Enterprise Products Partners LP (EPD) 2006 Q3 法說會逐字稿

Welcome to the Enterprise Products Partners third quarter earnings conference call. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections you may disconnect at this time. Now I will turn the meeting over to Mr. Randy Burkhalter, Director of Investor Relations. Sir, you may begin.

Good morning and welcome to everyone to the Enterprise Products Partners conference call to discuss earnings for the third quarter. Bob Phillips, our President and CEO, will lead our call this morning, followed by Mike Creel, the Company's Executive Vice President and CFO. Also included on the call today from Enterprise is Mr. Duncan, our Chairman and Founder, as well as other senior members of our management team. Afterward we will open the call up for your questions.

During this call we will make forward-looking statements within the meaning of Section 21E of the Securities 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, they 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 will turn the call over to Bob.

Good morning and thank you to all of you for joining us this morning. As you would expect we are very pleased to announce another record quarter for Enterprise, with net income exceeding $200 million for the first time in the partnership's history. We are excited about the results and happy to report to you not only the highlights of the quarter, but status of our projects as well.

I think it is important to note that we exceeded Consensus estimates out there well beyond the $50 million in insurance recoveries during the quarter. Our business is operating very well and we have a lot of upsides due to the new growth projects that we are going to be placing in-service over the next five quarters.

With that opening, Mike will review the third quarter's performance, and I'll come back and update you on the projects and talk about some of our recent announcements.

We did have an exceptional third quarter with record results posted for revenue, gross operating margins, EBITDA and distributable cash flow. Strong contributions from all of our NGL businesses and a near record performance from our Petrochemicals segment were instrumental in Enterprise recording record results for the third quarter.

Third quarter results included approximately $50 million of cash proceeds from business interruption claims associated with the hurricanes in 2004 and 2005. This benefit was partially offset by $14 million, or $0.04 per unit, from a non-cash impairment of the investment in our 26% interest in the Manta Ray and Nautilus offshore natural gas pipelines, and a loss related to the replacement of cushion gas in our Wilson gas storage facility that is undergoing mechanical repairs.

As Bob said, we had strong operating results, even excluding the benefit of the insurance proceeds, which led to a record distributable cash flow of $302 million for the quarter compared to $222 million for the third quarter of 2005. This has allowed us to increase our distribution per common unit through the third quarter by 7% over the distribution declared for the third quarter of last year. Given this continued strong operating performance, we expect to finish the year with an annualized distribution rate of $1.87 per unit as we stated earlier in the year.

We've established a new record for revenue this quarter of $3.9 billion. That is a 19% increase over the third quarter of 2005 and a 10% increase over last quarter, our second-highest revenue quarter.

Gross operating margin for the third quarter increased by 28% to a record $400 million compared with $312 million for the same quarter in 2005. EBITDA increased 30% to $389 million, also a new record, from $299 million in the third quarter of 2005. Excluding the insurance proceeds, we still would have established records for gross operating margin, EBITDA and net income.

Now getting into the segments. The Natural Gas Liquids Pipeline and Services segment posted another solid quarter with a 51% increase in gross operating margin to $232 million for the current quarter versus $154 million for the third quarter last year. Excluding insurance recoveries of $30 million, gross operating margin increased $48 million, or 31%, due to strong results from all of our NGL businesses.

Our NGL fractionation business accounted for the largest increase in gross operating margin, up $24 million, excluding insurance recoveries of $11 million, finishing at $37 million for the quarter compared to $13 million for the third quarter of 2005. Fractionation volumes increased 26% to 341,000 barrels per day in the third quarter this year compared to 270,000 barrels a day in the same quarter of last year.

The largest increases were from our Norco facility in Louisiana and our Mount Belvieu fractionation facility here in Texas. The increase in volumes at the Mont Belvieu facility was primarily due to the completion of an expansion project during the second quarter this year that increased the capacity by 15,000 barrels a day to 225,000 barrels a day.

NGL Pipelines and Storage contributed 56 million in gross operating margin this quarter, excluding insurance recoveries of $2.7 million, reaching $43 million for the quarter -- or compared to $43 million for the same quarter last year. Total NGL transportation volumes for the quarter hit a new record of 1.7 million barrels per day compared with 1.5 million barrels per day in the third quarter of last year, and surpassing the previous record set in the second quarter this year.

Substantially all of our NGL pipelines reported volume increases. Our Mid-America and Seminole pipelines recorded a $7.5 million increase in gross operating margin to $36 million on a 34,000 barrel per day increase in volumes in the third quarter of this year. Our South Louisiana pipeline, Tri-States pipeline and Mont Belvieu NGL storage facility all reported increases in gross operating margins on higher volumes.

Construction on the 50,000 barrel per day expansion of our Mid-America Rocky Mountain pipeline system is continuing on schedule with 30,000 barrels per day of additional capacity scheduled to be available in the fourth quarter this year. We received management approvals from all but one of our current Mid-America shippers this quarter resulting in new long-term dedications that will fully subscribe the phase 1 expansion capacity on this system. The balance of the 50,000 barrel per day expansion should be available by midyear 2007.

The natural gas processing business reported a $10 million increase in gross operating margin, excluding insurance recoveries of $16.5 million, reaching $108 million for the quarter compared with $98 million for the third quarter of last year. Strong demand for NGLs resulted in higher revenues from our margin band and percent of liquid contracts, as well as a 52% increase in natural gas volumes processed under our fee-based contracts.

Our Onshore Natural Gas Pipelines and Services segment generated $77 million of gross operating margin in the quarter compared to $94 million for the third quarter of last year. A decrease in revenues from the Acadian pipeline system and our natural gas storage facilities in the third quarter, coupled with a $9 million decrease in gross operating margin from the Wilson storage facility, were the prime reasons for the decline in gross operating margins.

The $9 million decrease includes a $6.6 million charge for an accrued loss during the quarter associated with the withdrawal of cushion gas at lower natural gas prices compared to higher contracted prices for natural gas that are expected to be reinjected into the caverns in the first half of 2007.

Partially offsetting these decreases is a $5 million increase in gross operating margin from the Enterprise Texas Intrastate natural gas pipeline system due to higher transportation fees and lower operating expenses. Volumes averaged 3.3 trillion BTUs per day in the third quarter of 2006 compared with 3.6 trillion BTUs in the same quarter of last year. The San Juan Gathering System reported gross operating margin of $34 million for the quarter compared to $36 million for the third quarter of last year. Total natural gas pipeline transportation volumes were flat with 6 trillion BTUs for the third quarter of 2005.

The Offshore Pipelines and Services segment reported gross operating margin of $38 million in the third quarter of 2006, including $20 million of insurance recoveries under our business interruption insurance policies. This compares to $17 million of gross operating margin in the same quarter of 2005.

Gross operating margin from offshore oil pipelines increased $8 million. This business did not have any business interruption recoveries. The increase was due primarily to contributions from the Constitution oil pipeline that began commercial operations in the first quarter of this year, and increases in volumes on the Marco Polo and Poseidon oil pipelines.

Gross operating margin from offshore natural gas pipelines increased to $16 million for the third quarter this year from $5 million in the third quarter of 2005, and included in this is $15 million received from business interruption insurance, as well as a $7.4 million non-cash impairment charge, again, associated with our interest in the Manta Ray and Nautilus natural gas pipeline system. Total offshore natural gas transportation volumes were 1.6 trillion BTUs per day in the third quarter of this year, essentially the same as in the third quarter of last year.

We have made substantial progress on our largest organic growth project, the Independence Hub and Trail, which will have a capacity to handle 1 billion cubic feet a day of natural gas. Mechanical completion of the hub is expected during the first quarter of 2007, at which time the producers will be paying the hub owners a monthly demand charge of $4.6 million.

The Offshore Platform Services business generated gross operating margin for the third quarter of $14 million, that includes $5 million of recoveries under business interruption insurance. This compares to $11 million of gross operating margin earned in the third quarter of 2005.

Our Petrochemical Services segment generated gross operating margin this quarter of $52 million. This is the second consecutive quarter this segment has exceeded $50 million in gross operating margins. Two of the three businesses recorded increase in gross operating margins, with the butane isomerization business recording a slight decrease. Our octane enhancement business posted a 29% increase in gross operating margins of $18 million for the third quarter compared to $14 million in the same quarter of 2005. Isooctane production totaled 11,000 barrels per day in the current quarter, 3,000 barrels per day higher than the third quarter of 2005.

Propylene fractionation reported gross operating margin at $15 million through the third quarter of '06 compared to $13 million for the same quarter of 2005. Petrochemical pipeline transportation volumes more than doubled, reaching 101,000 barrels per day for the current quarter compared to 50,000 barrels per day for the third quarter of last year. This increase in volumes was largely due to the 33,000 barrels per day from our recently completed Texas City refinery grade propylene system.

The butane isomerization business had gross operating margin of $19 million for the third quarter of 2006 compared to $21 million for the same quarter last year, with production volumes decreasing to 82,000 barrels per day in the current quarter from 96,000 barrels per day last year.

Operating income for the third quarter of 2006 was $274 million. That is a 41% increase over the $194 million operating income we had for the third quarter of 2005. Depreciation expense increased to $112 million from $103 million in the third quarter of last year, primarily due to increased property plant and equipment.

General and administrative expense was $16 million for the third quarter of '06 compared with $13 million for the third quarter of 2005, and $20 million for the fourth quarter of 2004, the first full quarter we had after the GulfTerra merger. G&A expense is running consistently now in the $15 million to $16 million a quarter range.

Interest expense for the third quarter of 2006 was $63 million, slightly higher than the $61 million for the third quarter of 2005. And average debt outstanding was $5 billion for the third quarter of 2006 compared with $4.8 billion in the third quarter of 2005. The average debt outstanding for the third quarter of 2006 does include the hybrid debt securities that we issued for which we get some equity credit.

Net income for the quarter was $208 million compared to $131 million for the third quarter of 2005. That represents an increase of 59%. Distributable cash flow was a record $302 million for the third quarter of 2006, resulting in a distribution coverage ratio for the quarter of 1.4 times. Excluding the $50 million of cash recoveries from business interruption insurance, distributable cash flow provided 1.1 times coverage.

Since the GulfTerra merger two years ago, Enterprise has generated over $1.8 billion in distributable cash flow. We have increased the distribution rate on our common units by 16.5%. And we have reinvested approximately $300 million of excess distributable cash flow in the business. This year to date we've raised over $1.1 billion of capital, resulting in $1.3 billion in liquidity at the end of the third quarter, and putting us in a very strong position to execute our current growth plans for the remainder of this year as well as next.

Sustaining capital expenditures for the quarter totaled $31 million. They were $95 million for the year-to-date. Spending for pipeline integrity in the quarter included a total of $22.6 million, with $7.1 million of that being reported as an operating expense and $15.5 million being capitalized. We spent approximately $54.3 million for pipeline integrity costs this year, and expect our net cash outlays for the pipeline integrity program expenditures to be about $10.4 million for the balance of the year.

At the end of the third quarter we had $4.9 billion of debt outstanding, including 100% of the hybrid securities. We had consolidated debt to total capitalization adjusted for the average equity content of the hybrid securities of 39.4%. And we had liquidity of $1.3 billion, including $117 million of unrestricted cash on hand and amounts available under our $1.25 billion revolving credit facility.

Our floating-rate exposure was approximately 22% of our total debt at the end of the quarter, including our share of project financing. The average life of our debt was approximately 16 years, and our average cost of debt is approximately 6.15%. That includes the cost of our hybrid debt securities.

We issued $550 million of fixed floating-rate junior subordinated notes during the quarter. Those were the ones that we refer to as the hybrid securities. You will recall from our last earnings conference call that we issued $300 million of those securities in July. We reopened that series of notes twice during the quarter, issuing an additional $250 million. And each time we issued, they were at lower cost. These notes have a 60 year final maturity and have a fixed coupon of 8 3/8% for the initial ten-year period, after which the interest rate becomes floating.

Based on the characteristics of the security, including the long dated tenor, our ability to optionally defer interest payments for up to 10 years, the rating agencies have assigned partial equity treatment to the notes, with Moody's and S&P each assigning 50% equity content, and Fitch Investors assigning 75% equity content. The rating agencies have indicated in their publications that issuers could include 10% to 15% of these hybrid debt securities in their capital structure and still receive partial equity treatment. So we will likely look to this type of security to fund part of our future capital requirements.

EBITDA for the third quarter of 2006 was $389 million. That is a new record for the partnership. The last 12 months EBITDA through September 30, 2006, as defined in our credit facility, was about $1.3 billion. And that resulted in debt the last 12 months EBITDA at quarter of 3.37 times.

We recently announced our ninth consecutive quarterly increase in our cash distribution, going from an annualized $1.81 per unit to $1.84 per unit with respect to the third quarter of 2006. Again this represents a 7% increase over the annualized distribution of $1.72 paid with respect to the third quarter of 2005. We have now increased the quarterly distribution 18 times since our IPO in July of 1998. With that now, I'll turn it back over to Bob for a project update.

Clearly the numbers speak for themselves. We think we're in the sweet spot of the midstream industry right now. We are having a great year -- a lot of momentum for future growth. It occurs to me that as each quarter goes by since the merger with GulfTerra a couple of years ago, a pattern has emerged. We continue to make quarter over quarter substantial project -- progress on our growth projects. We place completed projects in service and they begin to add to the bottom line. We announce new projects from quarter to quarter to be developed to provide future growth. All the while we're maintaining an extremely strong balance sheet, probably the strongest in the sector, and we continue to deliver record performance. I think all that adds up to the essence of a long-term sustainable business model.

A quick project update starting in the Rockies. Mike mentioned our 50,000 barrel a day expansion of the Mid-America pipeline system. It is certainly on track. Let me give you a little bit more detail. We have currently completed 88% of the pipeline looping project, which will be placed in service in November, and add incremental capacity of between 25,000 and 30,000 barrels a day.

The pump station work is in progress. It will be completed by midyear 2007. That will take us all the way up to 275,000 barrels a day total capacity for the phase 1 expansion project. We're beginning to see incremental volume growth at a number of Rocky Mountain processing plants that feed into the MAPL system. We know that the Williams TXP5 Opal expansion will start up in the first quarter of 2007, possibly as early as December of this year, ramping up to an additional 10,000 to 20,000 barrels a day.

Enterprises' new Pioneer and Meeker processing plants to be constructed -- being constructed in the Rockies are on schedule for the second half of 2007. And we are also working on several new producer-owned processing plants in the Rockies that are under consideration, and we are excited about that potential as well.

Importantly, we have completed during the recent quarter the long-term dedication and transportation agreements on MAPL with all but one of our shippers at current rates with escalators. That is an important acknowledgment that I want to make sure you're aware of. We are pleased with the acceptance of our customers of our program up there. Based on higher NGL production estimates that we're getting from our producers over the next few years, we think our phase 1 expansion is fully subscribed at 275,000 barrels a day. And we're beginning to look at a phase 2 expansion.

Again, to highlight I think the acknowledgment of our shippers from the Rockies, they clearly made a statement with their long-term dedications to the Mid-America pipeline system as opposed to another project that had been announced that they believe in our competitive transportation and fractionation rates. They believe in our strong flow assurance program on the Mid-America pipeline, and our greater market access to the petchems and refiners at Mont Belvieu and in the Conway market. We're very pleased with the progress we have made on the Mid-America pipeline system.

Moving to western Colorado and the Piceance Basin, producers continue their aggressive and active development of this unconventional gas play. The big players are EnCana, Exxon and Chevron. They're making major investments in this basin to develop these large national gas and NGL resource base.

Enterprises' new 750 million a day Meeker gas processing plant is on target for a July 2007 start date. Detailed engineering is about 85% complete. All the long leadtime equipment has been ordered. Construction is about 25% complete, and the new 50 mile 12 inch lateral to the MAPL system is now underway.

Based on their continued success in the Piceance Basin EnCana has elected under their basinwide dedication agreement to Enterprise to have Enterprise expand the Meeker plant by another 650 million a day, for a total of 1.4 Bcf a day of processing capacity in the basin. So we're beginning to perform engineering and procurement and initial site work on that plant.

The Meeker 2 project will have an in-service date of May 2008. It will produce an additional 30,000 barrels a day of NGLs at full rates. And we think it will benefit from shared facilities with the Meeker 1 processing plant resulting in the lower capital cost for that second expansion. That is an exciting project that is going forward as well. We're building a significant infrastructure presence in the very important Piceance Basin of western Colorado.

Moving south to the San Juan Basin northwest New Mexico, during the quarter we signed a new twenty-year gathering agreement with BT, which is our second-largest producer in the San Juan. We signed a new long-term gathering and processing contract with XTO, which is our third-largest producer. Drilling activity across the Gathering System continues to be robust, as you would expect, and volumes are increasing now due to the optimization work that we completed in 2005 and 2006. In fact, volumes are up nicely since the beginning of this year.

Total year-to-date well ties on the San Juan gathering system are 326 compared to 336 well ties for all of 2005, and 241 well ties for all of 2004. You can see the impact of higher prices and the optimization work that we did. Producers are drilling actively on our system.

Moving down to the Carlsbad Gathering System in southeast New Mexico, the same story. We have completed 72 new well connects year-to-date in 2006 versus 81 for all of 2005. This activity is boosted by new long-term contracts we have with Devon and EOG, and we are also installing a new 150 million a day refrigeration dewpoint plant on that gathering system. That should be completed by year-end 2006, and make us even more competitive out there in that region.

Moving over to the Waha area of the Permian Basin, Anadarko continues its success at the Hailey Ranch deal. They announced a new joint venture with Chevron to develop acreage that is largely on our gathering system. As well Petro-Hunt and Chesapeake continue their development of the West Texas Barnett Shale play, which is proximate to our gathering system as well. Some exciting things happening on those two gathering systems.

At Hobbs, New Mexico, our new 75,000 barrels a day fractionator is on schedule for an August 2007 start date. Engineering is 85% complete. Construction is progressing nicely. We have recently completed the new ethane storage well, which is drilled and bleaching is now underway. The brine pits have been installed. The foundation work for the fractionator is 95% complete.

A companion project, the 50,000 barrel a day expansion of the Mid-America central system between Conway Kansas and Hobbs, New Mexico is on schedule for completion by the second quarter of 2007. This new pipeline expansion will allow us to optimize our flexibility to ship natural gas liquids, both wide grade as well as finished product, north and south to meet market demand between Conway, Kansas and our new Hobbs fractionator. So we're excited about the progress of that project as well.

On the Texas pipeline system we had an active third quarter. We fully integrated the new South Texas Cerrito Gathering System that we acquired from Lewis Energy during the quarter, and that made a solid contribution to both gathering, as well as processing. In south Texas we have started construction work on the interconnections to the Centerpoint local distribution system in Houston. That new project will be in service in April of 2007. We're also expanding the treating capacity at one of our very important processing plants, the Armstrong plant, located in the Upper Gulf Coast area. We're seeing a lot of new drilling in that area. So we're having an opportunity to expand processing and treating capacity there.

We continue to work very actively on the Barnett Shale expansion project, and we think we are making some good progress there. We're also negotiating a new extension with the city of San Antonio to extend their transportation and storage contract. That is one of our largest customers on the system.

Moving to Mont Belvieu, we have several projects underway. We have completed two new brine ponds and related piping, totaling about 6 million barrels of new brine service, and they are in service as we speak. This increases the utilization of our existing NGL storage capacity at Mont Belvieu. We also have additional ponds under development over the next few months and should sometime during the wintertime add a total of 10 million barrels of brine capacity to our storage facility at Mont Belvieu, reminding you that that is the largest natural gas liquid storage facility in the U.S.

Our propane/[propylene] splitter expansion of 1 billion pounds per year is on target for third quarter 2007. Engineering is 85% complete. Construction is 25% complete on this important project, which will satisfy growing demand for polymer grade propylene from the plastics industry. It is one of the few facilities in the industry, and it has had a great year so far from an earning standpoint, so we're looking forward to the contribution that this expansion will have on our bottom line in 2007.

We're also making good progress on our import and export facility expansion. That is on track, and it will effectively double our peak rate capacity to handle increased international NGLs supply and demand requirements. We have had a great year so far in the import/export business. It has exceeded our expectations, and we look for that to continue as we enter into more long-term contracts with some of the world's largest NGL suppliers.

All of these projects taken as a whole, along with the expansions of our Gulf Coast distribution system from south Texas, the Texas City area, and up through the Ship Channel into Mont Belvieu over to Beaumont, Port Arthur will help us provide increased feedstock and blend stock services to many of the announced refinery expansions in Texas and Louisiana. We see that as an area where we have significant new growth opportunities in meeting that demand from the refinery expenses.

In the Gulf of Mexico all of our attention is now on the Independence Hub and Trail project. We hit some very important milestones during the third quarter, including the completion of our 134 mile 24 inch pipeline system. We successfully mated the platform topsides with the hull. And we have now started precommissioning activities with our producers, Anadarko, Devon, Dominion, and Heathrow. We expect to commence loadout and installation of the platform sometime in the fourth quarter, and we look for mechanical completion in the first quarter. And as Mike said in his note, that will trigger producer payments of $4.6 million a month, with first production estimated in mid 2007.

Importantly, I would note for you that the producers out there have conducted a number of very successful production tests on some of the gas wells that have been drilled and dedicated to the Independence Hub and pipeline project, and these production tests give us even greater confidence about the reserves supporting this 1 Bcf a day facility. We are excited about getting Independence Hub and Trail on in 2007.

Finally, we recently announced a new long-term Deepwater project to tie in BHP's Shenzi oilfield. It is a Deepwater discovery, and we will be tying that to our existing offshore oil pipeline network, which includes Cameron Highway, Constitution and Poseidon. Shenzi is a world-class discovery in the South Green Canyon area. Producer estimates around 350 million to 440 million barrels of reserves. And they are designing their platform for production capacity of 100,000 barrels a day.

We had intentionally oversized the pipeline up to about 230,000 barrels a day at a slight increased incremental capital cost because of the close proximity of the Shenzi field to some of the lower tertiary oil discoveries that were recently announced by Chevron and Devon in the Walker Ridge area. The Shenzi pipeline project will be a late 2007, 2008 project, with first production scheduled for 2009. We think it puts us in very good competitive position for those lower tertiary discoveries.

In summary, Enterprise's record results in the third quarter I think highlight the earnings power of our fully integrated midstream value chain. As I said, our balance sheet is one of the strongest in the MLP sector, and our expansion projects continue to provide clear visibility to where our long-term growth is going to come from. With that overview, we will be happy to answer any questions that you might have.

Brenda, we're ready to take questions.

(OPERATOR INSTRUCTIONS). Mark Reichman, A.G. Edwards.

It sounds like most of your projects are proceeding on schedule. But I wanted to ask, looking at the capital expenditure budget, as well as the timing of the in-service date from the analyst presentation back in August, are there any material changes to the capital expenditure budget or expectations in terms of the timing on any of those projects?

Let me speak to the timing, and then I will ask Mike to speak to the capital budget. From a timing standpoint, and this is the reason why we probably going to agonizing detail about these projects on the quarterly call. It is probably more information than you really want to know. But it is very much our intention to keep you apprised of the timing of all these projects. And in fact, all of our projects are on schedule for the timing, the in-service dates that we originally announced.

We know that coming into the wintertime in the Rocky Mountain region, depending entirely upon weather, we could slip weeks, not months. That would be our typical experience up there. That would impact our Pioneer processing plant at Opal. It might impact to a certain extent our pump station work on the northern part of the Mid-America pipeline system. But as a practical matter most of that work is down in middle to southeastern New Mexico. So it is unlikely that strong winter weather would impact that.

It may impact a little bit of our Meeker processing plant in the western Colorado region. But again, we're talking about -- in a serious weather delay we would be talking about weeks delay as supposed to months delay. We're still very much within our schedule.

Turning to the Gulf of Mexico, as you all know, we have successfully avoided hurricanes this season, and as a result we are equal to or ahead of our schedules there, so we don't expect any serious delays in the Gulf of Mexico work. As a practical matter, weather does not really impact our projects in Texas and New Mexico and Louisiana, so we shouldn't expect any delays there.

We don't have any materials delays. We don't have any labor shortages. We don't have any situations where we know that equipment has been back ordered, other than in the ordinary course of business. When you place compressor orders with a 52 to 56 week deadline, typically they come in at 56 weeks as opposed to 52. Again, you're talking about weeks, maybe a month, but no serious delays on any of our projects.

Let me just add to that. In 2006 what we showed at the analyst meeting, we're probably going to be $150 million, maybe $200 million short of that. Frankly, some of that may just be timing of invoices and things of that sort, so nothing significant. For 2007 through 2010 we have actually shown a growth CapEx of about $1.4 billion. We're looking at that much for 2007 alone right now. As we mentioned at the analyst meeting, as we continue to move through the year, we're going to be identifying additional growth projects for 2008 and beyond. As Bob said, we're essentially on track with what we showed you.

And again, just to follow-up on that point, our model here is total visibility and total transparency. Our entire growth strategy is built around the sequential impact of all these various projects that come on quarter after quarter and add to our bottom line. Our pledge to you is we will give you the good, the bad end the ugly. If we've got a project that gets off in the ditch, we will tell you about that. We will let you know, and we will allow you to adjust your model accordingly. I think you can expect that when we give you these quarterly reports, they are about as accurate as we have up to the day before we start the conference call.

Great. Just one second question. It would appear that 2006 and 2007 capital expenditures, about 50% of that has already been prefunded with equity, including retained distributable cash flow. Can we assume that going forward that the debt portion would be financed with the hybrid securities, or may there be an opportunity to issue lower cost debt? And then also what feedback are you getting from the rating agencies, in terms of specifically Standard & Poor's, in terms of their outlook?

Boy, that is a lot of questions. Actually, for the capital that we have in our 2006 capital plan, we have -- between the equity that we've raised and the retained capital, that covers 77% of our 2006 capital. It covers about 42% of the combined 2006/2007. We have essentially funded the equity component of our growth capital project that we have currently planned through the end of 2007.

Certainly the hybrid securities are something that are a very economic way to fund a part of these capital requirements, and we do get some equity credit from the rating agencies. As I mentioned, the spreads on those hybrid securities, ours have tightened up quite a bit since our initial offering. We do expect that to be a component of our capital raising efforts going forward. You might see more of that, maybe one other offering in 2007. Frankly we don't think we need a whole lot more equity to fund our 2007 plan, and perhaps a wedge of the hybrids might do it.

With respect to the rating agencies, we have been in front of them time and time again showing them what we have done for 2006. We have pledged to maintain an investment-grade balance sheet. We think we have done that. We think our balance sheet, as you look at it today, is clearly better than a BBB flat or a Baa3 rating. But we're patient. We don't get to set our own rating, we have to wait on the rating agencies. But we're doing everything they have asked for. We have been very open with them in terms of our plans for 2006/2007. Very diligently working to front-end load our capital requirements with equity offerings and equity-like offerings. So we think we have done everything they have asked us to do.

Alex Meyer, Zimmer Lucas Capital.

Congratulations on the quarter. I just wanted to ask you about your Barnett Shale expansion project that you are considering undertaking. Can you give me a little more color on that?

The Barnett Shale is located in the Fort Worth Basin in north Texas. Kind of west and north of the Dallas-Fort Worth area. We currently have a 36 inch pipeline system that runs through the south side of the Barnett Shale. Actually the development play started probably 50 miles north of our pipeline, and in fact actually moving down towards our pipeline system. That is the good news.

The bad news is our capacity is full up there, which is kind of, as I said, a good news/bad news thing. The capacity is full. We're currently the largest gatherer and transporter of gas for Devon, which is the largest producer in the Barnett Shale play. We have been working with all of our producer shippers up there to develop projects that might allow us to export more gas out of the Barnett Shale.

We all know that the Barnett Shale is an active region. We are seeing estimates right now of 3.5 Bcf to potentially 4 Bcf a day of daily production some years out in the future. Current takeaway capacity out of the Barnett Shale, of which our pipeline plays a large part in that, is limited to a little over 2 Bcf a day. The majority of that gas goes east to the Carthage Hub. We think that the Carthage Hub is getting loaded up with gas. So we're working with some other industry partners to try to develop a project that would take a substantial amount of this new gas production that will be developed out of north Texas, past Carthage, and over into other areas where we might find an active market for that gas.

We continue to work diligently on that. I think we're well-positioned for a project like that. We look forward to having something to say about it in the future.

Can you comment a little bit about I guess the bottlenecks you're seeing at Carthage, and I guess, some of the projects that had been proposed, and when you expect some of those projects to be built to address those needs to bring gas further east?

Our pipeline goes to Carthage and it is full. Our producers are asking us to work on developing additional projects to take gas to the East. We know from discussions with those producers that they would rather not land at Carthage, because there is not enough export takeaway capacity from the Carthage Hub to handle substantially more Barnett Shale gas. As gas gets loaded up there at a hub typically the price drops. So the producers have in their best interest the economic incentive to support a long-term pipeline project to take gas further east where the basis differentials would be more advantageous to the producers.

There have been several announced projects. It is probably not my place to talk about the status of some of our competitors' announced pipeline projects. We know that not all those projects will actually go forward, or at least it is our expectation that they won't go forward. We think that we have an opportunity to develop a project that will go forward. I will just leave it at that. I know that is an important part of the business. We move 3.4 Bcf a day on our Texas Gathering system. This is about between 500 million and 600 million a day of that. Barnett Shale is an important area for us. It is an area of growth. We would like to be able to invest some long-term capital there year over the next three or four years to help be a solution to the producer issues out of the Barnett Shale.

Ted Gardner, Raymond James.

Just got a couple of questions for you actually. Looking at the volumetric information that you guys showed, I noticed that the [P-based] processing was down sequentially, but you had increased equity volumes as well. But I seem to recall that you guys have some contracts that are sort of hybrid and allow for some switching between the structures. I was just wondering if that is what is going on here. And if so, if you might give us a little bit more color on that.

Bill Oredmann, who runs our processing business, has a real good handle on that, so he will answer that question.

I think you hit it on the head. We had a lot of producers, as the margins came up this year to what I was as best near record levels, switch over from their P-based kind of conditioning contracts over to processing contracts, which meant we went from collecting fees on those to collecting a percent of the liquid. With liquid prices where they were that usually on an unit per unit basis provided more revenue for us. But that is why you're saying our equity production up a little bit, and maybe the P-based volumes down a little bit.

Secondly, on the Wilson facility, I was wondering if you could give us a little bit of color on what the nature of those repairs are and things surrounding that.

I'm sorry which one?

At the Wilson facility that was down for the quarter. It looks like it will be down through the second quarter of '07 for repairs.

Let me give you a brief update. Unfortunately it is pretty technical, so I don't want to spend a lot of time here. But let me say this. Wilson is a very important storage facility for us. It is on our Texas pipeline system. It is located in the Upper Gulf Coast area, kind of strategically between San Antonio and Houston. We have four primary caverns there. It is salt dome storage -- kind of classic salt dome storage. The storage facility has been there almost 30 years now.

We conducted a series of tests on the casing of the four storage caverns earlier this year. We determined that there might be some weakness in one of those caverns. To fully test to the extent that we like to test it you have to actually unload the caverns, take the natural gas that is stored there out, so you can run a cavern -- I'm sorry a camera down in the cavern itself and take pictures of the casing. We did that. Once we ran that test on the first well, we decided that based upon the mode of operation of that storage facility over the past ten years or so which we have experience with that we might want to check the other three caverns as well.

And over the past six months it has been a steady process of taking gas out of storage and running internal tests on those facilities. During the conduct of those tests we did determine that we needed to experience some repairs there. We brought in an engineering firm and they are in the process of repairing those caverns one at a time.

The charge in the quarter comes from economically having to take the gas out of storage, give it to someone else, a third-party, usually a trading firm, and they give that back to you at a point in 2007 in which you think the repairs will be completed. And you're going to put that gas back in the storage facility. Because of pricing between the time we took it out and the time we have to put back in next year, we have to take a charge. That is a classic park and loan type strategy in the reverse though. As opposed to the storage operator parking and loaning gas, it is actually the marketer who is parking the gas for us, and then he will give it back to us in 2007. So there was a charge associated with that.

We also took, Mike, about $3.5 million in repair costs in the second quarter. We originally estimated what the repair costs for those casing situations would be. Hopefully, that is enough background on that. We fully expect the caverns to be back in service sequentially beginning in January of 2007 for wintertime service, and all the way through April/May of next year. So we are in very good shape to be able to meet our customer demand. It is unfortunate we probably won't make as much money at that business through the winter of '06 and '07 as we thought we would. But on the margin we're not going to lose a whole lot more than what we already have.

That 6.6 million is just a onetime charge then? It is not something else?

Yes. It is a onetime charge. It is essentially marking to market the effect of loaning the gas out and getting it back in April/May of next year.

My last question just concerns the Texas Intrastate system. You mentioned in the press release that volumes were down about 6.6% year-over-year. I was just wondering if any of that had anything to do with shut-ins anywhere on the system?

No, absolutely not. It had to do with the fact that on the margin we had a very hot July/August, September of last year. And so power plants were running on the system at a higher rate than they were this year. We had a reasonably mild summer down here, so it was just an impact of on the margin gas-fired power generation demand.

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