority of gas production in the Gulf of Mexico for three to seven days in September. All Enterprise-owned or operated natural gas processing plants in Louisiana and Mississippi process offshore gas, and as a result they were shut down for this time period due to a lack of gas.

A few days after the storm passed, all inland (ph) gas volumes returned to pre-storm levels except for our Pascagoula, Wikoski (ph), and Toca plants, which are still running at reduced rates due to hurricane damage to offshore pipe forms and pipelines in the eastern area of the Gulf of Mexico.

At the beginning of November, the inland gas rates were about 70 percent of pre-Ivan at both Pascagoula and Wikoski, and about 60 percent of pre-Ivan at Toca. We expect most of this gas to be back in production in November and December after platforms and oil pipelines are repaired. Inland rates at Wikoski and Toca are expected to remain at reduced until repairs are completed to the gas pipelines upstream from these plants, and those are Sonat and Bioskanole (ph). Until these lines are completely back in service we will process most of this gas at our Pascagoula plant.

On a stand-alone basis in the third quarter, Enterprise gross operating margin (indiscernible) by $7 million due to Ivan. On a combined basis with GulfTerra, our gross operating margin in the fourth quarter should be about $18 million lower. In the first quarter of 2005, the impact is estimated to be approximately $5 million, some of which in the fourth and first quarters will be covered by insurance.

The integration of the Enterprise and GulfTerra organizations is proceeding extremely well and has exceeded our expectations. I'm especially excited about the number of growth opportunities for the combined companies. GulfTerra has a number of projects that will be coming onstream over the next few quarters. We are also evaluating a number of significant projects to build and provide midstream services to producers in the deepwater Gulf and the Rocky Mountains.

The fourth quarter is shaping up to be another strong quarter. We are making good progress in capturing the cost savings that we identified over the past ten months. Our management team is working hard to identify and capture new commercial and operational synergies. Based on our current business environment, we believe we will cover our increased distributions to partners in the fourth quarter by approximately 1.2 times despite the impacts of Hurricane Ivan.

At this point I'll turn the call over to Bob Phillips who will provide a business overview of the combined partnership. Bob?

Thanks, Dub, and welcome to all of you on the call. Thanks for joining us.

Let me start by saying a little bit about how much we've enjoyed our first month here at Enterprise. I have observed two very talented and aggressive companies working very quickly to put the two organizations together. I have been impressed with how nicely the two partnerships have fit together, and I think that's a direct result of the careful integration planning process that we conducted over the prior six-month period.

Mike Creel is going to give you a lot of detail on the cost savings. We have talked about that. We're now beginning to realize those cost savings that we have predicted. Let me talk a little bit about the integration process and how important that is to the commercial side of the business.

Immediately upon close, our two senior management teams were joined. We have relocated our offices over into Enterprise and we've been here every day since then. I've already began to see the benefits of strong General Partnership ownership, and we have really enjoyed working with Dan and Dub over the past month. Our operations groups immediately rolled out there combined organization on day one. They quickly eliminated any overlap that we had identified and consolidated both the personnel as well as the operating practices into what we think will be a best-in-class midstream operating group.

Our commercial staffs have been fully integrated with Jim T. (ph) incorporating GulfTerra, San Juan and Permian gathering and processing assets into the Western Region group, which includes the MAPL and Seminole pipeline systems to form a very strong and formidable Western Region midstream competitor. James Lydle (ph) has combined Enterprise's Louisiana processing, fractionation and NGL pipeline assets with GulfTerra's very strong offshore Gulf of Mexico pipeline and platform network to develop what we think will be the competitor in the Eastern U.S. They're already beginning to mine out some significant commercial synergies for us.

We have also combined our intrastate natural gas pipeline assets located in Texas and Louisiana and Alabama, and consolidated those under common management to extract some significant operating efficiencies and customer opportunities there. And we are also in the process of evaluating and consolidating our very significant natural gas liquids pipeline and storage assets located from Texas City to Corpus Christi, and integrating those into Enterprise's NGL supply and distribution network along from Mont Belvieu over to Louisiana. And we think that will have a significant positive impact on our fractionation, isomerization and propylene businesses.

Mike Creel and his team are on track to fully integrate the back-office over the next few months, and as I said earlier, we're very excited about and are beginning to realize those significant cost savings that we developed in our integration plan. We're seeing the efficiencies and economies of scale going forward, and I'm very excited about the organic growth potential of this partnership in the years ahead. I think it truly establishes us as a unique midstream presence, a unique master limited partnership, given the significant portfolio of growth projects that we have in this company.

Let me start by giving you a quick status report on some of the growth projects that were already underway at GulfTerra before the merger was complete.

Starting with the Cameron Highway Oil Pipeline system. As many of you know, we have completed construction on this project. Fortunately we completed it before Hurricane Ivan came through the Gulf. We were in the process of starting line fill in September. That's now been completed. We have just recently sent a mechanical completion notice to our partner, Balero (ph). We expect a $5 million payment from them in the next couple of weeks and expect the final payment of $11 million from Balero in 2006.

Our producers in the Cameron Highway are BP, BHP and Unocal. They're on track to start up oil production from the Holstein Field in December, with production from the Mad Dog field to follow in January, and bringing on the significant discovery in the Alanis (ph) discovery in the South Grand Canyon area in 2006.

Coincidentally and importantly, natural gas production from these three new deepwater fields will flow into the Nautilus-Manta Ray pipeline system, where Enterprise has an ownership position in that, and then directly into Enterprise's Neptune processing plant, then on to our joint interest ownership Promix fractionator, and on into our product distribution line. I think this project really illustrates a classic example of the integration potential of the new Enterprise now that we have combined these great sets of assets under common management in the Eastern Region.

The Marco Polo and Phoenix pipeline systems were both completed in the third quarter -- two new major deepwater projects for GulfTerra. Marco Polo, as you know, is currently handling about 30,000 barrels of oil equivalent per day. Anadarko had an announcement last week where they announced that the field was not producing at the levels that they had expected. We certainly agree with that. The explanation, I think, was clear that the field is somewhat compartmentalized, more so than they originally thought. That might lead to some extra side tracks or some developed wells.

Notwithstanding that slight disappointment, we're very excited about the area potential. Also -- Anadarko also announced that they will soon drill the Genghis Khan prospect. Probably start that in December. Genghis Khan lies on dedicated acreage just about two miles from the Marco Polo platform, and it will test the westerly extent of BHP's new discovery at Shenzi, which is just offset to Marco Polo. I think public information makes it clear that Shenzi is a major discovery for BHP, and the acreage that Anadarko has dedicated to us may be significant in terms of adding future volumes to the Marco Polo platform as well.

You're also aware that we continue to work with Anadarko and Enoch (ph), the operators of both the K2 and K2 North fields which have been discovered and are on dedicated acreage immediately adjacent to the Marco Polo platform. Those producers will be tying back that production to Marco Polo beginning in the second quarter of 2005, and that should add significant new production to the Marco Polo platform and the downstream oil and gas export pipelines.

Another significant projects that came online for us in the third quarter was the Phoenix Natural Gas Pipeline system. It came in service in January -- in July of 2004, currently running slightly ahead of expectations at about 132 million cubic feet per day. That's a Kerr-McGee discovery in the central part of the deepwater trend, and we are excited about the potential for adding new discoveries to the Phoenix Pipeline System in the future.

We have completed construction of the Front Runner Oil Pipeline, which is an extension of our Poseidon Oil Pipeline. We've made tie-ins to Murphy's platform at the Front Runner field. We're expecting first production from Front Runner in December and expecting a production increase ramping up to about 60,000 barrels a day by the end of 2005.

We're also expecting first flows into Poseidon from the Tarantula oil discovery. That's a discovery made by Anadarko recently sold to Apache that we should the first production there in December of this year, adding about 15,000 barrels a day to our Poseidon oil pipeline system.

The Constitution oil and gas pipeline projects were announced in the second quarter. We'll start construction on this $130 million deepwater project in early 2005. Pipe lay is scheduled for the second quarter of '05. The production there from two fields discovered by Kerr-McGee, the Constitution field and the Ticonderoga field. That oil is committed to the Cameron Highway Pipeline and the gas will go into our Anaconda gathering system which runs through the South Grand Canyon deepwater area and currently gathers gas production from Marco Polo. We think this project will put us in great shape to compete for additional projects in the South Grand Canyon area.

Just to summarize the Gulf of Mexico we're currently working on another three to four transactions that we think may have a possibility of coming together for us. It totals about $750 million worth of new capital projects. We are excited about some of the potential projects that are included in that group, and hope to have completion on some of those in the next few weeks.

Some of the onshore projects that GulfTerra was working on prior to the merger -- give you a status report on that. Our expansion project at Tuttle (ph), Mississippi for our natural gas storage facility. As you know, we announced a 1.8 Bcf expansion for our customer, BP Marketing, to be completed in early 2005. And we are on track with that project. That would bring our total gas storage at Tuttle Hattiesburg just slightly over 21 Bcf, and we're looking forward to some future expansion opportunities there as the market begins to rely more on storage to meet seasonal needs and unusual events like Hurricane Ivan, when significant supplies are shut in.

We've seen a significant increase, we think, in both the demand for our capacity over there as well as the value of that capacity due to hurricane Ivan. And the Texas Gas Pipeline System -- it continued to perform well in the third quarter of this year. Throughput will average more than 3.4 million decatherms a day. That's slightly above the second-quarter average of 3.3 million decatherms per day, and so we continue to trend up. That's driven largely by the growth in new supplies from the Barnett shale expansion in North Texas. During the third quarter we made four new interconnects with additional capacity of about 80,000 Mcf a day. We're seeing strong supply growth there. We continue to capture about 50 percent of the total production from the Barnett shale play.

We're also seeing solid growth in demand in the Central Texas Metropolitan market -- that's Austin and San Antonio -- and we continue to work with both of those customers looking at expansion projects to bring in additional gas supplies to those growing markets. We're very pleased with the performance of the San Juan basin assets in the third quarter. Our optimization project is moving along while. You'll recall that that's a total $40 million capital project comprised of over 300 small projects designed to increase overall gathering capacity by about 10 percent, or 130 million a day over a three-year period.

We're making good progress there. As I said, pleased with how the assets performed in the third quarter. San Juan gathering system averaged slightly more than 1.25 Bcf a day. On the gathering system, the Chaco plant processed about 613 million a day in the third quarter. Both very strong volume throughput numbers.

Drilling continued at a brisk pace in the third quarter. Year-to-date we've made 210 well connects and we're on track to meet our goal of 245 new well connects in 2004. We're very pleased with the process out there.

Let me turn to Enterprise and give you the benefit of some of my observations over the first month. In terms of organic projects, I started going asset by asset. I'm very pleased with all the growth potential that comes out from these assets. In the Louisiana market we're looking hard at the Acadian gas pipeline system. It had a very strong third quarter, transporting and selling more than 620 million cubic feet per day in the third quarter. And the pipeline made several new interconnects in the quarter. The significant interconnects include a new interconnect with Trunkline to bring in some offshore supplies, a new interconnect with two industrials, OxyChemical, a COGEN facility, and air (ph) products, a hydrogen facility during the third quarter.

We're doing some significant evaluation of the potential to bring in new deepwater trend supplies and new LNG cargos into the Acadian system as potential new supply resources, and I think that's going to work out well for us as well.

To the Western region, the Mid-America pipeline system and the Seminole Pipeline System ran particularly strong during this quarter, and I might note without the benefit of an incentive tariff, extraction margins and spreads were very strong up there. And we saw that, benefited from that through very full volumes. We averaged on a gross basis 855,000 barrels a day through both pipeline systems, as compared to 802,000 barrels a day in the second quarter of this year, and 735,000 barrels a day in the third quarter of last year. So a 15 percent increase volume metrics year-over-year. We're very pleased with that, and continue to believe that the market will stay strong for wide grade (ph) transport out of the Rockies over the next several quarters.

We continue to look hard at and I've spent a lot of time evaluating the Mid-America pipeline expansion project which Enterprise had told you about in earlier quarters. We think that significant potential exists for new NGL suppliers from the Rockies. I've seen a number of new gathering and processing projects that are on the boards up there. The fundamentals look very strong for an expansion. Drilling is up, as you know, driven by high prices. Processing plants have been running at full recovery. In the past few quarters we've got new natural gas pipeline expansions like Sian (ph) Plains, which are being completed to take export residue gas out of the Rockies region. And as I said, we're looking at a number of new gathering and processing projects in the Rockies which we think will support an expansion of the MAPL and the Seminole system.

Additionally on MAPL Seminole, as you know, it's a FERC-regulated pipeline, and we are finalizing our analysis of a possible cost of service filing that would allow us to recover a portion of the increased fuel cost due to higher gas prices. We're going to be meeting with our customers soon to discuss this process, but I'm satisfied that we'll probably move forward with that process and that will benefit our bottom-line.

Moving down to Mont Belvieu and our fractionation and our petrochemical business, NGL fractionators operated at a very high level in the third quarter, on a gross basis averaging around 200,000 barrels a day; on a net basis, net to our interest, 139,000 barrels a day in the third quarter, compared to 133,000 in the second quarter and 134,000 barrels per day in the same period last year. Importantly, on October 1st Enterprise began receiving about 63,000 barrels a day of new frac volumes from Williams Rockies production. That's going to be an important addition for us. We have just approved -- because our fractionators areas have been running at or near full capacity, we've just approved a small energy enhancement and frac expansion project for about 15,000 barrels a day at Mont Belvieu.

In the petrochemical area, the isomerization facility has had a very good quarter, averaging slightly over 81,000 barrels a day during the quarter, compared to 77,000 barrels a day in the same period last year. Our propylene business ran very well, ahead of plan, fractionating 58,000 barrels a day during the quarter and running at about 95 percent of plant capacity. And that's clearly due from strong demand from the polypropylene business.

We've just recently contracted for and are finalizing agreements on some new RGP supplies, which will start in early 2005 from the Texas City area. And I mentioned that not because it has size, but because it illustrates another point. Where we're using former GTM NGL pipelines to transport the excess refinery-grade propylene up to Mont Belvieu for processing at our splitter, and again, as an example of the integration opportunities that are arising as we spend more time to evaluate our joint assets in this area. And finally, in the petchem area, we're on track to complete the conversion of our NTV (ph) facility to iso-octane (ph) production in the first quarter of 2005.

I know that's a lot, but I thought it would be helpful if I gave you the benefit of some of the joint opportunities that we're looking at. In summary, though, I think I am certainly more excited about our growth prospects than I was before the merger, having had a chance to look at the two sets of assets on a combined basis.

We continue to have a strong position in developing infrastructure in the deepwater offshore area, and I think that is supported by the extensive NGL processing fractionation storage and distribution network that Enterprise has in Louisiana. In the Western Region I'm very excited about the opportunity to expand MAPL, some of the new Greenfield gathering and processing projects that we're looking at, and hope to be involved in, and the opportunity to finalize the cost of service filing that will all us to recover some of our higher fuel costs.

The intrastate gas pipeline business is going to be a solid performer for us, as we have now consolidated those under common management. I'm impressed with the number of opportunities I see in the petrochemical area to both expand some of our current facilities and add some complementary assets that are on the market that will add flexibility and expand our supply options. I am very excited about the growth potential. I think it creates a unique master limited partnership, one that we're going to be working hard in 2005 both to mine all the opportunities and realize those cost savings.

So with that overview, I'm happy to turn it over to Mike Creel to discuss the financial results of the Partnership for the quarter.

Thanks, Bob. As Dub previously mentioned, gross operating margin was a record $138 million for the third quarter of 2004, and that compares to 68.5 million for the same quarter in 2003. Gross operating margin in the third quarter of this year was reduced by $4 million for a noncash impairment charge to our investment in a small NGL storage facility in Hattiesburg, Mississippi that we were required to sell as part of that FCC consent order related to the merger.

Gross operating margin in the third quarter of last year was reduced by a noncash impairment charge of $22.5 million to the value of our investment in our octane additive facility. Excluding these two noncash impairment charges, gross operating margin increased by 56 percent to $142 million in the third quarter this year, compared with $91 million last year. $34.6 million of that 51 million improvement was attributable to our NGL pipelines and services segment. Gross operating margin from natural gas plants historically owned by Enterprise increased by $12.8 million on increased volumes and product prices.

The nine natural gas processing plants that we purchased from El Paso for $155 million effective September 1 of this year generated $7.8 million of margin for the month of September. Gross operating margin from Enterprise's NGL fractionators increased by $7.1 million on increased volumes and in-kind fees at Norco, and the volumes on the Mid-America Seminole pipeline systems increased 16 percent, resulting in an $8.4 million increase in gross operating margin. $10.8 million of the increase in total gross operating margin was equity earnings from our 50 percent interest in GulfTerra's general partner during the third quarter. GulfTerra's general partner is now a wholly-owned subsidiary of Enterprise.

G&A expense for the third quarter of this year was $10.1 million, and that compares to $7.4 million in the third quarter of last year. The biggest single component of that was a $1.1 million write-off of costs that we incurred in preparation for a potential offering of institutional partnership units, or I-shares. We had previously looked at I-shares as a way of raising equity for the Partnership.

A couple of things led us to conclude that it was unlikely that we were going to issue those. One was simply the performance of I-shares in the market. It doesn't look like investors have really warmed up to those units. And more importantly, the equity markets have improved radically for partnerships as witnessed by our two offerings that we did this year in May and August. We raised roughly $350 million in each. So we think that common units are sufficient to give us the equity capital we need for continued growth.

Net income for the third quarter of 2004 was $61.3 million, or 21 cents per unit. This included and was reduced by the $5.8 million, or 2 cents per unit, of noncash charges, and that includes the $4 million impairment charge for Hattiesburg, the 1.1 million write-off of cost for the I-shares, and $700,000 of unamortized fees associated with the termination and replacement of our old credit facilities. We replaced those with a new $750 million five-year facility last month.

Net income was also included and was reduced by $7 million, or 3 cents per unit, resulting from the negative impact from Hurricane Ivan. Now, without the noncash write-offs and the impact of Hurricane Ivan, net income would have been roughly 26 cents per unit.

As you know, we completed our merger with GulfTerra on September 30, and based on our initial assessments we believe that we will realize at least $140 million of annual cash savings from this merger. About 55 million of that is a decrease in the cash that is paid to the General Partner, about 45 million is from interest expense savings, and roughly $40 million from G&A cost savings. We estimate that we are currently realizing at least 120 million of these savings on an annual basis. That includes the reduction in the payments to the General Partner, about 42 of the $45 million of interest rate savings. And that interest rate savings number may actually go up a bit. And about $23 million of the 40 million we expect to see in G&A cost savings.

We were also able to capture about $100 million of onetime cash savings for our partners by purchasing 13.8 million GulfTerra common units from El Paso at a 10 percent discount to market, resulting in a cash savings of approximately $80 million. We also had an interest rate hedging program during the year to hedge the $2 billion of Rule 144A private placement notes that netted $2 billion. We had about $20 million of cash from that program.

At September 30, 2004 we had $5.6 billion of debt outstanding and $1.3 billion of cash. This included both the $921 million of GulfTerra senior unsecured debt, and also included $1.1 billion that was borrowed under our credit facilities to fund an escrow account related to the settlement of the tender for substantially all of GulfTerra's senior and senior unsecured debt. On October 5th, we settled the tender for the GulfTerra notes and retired those notes using the funds that were in escrow. So at the close of business on October 5, our debt was reduced by $1.1 billion to $4.5 billion.

Based on this debt balance and adjusting equity for 30 million of common units that were sold to an institutional investor last month, and $45.4 million that was invested in common units through our distribution reimbursement program, total debt to total capitalization was roughly 45 percent.

On October 5, we had approximately $285 million of liquidity between cash on hand and availability under our bank credit facilities. Enterprise and GulfTerra generated $127 million and $104.1 million of EBITDA, respectively, in the third quarter of this year. GulfTerra's EBITDA was reduced by approximately $14.4 million of merger-related expenses. Combined EBITDA for Enterprise and GulfTerra was reduced by approximately $9 million due to the impact of Hurricane Ivan. Without these items, on a combined basis, EBITDA would have been approximately $255 million for the quarter.

And with that we'll open it up for questions.

We're ready to take questions now.

(OPERATOR INSTRUCTIONS). David Fleischer (ph).

Bob probably already quite fully addressed half of my questions. What I would like to get is Dub or Dan, and separately, Bob, to comment on specifically what you have been positively and negatively surprised or challenged about as you have gotten to know the assets of the other company better over the last five weeks since you've closed on this transaction?

David, I guess I think Bob did a pretty fair job of covering those. I think the speed in which we could find opportunities for some things like South Texas pipelines coming into the Mont Belvieu area, those kinds of activities that we could get into a commercial sense in a hurry, and the integration that we saw in the Rocky Mountains here of being able to look at gathering and processing and expanding our systems out there. So I feel like the integration process, all except the commercial activities we were already pretty far along. And we knew our commercial activities. We didn't know the details of the economics of those commercial activities, but we knew the assets before we merged. So I think the speed in which we got everything rolling here was quite exciting and interesting, and I think we are well on track here now to start showing some results of some of these organic opportunities that we have here in the fourth quarter and into 2005. Would you like to answer (multiple speakers)

I'll give you a little bit of color. I guess none of us is that completely crazy about FTC, but when you go to FTC, the time period that it takes them to give you decisions on how you can put two companies together -- especially in the midstream world -- and they took a long time on ours because I think it's the two first midstream companies that they've merged together, that they look at strictly from a midstream basis. So by giving us that six to nine-month timeframe though, it made it a lot easier to integrate it effective October 1 when we actually got through the integration. (indiscernible) FTC gives approval.

So I guess the one thing that surprised me is for that much time how good you can do a job on integration of both people, assets and plans. So I think even though we are sometimes unhappy with the FTC, in this particular case they gave us a favor by letting us have time to do it.

It has been a long time, and you haven't been able to really comment about the other company. And that's why I'm asking really is as much the other side of the question -- what -- have you found what issues -- there have to be some problems, and I would love to know what you have been maybe a little disappointed with, a little surprised about on the negative side of the equation as well. Otherwise you have to be raising your expectations and raising your forecast for us, right?

It reminds me a little bit when you're young when you get up to that alter (ph) about three or four times before you pull the shot, I think this case we got up to the alter about three times with GulfTerra's back -- starting back in 1998 with Bill Wise. So we've been there several times, and finally we got everything together that we actually could pull the trigger and do the merger. So we knew each other's assets very good because -- since we've looked at them every other year for the last six years.

David, this is Bob. Let me just comment briefly and reiterate the same point I made during my prepared remarks. The amazing thing about this combined partnership is the number of organic growth projects and opportunities that we have in front of us over the next couple of years. And that creates a very unique situation for us. We do not have to rely on acquisitions at the sometimes inflated multiples that we're seeing in the market today to reach our growth objectives. We have an extraordinary portfolio of internal projects across a number of different regions across all of our different business lines, many of which even integrate from business line to business line. An investment in gathering in San Juan benefits not only throughput on MAPL Seminole but fractionation volumes at Mont Belvieu, and then the opportunity to make additional margin on moving product through our distribution system.

That's what I've been most excited about and most impressed with is how fully integrated this company is and the extraordinary portfolio of organic projects that will drive our growth. So I can't really look at any kind of negative because I am just -- I'm beside myself with the opportunities that there are in this company.

Second question if I can. Are there any capital implications or long-term implications from these mudslides that have come out of Ivan? And are there risks or opportunities that come out of all that?

We're still looking at that, David, but that's a very small region of the Gulf here where the mudslides occurred. It did happen to occur on the Viosca Knoll pipe for some distance, and we're currently feeling like we can rapidly repair that and get it back in action. The mudslide situation, I think, is pretty much there in the mouth of the Mississippi area where all that mud is deposited overtime, and is a unique situation. Would you like to say something on that, Bart? We've got Bart with us today who is our deepwater expert. Bart, why don't you fill us in on the mudslides?

(indiscernible) only one segment of the (indiscernible) organic system was not impacted by mudslides in the Mississippi Canyon, Mississippi area. And that segment -- we have around 50 million a day (indiscernible) as a result of the mudslide, that part of the (indiscernible) system. We have inspected that pipeline at several locations. It was moved 6000 feet to the south. Pretty soon it will be (indiscernible) testing that pipeline, and at the moment indications are that we don't have a significant amount of damage on that segment. And so if that is proven by the (indiscernible) test, then we hope to bring that segment back into service within four months.

But there are no other longer-term issues, major issues in terms of how you go about building pipe, constructing pipe in the future as a result of this?

No. What we normally try to do is avoid these areas. And this is really one specific area on the Gulf of Mexico where there was all this exposure to these mudslides. Because I mean the bulk of that there increases very rapidly over a 6 to 10 mile distance and (indiscernible) increases from zero to 600 feet over that distance. And we don't have any older pipeline assets that are exposed to those mudslides.

Sam Brothwell.

I had a couple of questions if I may. First of all, maybe Dub or Bob, if you could just quickly comment on your outlook for petchem demand as we move into '05? Secondly, Bob, if you could talk a little bit about how -- you mentioned the issues at Marco Polo, and I think also Pioneer has had some issues on Harrier that will ultimately affect Falcon. But just kind of how the economics of that play out. Is that a loss of upside versus just -- do you continue to get paid for the capacity there? And then finally, Mike, if you could rerun through the breakdown of the cost savings, I was writing as fast as I could but I couldn't keep up with you.

This is Dub. Let me speak to the petrochemicals; then we'll turn it over to Bob and Mike. The petrochemical activities that we see going on now we -- as I indicated earlier, we're seeing approximately 58 billion pounds operating rate for the ethylene industry at the present time. That's getting up pretty close to capacity. That's in the 92, 93 percent of capacity. And usually when they get up to 95, 96 it's full capacity. So they've got a little bit of room yet to go before they're at total capacity.

But I think what we're going to get into in the near-term here is some outages that have to go into maintenance programs here in the spring, and where we'll probably stay in that 58 billion pound range. I think all through 2005, I think the economies that we see on a global basis and a domestic basis is certainly supporting another 3 to 4 percent growth in 2005. And I think petrochemical growth will be about approximately that same percent during that time frame. So I think we will see petrochemical demand very strong throughout 2005.

'06 and beyond there's some activities going on in other parts of the world that will supply some of the exports that we see going out of the United States, but I think the domestic demand will grow and offset those export reductions. So it's still looking -- it's looking like a very healthy trend right now. The one problem that petrochemicals is having is the high natural gas prices, how to pass along that to the customers. And they're doing right now a very adequate job on that. I think what I see of performance in the petrochemicals, they all look like they're going to have real good third quarters. So they're passing along a substantial amount of those higher energy and feedstock costs. Bob, do you want to respond (multiple speakers)

Sam, let me comment on Marco Polo and Falcon starting with Marco. As you know, we own 50 percent of the platform in a joint venture with Galva (ph) International. We own 100 percent of the oil pipeline and 100 percent of the gas export pipeline. In addition to that, the oil flows into the Poseidon Oil Pipeline system, which we own 36 percent of. So we actually receive four different fees for each (indiscernible) produced out there -- a platform fee, an oil pipeline fee, a downstream Poseidon fee, and a gas pipeline fee.

Having said that, even at the slightly reduced rate of about 30,000 barrels of oil equivalent per day, we're still making well above our original investment returns on that project. What is important to note is the significance of the other discoveries in the area; not the reduced reduction from Marco Polo, but how important bringing on K2, K2 North, and the potential for another discovery in Genghis Khan, which would open up dedicated acreage on the eastern side of the platform to the big discovery at Shenzi.

Having said that, just our own analysis -- not the producer's numbers, but our analysis is that when we bring on K2 and K2 North, and have the potential for a discovery at Genghis Khan, we could be at a run rate of about 50,000 barrels a day by mid-to-late 2005, a run rate of potentially as high as 80,000 barrels a day sometime in 2006. And it wouldn't be surprising for us to fill up the capacity on the platform at 120,000 barrels a day on a peak basis sometime in the late 2006, 2007 range.

Having said that, and I'm not prepared to share the earnings from that, but I can tell you that on that basis -- adding K2, K2 North, and the potential for Genghis Khan -- that this will be a very nice return for us. It will leave us with a pipeline and a platform out there that makes us very competitive for additional future production that we might find out there.

I am not prepared to talk about Anadarko's comments on what work they might do at the Marco Polo field. I think they had a detailed analysis of that, and I would encourage you to look at the transcript of their call. But it's not that surprising. It's something we've seen in other small oil field discoveries in the Gulf of Mexico. The compartmentalization, if you will, of the pay zones; drilling a small number -- drilling and completing a small number of wells and attempting to complete those in multiple pay zones -- it's not that unusual that this would occur. But I would direct you to some of the comments that they made previously about the K2 and K2 North discoveries, and how significant we believe that those discoveries will be when we bring them into production in 2005.

Let me turn quickly to Falcon. That's located in Western Mexico. It is a platform and a gathering system that brings gas production, dry gas production into the Texas market. As you know, we built that platform and pipeline for about $55 million all in. It started out gangbusters with four significant discoveries in a row, starting with Falcon, then Raptor, Tomahawk, and then finally Harrier. Harrier was a one-well or two-well field -- one-well field that had significant production capacity potential. They ran it at a fairly high level of about 100 million a day and basically lost the wellbore. They have been in the process of redrilling that. They are still on track to bring that on sometime in the spring of 2005, and we expect to ramp our production back up when that occurs.

We're currently running at about 200 million a day of all-in production. Just to give you a sense for the earnings potential of the Falcon Nest platform at this lower rate, the platform and the pipeline on a combined basis generated about $6 million of EBITDA in the third quarter of this year. We have been earning on that investment now for about six quarters. Again, I think it will be an outstanding investment return for us and is an example of the job that we can do for these producers when we get the projects in on schedule and on budget.

So I think we are in good shape. At 200 million a day we'll continue to earn significantly on that investment. We are expecting higher production, and we know that Pioneer has a large portfolio of additional prospects that they're going to be drilling in in the Falcon corridor out there. And some other independent producers have taken leases and are developing prospects as well. So we see a good future potential for that to increase volumes. I think the next question was -- Mike?

Sam, I will try to talk slower or you can write faster. A combination of them.

Cash savings. One of the biggest chunks was the $55 million that will be reduced payments to the General Partner. So if you look at GulfTerra and Enterprise on a stand-alone basis, what they would've paid to the General Partner, compared to what Enterprise pays on a combined basis with a cap of 25 percent (indiscernible) distribution rate, that's a savings of $55 million a year.

We have got today about 45 -- about $42 million of interest savings that we are recognizing today. We think that number is going to be closer to -- I said 45 million before. We think we may actually get something closer to 47, $48 million of annual cash savings. And that does not include the $20 million of cash that we received from our interest rate hedging program. Now, a lot of that is attributable to the refinancing that we did of the GulfTerra debt, the $2 billion that we issued in the 144A market. That $2 billion has an average coupon of 5.14 percent and terms of three years out to 30 years. So I think we got it at an opportune time.

We have also got G&A cost savings that we expect to see at least $40 million of savings from. Today we're recognizing about 23 million of that 40. And it's essentially what we are recognizing today is headcount reduction. There are other things that we are probably starting to realize, it's just difficult to capture on a real-time basis. Those are going to be things like public company costs, external audit, although external audit may be a bit higher in the first year as our auditors do their first-year audit of some of the GulfTerra assets. We expect rent to be cheaper, and that's going to really start to show up by the end of March when we move the remaining GulfTerra people out of Greenway Plaza over into our offices. We're building out space now and waiting on some new space to come up.

We've also got a reduction in IT expense that we would expect to see after the conversion of all of the GulfTerra systems into the Enterprise systems. That is going to take place over the next year. We expect a lot of that to be done by the first of the year, essentially converting over their general ledger systems. But there are some other systems that are going to take a bit longer to fully capture.

We also expect to see some reductions in insurance cost. We're trying to fine-tune those numbers right now. We've talked in the past about purchasing, and we have not put a purchasing number or savings from purchasing in that $40 million estimate. We have hired some folks with significant purchasing experience. They are starting to work up a program to really tackle the highest value items first, and we are pretty excited about what we're seeing there, but just not really prepared to start talking numbers yet.

Thanks for all the detail.

Ross Payne.

In general, I was just wondering if, starting off if you could just comment on how much production is down out in the Gulf in general, what you're kind of hearing in terms of it coming up as we look forward to fourth quarter production out of those regions?

Ross, I think our numbers are consistent with MMS numbers. There's still slightly less than 500,000 barrels a day of oil production shut in, and somewhere around 1.3 to 1.4 Bcf a day of gas shut in. Importantly, our largest single source of supply on the Viosca Knoll system just came back up two or three days ago. Shell's Ram Powell field, which is on a normal run rate about a 275 million a field, just came back on stream. They're in a ramp-up phase right now. I am looking at this morning's daily report. We're running 286 million a day through Viosca Knoll presently, as compared to about 600 million a day normal run rate prior to the hurricane. So we are at about half strength.

Ram Powell should be ramping. We understand that they did not have significant, on a relative basis, damage to the platform. So they are on schedule. Several of the other significant fields on the system are in the return to service phase. Anywhere from November 1 to the end of the year we should see additional fields come on stream. I don't -- beyond the production patch to the Viosca Knoll system, I'm not sure I've got any detailed information. I'm looking at Bart and he says we don't. There's been a lot of talk about Nakika (ph) out there. We don't have information on that. And some of the deeper water platforms -- Matterhorn, which is connected and is a deepwater facility, is back in service. Medusa, which is a deepwater, is back in service as well. It's just not flowing through our system; it's going directly in the Tennessee gas pipeline. So I think that's the update that we have. It's consistent with the MMS weekly report; about 500,000 barrels of oil and 1.4 Bcf a day of gas.

Okay. Also, obviously, this has had some impact on third quarter, a little bit more of an impact, obviously, in the fourth quarter. What type of insurance do you guys have? Do you have business interruption insurance, or is this just the normal course of business that in some fashion may or may not be covered?

Ross, it's Mike. We do have business interruption insurance and contingent business interruption insurance. The insurance guys are really working now to look at the loss of income and trying to figure out what our claims are. Kind of rough numbers based on what they're seeing right now is that they expect that recoveries might be in the 8 to $15 million range, just on the business interruption.

Very good. A large portion is covered.

A little more detail on that; that business interruption starts after one month. So we can't go back and recover what we lost in the third quarter. But most of what we are estimating here for the fourth quarter, we think we can recover that. All of our numbers that we've thrown out assume we don't recover anything. We've talked from an $18 million loss here in the fourth quarter; we don't have that recovery in any of our numbers.

One final thing. Can you comment on where the frac spreads were in the third quarter, and what you're expecting as we go into the fourth quarter?

Jim Teague, why don't you handle frac spreads?

I think what we're forecasting -- Randy, help me -- we're looking at about 24 cents is what we're looking at as a gross processing spread. And frac spread in the fourth quarter was wider than that, in the third quarter.

The average -- the rough average in the third quarter ran 26 cents. And again, that's looking at Henry Hub gas and Belvieu liquids.

What we're expecting is we're expecting about 24 cents, in that neighborhood in the fourth quarter, driven on like Dub said earlier, with a strong petrochemical demand. What's unusual is we're seeing spreads out in the Rockies, tariffs exceeding 15 cents just on an ethane frac spread.

So the recent increase in natural gas relative to crude has not really moved that down significantly?

It hasn't moved the gross spread down. It'll cost you a little bit in terms of field use in the processing plants, so you'll see a little shrinkage on the net spread. But we're still going to see full tariffs on all -- we think, through November at a minimum. We've run some numbers. We expect maybe a little discounting in December, but that assumes the prices stay where they are. With the demand Dub talked about in the petrochemical industry, we're building no ethane inventory whatsoever. So at the use rates we're seeing, all of these plants have to extract -- being full extraction -- extraction to supply the petrochemical industry, you would expect those frac spreads to reflect that demand.

Ron Londe.

I was interested in -- if you could give us kind of a range or a number for the value going forward for the organic growth projects that you see in the next couple of years. Is it a range of 100 million or 400 million? Can you put a number on it? And could you go -- could you tell us about how you go about ranking which projects you're going to do first or last? Is it a pure numeric kind of decision, or how do you go about ranking those?

This is Dub. I think what we are looking at now is something in the range of $2 billion over the next couple of years, two to three years of organic growth. The way we rank them, obviously, is as demand occurs to expand things like Mid-America and Seminole, it's how fast the Rocky Mountains gas developments occur. And right now they are occurring very rapidly, so that puts a very high priority on looking in that direction. And then the deepwater, a lot of the same. With the big discoveries that are all coming on here in '05 and '06, we see a high likelihood of quite a bit of organic growth in that direction.

So that's just what we have got listed as potentials right now, and that includes very little, if none -- I don't think we have any acquisitions in that number. Something in the range of 1.8 billion to $2 billion of organic growth.

John Tysseland.

Obviously, during the quarter your assets benefited significantly from the higher petrochemical demand for NGLs. But I was curious, how much of that demand was due to switching away from I guess the crude-based feedstocks, given the recent ramp-up in crude prices, versus actual demand growth for NGLs by the petrochemical companies?

If you study the numbers -- we pay a lot of attention to that on a daily basis -- we haven't seen any backing off of the heavier cracking. A lot of those heavy crackers don't have the flexibility. They are integrated into refineries. The best example I can give you of that is the Lyondell ethylene crackers are big gas oil crackers, and they don't have a lot of flexibility to go to alternate feedstocks. Exxon has a lot of heavy cracking and so does Shell. So those heavy crackers -- we haven't seen very much change in the barrels at all, still cracking (indiscernible) gas oil at the rates they have back in the spring. The increases have all, for ethylene production, have come from cracking light. And right now, there's probably no flexibility to crack any additional heavies. I think we pretty much feel like all the heavy cracking (indiscernible) that capacity. So if they do pick up any incremental rates here, it will have to be through ethane and propane cracking.

Also, are you -- are the petrochemical companies beginning to export a little bit more than they were maybe a year ago? Are you seeing increased exports out of them?

Yes, they are exporting a little more than they were in 2003. The exports in 2003 almost stopped. We had about, I think about a 3 to 4 percent export rate. We currently are up in the 6 to 7 percent export rate on total production in the Gulf Coast.

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