Enterprise Products Partners LP (EPD) 2005 Q1 法說會逐字稿

Good morning and welcome to Enterprise Products Partners 2005 first quarter earnings call. All participants will be placed on listen-only until the question and answer session of the call. (Operator Instructions). Today's conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the meeting over to your host, Mr. Randy Burkhalter Director of Investor Relations. Sir, you may begin.

Good morning and welcome to the Enterprise Products Partners conference call to discuss earnings for the first quarter of 2005. Bob Phillips, Enterprise's President and CEO will lead the call, followed by Mike Creel, the Company's Executive Vice President and CFO. Also included on the call today from Enterprise are Dan Duncan, our Chairman and Founder and several senior members of our management team. 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 gave 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. And with that, I will turn the call over to Bob.

Thank you, Randy, and good morning to all of you on the call. We're obviously very pleased with our first quarter results as we delivered strong operating performance across our value chain, recorded distributable -- a record in distributable cash flow and also delivered an impressive coverage ratio on distributions to our limited partners. Mike Creel will give you the financial and operating details, so I'm going to focus on the strategies and highlight some of the business activities that affected our performance during the quarter and we think build a great platform for future growth.

Talking about the merger and the integration, of course this was the second full quarter since the GulfTerra merger and I think the results again confirm the benefits of the combination. Our integration planning as you know set a target of $40 million in annual cost savings and through the first quarter, we're certainly on track to exceed that goal. Just as an example of some of the work we've been doing, our new strategic sourcing program has renegotiated service contracts on things such as fleet vehicles, aerial patrol, office supplies and equipment and other administrative items. We're now working on rebidding contracts on among other things pipe valves and fittings, travel services, chemicals and lubricants, IT hardware and contract labor. And in that group, we are targeting $10 million savings on over a $100 million annual spend in materials management. So again, an example of how well we're doing at integrating the companies and dropping those cost savings to the bottom line.

First quarter results also highlight I think a number of other merger strategies that we have talked about. Those include the diversification of Enterprise's business mix as clearly the NGL Pipelines and Services and Onshore Gas Pipeline Groups carried the load for the quarter, while Offshore Pipelines and Petrochemical Services were down slightly due to largely onetime and some unusual events. A second merger strategy I think highlights the competitive position of our integrated value chain as we continue to see a strong supply response in the basins that we operate in, from the Rockies to San Juan, Permian, Texas and the offshore area. We also saw solid demand for products and services on the market side, continuing strong demand for petrochemical feedstock.

A third strategy was the natural hedge against gas prices and volatility and that was clearly evident during the quarter as we saw increased plant and pipeline fuel cost offset by higher gathering revenues. And of course, we made substantial progress over the last two quarters on our very unique organic growth portfolio projects across all of the segments, which will improve performance later in 2005 and drive increased cash flows in the future. And in the press release, we talked about our sump capital, or our invested capital to date. Mike will give you more information about our capital portfolio and how we're doing through the first quarter.

Now let me turn to the segment analysis and point out some highlights in each of those areas. NGL Pipelines and Services clearly performed very well during the quarter. Gas Processing and Marketing made the largest contribution due to the addition of the Texas and New Mexico plants acquired last year, but also the Indian Springs Plant gathering system which we purchased in January and much better performance from our Louisiana plants. Now while improved processing margins were clearly prevalent industrywide, our portfolio benefited from increased fee-based volumes year-over-year, and I wanted to point that out to you. That was due largely to the renegotiated Shell agreement in Louisiana and the addition of the South Texas plants which we have a lot of flexibility in that portfolio. Those South Texas plants can convert to a conditioning fee on a monthly basis and in both cases, that gives us the ability to insulate against track (ph) price volatility in the processing business.

We also saw higher volumes in Louisiana, Shell and third-party volumes that were shut in by Hurricane Ivan in September of last year are on the rebound. We also saw new rich gas production from the deepwater fields Mad Dog and Holstein start up with first deliveries in the quarter. Segment-wide, we experienced higher percentage of liquids processing revenues due to more than just higher prices. We think that is largely due to our downstream pipeline and marketing value chain and the marketing group really added value to us in the quarter.

NGL Pipelines and Storage at another solid quarter, despite somewhat lower import and export activity which indicated the strength of the domestic NGL markets. I would point out to you that volumes on the Mid-America and Seminole system were up 7% in the quarter as we continue to see strong growth in NGL supplies from the Rockies and the San Juan offset by warmer than average winter weather in the Midwest which resulted in slightly lower propane deliveries.

Now importantly, in January of 2005, we accomplished -- began to accomplish one of the things that we promised last year, and that was to work hard to impact or mitigate rising fuel costs on the Mid-America pipeline system. We did that in January of this year by filing an increase to the MAPL Seminole Joint Tariff Rate which became effective March 1 of this year. We expect the rate increase to boost margin by about $10 million annually and we followed that up on March 31 by filing for a cost of service increase on the local rates on the Mid-America Pipeline's northern system. Those rates went into effect May 1 just recently subject to refund and subject to review. And if approved by the FERC or settled with our customers, that increase should account for increased margin of about $12 million annually. So two cost of service rate increases that will positively affect the margin generation on the Mid-America and Seminole pipeline system.

Additionally during the quarter, we increased our ownership to 66% in the Dixie Pipeline system which as you know is one of the (technical difficulty) propane transporters. It transports wholesale propane to the Southeastern and Atlantic states propane markets. We think this is a good addition for us. We have always been an owner in the pipeline, had an opportunity to increase ownership. Dixie has solid growth potential and it will serve as an additional outlet where expected increases in NGL's from the deepwater Gulf of Mexico area over the next few years.

Also noteworthy during the quarter, we completed a project to tie the Sea Robin processing plant, a plant that we own an interest in, into our Louisiana NGL Pipeline system. And the reason why I point that out is interestingly during the quarter, that plant received a new source of NGLs when Accelerate (ph) unloaded its first LNG cargo offshore at the Energy Bridge Facility, and that was a source of new NGLs that came through the C Robin plant and into our Louisiana NGL pipeline system. So we're very much beginning to see the positive impacts of that on our business.

In the fractionation area, our business improved nicely year-over-year reflecting I think higher (indiscernible) volumes, clearly continued strong demand for petrochemical feed (technical difficulty) and the addition of course of the South Texas fractionators that came from the GulfTerra merger. But focusing on Mount Bellevue, those fractionators operated at record levels in the first quarter with an average frac throughput of more than to 216,000 barrels a day. And it's further indication as to why we're going forward with our expansion project (technical difficulty). We made good progress on that in the first quarter and should have that completed by the end of the year so we can receive more volumes for fractionation at Mount Bellevue.

Turning to the Onshore Natural Gas Pipeline business, it made a very strong contribution in the quarter. We recorded a significant increase compared to the (technical difficulty) clearly due to the addition of the GulfTerra onshore pipelines from the merger, but also a nice increase in growth operating margin over the fourth quarter of last year due to higher margins on the San Juan Gathering System and a 5% increase in volumes in Texas and in the Texas area, wider basis differentials across the Texas intrastate system which supported the increased transportation margins. And importantly on the supply side, in North Texas, we continue to the increased production from the Barnett Shale where we are receiving over 400 million a day from Devon, the largest producer in the trend and close to 500 million a day from the Basin in total, about 50% of total production in the Barnett Shale Trend.

In South Texas, EOG (ph) has become a very important producer for us. They have grown new production in the last year to over 120 million a day with 30 more wells planned around our pipeline system in 2005. Drilling activity is surprisingly up in South Texas. Just recently, last report increased by 20 rigs in the first quarter to 135 rigs running at the end of March. That is a recent high for us and we're excited about possibilities of new production down there. To handle all of this new supply, during the first quarter we initiated expansion projects on over 400 million a day of new capacity that includes additional compression to the Carthage area, a larger interconnect at Hogwood Dilsey (ph). Those of you that follow the Texas intrastate market know that those are two very important trading hubs. And importantly, an expansion of our West Texas Pipeline System to bring to Barnett Shale and Permian Basin Gas into the growing Central Texas market. So we're excited about the expansion that is going on in the Texas intrastate market.

Turning to the San Juan and Permian Gathering Systems, they continued their solid performance on higher margins and stable volumes. In the San Juan, we've connected over 100 new wells year-to-date towards an annual goal of 245, so we're well ahead of schedule there. We made very good progress in the first quarter on our San Juan optimization projects? We completed the additional front-end liquids handling facilities at the Chaco plant and moved some compression around. Importantly, we received FERC approval to move forward with the new interconnection with Transwestern later this year and that is an important aspect of our San Juan expansion project.

In the Permian Basin, we've connected 17 new wells year-to-date, so we're right on track with our target there. But importantly, we have recently completed the new contract to gather a new 120 million a day of gas production from Anadarko's 50,000 acre Hayley (ph) Field development and that's a new exciting project for us that we should reap the benefits of for years to come.

Turning to the Offshore Pipeline area, as you can all see, we saw a large increase year-over-year due to the addition of the GulfTerra offshore assets but a slight decline from the fourth quarter of last year due to some unusual events. Those include among other things lower volumes in Marco Polo, which I will talk about; a downward rate revision on our FERC regulated Highland (ph) offshore system, that is a gas pipeline; higher depreciation in interest expenses on the Cameron highway system now that we have placed it in service and a loan takeout cost on the Marco Polo project financing, which was a GulfTerra deepwater gateway project financing off balance sheet, fairly high cost. We've taken that down and that will improve our interest expenses overall and free up some cash flow for distribution.

Now clearly, the highlight of the quarter in the Offshore area was first production through the Cameron Highway Oil Pipeline System. That is the largest oil pipeline in the Gulf of Mexico. We placed it in service in January and we have seen rates in excess of 100,000 barrels a day from five wells from the Mad Dog and Holstein fields and we expect production to continue to ramp up throughout the year with three new fields -- Atlantis, Constitution and Ticonderoga -- coming on next year. On March 22 of this year, Unocal announced a significant new extension of the Mad Dog field with an appraisal well that they drilled to what is called the Mad Dog Southwest Ridge, so we're excited about that. Additionally, we began receiving new rich gas production from Mad Dog and Holstein through our Nautilus Manta Ray offshore gas pipeline, which delivered into our Neptune processing plant. The liquids then went to our Pro Mix fractionator onshore Louisiana highlighting the value chain that we have created for new deepwater trend production in the South Green Canyon area.

Turning into the oil side, Oil and Gas volumes from the Marco Polo field were lower than expected during the quarter largely due to downtime associated with the construction and connection of the new subsea tieback for the K-2 field. It is completed and we are expecting production to come online in the next couple of weeks. Also the K-2 North Field subsea line is currently being constructed and tied back to the Marco Polo platform and first production there should occur in the third quarter.

I also wanted to point out that in late April, Anadarko announced that its Genghis Khan well is going to be a significant new discovery located just 2.4 miles from Marco Polo platform. And in a press release, Anadarko stated that having the Marco Polo facility available to produce the Genghis Khan discovery greatly enhances the project's returns both by accelerating the development plan and leveraging the off existing assets and I think that is a great testimonial to our deepwater infrastructure strategy. So we're excited about bringing on K-2, K-2 North and then alternately next year, the Genghis Khan discovery as well. We're excited about the contribution that Marco Polo will bring to us later this year and in 2006.

To our Offshore Gas pipelines, production that was shut in due to Hurricane Ivan September of last year continues to increase. I'm excited about our Vioscanole (ph) gathering system. It is currently following 695 million cubic feet per day, which is right at our pre-hurricane level of about 700 million a day. The interconnect between DOS can all in Tennessee gas was back in service by the interconnect between Vioscanole and Tennessee Gas was back in service in (technical difficulty) the interconnect between Vioscanole and Sonat (ph) should be completed by midyear. Both of those connections feed our downstream processing facilities at Wycloski (ph) and Toca (ph) in Louisiana. So we should see some improvement as Vioscanole is ramped back up to pre-hurricane levels and we begin to see downstream processing volumes increase as well.

To our largest project in the Gulf, that is the independent sub and trail, construction on the project is very much on track. The Atwater (ph) Valley Producer Group continues to have great success in the area with two new discoveries -- Cheyenne and Mondo Northwest. Both are dedicated to the project. That gives us 11 total discoveries in the area to date. We know that nine of those have been sanctioned by the producers to go forward. Two are in the appraisal stage and we expect them to drill three additional prospects in 2005 on dedicated acreage. So we're very pleased with the progress we are making on the Independence Hub and Trail.

In summary for the Offshore Group, I think we should see improvement in the second quarter with a full quarter of Cameron Highway production, Vioscanole gathering at pre-hurricane levels and some partial contribution from K-2 at the Marco Polo platform and through those pipeline systems.

Let me turn to Petrochemical Services. Clearly lower operating margin does not tell the whole story there. If you look deep into the numbers, year-over-year volumes were higher in butane isomerization, propylene fractionation and our petrochemical pipeline transportation business, all reflecting continued strong demand for feedstock in the Gulf Coast markets. Offsetting that were expenses associated with a full quarter turnaround at our octane enhancement or our beef facility as we've built in the flexibility to produce MTB or isooctane as market conditions dictate. Mike will give you more detail, but during the quarter we expensed about $8.5 million attributable to the turnaround, which included feedstock, catalyst and other startup expenses. And I think that masked an otherwise very strong quarter in our pet-chem services business. We do expect to load our first shipment of isooctane in May and as I said see improvement in the second quarter going forward.

Now let me just close with some summary statistics during the quarter. Our gas pipelines moved over 7.6 Bcf a day, our NGL oil and petrochemical systems moved more than 1.6 million barrels per day, our fractionators ran full out handling about 471,000 barrels a day of NGLs, butane and propylene. We think that reflects continued strong supply growth and demand from our downstream markets. And when you combine that with the over $1 billion worth of capital projects that we have underway, we think Enterprise is uniquely positioned to grow our business and continue to deliver very strong performance to our limited partners. As investors begin to differentiate between MLPs based upon their business platforms and the visibility of their long-term growth profile, we think Enterprise will emerge as a leader in the sector.

And with that overview, I am pleased to turn it over to Mike Creel to review the financial and operating results.

Thanks, Bob. Total gross operating margin for the first quarter of 2005 increased by 110% to $275.2 million from 131.1 million for the same quarter in 2004. Breaking that down by segment, gross operating margin from NGL Pipelines and Services increased 70% or 63.3 million quarter to quarter, primarily due to improved processing economics and contributions from the natural gas processing assets acquired in connection with the GulfTerra merger and the South Texas midstream asset acquisition. Indicative U.S. Gulf Coast gas processing margins for the first quarter of 2005 averaged $0.24 per gallon compared to $0.13 per gallon in the first quarter of last year and $0.18 per gallon on average for the full year of 2004. Gross operating margin from Onshore Natural Gas Pipelines and Services increased $73.8 million quarter to quarter primarily due to onshore natural gas pipeline and storage assets we received with the GulfTerra merger. These assets accounted for 95% of the 79.4 million of gross operating margin recorded for this segment during the first quarter of '05.

Onshore Transportation volumes were 5.7 million Btu's per day in the first quarter of 2005 compared with 0.6 trillion Btu's per day in the same quarter of last year. Gross operating margins from our Offshore Pipelines and Services increased 22.2 million quarter to quarter primarily due to the offshore Gulf of Mexico assets we obtained with the GulfTerra merger. These assets accounted for 98% of the 23.2 million of this segment's gross operating margin in the first quarter of '05.

Gross operating margin from the Petrochemicals Services segment as Bob mentioned decreased 4.7 million quarter to quarter. An increase in the gross operating margin from our isomerization and propylene fractionation businesses was more than offset by an $8.5 million operating loss at our octane enhancement facility. This is primarily due to lower volumes and startup expenses related to modifications to the facility to add the capability to produce isooctane. As a result of this construction work, the facility was idle during the first quarter. And again as Bob mentioned, we expect the first production of isooctane this month.

The other gross operating margin in the first of last year is a $10.6 million of equity earnings we recorded from the GulfTerra General Partner prior to the completion of the merger on September 30, 2004. Depreciation expense for the first quarter of 2005 was 100 million. That compares to 30.5 million for the first quarter of 2004 and is primarily attributable to the depreciation and amortization associated with the values assigned to GulfTerra's property, plant and equipment and intangible assets.

General and administrative expense was 14.7 million for the first quarter of 2005. That compares with 20 million for the fourth quarter of 2004 and 9.5 million for the first quarter of 2004. The year-over-year increase is attributable to higher expenses associated with the combined partnership. Operating income for the first quarter of 2005 increased 86% to 165.5 million in the first quarter of 2005 from 88.8 million a year ago. The most recent quarter includes a $5.4 million gain on the sale of our 50% ownership interest in Starfish Pipeline Company.

Expense for the first quarter of 2005 was $53.4 million compared to $32.6 million for the first quarter of '04. This increase reflects the higher average debt levels than 2004 after the completion of the GulfTerra merger. Our weighted average debt outstanding was $4.3 billion in the first quarter of 2005 compared with 2.2 billion in the first quarter of last year.

Net income for the first quarter of 2005 was $109.3 million and $62.5 million for the first quarter of 2004. The first quarter of 2004 included a $10.8 million benefit related to the cumulative effect of changes in accounting principles adopted during 2004. Distributable cash flow totaled $252.3 million in the first quarter of this year resulting in a distribution coverage ratio for the quarter of 1.5 times. Excluding the proceeds from the sale of the Starfish Pipeline Company, the coverage ratio would've been a healthy 1.2 times.

In February of this year, we received approximately $457 million from the sale of 17.25 million common units. We used the proceeds of this to repay our 364-day acquisition credit facility and reduced borrowings under our multi-year credit facility.

Also in 2005, February 2005, our operating partnership sold $250 million of 5% 10-year unsecured notes and 250 million of the 5.75% 30-year senior unsecured notes. We used the net proceeds to repay the 350 million of 8.25 senior notes that became due on March 15 of this year and to reduce borrowings under our multi-year revolving credit facility.

Our capital budget for 2005 is on track and includes approximately $884 million for growth capital expenditures and 80 million for sustaining capital expenditures. Capital expenditures for the first quarter of 2005 totaled $404 million and included 147 million related to business combinations, principally the acquisitions of the Indian Springs Natural Gas gathering and processing assets and the acquisition of additional ownership interest in the Dixie Pipeline. We also invested 152 million in growth capital projects, such as Independence Hub and Trail, the Constitutional and gas pipelines and the conversion of the isooctane facility and we also invested another 10 million or so for the completion of the Cameron Highway project.

To date, we have invested a little over $250 million in organic growth projects that are expected to be completed and begin generating new streams of cash flow over the next two years. The big chunks in that $250 million include Independence Hub and Trail at $115 million, $47 million for the Constitutional and gas pipelines and $38 million for the isooctane project.

The (indiscernible) capital expenditures for 2005 are expected to include approximately $14 million for well connects, 48 million for maintenance CapEx and $18 million for pipeline integrity. Spending for pipeline integrity totaled 5.4 million in the first quarter of this year with 4.3 million recorded as an operating expense and 1.1 million of that being capitalized.

At the end of the first quarter of 2005, we had just under 4.2 billion of debt outstanding. Consolidated debt to total capitalization was 41.5% and we had liquidity of approximately $490 million and that's split between $58 million of unrestricted cash on hand and 432 million of available credit under our $750 million multi-year credit facility. The floating-rate exposure was approximately 30% of our total debt at the end of the quarter and that includes our project financings. Based on annualized first quarter 2005 EBITDA of 266.3 million, our debt to EBITDA ratio was approximately 3.9 times. With that, we will open it up for questions.

(Operator Instructions). Ross Payne, Wachovia Securities.

Good quarter, guys. I guess the first question I'd have is related to LNG's, how much volume off of these new facilities do you expect to flow through your system? And the second question I would have is related to North Texas, the Barnett Shale Bossier area. Are you running it up against capacity issues? And if so, what plans do you have to expand in that region?

Ross, this is Bob. Let me do the LNG question first so I can tell you that when that first cargo came in, I believe it was -- the volume on the cargo was 3 Bcf, right?

We got a little over 2.

We got a little over -- so they split, so we got a little over 2 Bcf into the Sea Robin (ph) system which fed the Sea Robin plant. What we saw on an instantaneous basis was about a 13,000 barrel a day increase in liquids being produced from the plant. And once liquids were produced, we got our ownership interest in the Seas Robin plant, plus all of the liquids in our pipeline system.

So we think it's going to be spotty. We're not involved in that project but we thought it was interesting to note that they did make their first deliveries to during the first quarter and that it was rich gas, and that that was an important highlight for us. So it's not something to model, but it is something we think we will benefit from the going forward.

On the Texas Pipeline question, you are exactly right. We are beginning to reach our capacity limits on our North Texas Pipeline. As you know, we own the North Texas Pipeline 50-50 with Energy Transfer. The pipeline system is the largest pipeline that exports gas out of the North Texas area. Production from the Barnett Shale is now reaching 1.1 Bcf a day from about 200 million a day just four years ago. So it is beginning to stretch the infrastructure up there. There have been several projects that have been announced by some of our competitors. We're not sure how far they are along. Let me tell you about three projects we have underway. The first is an expansion of our compression delivering to the Carthage area, which is the easternmost trading hub on our North Texas system. This project will increase compression and allow us to make additional deliveries east of Bethel by about an additional 120 million a day which would give us a total delivery capacity net to our interest of 570 million a day from the present 450 million a day.

To support that contract, we signed a new five-year firm transportation agreement with Anadarko for Bossier Gas and we had previously announced I think in the fourth quarter of last year, we signed a new long-term firm transportation agreement with Devon for their gas. We have the flexibility of taking the Devon gas either east to Carthage for delivery into the interstate market or west to the Permian around the horn back into the central Texas market. That contract is supporting a new $21 million capital project that we are funding for again, a similar number, $120 million a day increase in our West Texas Pipeline system. So we are bringing Barnett Shale excesses supplies all the way around the horn back into the central Texas market. We are signing two contracts there, one with Devon, another with one of our larger LDC markets in the central Texas area. But essentially, that is a project that is being supported by the excess Barnett Shale gas.

The third project is a $150 million a day increase and that is where we're taking Barnett Shale gas all the way down to South Texas for redelivery into Tennessee Gas Pipeline at a new expanded interconnect at what is called the Agua Dulce market. So three large projects all precipitated by increased Barnett Shale gas and we are working on more.

Okay, that's very helpful, Bob. I appreciate that. One final thing. Mid-America, I assume you are at full tariff there and these proposals put forth to -- FERC will obviously increase that. But that is I guess subject to market conditions -- is that correct, if it turns around and looks a little bit more like it did good several quarters back?

Well, that's right, but we don't expect that to happen and I'm glad you brought it up. It's a point I should have made that the ethane market up there, margins remained very strong during the first quarter of 2005 and we clearly expect them to be positive for the remainder of 2005. We are continuing to collect our full tariff of from the Rocky Mountains. That means there's no reduction in rates due to the ethane incentive. We preserve the right to have the ethane incentive just in case we need it, but I think we are very comfortable with the fact that our volumes are going to be running at or near plan for the remainder of the year and we continue to expect to collect our full rate up there.

The cost of service tariff increase that will go into effect in May does not have anything to do with the Rocky Mountain section. That is a rate increase for movement of products on the Northern System only, the Northern System, that being the one that delivers finished products, primarily propane, but there are other products that we deliver and transport on that system through wholesale propane terminals and other users of products in the midwestern areas, so no impact at all.

I'm very pleased with the performance of the MAPL Seminole system. We see good, solid volumes. Our people are doing a really good job of controlling their cost on that system. As we've promised, we're now (technical difficulty) recoup some of the higher fuel increase expense by increasing the cost of service on these tariffs but we're doing it in a way that's very sensitive to our customers because we know this is an area where we're going to continue to grow and expand and we're moving forward on the makings of a fairly large expansion project there as well. So all things are working very nicely on the MAPL system.

Okay, thank you guys.

John Tysseland, Smith Barney.

Good morning. (technical difficulty) value chain I guess over the last year has really benefited from strong U.S. petrochemical demand for feedstocks. What is your outlook for the rest of 2005 in that segment as far as demand for feedstocks from petrochemical companies?

This is Dub. I think what we see in the petrochemical area is a very strong next three years, not just 2005. There are a lot of facilities coming on in the Middle East and Far East, but they're not coming on for quite a bit of time. So we expect ethane demands and petrochemical demand here in the Gulf Coast to be extremely strong through 2007.

And then if you look at -- you mentioned your isooctane project having first deliveries in May. What is your demand for -- what kind of demand do you see for that new product, and I guess what type of utilization do you expect to be running at in the first year? And does that utilization go up as MTBE is phased out?

We feel that isooctane is going to have extremely strong demand because of the octane needs of refineries due to the removal of MTBE over time. As you know, MTBE has not been panned (ph) yet, but a lot of states have taken action and we feel that MTBE demand will be going rapidly down over the next couple of years as ethanol and other sources of octane come into the streams. So we feel like isooctane is going to have extremely strong demand. We're looking primarily starting the facility up with the California markets because it has such a high value to gasoline. But the Gulf Coast refining industry also will need a lot of octane in those refineries as we reduce MTBE. We really don't plan to continue to make the MTBE in the Gulf Coast, we just have that as a backup in case that product is needed in the industry on a short-term basis. We cannot convert the plant but we don't really expect that. We think isooctane demands are going to be strong enough and the price strong enough that we will continue to just run that as an isooctane-only facility over the next three to five years.

How's your margins on isooctane versus MTBE? Are they comparable?

We feel like they're about the same. From a margin standpoint, operating margin standpoint, we expect to make good margins on that, relatively about the same. In fact, the Gulf Coast margins do pick up over the next couple of years as I said earlier, so -- then it will be about the same as to MTBE in the Gulf Coast region.

And then shifting gears a bit, going to Offshore Pipelines and Services, Marco Polo, you experienced lower expected volumes there. When did that I guess volumes begin getting impacted from some tie-in activity during the quarter?

John, it was probably early in the quarter. We had talked in our fourth quarter call about lower production volumes from the Marco Polo Field, which you may recall was a very small field. It was the original anchor for that project. If we had originally expected it to produce as much as 40,000 barrels a day of oil at its peak, it got up to a peak of about 25 to 28 and then they began to have well problems in the six predrilled wells. Anadarko has continued to fight those wells. I don't want to out words in their mouth. They are no doubt disappointed as we are about the production from those wells. But we also let you know on the fourth quarter calls that we were excited about the new discoveries that had been made that K-2 and K-2 North which are much, much larger fields containing significantly more reserves and production capabilities than the original small anchor field at Marco Polo.

So I think the lower volumes we saw in the first quarter was a combination of continued well problems that Anadarko was having with the wells that produce there on the platform and the overall downtime, the collective downtime, through the course of the full first quarter that also shut in production on Marco Polo and did have an impact on that. So right now, I think right now we're moving about -- James, we're about -- 7 or 8000 barrels a day from those wells. Not all six wells are producing. Several are in the process of being worked over. But I think we should expect some improvement from the Marco Polo. Just to give you a number to hang your hat on, we're still looking for about 100,000 barrels a day by the end of the year once we get -2 and K-2 North up and running.

Thank you, that's helpful.

Yves Siegel, Wachovia Securities.

Thanks, and good morning, everybody. A couple of questions. One, are you able to quantify any residual impact of the hurricanes from last summer?

Do you mean from a financial standpoint?

Exactly, yes.

Well, we did. We quantified it for you in the fourth quarter all. We told you --

Was anything in the first quarter? Any residual of that?

We really don't feel like there was a lot of residual. I think we quantified it on the last call as being something on the order of maybe another $3 to $4 million overall through the quarter. Honestly, we have not gone back and run that calculation for this call, but my sense is that's probably in the ballpark a combination of lower gathering revenues on the Vioscanole system and lower processing volumes on some of the plants, particularly Toca and Wycloski. And then of course, the value chain allows us to get downstream through the pipelines and fractionation at Norco. So I think when you add it all up, if it's important to you, we will go back and quantify that. You can talk to Randy off-line about that, Yves.

Thanks Bob. And the second question has more to do with -- you have a great slate of organic projects. Where do acquisitions fit into the strategy at this juncture in time?

We did do a couple of acquisitions in the first quarter -- Indian Springs and increasing our ownership interest in Dixie. But if you look at what we've kind of laid out in terms of our big organic projects, we really don't have a need to do any acquisitions. We have plenty of acquisitions internally on these organic growth projects that frankly are going to yield much higher returns.

Thank you.

Yves, let me just add to that. If you'll notice, we're trying to give you guys a lot more information about our projects, about their status, about what we're calling the sump capital, which is certainly an important financial issue for us. As we noted in the press release, we have about 250 million of sump capital in these projects right now that's not earning a return. That number will grow over time. That is why we think there's so much more visibility to our growth profile than any other MLP out there because we have got the projects, you know where they are and you know how much we expect to spend, you know what the expected production from those projects will be and we're going to update you quarter to quarter both in terms of how much capital we're spending as well as what is happening around those projects. And right now, it's all positive.

Now though Yves, we have Cameron Highway that has just gone into service and you're going to see the cash flows from that ramp up over the next couple of years. So you will see the benefit of the investments that we have already made.

What I was just trying to understand as well is, there's a couple of large potential acquisitions and given the organic growth that you have, I'm just trying to calibrate it if perhaps another large acquisition could be in the cards.

We'll continue to look at every acquisition that comes along and see how it fits the Company. We're not going out of the acquisition business. We will continue to look at those. Obviously if there is some synergies that we can work into acquisitions that no other parties can, then obviously the bidding is pretty high as far as the ratio these days, in the 10 to 12 range. So we will carefully look at those with the knowledge here that if we make one, it has to be integrated into our systems somewhere.

Thank you.

Gil Alexander (ph), Darville (ph) Associates.

Good morning. What do you know or estimate your depreciation and amortization at for the year?

For the quarter, it was about $100 million, so it would be about $400 million, ballpark.

Not higher? Okay, I thank you.

Ron Londe, A.G. Edwards.

Thanks. I think you mentioned during your presentation that you expected future cost savings to be around another 10 million. Is that 10 million over the (technical difficulty) 40 million, or it is that part of the 40 million? And is that 10 million for the next three quarters, or how does that -- can you put that in perspective for me?

Yes, Ron. I think Bob mentioned that we were seeing 10 million of savings so far just on the procurement side. I think in our original numbers, we might have put in a couple of million. So I think what he's really pointing out is that there were far more synergies than we had originally indicated to you guys, and particularly on the procurement side, we were starting to see the benefits of that.

Okay. Also, how many shares were outstanding, or units -- pardon me -- were outstanding at the end of the quarter, common units?

That was approximately 383 billion.

383? Great, that's all I had.

Mark Easterbrook, RBC Capital Markets.

Just two quick questions. The distribution that you're getting from unconsolidated affiliates, that was pretty -- a lot higher than I would've expected. Is that a trend that's going to continue, especially with Cameron Highway coming onboard?

It will increase as Cameron Highway ramps up, but part of that was the depart gateway where we unwound the project financing that was there and that enabled us to upstream (ph) more cash.

Okay. And then what's (technical difficulty) CapEx and total CapEx expected for (technical difficulty)?

Maintenance CapEx is on the order of $80 million. Growth CapEx or total CapEx rather is about 184 million, and that includes the 80 million for sustaining CapEx.

(Operator Instructions). At this time, there are no further questions.

Okay, Carla, would you like to give the replay information for us, Carla?

A replay will be available until May 10, 2005. You may reach that number at 866-507-3617 (OPERATOR INSTRUCTIONS).

Thank you for joining us on our call today and have a good day.

That concludes today's conference. You may disconnect at this time.