Enterprise Products Partners LP (EPD) 2006 Q2 法說會逐字稿

Thank you for standing by. Good morning, good afternoon, and welcome to the Enterprise Products Partners second quarter earnings call. At this time, all participants are currently in a listen-only mode. After today's presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to today's first presenter, Mr. Randy Burkhalter. Sir, you may begin.

Thank you Ed. Good morning and welcome to the Enterprise Products Partners conference call to discuss earnings for the second quarter. Bob Phillips, Enterprise's President and CEO will lead the call, followed by Mike Creel, the Company's Executive Vice President and CFO. We also have other members of our senior management team present. 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. And with that, I'll turn the call over to Bob.

Thanks and good morning to all of you. Thanks for joining us. As you can see from the results, Enterprise had a great quarter in the second quarter of 2006. In fact, it was the best second quarter in the history of the partnership. Our businesses have performed consistently well in the past four quarters.

We're gaining a lot of momentum, executing our long-term growth strategy. Cash flows are stable and improving and I think that highlights three of the real strengths of the Enterprise value chain concept. That is the portfolio's natural hedge against gas prices, the national scale or the large footprint of our assets, and the ability to drive higher margins through integrated services. And each of these are huge competitive advantages in the market that we compete in.

Now, it seems like each quarter a different business line steps up with a really big quarter, and this time it was Gas Processing and Petrochemical Services, and I think that underscores the breadth of our integrated value chain. At the midpoint of 2006, I am pleased with the performance of all of our businesses. Natural Gas Liquid and Natural Gas Pipelines continue to make solid contributions with healthy volumes, good margins, and lower operating costs.

Our processing plants had a record quarter with the best plant extraction economics that we've seen in years. Our fractionators are running at full rates now that the Louisiana plants are largely back on-line. They came on in the second quarter. And both our natural gas and natural gas liquid storage businesses are benefiting from very strong customer demand for these services. We also continue to integrate and expand our distribution network to serve more customers.

The midstream fundamentals that support our business also look to stay strong in the second half of the year as producers maintain what we see as a record drilling pace in the areas that we operate, and the demand for natural gas and natural gas liquids continues to be robust. We've strengthened our balance sheet. We've made timely and accretive bolt-on acquisitions.

And finally, our unit price is headed in the right direction. I think the market is beginning to recognize the real value of Enterprise's assets and the earnings potential of our growth projects. With that overview, Mike Creel will now review the quarterly results and I'm happy to come back and give you a project update and to answer questions. Mike?

Thanks Bob. I'm pleased to report another quarter of solid results for Enterprise with strong contributions delivered from our NGL pipelines and natural gas processing businesses, our Onshore Natural Gas Pipelines and our Petrochemicals segment. Strong operating results led to our sixth consecutive quarter of distributable cash flow in excess of $210 million.

The $217 million of distributable cash flow generated this quarter allowed us to increase the distribution per common unit with respect to the second quarter of 2006 by 7.7% over the distribution declared for the second quarter of last year. We expect to finish the year with an annualized distribution of $1.87 per unit with respect to the fourth quarter of 2006, and that is the same as we've stated in previous calls.

Revenue for the quarter increased by approximately $850 million or 32% over the second quarter of last year. The $3.5 billion in revenues earned this quarter is the second highest revenue quarter for Enterprise since the merger with GulfTerra in 2004, and is more than $250 million higher than the revenue we generated in the first quarter of this year. Gross operating margin for the second quarter increased by 26% to $311 million compared to $246 million for the second quarter of 2005.

The Natural Gas Liquids Pipeline and Services segment posted another solid quarter with a 22% increase in gross operating margin to $146 million for the current quarter versus $120 million for the second quarter of 2005. Our natural gas processing and related marketing business accounted for most of the increase, as strong demand for NGLs led to higher processing margins and increased volumes processed under our fee based contracts.

Gross operating margin also increased due to contributions from the Pioneer silica gel processing plant located in the Jonah field in southwest Wyoming. We acquired that plant in March of this year. Fee-based natural gas processing volumes increased 23% from approximately 2.5 billion cubic feet a day to 2 billion cubic feet a day in the second quarter of 2005.

NGL pipelines and storage contributed $51 million in gross operating margin this quarter compared to $48 million in the second quarter of last year. Total NGL transportation volumes for the quarter hit a new record of 1.6 million barrels per day compared to 1.5 million barrels per day in the second quarter of 2005. The NGL storage business had higher gross operating margin due primarily to increased volumes and contributions from assets acquired in July of last year.

Gross operating margin from our fractionation business was $15 million in the second quarter of 2006 compared with $16 million in the second quarter of 2005. Fractionation volumes were 6% lower at 308,000 barrels per day for the current quarter compared to 327,000 barrels per day for the second quarter of last year. The decrease in gross operating margins and volumes was largely due to downtime and start-up costs associated with a 15,000 barrel per day expansion of Enterprise's fractionation facilities at Mont Belvieu.

Our Onshore Natural Gas Pipelines & Services segment generated $87 million of gross operating margin in the second quarter compared to $85 million in the second quarter of last year. Higher transportation fees in our Texas Intrastate pipelines and higher volumes in our gathering systems in the Permian and San Juan Basins were the primary reasons for the increase.

Partially offsetting these increases was approximately $4 million of costs associated with the inspection, repair, and maintenance of three storage caverns at our Wilson storage facility in Texas. For the quarter, total natural gas pipeline volumes were 5.9 trillion BTUs per day, approximately 1% lower than the second quarter of last year.

The Offshore Pipelines & Services segments reported gross operating margin of $20.5 million in the second quarter of 2006, slightly lower than the $22 million in the second quarter of last year. The combination of higher crude oil volumes transported on the Marco Polo and Poseidon oil pipelines due to additional wells coming on-line and higher volumes of natural gas and crude oil transported on the Constitution oil and natural gas pipelines that started up in the first quarter of this year provided increases in gross operating margin.

However, this was more than offset by lower overall natural gas transportation volumes due to the lingering effects of last year's hurricanes and a $5.1 million increase in insurance premiums.

Offshore natural gas pipelines were 1.5 trillion BTUs per day for the second quarter of this year, lower than the 2.2 trillion BTUs per day in the second quarter of 2005 before the hurricanes. It's also approximately 3% higher than the first quarter of this year, so you can see that production is coming back.

Offshore crude oil volumes increased to 161,000 barrels per day for the second quarter of this year from 151,000 barrels per day in the second quarter of last year, and they were 42% higher than the 113,000 barrels per day for the first quarter of this year.

As Bob said, our Petrochemicals segment earned a gross -- record gross operating margin this quarter, $57 million. Each of the businesses in this segment reported significant increases in gross operating margin with the octane enhancement business posting the largest increase with $21 million of gross operating margin for the quarter. Results for this business were exceptional due to strong demand for isooctane to boost octane levels in motor gasoline, partially driven by the elimination of MTBE from the motor gasoline pool.

We made a $40 million investment last year to convert an existing plant to enable it to produce isooctane, and we restarted the facility at the end of the first quarter of this year following its annual turnaround. We produced an average of 9000 barrels per day of isooctane during the second quarter of this year. The results of this facility tend to be seasonal, with the second and third quarters generally being the strongest performing quarters.

Demand for our butane isomerization services remains strong with our facilities producing 83,000 barrels per day of high purity isobutane for the quarter. This benefited from strong third party demand as well as from a full-quarter operation of our isooctane facility which uses isobutane as a feedstock.

Our propylene fractionation business also had a strong performance, producing 56,000 barrels per day of propylene this quarter, the same as we produced in the second quarter of last year. The gross operating margin increased 117% in the second quarter this year over the prior year to $16 million.

Operating income for the second quarter of 2006 was $186 million. That is a 48% increase over the $126 million in the second quarter of last year. Depreciation expense was up a little bit to $108 million in the second quarter of this year compared to $101 million last year, primarily due to increased property, plant and equipment.

General and administrative expenses totaled $16 million for the second quarter of 2006 compared with $19 million for the second quarter of 2005 and $20 million for the fourth quarter of 2004, the first full quarter after the GulfTerra merger. Interest expense for the second quarter of 2006 was $56 million compared to $57 million for the second quarter of 2005 on average debt outstanding of $4.7 billion for the second quarter of 2006, up a little bit over the $4.4 billion outstanding for the second quarter of 2005.

Net income for the second quarter of this year was $126 million compared with $71 million for the second quarter of 2005, again an increase of 79% year-over-year. Distributable cash flow totaled $217 million for the second quarter of 2006, resulting in a distribution coverage ratio for the quarter of just over 1 times, and for the trailing 12-month period is 1.1 times coverage.

In the seven quarters since the GulfTerra merger, we've retained $216 million of distributable cash flow, and since our IPO in July of 1998 we've retained $456 million of distributable cash flow for reinvestment in the business. Sustaining capital expenditures for the quarter totaled $35 million and totaled $65 million for the first six months of this year. Spending for pipeline integrity in the quarter totaled $13 million. Eight of that was recorded as an operating expense and 5 million was capitalized.

We spent $32 million for pipeline integrity costs this year and expect our net cash outlay for pipeline integrity program expenditures to be about $37 million for the remainder of 2006.

At June 30, 2006, we had just over $4.8 billion of debt outstanding. Consolidated debt to total capitalization was 44.1% and we had liquidity of approximately $700 million between unrestricted cash on hand and amounts available under our $1.25 billion revolving credit facility. Our floating interest rate exposure was approximately 32.5% of our total debt at the end of the second quarter, and that includes project financings.

Earlier this month, we sold $300 million of fixed floating-rate junior subordinated notes in a public offering and used the net proceeds to pay down our revolving credit facility. These notes have a 60-year final maturity and have a fixed-rate coupon of 8.375% for an initial ten-year period after which the interest rate becomes floating.

This offering was 3.3 times oversubscribed and was the fourth non-financial issue of hybrid securities. It was the first issue of hybrid securities by a publicly traded partnership. Based on the characteristics of these securities, including the long dated tenor, the ability to optionally defer interest payments for up to 10 years, the rating agencies assign partial equity treatment to the notes.

Moody's and S&P each assigned 50% equity treatment while Fitch has assigned 75% equity treatment. In publications by the rating agencies, they've given guidance that issuers could include up to 10 to 15% of these hybrid securities in their capital structure and still receive partial equity treatment. We think this is a very good way to fund the growth of our partnership as we go forward. Based on our capitalization at June 30th, this $300 million issuance of hybrid securities equates to about 3% of our capital structure. $1 billion of these hybrids would equate to less than 9% of our capital structure.

After this offering, we had approximately $850 million of liquidity between cash on hand and amounts under our multiyear credit facility. Our principal objectives in issuing these hybrid securities were to issue a debt security that includes equity content, further broadens our base of investors, and enable us to use an alternative method of financing our capital needs that will result in a lower cost of capital over the ten-year fixed term than a traditional mix of straight debt or traditional common units would.

The combination of reducing the highest incentive distribution rate paid to our general partner from 50% to 25% and issuing these hybrid securities should lower our cost of capital and allow us to generate higher returns for our investors. Based on the current annual distribution of $1.81 per unit, capping the GP's[TF1] incentive distribution at 25% has resulted in a reduction of $67 million per year in distributions that would otherwise have been paid to the general partner.

EBITDA for the second quarter of 2006 was $299 million. You will recall we set a new EBITDA record last quarter with $301 million, so this is right on top of that. The last 12-months' EBITDA through June 30, 2006, as defined in our credit facility, was approximately $1.2 billion which results in the last 12-month EBITDA at quarter end of approximately 4.05 times.

We recently announced our eighth consecutive quarterly increase in our cash distribution, going from an annualized $1.78 per unit to $1.81 per unit with respect to the second quarter of this year. This represents a 7.7% annual increase in the distribution of $1.68 paid with respect to the second quarter of last year, and it also is our 17th distribution increase since our IPO. With that, I'll turn it back over to Bob.

Thanks Mike. That was a good report. You can see why we're excited about our performance for the second quarter. I am equally excited about the progress that we've made on our major expansion projects, so I will touch on a few of those, make a couple of comments about market conditions and then we'll be ready to answer your questions.

Let me start first in the Gulf of Mexico. Our largest project is the Independence Hub and Trail project, and we're making great progress out there. We've hit a number of milestones over the last several months. The whole portion of our platform which was manufactured in Singapore has been transported into Corpus Christi, Texas and it arrived in June. That was the first major project milestone that we've reached.

The topsides which were being constructed at Kiewit yard in Corpus Christi are now 98% complete. Expect those to be complete over the next month or so. Integration work between the topsides and the hull is underway. In fact, the Atlantis production platform that BP is ready to tow out had to move to make way for our platform to come in there for the integration.

Once the platform and the topsides and the hull are integrated, we will tow the platform out to location in October, where we will spend the next few months making the existing subsea tie-ins with the producer lines out to the fields and commissioning the facility. The 134 mile, 24-inch pipeline project from Mississippi Canyon 920, which is where the platform will be installed up to West Delta 68 where we'll make the interconnection with the Tennessee 500 line, that pipeline project is now 75% complete.

We started in the deeper water. We work to the shallow water. The contractor's doing a good job there and we should be finished with that project in the next few weeks as well. The weather is great and construction has gone at or ahead of schedule out there. We're setting a junction platform at the interconnection with Tennessee; that is on schedule as well. The jacket has been set. The piles have been driven and the topsides for that small interconnecting platform will be installed in September.

We should start receiving initial payments of about $4.6 million per month from the producer group at the mechanical completion date, which is -- still remains scheduled for in the first quarter of 2007, and we continue to forecast first production through the pipeline system by second quarter 2007. And I'll remind you that this is one of the largest natural gas projects ongoing in the industry today. It's for about 1 Bcf a day, which is 10% of total offshore gas production, so we're excited about the progress that we've made there, and the impact this project will have not only on the industry but on Enterprise as well.

Let me turn to our oil pipelines, Cameron Highway and Poseidon. Volumes continue to grow in the south Green Canyon area and the trend is definitely up and positive. You may have seen a difference in measured volumes between Cameron Highway and Poseidon. Currently, all the incremental spot barrels are moving to Poseidon due to higher netback prices. We think that will balance out in Cameron Highway's favor, possibly when BP's Texas City refinery comes back to full production. That refinery is currently at 200,000 barrels a day and we expect it to ramp up over the course of 2006 and into 2007.

Let me just speak to current net oil volumes so you can get a sense for the picture that we see out there. Currently, and I mean on our daily volume reports, our net oil volumes in the Gulf of Mexico are about 186,000 barrels a day. Let me compare that to an average of 161,000 barrels a day in the second quarter of 2006, an average of 113,000 barrels a day in the first quarter of 2006, and by comparison, 151,000 barrels a day average through our oil pipelines in the second quarter of 2005. So you can see a pretty significant percentage improvement in oil volumes that are being attracted to our pipelines and production that is ramping up in that area. So we're pleased with that trend and we expect that to continue throughout 2006.

On the supply side, there have been several notable examples of major discoveries in the area. Genghis Khan, of course, which is dedicated to us, offset to the Marco Polo discovery. Shenzi, Pony and Knotty Head have all been announced within the last year. They are in the same geographic region of all of our Oil Pipeline assets. And we think they're going to be significant developments over the 2007, 2010 timeframe.

As far as the fields that are dedicated to Cameron Highway, Constitution and Ticonderoga production continues to ramp up nicely. BP has made two additional discoveries near the Mad Dog field which is dedicated to us, one of which is fairly noteworthy -- Mad Dog Southwest. And importantly, today -- earlier this morning, BP announced in London that their Atlantis production platform, which is going to be installed on the largest of our dedicated fields, is now completed and it's ready for tow-out in the next few weeks with installation in the second half of 2006 and first production in early 2007.

And that's an important milestone for them as they have worked with both their Thunderhorse and Atlantis discoveries out there to get them -- get the production facilities completed and first production started. So when we look at the information BP provided the market today, we see Thunderhorse and Atlantis both coming on in 2007. Mad Dog Southwest Ridge coming on in the 2008, 2009 timeframe. Atlantis North, an extension of the Atlantis field dedicated to us coming on in the 2010 timeframe.

I think what this all tells us and in fact it was confirmed in a meeting we had last week with BP's senior management, we get a high degree of confidence that BP remains strongly committed to not only these developments, but the deep water trend in general. And I think that's consistent with what we're hearing from our other producers as well.

So the delays in production have been frustrating for us. The reserve picture looks better and better, and we remain positive about these investments in the deep water trend. We have a very, very strong competitive position out there that should create a lot of value for our investors in the years to come.

Let's turn to the Rockies now, the other area where there is a lot of excitement going on. During the second quarter, we started construction of our 50,000 barrel a day Mid-America pipeline system expansion. Pipeline looping and pump station work is underway. We think incremental pipeline capacity will be available as early as October of this year, with full project completion still on schedule by the early second quarter of 2007.

The good news is MAPL is experiencing higher NGL volumes from the Rockies. We know that Williams TXP-5 expansion at Opal is scheduled to come on in the fourth quarter of this year, possibly the first -- as late as the first quarter of 2007. That will bring additional NGLs. You also remember that we recently purchased a silica gel plant up in the Opal area and we've just brought that on with a major expansion there.

We've received -- I think very importantly we have received our BLM permit for our new 650,000 MCF a day Pioneer processing plant at Opal and we broke ground yesterday on that project. So we're off and away there and still on schedule. We have started construction on the new pipeline and compression projects for the Jonah/Pinedale field. We talked about those earlier in the year when we disclosed a joint venture between Enterprise and TEPPCO. That project is well along the way and I think on schedule and on budget as well.

Producers have about 45 to 50 rigs running in the Jonah/Pinedale area right now. The environment looks very strong. Prices are driving record rig rates up there, so we're looking to capture a lot of that new production both in the Jonah/Pinedale gathering and compression expansion as well as the new processing plant there at Pioneer. Long-term contracts with EnCana and Ultra support those projects and we're very excited about what 2007 will bring for us in the Jonah/Pinedale area.

Turning to the Piceance Basin, very quickly, we're well into the construction phase ahead of schedule there on the 650 million a day processing plant at Meeker, I would say ahead of where we are up at the Pioneer plant. We continued to be on schedule and on budget there. I think you have all seen some of the recent announcements from the Piceance Basin, some of the major producers that are announcing their development plans in that area gives us a lot of excitement and encouragement about the competitive position of our facilities once they are complete in mid 2007.

In Texas, we've been very busy. Yesterday, you might have seen we announced a new long-term transportation and storage contract with CenterPoint to serve the growing Houston area LDC market. We're excited about this relationship. It leverages off of an older relationship we had serving CenterPoint utilities in South Texas.

These new contracts will complement the similar type delivery services that we provide to the cities of San Antonio and Austin. It will add to our already strong position serving industrial customers in the Houston Ship Channel, and I think overall, it broadens the market for our producers and makes our pipeline system more attractive for producers in areas like the Barnett Shale, the Permian Basin, and some of the growing development plays in South Texas.

Speaking of which, in early July we announced a $325 million bolt-on acquisition. We acquired the Cerrito gathering system down there. It's a system that gathers a lot of rich gas volumes and will provide a long-term feed of those volumes into our south Texas processing plant complex. I think more importantly, it cements our competitive position down in an area where we see a lot of exciting things happening over the next few years, a play that may be similar to some of the shale development plays like the Bossier or the Barnett up in East Texas and North Texas, so we will have to see how that works out.

Our anchor producer is Lewis Energy. He has been incredibly successful with the Olmos formation which is that rich gas 4.5 GPM average gas. But producers like Chesapeake and Anadarko have recently come in the area and taken large acreage positions. Our analysis indicates that there is some pretty positive shale development opportunities down there, so we're now well positioned for that.

And as well, in the second quarter we completed an expansion of our West Texas 36-inch pipeline system which runs from Waha down to San Antonio and Austin with a bypass over into the Gulf Coast area. That was an important expansion project. We worked on it for several quarters. It was supported by long-term contracts with Devon and the city of San Antonio.

Devon, of course, is the largest producer in the Barnett Shale and that was based on an expansion of our contracts there. We continue to be Devon's largest gatherer out of the Barnett Shale, I think over 400 million a day currently. This new 120 million a day expansion of our West Texas line links up that growing source of supply with our growing markets in the South -- in the Central Texas area.

And finally, let me close with a note on NGL demand which I think is really driving a lot of the value that we're seeing in the market today. NGL demand from the petrochemical and refining markets looks particularly strong. We saw that impact in the second quarter. We expect prices and demand to remain strong throughout the fourth quarter of this year.

The gas-to-crude ratio averaged 55% in the second quarter of 2006 versus 75% in the second quarter of 2005, so prices are very favorable for our businesses. Run rates on ethylene crackers were above 90% and ethylene and propylene inventories remain below five-year averages, so those numbers work particularly well for us. Current ethylene production rates compute to over 58 billion pounds total production in 2006. That would be a very, very big year and computes to a lot of demand for our feedstock products.

Current ethane supplies are running near 700,000 barrels a day. We think after backing out ethane production from refineries, we're actually above 700,000 barrels a day in June, and that, of course, bodes well for our NGL pipelines as well as our fractionator and storage business. All of these conditions we think are sustainable. They bode well for all facets of our NGL value chain and I think speaks to what you should expect out of us over the second half of this year.

So those are the highlights from the second quarter that Mike gave you. We are very proud of our performance. We're please once again we exceeded our expectations as well as the Street's expectations in a year that was supposed to be a bridge year between the merger integration in 2005 and our big projects coming on in 2007. We continue to surprise to the upside and I'm pleased that all aspects of our business are performing very well. So with that, I think we'll turn it back over to Randy for questions.

We're ready to take questions now.

(OPERATOR INSTRUCTIONS). Ross Payne, Wachovia.

First question, maybe for Mike. Two things. Number one, what was the cost of the 30 inch West Texas Pipeline expansion? And second of all, any estimation on what it might have cost you guys for downtime at Mount Belvieu?

Hang on. It looks like the total cost -- this is the West Tex frac? A little bit over 40 million.

Repeat those questions, Ross.

Okay. The cost of the 30 inch West Texas Pipeline expansion, and the second question was any estimations on your all's part on what the downtime at Mount Belvieu might have cost you I guess during that period of time.

Let me tackle the first one. The 30 inch West Texas expansion which included not only some pipe looping and compression but also some interconnects where we have takeaway capacity down in South Texas, so it was kind of a comprehensive delivery solution for Devon's gas. In the Barnett Shale we spent about $27 million on that project and have some fairly high returns to it, but again, it's all part of matching up Barnett Shale supplies with the growing demand for natural gas in the San Antonio area.

And again, I point out that we signed long-term contracts with both Devon and the City of San Antonio, so it was really kind of a custom-built expansion project for them.

Ross, I don't have a number for you in terms of what it cost us for the downtime. It looked like operating expenses were up a little over $2 million for the quarter. Certainly some of that and maybe most of that was related to start-up cost, but we can get that number for you.

Okay, thanks very much. One final question. Obviously insurance costs are up. I assume the 5.1 was a quarterly number. Is there any way to pass on those costs to some of the producers out there?

Insurance costs as a whole are up. I think they've gone from about $21 million thereabouts for last year's premiums to about $48 million or so today -- 49, and that renewal period starts April 17th of each year. There is an ability in some of our projects where -- particularly in the offshore -- where the producers pick up operating costs to pass some of those costs through. But I don't have a breakdown of how much that is.

Mark Schwartz, Bloomberg.

Good morning, gentlemen. Congratulations on a great second quarter. My question revolves around the distributions from your Company. I see in '05 that you guys had a quarter -- quarterly increase of $0.01 per share and then in '06 so far you guys are increasing by an amount of three quarters of a cent. I was just wondering if you'd be able to illuminate for '07.

I'm pretty comfortable with the final payment coming up with '06, but for '07, where you guys hope to be as far as the dividend amount per share, and then if you don't mind giving me a little bit of transparency as far as in the methodology of what goes into deciding the amount per increase for a given year. Thanks.

We have not given any kind of guidance with respect to earnings or distribution increases for 2007. Clearly for 2006, what goes into that calculation and our decision to increase distributions is pure and simple our distributable cash flow. As you can see from this conference call and from looking at things that we have on the Web, we have got a lot of projects that are in the middle of construction -- a lot of capital that's tied up and currently not generating cash flow.

Many of those projects will be coming on-line late this year, early next year, and as they do, they will be contributing to our distributable cash flow and allowing us to increase distributions even further. The farthest we've gone out is showing where we expect to end the year. We think that's a pretty healthy year-over-year increase but we have not given any kind of guidance for 2007 distribution increases.

Okay. Good enough. Thanks.

Mark Reichman, A.G. Edwards.

Just a few questions. The first question is to the extent that you can, maybe provide a little guidance on your expectations for the cash flow or gross operating margins associated with the CenterPoint agreement and the purchase of the Cerrito natural gas gathering system.

Let me take Cerrito first. The only guidance that we'll give is what we included in our press release and that it is immediately accretive. I think from listening to Bob's comments you can see there is some pretty strong interest in that area by producers. We certainly expect that volumes will increase and that the cash flows will increase as well. But again, we haven't given guidance and that is just not something we tend to do. Bob, do you want to talk about the CenterPoint contract?

Yes, but before we do that let's take a minute here to give a little bit more color on Cerrito because it's an important -- small, but important acquisition for us. James, would you like to kind of go from wellhead through the burner tip and explain the value of the different services that we provide for that very rich gas? I think investors may get a sense for how important that volume of gas coming from that area of South Texas is to us.

Yes, I'll start by just saying the footprint of this gathering system set up really well for a play that is going on down there. Bob had mentioned the Olmos formation. This is a low pressure gathering system. We're in the heart of where all this drilling is going on. We've seen our -- the production down there almost double in the past three or four years.

But by extending out and buying this gathering portion, it gives us the gathering into this area, the gas will be gathered into our existing Enterprise Texas pipeline where we get a transportation fee there. The gas will be gathered up to our processing plant in South Texas where we will get a processing fee, and then downstream the residue gas will be transported into the markets.

On the liquid side, downstream of the plants we'll get a fee for the transportation and fractionation of the liquids, and we also are buying the liquids, so we should have the ability to make some money marketing the liquid. So it's quite a value chain that we've developed out of far South Texas in an area, as Bob mentioned, with already an existing main field pay in the Olmos. But we also see a tremendous amount of upside through the drilling of the Eagleford Shale as well as there's Austin chalk potential in the area.

That's a good overview. Mark, let me speak to the CenterPoint contract. And again, as Mike said, we typically don't provide specific cash flow estimates of these projects, but let me give you kind of some of the parameters.

A project like this has fairly typical mid-teens type returns for us. It combines both transportation services, where we get paid a fixed fee for being prepared to or having available the space to transport an amount of gas at the discretion of the local distribution company, in this case CenterPoint. These loads are typically seasonally weighted towards the wintertime. Other loads that are served by power companies are correspondingly weighted towards the summertime, so we balance our system that way.

One of the interesting developments here in the Houston area is that our competitor, Energy Transfer, who purchased the old Houston pipeline system a couple of years ago from AEP had their major contract come up for renegotiation, and we were successful in muscling our way into this very attractive market. It looks like what we'll be delivering is about 20% of the overall Houston area load.

We expect that to grow over time. It's a ten-year contract. And the dollars that we're investing to make these interconnects and to provide the deliveries throughout the Houston Metropolitan area should put us in very, very good position to add to that when that contract comes up in the next ten years or so.

So it's an example of the dollars we're investing here in the Texas and tri-state market to provide transportation and storage services and make our system more attractive for producers, particularly producers in the areas like James just mentioned down in South Texas. Producers want to go with the pipelines that have the most attractive markets.

And so we now have three of the four largest metropolitan markets in the state. Only Dallas-Fort Worth is the area that we don't serve. But San Antonio, Austin, and Houston are all very attractive markets on our pipeline system. So we're excited about this new deal, excited about getting service started in April of 2007. We'll have a partial contribution next year and then a full contribution in 2008.

And then the next question I had was just on the Offshore Pipelines & Services. There was -- it looked like a slight decline in volumes quarter over quarter, year-over-year. How much of that was attributed to the lingering effects of the hurricane versus production declines, recognizing that we should see a lot of new production coming onstream next year?

Mark, did you say gas or oil?

I was looking at the offshore natural gas pipeline volume.

Gas. Okay. That's what I thought. You're right. On a second quarter to second quarter basis, there was in fact a reduction in volumes of I think about 0.5 Bcf a day or 500 million feet. And that was attributable I think to two things -- number one, is just normal production decline, and number two, wells that were shut-in after the hurricanes of last year that were either damaged or never came on.

So let me say it this way. We -- our throughput in the second quarter of '05 was about 2.1 Bcf a day. In the first quarter of '06 it was about 1.475, and in the second quarter it was about 1.523. So after we got most of the damage control out of the way and producers started bringing production back on, we're starting to inch our way back up. Currently, our volumes are in excess of our second quarter average. So again, we're climbing our way back up.

Of our 12 different gathering systems in the offshore, we really only saw significant production declines on three. That was the Viosca Knoll system, which was shut-in for Katrina and suffered some damage over there. The High Island offshore system on the western side of the Gulf was shut-in from Rita and has probably seen the biggest production decline. We're looking at a lot of those wells and we're continuing to believe that some of these wells will come back.

As you may know, Enbridge's Stingray system which is -- runs parallel to our system, has still yet to return to full service and a lot of that production was shared production, so we think some of it will come back. And offsetting that was the new Constitution gas pipeline we put in service late in the first quarter, early in the second quarter, and that's added about 90 million a day of production.

So net/net, we're down from where we were second quarter last year I think largely attributable to production damage from the hurricanes, but we're beginning to claw our way back inch by inch. I think we have a pretty positive outlook for the second half of this year.

Thank you. That's all I have.

Yves Siegel, Wachovia.

Just I think three questions. One is, could you review the Texas margin tax, why it was non-cash and what are the implications going forward?

Sure. The Texas margin tax essentially replaces the Texas franchise tax. And in addition, as something that was done at the same time, there was a reduction in property taxes. So what we did in this quarter was set up a deferred tax liability, much as you would for an income tax.

The taxes are not actually starting to be accrued until 2007 with the first payment in 2008, so what you saw in the second quarter this year was simply setting up the initial deferred tax liability account. Going forward, frankly, I don't think it's going to be a material item. And it will be offset somewhat by lower property taxes.

Thanks Mike. And Mike, how do you think of equity issuances going forward in light of the hybrid security that you successfully did a little while ago?

Well, we did a lot of work around the hybrid security crafting something that worked for an MLP, that got us the treatment at the rating agencies that we were looking for. Certainly with equity content ranging between 75% and 50%, we think it's a very attractive security. We think it's very good for our unit holders and certainly is an alternative to going back to the traditional equity markets.

As I mentioned before, the rating agencies have indicated that we might have anywhere from 10 to 15% of hybrids in our cap structure and still get equity credit. We have only issued about 3% of our capital structure so far, so still something that we can take advantage of.

We're also looking at other ways to fund our capital program in a way that avoids the traditional equity market, although obviously there will never be a total replacement for it. It may mean that it's a longer time before we have to go back to the equity market.

My last question is just a follow-up to the Cerrito acquisition and to James' comments. Where was that gas going? Because obviously, I heard the commentary that it really fits nicely into your value chain. But was that gas not going through your facilities before?

Yes, we were getting that gas. We have it under a term agreement but that term was going to end at a point in time. I will say, though, when we analyzed the acquisition, we didn't use the existing revenues we made. We built -- we went to the wellhead and obviously got more fees for going to the wellhead. And our analysis of the acquisition was based on the additional revenues to the Company, not what we make existing.

But the gas was not dedicated to us forever, Yves, and as part of this deal, Lewis Energy dedicated the main field pay, this Olmos production, to the gatherings system in our downstream asset for the life of the reserves.

Okay great. Thank you so much.

Ted Gardner, Raymond James.

I just have a question regarding the seasonality in the isooctane business. Given the expected seasonality in the ethanol blending into the gasoline, I was just trying to get a flavor for what sort of fluctuation we might see in the third and fourth quarters on volumes and cash flows out of that particular operation.

This is Gil Radtke. I think you're going to see -- or what our expectations are is that you'll see this come off of these high levels because as Mike said, this is seasonal. Second and third quarter are our best quarters. But we've actually put in place some hedges that basically we've locked in the fourth quarter already; very attractive results compared to what our expectations were originally.

Okay. That's all I had.

On the same point, Jim Teague, why don't you make a comment about what we've done on the processing margins as well?

Okay. We get a good bit of percent of liquids barrels as a part of our processing fee. I think it's around 20,000 barrels a day which at these -- at elevated NGL prices that we're seeing, we've sold those forward through I think October, locking in those values. We still have a modest amount of keep-whole contracts. We've taken the keep-whole contracts we have and we've locked those margins in through the end of the year at the kind of levels we're currently seeing.

John Tysseland, Citigroup.

Thanks, two quick questions. One, could you -- given your capital outlay so far during the year and the expectation for a lot of these projects to come on-line in the second half of 2006 and beginning of 2007, how do you expect capital outlays to progress as we look at the third quarter and the fourth quarter, and the first quarter of 2007?

John, this is Mike. I don't have a good fix on the first quarter. We have not gone through our 2007 planning cycle and we're kind of looking at 2007 currently as a whole. But for the back half of the year, the remaining CapEx to spend for this year on our growth capital projects is probably in the range of $1 billion.

Okay. Fair enough. And you have already spent I believe about 500 -- a little under $500 million so far this year?

Yes, probably $600 million or so for the first six months that we did the Cerrito acquisition, but if you remember, in the Cerrito acquisition that was funded with cash and equity, so kind of a self funding and that was a pretty good deal for us.

Right. And second question, from a longer-term basis, if you look at isooctane and ethanol from a refiner's perspective, could you kind of describe the competitive nature of the two and really the market that you see developing there now that MTBE is phased out?

John, you're breaking up just a little bit.

Sorry. It's -- what I asked was given the -- now that MTBE have been phased out, really the competitive nature of isooctane versus ethanol from a refiner's perspective in the market that you believe will develop on a longer-term basis.

John, this is Gil Radtke again. That's -- the isooctane business actually benefits from the ethanol going into gasoline and as Congress has passed the mandate for renewable fuels and putting more ethanol into the gasoline, you're actually going to need more and more isooctane and alkylate to go into the gasoline to blend the bad characteristics of ethanol down.

The ethanol has a very high vapor pressure, and isooctane has a very low vapor pressure. So the more ethanol you put into gasoline, the more components like isooctane that you need to put in there. And our plant is only the second plant that's ever been built in the world, and we're way ahead of anybody else that would be bringing -- doing any kind of conversion of their existing MTBE plants into isooctane. So I think we're very well positioned and established in the market to compete with anybody else out there.

What kind of utilization rates did you experience during the quarter and where do you think there could be possibilities for further expansion?

Well, I'd say our utilization rate was well over 95%. We had just a brief period that we had some maintenance work that we had to do. But in general, we've got some work we're going to do at the first of this year or first of 2007 to -- during our annual turnaround that should help us maybe 10, 15% increase in our capacity at that plant with that -- the work we're going to do there. And then we also still have an idle plant that is down in Morgan's Point that we're evaluating at this point for restart as well.

Excellent, thanks guys.

Barret Vlasky, RBC Capital Markets.

A lot of my questions have already been answered, but I did want to see how many well connects here in the second quarter.

That's a good question and I will come up with that in just a second. Go to the next question.

Well, I think you guys have answered everything else at this point, but I just was wondering if you were kind of in line with your expectations for the quarter and for the year at this point.

Yes. We're doing very well. Drilling activity in the well connects on the San Juan gathering in the second quarter was 116 wells connected compared to 109 wells in the first quarter and an annual budget of 350 well connects, so at 225 we're well ahead of our budgeted pace and probably will far exceed that.

The good news, gives me an opportunity to talk about the San Juan gathering system. The good news there is that two things -- number one, the volumes have finally turned. We completed our system optimization project in basically January of this year. And so we're beginning to see significantly lower pressures as well as rising net field volumes. And that is very positive.

In fact, I was just looking at some data this morning for this call which indicates that in the month of June, on a daily average basis, we had the highest producing rate in the field since November of 2004, which is the time in which we really started taking a large parts of the system down for the system overhaul and the optimization project. So it was a very, very long engineering process. They completed I think well over 350 different projects out in the field.

There was a lot of downtime. Producers were very frustrated by that, but the good news is that was over in January of this year and we've started building volumes each month since then, so we're now beginning to see the combined impact of the higher well count out there as well as the benefits of lower pressure on the system and all of the benefits of the system optimization project. San Juan gathering, Chaco plant, Permian all continue to be big contributors for us because of the robust drilling in those areas.

Okay. Great, thank you.

[Richard Viola], Deutsche Bank.

Good morning guys. I just wanted to get a little more color on the delays at Thunderhorse, and BP wasn't really all that positive this morning on it, so just kind of what that quantifies out to you and if you could be a little more specific on that it would be great. Thanks.

Sure. And I mentioned Thunderhorse without thinking that that's not dedicated to us and does not have anything to do with us, but Thunderhorse and Atlantis which is dedicated to us, were both mentioned in the same call. And I didn't have the chance to listen to the call, but we did see the slides. We had an extensive meeting with BP's new offshore senior management team last week and came away very impressed not only with their capability, but BP's continuing commitment to the deep water trend.

Thunderhorse is their number one priority, no doubt about that. They've made that public and we don't think that has changed. But they're on track I think for completing their repairs of that platform during the second half of this year and should be in full production there early 2007. But again, Thunderhorse is not dedicated to us, so that only has an impact I guess indirectly in that resources and equipment that are being used at Thunderhorse might be available sooner to help with the installation of Atlantis.

Now, Atlantis is a super major field. It's a field BP I think has publicly stated has more than 0.5 billion barrels of proved oil reserves. It's a field where the production platform is designed for 200,000 barrels a day of production. It's a field where they continue to drill extensions, and so the reserves continue to increase for us, but there has been what now appears to be almost a year delay in the actual installation of the producing platform, the tieback of the pre-drilled wells, the completion of those wells, and first production.

We're now closer than we've ever been before. The Atlantis floating facility is sitting there at the dock at Corpus Christi. They did indicate this morning on their call that they were waiting for loop currents to decrease to a certain extent then they will start the tow-out or the sailaway to the installation location there in the South Green Canyon area. That typically only takes a few days and then they'll start the process of actually installing the platform and commissioning it.

And that is a very large platform. It is similar in size to our Independence Hub platform. It will take several months to actually commission that and then do the tieback. So they have a lot of work ahead of them. We're expecting first production in the first quarter of 2007 and based upon the confidence that we took from our meeting with BP last week, I think we're going to achieve that target.

Great, thanks.

Mark Easterbrook, RBC Capital.

Two quick questions, most of my questions have been already asked, but this sub-debt deal that you guys did at $300 million, is there a -- the next time you go out and potentially revisit that market, is there a limitation to how much you can do at any one time? Is $300 million the most you can do at once?

No, Mark. Our interest in getting that first issue out was to make sure that we had the terms right, that it was something that investors liked, that we introduced Enterprise to a new set of investors. As I mentioned, we had about $1.1 billion of demand for what was a $300 million transaction. We could have upsized it. We chose not to, but that doesn't place any kind of a limitation on us going forward.

And the second question, you had some downtime at Mont Belvieu. Is there any anticipated downtime or maintenance expected there in the third or fourth quarters?

No, none. I think we were specifically referring to downtime for the installation of the West Texas fractionator expansion, and that occurred in April. So there were a few weeks there where we were at lower or reduced rates as we were installing vessels. We don't have any additional work going on there other than we're actively expanding our storage in our brine storage well in our brine system in our distribution networks throughout the Mont Belvieu complex. The only other project we have, Gil, is your splitter expansion. You want to update on that?

Yes. Actually, that is on time and on budget. We're still shooting for the third quarter of 2007 for the propylene expansion to be on-line. And again, as Bob mentioned, the storage expansion is on time as well and neither one of those two projects will have any downtime associated with it.

Yes, as far as fractionators go, our fractionators are running full out right now. In fact, we're offloading to third parties which is a situation that we found ourselves in a year ago when we announced to the market that we were going to build a new fractionator at Hobbs, because of this offloading. I think it's very reflective of the increased NGLs that are coming from the West, not just the Rockies, but New Mexico, the mid-continent, Permian Basin, the Barnett Shale.

All these new plays, particularly the shale plays are rich in liquids. So we're seeing increased production out of Jonah/Pinedale. We have got stuff that's going to come on in Piceance here in the next couple of quarters. Jim Collingsworth who runs our Mid-America pipeline system is seeing higher volumes there. And those volumes are all coming to Mont Belvieu right now. Frankly, we're out of frac space, so this is a good problem for us to have and one that we hope to reconcile within the next year or so.

Certainly when the Hobbs fractionator comes on in mid 2007, that's going to help a lot of our problems with the offloads at Mont Belvieu.

Okay thanks.

Jim, do you want to comment?

Yes. I think another thing that Dan just pointed out to me -- the other thing that we're doing in terms of bringing more product into Mont Belvieu is it's really what we're doing in South Texas. It's consistent with what Enterprise did in South Louisiana. If you'll remember when the Shell assets came over here, we had a lot of production that we acquired from Shell that was stranded in Louisiana. We built a pipeline and tied that into Mont Belvieu, creating a -- if you would, a corridor.

We're doing the same thing in South Texas right now. Right now, we're bringing all the ethane up from South Texas. We've improved our netback down there by $0.02 a gallon. We have projects in place to do exactly what we did in South Louisiana, and that is to tie that production basin into a Mont Belvieu complex so that again, we have a corridor approach whereby we can enhance the return we get on the produced barrels which is some 70,000 barrels a day I think is what we are producing out of those processing plants.

So not only are we seeing increased productions, we are creating new avenues to get more barrels into our Mont Belvieu complex.

This is Dan Duncan. I would like to add a little bit of color to that. I think when James was talking about the Cerrito, he and Bob both were talking about Cerrito, the production we're bringing in from South Texas tying into Mont Belvieu complex was tied into that Cerrito deal. So that is one thing that really made this Cerrito acquisition a very, very, very good deal for us because it ties us into the -- moving all this South Texas all the way into Mont Belvieu market which is the number one market for NGLs in the world.

So along with the Cerrito coming in long-term that we got dedication on that along with our import terminal, I think we're actually doubling our import terminal. We're in a position right now, we're doing that deal, we go from 240,000 barrels a day to 450,000 barrels a day, and that should come on in the second quarter of '07. So beginning next summer, we'll have -- we're doubling the import capacity of what we can do.

We're also moving our export capacity from probably $150,000 to $175,000 a day to about 250 to 300. At the same time we are expanding in Mont Belvieu complex where we can fractionate more what we call our DIB facilities which is fractionation of the [C4] that's coming in from the Persian Gulf and from West Africa. So we're expanding that whole system along with the south Texas deal, and this is in what we call our bolt-on value chain by putting a value chain either on the end of something or the beginning of something.

And that's what really was exciting about the Cerrito deal, is that now after Bob and James made that deal that we've got that Cerrito deal now locked into our assets because of our gathering system, our processing plants in South Texas, our pipeline into Mont Belvieu which is the number one market in the world, along with exports and everything else. So we continually go into the system of our bolt-on deals or actually increasing our value chain, and I think that's the key to what Enterprise has been doing all these years. And that's what we are focusing on for the future.

Ed, we have time for one more question.

Sir, there are no additional questions at this time.

Okay. If you would give the replay information, please?

Thank you. At this time, this call has been recorded for instant replay. It will be available until August 1st, 5 PM Central Time. The number is 1-800-666-3831. That's for the instant replay of this recording which is available through August 1st, 5 PM Central Time, 1-800-666-3831.

Thank you.

Thank you.

That concludes today's teleconference. Thank you for attending. You may disconnect your line at this time and have a good day.

[TF1]This abbreviation is for general partner as mentioned at end of sentence.