Enterprise Products Partners LP (EPD) 2007 Q1 法說會逐字稿

(OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect now. I would like to the conference over to Mr. Randy Burkhalter.

Thank you. Good morning and welcome to Enterprise Products Partners' conference call to discuss earnings for the first quarter. Bob Phillips, Enterprise's President and CEO, will lead the call, followed by Mike Creel, the Company's Executive Vice President and CFO. Also included on the call today from Enterprise is Dan Duncan, our Chairman and Founder, as well as other members of our senior 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 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.

With that I'll turn the call over to Bob.

Thanks, Randy. Good morning to all of you; thanks for joining us. Let me do a quick intro, and then I will turn it over to Mike, and then I'll come back and give you kind of our regular update on industry fundamentals and our projects.

I think this is the first quarter of what will be a significant year in the history of Enterprise Products. I think we delivered a very solid quarter to start the year off. Mike will go into great detail and normalize the two quarters for you for comparison. And after that, I think, you will agree with us that we performed as expected in the first quarter, and we have great visibility of growth throughout 2007. In fact, I think there was some confusion about what consensus is. But, clearly, First Call has consensus at $0.19. So, we're very pleased with the quarter that we've delivered here, and we think the underlying fundamentals continue to be very strong.

Let me also remind you that part of Enterprise's strength as a midstream player, and our attraction as the largest MLP, is the size and diversity of our value chain and our businesses. From quarter to quarter, our investors clearly benefit from this diverse set of midstream businesses that we operate that are all structured to generate a very steady stream of growing cash flow. Different businesses, of course, will perform at different levels from quarter to quarter, based on changing market conditions. But the sum of the parts at Enterprise should always generate a steady, growing cash flow over the long-term.

And furthermore, because of our size and scale, investors in Enterprise get to invest in some of America's best energy infrastructure projects. Because we're involved in so many different projects over so many different regions, it's this broad portfolio of organic projects that truly separates Enterprise from the other MLPs in our sector, and, I think, the discipline that we show at Enterprise in making good investments that will drive long-term value for our investors. So remember those principles as we go through the numbers and as we talk about this quarter's performance, your expectations for us throughout the year, and the status of our projects.

Mike?

Thanks, Bob. Bob was right; Enterprise did have a great quarter. We had a solid operating performance, as our NGL Pipelines & Services segment, the Offshore Pipelines & Services segment, and the Petrochemical Services segment, each reported increased gross operating margin over the first quarter of last year.

The Partnership also learned its first fees on the Independence Hub platform this quarter after it was successfully installed in the Eastern Gulf of Mexico last month. Bob will talk about the Independence project more in detail in a few minutes.

Revenue increased a little over 2% year-over-year to $3.3 billion for the first quarter of 2007, and gross operating margin this quarter increased 4%, to $324 million from the $313 million in the first quarter of last year. EBITDA was 305 million this quarter, compared to 301 million for the same quarter last year.

Insurance costs this quarter were $8.7 million higher than the first quarter of last year. And keep in mind that the first quarter of 2006 also benefited from $10 million of recoveries from business interruption claims related to Hurricane Ivan -- all of these things somewhat skewing the quarter-to-quarter comparisons.

Distributable cash flow totaled 222 million for the first quarter, resulting in a distribution coverage ratio of 0.9 times for the quarter. We expect stronger distribution coverage during the remainder of this year as our cash flows increase from capital projects that will be put into service, including the Independence Hub, which just recently began generating cash flow.

Last week the Board of Directors of our general partner declared an increase in the quarterly cash distribution rate of $0.475 per common unit, or $1.90 per unit on an annualized basis. This represents a 6.7% increase over the distribution paid with respect to the first quarter of 2006, and this is our 11th consecutive quarterly increase in our cash distribution rate.

Now turning to business performance, the NGL Pipelines & Services segment had a solid quarter, with gross operating margin increasing 12%, or $20 million, over the first quarter last year, to $191 million, with each of the business lines within this segment reporting higher gross operating margin for the second consecutive quarter. Gross operating margins for the first quarter of 2006 benefited from $8 million of insurance recoveries from business interruption claims.

The largest increase came from NGL Pipelines & Storage, which rose 14% to $79 million of gross operating margin, compared to $69 million in the first quarter of last year. The biggest reasons for the improvement were margins on Enterprise's DEP South Texas NGL pipeline system, which was placed in service during January this year, higher NGL and petrochemical storage fees earned at our Mont Belvieu storage and petrochemical complex, and increased propane deliveries on the Dixie pipeline. NGL transportation volumes in the first quarter increased 11% to 1.6 million barrels per day, compared with 1.4 million barrels per day in the first quarter of 2006.

First quarter 2007 gross operating margin from the NGL fractionation business increased approximately 50% over the first quarter of last year to $26 million. Total fractionation volumes were 351,000 barrels per day, up 37% from the first quarter of last year, primarily due to our Norco fractionation facility in Louisiana, which was idle in the first quarter of 2006.

Also contributing to quarter-to-quarter improvement was the completion of a 15,000 barrel per day expansion at our Mont Belvieu NGL fractionator during the second quarter of last year. Volumes for this facility were 175,000 barrels per day, compared with 140,000 barrels per day in the same quarter of last year.

The natural gas processing and related NGL marketing business reported gross operating margin of $86 million in the first quarter of this year. That was $1 million higher than the first quarter of 2006. Gross operating margin this quarter includes about $3 million related to our July 2006 Encinal gathering system acquisition, and $1 million from the Pioneer plant that we acquired in March of last year.

Our Louisiana gas plants have increased gross operating margin this quarter due to higher processing margins and volumes compared with last year.

Our Chaco gas processing facility also had higher gross operating margin, as a result of increased natural gas volumes received from the San Juan gathering system. Partially offsetting the improved performance of our processing plants was lower gross operating margin from our NGL marketing business compared to the very strong quarter in the first quarter of last year.

Equity NGL production, which are the NGLs we earn and take title to by providing processing services, increased 21% this quarter to 70,000 barrels per day. That compares with 58,000 barrels per day in the first quarter of last year. Fee-based processing volumes increased 33% to 2.4 billion cubic feet a day for the most recent quarter.

Our Onshore Natural Gas Pipelines & Services segment reported gross operating margin of $77 million this quarter, compared with $97 million in the same quarter of last year. Onshore transportation volumes increased to 6.3 trillion BTUs per day this quarter, compared with 6.1 trillion BTUs per day in the first quarter of 2006. Most of the decrease in gross operating margin was attributable to lower revenues from the San Juan and Permian natural gas gathering systems, and the Texas intrastate pipeline.

A significant portion of the gathering contracts on the San Juan system have fees tied to natural gas price indexes in that region. Those averaged $6.26 per MMBtu in the first quarter this year, and that compares with $7.16 per MMBtu in the first quarter of 2006. Gross operating margin from the San Juan gathering system was $35 million this year, compared with $39 million last year, and volumes were 1.1 trillion BTUs per day this quarter, compared with 1.2 trillion BTUs last year.

Gross operating margins were lower on our Texas intrastate pipeline system, primarily due to lower average transportation fees and a decrease in volumes. Gross operating margin from our natural gas storage business declined about $5 million quarter-to-quarter, due to additional expenses related to the repairs of the Wilson gas storage facility in Texas. We expect one of the Wilson caverns to be back in service next week, providing about 1.6 billion cubic feet of working gas capacity.

Gross operating margin for our Offshore Pipelines & Services segment increased $20 million in the first quarter of 2007 from $17 million in the first quarter of 2006. That 2006 period also included $2 million of recoveries from business interruption insurance. The largest contributor to the increase was our platform services business, which had a 64% increase in gross operating margin to $14 million in the first quarter this year. This business earned $4 million of demand fees during the quarter from the Independence Hub platform, which was successfully installed last month. We also received revenues from East Cameron 373 and the Garden Banks platforms, which were not in service in the first quarter of last year.

Gross operating margin from Offshore Natural Gas Pipelines was $9 million for both quarters in 2007 and 2006. The total Offshore Natural Gas transportation volumes were 1.4 trillion BTUs per day in the first quarter this year, down a bit from the 1.5 trillion BTUs per day for the first quarter of last year.

Lower volumes on the Highland Offshore system due to third-party pipeline outages were partially offset by an increase in volumes on the Phoenix system, which was in service for only a portion of the first quarter of last year.

Gross operating margins from offshore oil pipelines increased to $4 million in the first quarter of 2007 from $2 million in the first quarter of 2006, due to an increase in transportation volumes, primarily on the Marco Polo, Constitution and Poseidon oil pipelines. Total offshore oil transportation volumes were 153,000 barrels per day in the first quarter this year, 35% higher than the first quarter of last year.

The improvement in gross operating margin from Enterprise's offshore assets was partially offset by higher insurance costs, which were $6 million higher than the first quarter of 2006. And that 6 million is the part attributable to the offshore assets.

Gross operating margin for our Petrochemical Services segment rose 37% this quarter to $38 million, compared with $28 million in the same quarter of last year. Our butane isomerization business gross operating margin increased $3 million over last year to $21 million, primarily due to a 13% increase in volumes.

Propylene fractionation and petrochemical pipelines had $18 million of gross operating margin in the first quarter this year, compared with $21 million last year. This decline in gross operating margin was primarily related to lower margins on polymer-grade propylene sales. Petrochemical pipeline transportation volumes increased 17% over the first quarter of 2006, to 102,000 barrels per day.

Our octane enhancement facility was idle for about half of the first quarter this year, and for about 75% of the first quarter of 2006; in each case, for scheduled maintenance activities that are planned for periods when demand for motor gasoline and gasoline additives is seasonally low. This business recorded a loss in gross operating margin of $1 million for the first quarter this year, compared with an $11 million loss last year. Higher isooctane sales volumes and lower maintenance costs were the primary reason for the reduced loss quarter-to-quarter in gross operating margin.

Operating income for the first quarter of 2007 was $188 million, compared with $194 million in the first quarter last year -- again, reflecting higher insurance costs in 2007, as well as the insurance recoveries from business interruption claims that occurred in 2006.

Depreciation expense increased to $119 million for the first quarter of 2007 from $105 million from the first quarter of 2006. This is primarily due to acquisitions and new assets placed into service, including the Independence Hub platform, the Encinal gas gathering system, the DEP South Texas NGL pipeline, and our expansions of the Mid-America NGL pipeline, the San Juan gas gathering system, and our Texas intrastate pipelines.

D&A expense was $17 million for the first quarter this year. That's about $3 million higher than the first quarter of last year, which benefited from a $1.7 million favorable credit. It's also $1 million lower than last quarter.

Interest expense for the first quarter 2007 was $63 million, up from the $58 million in the first quarter of last year. Average debt outstanding, including 100% of our hybrid debt securities, was $5.4 billion in the first quarter of 2007, compared with $4.7 billion in the first quarter of last year.

The provision for income taxes increased $6 million from the first quarter of 2006 to $9 million this quarter, primarily due to the accrual for the new Texas margin net -- Texas margin tax.

Net income was $112 million for the quarter, compared with $134 million in the first quarter of last year. Variances from the first quarter 2006 include $15 million of additional depreciation expense this quarter, a $9 million increase in insurance costs, a $6 million increase in income taxes -- again, the Texas margin tax -- 5 million more in interest expense, and minority interest of 3 million. Also, the first-quarter results from last year include the benefit of approximately $10 million of insurance recoveries from business interruption claims.

Capital spending in the first quarter this year was approximately $614 million, including sustaining CapEx of about $26 million. We spent roughly $19 million for pipeline integrity this quarter, with 8 million of that recorded as an operating expense, and the balance being capitalized. We expect to spend another $30 million or so on pipeline integrity during the remainder of this year.

At the end of the first quarter we had $5.5 billion of debt, including 100% of our hybrid debt securities and including Duncan Energy Partners' debt, which is a consolidated subsidiary of ours. Consolidated debt to total capitalization, adjusted for the average equity content of the hybrid securities, was 41.8%, and we had liquidity of approximately $881 million, including availability under our $1.25 billion revolving credit facility and our unrestricted cash on hand. Our floating rate exposure was about 29% of total debt at the end of the quarter, and that includes our share of project financings. The average life of our debt was approximately 14 years, and the average cost of that debt is approximately 6.1%.

The last 12 months' EBITDA through March 31, 2007, as defined in our credit facility, was approximately $1.3 billion, resulting in a debt to last 12 months' EBITDA ratio at the end of March of about 3.64 times.

Before I give the call back to Bob, I'd like to say a few words about Enterprise GP Holdings. Enterprise GP Holdings' first quarter net income was up 17% year-over-year at $26.1 million, or $0.29 per unit on a fully diluted basis. The Partnership announced last week that it increased its quarterly cash distribution to partners to $0.365 per common unit, or $1.46 per common unit on an annualized basis. This distribution represents a 4.3% increase over the distribution paid with respect to the fourth quarter of 2006, and a 24% increase over the $0.295 per unit paid for the first quarter of 2006. Enterprise GP Holdings distributable cash flow was 33.4 million for the first quarter of 2000, providing 1.03 times coverage of the distribution to be paid on May 11.

With that I'll turn the call back over to Bob.

Thanks, Mike. I think we had a very solid quarter, and the outlook is promising for the remainder of the year as well, with continuing strong fundamentals, and as you all know, about $2.5 billion of new projects coming online throughout calendar year 2007.

Let me first touch on the very strong fundamentals. As you know, producers are continuing to aggressively drill throughout the country, particularly in the basins that we operate. The U.S. rig count topped 1700 in January of this year and continues to go up.

We're seeing significant year-over-year production increases in the areas that we operate. The Rockies and the Barnett Shale. Solid production in the San Juan, Permian and South Texas. In fact, just a quick note, year-over-year, Barnett production is up 30%. Piceance production is up 18%. Jonah/Pinedale production is up 15%, and the Permian is up 2% in the areas where we have gathering systems. So, we're very pleased with producer response to high prices in the areas that we operate.

Processing margins continue to look very favorable for the remainder of 2007. As you know, gas to crude ratios have been in the high 60% range over the past few months. When you look at the forward strips, they remain in the 70 to 75% range, gas to crude ratios. And they look particularly strong in the Rockies due to the widening gas basis. And of course, that will positively impact our Meeker and Pioneer plants when they come onstream later in the year.

Petrochemical demand for ethane and propane remains very stable. Demand for ethane from the ethylene industry is forecasted at about 730,000 barrels a day. That compares to about 740,000 barrels a day for the three-year average 2004 through 2006. So, solid demand from the petchems for ethane.

Propane inventories remain seasonally and historically low, due to the 50% colder weather that we experienced in the past few weeks. That brought inventories down, tightened up the market, prices are high, and also led to some of that very strong throughput that Mike talked about on our MAPL and Dixie pipelines.

Refinery demand for NGLs also looks very bullish for this time of year. Through the year, gasoline demand is expected to be up 2% year-over-year. But we've seen an early push, early strong pull for the motor gasoline pool. And this strong demand, of course, positively impacts the value of our butane and octane enhancement businesses, and a lot of the NGL products that move through our value chain. So, the fundamentals look good from wellhead to the burner tip.

Now let's turn to our growth projects. First let me just put in a quick plug for our engineering and operations people out there in the field. They're doing a great job for us. We think we have built a great culture at Enterprise for project development and project execution. We've already seen a number of these great projects come on since the first of the year -- some small, some large; diversified from the deepwater trend to the Mid-Continent. So, hats off to the guys out in the field that are doing a great job for us.

In the Rockies, the Jonah/Pinedale gathering system recently topped 1.5 Bcf a day. That's the high-volume mark for that system. Producers are coming out of the winter range restrictions there, which should lead to more drilling and higher volumes, as our Jonah gathering system expansion comes on in phases throughout 2007. Pipeline looping on the Jonah system is now complete, and the Bridger compressor station phase 1 project will be mechanically complete in the June to July time frame. But I can tell you this capacity increase and pressure reduction project that we started last year has already begun to show benefits to EnCana, our largest producer up there. So we're excited about the success of that very large field project up in southwest Wyoming.

Our new Pioneer gas processing plant that we're constructing in Opal is on schedule for a late third quarter in-service date. Engineering is 85% complete and construction is 35% complete on that very important project.

Moving south to western Colorado in the Piceance basin, we have over 1000 employees and contractors on the Meeker I cryo plant project. It's moving along on schedule and is set for a July start-up date after a couple of weeks of start-up processing. Construction on the Meeker NGL lateral, that will take NGLs from the Meeker I cryo plant over to our Mid America Pipeline system, is fully complete and integrated. Work on our Meeker II cryo plant, which we announced last year, is underway. 35% of the engineering has been done. Three-quarters of the long leadtime items have been ordered. That Meeker II cryo plant expansion is placed in service in 2008.

Importantly, we just recently received BLM approval for the right-of-way on the ExxonMobil central treating facility that we are constructing for Exxon in the Piceance basin. Some of our long leadtime items have been ordered, and construction work is set to start this quarter. So we're making good progress on the big 30-year Exxon contract.

As you know, we announced in December the acquisition of the Piceance Creek gathering system, which extends our value chain all the way down into the southern portion, the very active southern portion of the Piceance basin. We've now fully integrated that. We got the benefit of volumes from that acquisition in the first quarter. But importantly, once the Meeker plant is up and ready to begin processing, we can shut down the upstream producer on processing facilities and immediately begin to process this very rich gas from the Piceance basin through our Meeker facility.

Evidencing the strong growth in NGL volumes across the Rockies, let me talk about our Mid America Pipeline system. Volumes year over year first quarter to first quarter were up 4.5%. But importantly, in March we averaged almost 225,000 barrels a day. That was up 15% from the first quarter in 2006. So, the very important and timely first phase of 50,000 barrel a day MAPL expansion is now complete. We've recently commissioned all nine pipeline looping projects; that's the first phase of that expansion. The second phase is the pump station work, which is underway at 20 different locations, and it's on track for a September completion date. So, a very timely upgrade of that, as natural gas liquids from all of the plants in the Rockies are starting to show increases, with the expectation of big increases when we bring Meeker on in the third quarter and Pioneer on at the end of the third quarter.

Now, these increased NGLs that will flow down the Mid America Pipeline system from our plants and third-party plants in the Rockies will be fractionated at our new 75,000 barrel a day Hobbs fractionator. We're also making great progress there. We've got over 600 people on that job, construction of the fractionator. And related equipment is about 70% complete. And we're very much on schedule for a July 2007 in-service date.

So you can see how all of the Rocky Mountain projects are beginning to line up, from the gathering system expansion at Jonah, all the way down to the new fractionator at Hobbs.

Let me move to Texas. Our Barnett Shale project -- right-of-way and survey work on the Sherman extension is underway. Pipe has been ordered, COMPRESSOR design work is being finalized, and we're making good progress on that project, which will be placed in service in late 2008.

In the Houston area we've commenced service under that new CenterPoint transport and storage contract that we announced last year. We're making real good progress on completing all the city gate utility connections, and CenterPoint is beginning to pay us demand charges under that contract.

We've also recently expanded our transportation agreement with the City of Austin to construct a new pipeline to their largest power plant in East Austin, accommodating the significant growth in that area. So that's another expansion for a utility customer.

At Mont Belvieu we have completed a non-binding open season to convert NGL caverns to natural gas service. We're very pleased with the results and we're moving forward with that project. We'll let you know more as that project develops, but we like the look of that.

On the NGL side, the guys signed a new long-term contract with INEOS, which is the former BP Chemical, to supply EP mix, a significant amount of EP mix from either our Seminole system or backhauled from Mont Belvieu. The interconnects for that project have been completed and service is scheduled to start on May 1st. So we're excited about that new opportunity to serve INEOS, one of our largest petrochemical customers.

At Mont Belvieu, two other important expansions are nearing completion. Our propylene splitter number 4 project is about 65% complete. It's on budget, and it's on schedule for a July start date; we're excited about that, given the demand for propylene and the tightness of that market.

Our import/export expansion project on the Houston ship channel is also being completed in phases. We've already benefited from the increased exports over the past few months as that [arb] was pretty strong during the winter, and -- during the European winter. So a lot of the export capacity is already in place. We're now finalizing the import capacity, and that project should be completed by the end of May or early June.

Moving to the Gulf of Mexico. As Mike said, we're very excited about the completion and installation of the Independence Hub, which was installed in March. The pipeline risers have been connected. Our 24-inch takeaway pipeline has been tested. We are currently de-watering that pipeline and we'll be ready for gas production by the end of May.

Pleased with the progress that the producer group is making. Anadarko has taken over operations of the platform. They are continuing to connect flowlines and umbilicals; making very good progress there. 12 of the 15 wells that were pre-drilled have been completed, and we continue to remain optimistic about first production late in the summer.

Final note, over in Mississippi at Petal, we're nearing completion on that natural gas liquids cavern conversion project we announced last year. It's fully subscribed at 2.85 Bcf, and it will be placed in service in July as well.

So, a lot of great progress on all of these projects, from the Rockies to the deepwater trend. We're excited about the performance of the Company during the quarter, and we're very excited about what the next three quarters look like in 2007.

So with that update, Randy, we'll turn it back to you for questions.

Fran, we're ready to take questions now.

(OPERATOR INSTRUCTIONS). Yves Siegel.

Number one, housekeeping. Do you have an update on what you think maintenance CapEx will be for the year?

That's going to run somewhere in the neighborhood of 150 million or so.

Bob, can you again just review what you see happening in the intrastate Texas market?

Yes. Let me just give you a couple of statistics to start with. Gas production in Texas is up sharply. It's being pulled by the Barnett Shale, but we're seeing good performance all across the state. You'll recall in James Lytal's presentation at the analyst meeting that he showed a number of different areas, from South Texas over into the Maverick Basin, the West Texas Shale -- which is the equivalent of the Barnett Shale out in the Permian area -- and then, of course, the big increases in Barnett and Bossier.

So at present, Texas produces about 16.5 Bcf a day and consumes between 10 and 11, based on seasonality. So we're an export state. So all three major pipelines in the state, Enterprise, Kinder and Energy Transfer, are all aware of long-term production increases that we're currently experiencing and that we all expect over the next five to 10 years. So we're all looking for export projects. The ones that have been announced, of course, are related to the Barnett Shale. We're very fortunate to be able to lay a project through the middle of the Barnett Shale that not only effectively unloads our system, with a lot of this excess production from the state of Texas to the interstate markets, but also gives us an opportunity to tie into a lot of processing plants and gathering systems along the route, right through the middle of the Barnett Shale. So we're excited about that.

Competition is pretty stiff. We've been very successful in the Houston area to take about 20% of that market away from the other two competitors. As I said, that project just started in April, and we're drawing demand charges from CenterPoint. So we're excited about building our pipeline system into Houston; as well, expanding our storage facility at Wilson to accommodate that Houston business.

Central Texas remains our strong point. It's where we have the majority of market share -- San Antonio and Austin. We recently extended by five years our agreement with San Antonio. And as I said, we just announced a new extension with the City of Austin to their largest power plant, which we had not provided gas service before. So in that area we're taking market share away from some of the other pipelines.

The Mont Belvieu storage expansion will be an important long-term project for us. It enables us to use our Texas pipeline system for the benefit of Houston ship channel and Gulf Coast area refineries and petchems that we do a lot of NGL business with, but we haven't been able to provide them with a lot of gas service over the years. So we're excited about a potential of 20 Bcf of natural gas storage out of our Mont Belvieu NGL cavern. I know the other guys are looking at storage expansions as well.

So, in each of the geographic regions, we are seeing the opportunity for growth and supply. And James and his team are very focused on that. In the customer service side, we've made major inroads in Houston. We continue to expand our market share in Central Texas. I think it's a very exciting area to be in right now and we like our position.

Having said what you just said, last question. How would you characterize the acquisition market right now, from your perspective?

It's frothy. That's probably a good word to use. Some of the multiples that we've seen are just off the charts. We continue to look hard at most of the nice assets that come out in this market. But we have so many impressive organic investment opportunities, that unless an asset is not only a bolt-on, but has significant synergies and significant downstream economics incrementality, then we're just not going to be able to buy at the level that maybe some of the private equity guys are buying. I guess I would also say that it appears that there's been a little bit of a slowdown in the number of assets coming to the market. And I think other guys that are in our position that see almost everything would probably agree with that. Mike, you want to comment on that?

I think Bob's got it exactly right. And the benefit that we have, as you know, is that we have got so much organic growth that we really aren't dependent on the acquisition market. We've got a lot of assets; about $2.5 billion of assets that we're building and expanding that go into service this year, and are already starting to fill up the CapEx program for 2008 and beyond.

Sam Arnold.

A question for you on -- basically, listening to a lot of the E&P company calls thus far, a lot of them have been noting that their service costs have been going down quite a bit. They're looking at 10 to 20%. I'm wondering have you had any discussions with them about actually increasing activity? Because I know some of them have mentioned trying to do an uptick because of the lower service costs. Are you kind of plugged into that, and where would be the areas you're seeing?

We are plugged into that. And I'm going to let James Lytal talk specifically about this area. We bought an asset last year down in South Texas that is an area where, on the margin, producer decisions to drill or not drill are based almost entirely on their ability to get service equipment and get those costs embedded in their drilling programs at a reasonable price. I think that's an area where we are beginning to see an uptick in drilling quarter-over-quarter, just based upon what has been a slight decline in service costs. James?

Bob's right. This area down in South Texas -- actually, they slowed down drilling -- one, due to lower prices the latter part of last year; but two, they've seen almost doubling in some of their costs to frac wells, to drill wells and things like that. And now we're seeing them back out drilling with lower costs and higher gas prices. A lot of the other areas we focus on like the Barnett Shale, they have such a low finding and development cost that we haven't seen them slow down. I think they're pumping as much in there, spending as much as they can in those areas to grow them. So, I think we have a nice mix. I think most of our areas, though -- we're in all the basins where even if we saw a little bit of pullback in price or increase in costs, they're going to stay very active.

Also, is ExxonMobil -- I know you can't necessarily comment too much on them, but I think they stated they were going to drill 200 wells in Piceance this year. Is that correct?

I think that is very much correct. And I would ask Jim Teague, who put that transaction together and has basically built all the infrastructure in the Piceance basin from scratch. Jim, you want to comment on what's going on in Piceance?

What we see right now is -- you nailed Exxon. Exxon is quite vocal about their plans and their excitement about their Piceance position. EnCana is our other anchor tenant. EnCana not only continues a fairly aggressive drilling program; I guess they're (inaudible) they've done some farm-outs with other parties because they just can't drill their acreage as fast as they would like to. They've done farm-outs that we think will enhance the rate of drilling out there beyond what we really expected when we put (multiple speakers) Meeker deal together.

That's kind of the question with Exxon; I was just wondering about their capacity and people to drill that many wells, if you think they can do it, or if they're going to be looking at farm-outs.

I don't think -- personally, I don't know. I think Exxon can pretty well do whatever they say they want to do.

Let me say two things. One, they already did their farm-outs; they did a farm-out with XTO right off the bat. They kept the acreage that they felt like they could drill. More importantly, they tell us they're going to drill over 4000 wells during the lifetime of this program. I think the number is 4800 wells, Jim, during the lifetime of that program. We just are on phase 1 right now, so we're building out that CTF facility, that central treating facility, and staying ahead of their drilling program and their production profile. And (multiple speakers) Exxon, and it's the only U.S. Lower 48 domestic development program they have, so I think their entire U.S. domestic team is dedicated to the success of that Piceance Basin play.

I think they're on record as saying they expect their production out of the Piceance to peak at around 1 Bcf a day.

And how big is the plant going to be?

Our deal is dedication to the first 200 million, which is the first phase of their development.

Okay. And are you guys designing the treating facility so it can be scaled up, [as far as] like utilities and common stuff, so you could add more trains going forward?

We fully expect to participate in 1 Bcf a day.

John Edwards.

Just on the -- what's the -- what run rate on depreciation are you guys expecting for the rest of the year?

We're at $121 million for the quarter, and that's kind of interesting. Most MLP investors probably don't care that much about it since it's non-cash, but that number will, obviously, go up as we continue to put assets into service. For people that are focused on net income, they probably kind of miss the picture for Enterprise, and for any other MLP that's growing quickly, because these assets that we put into service take a while to ramp up production and volumes, but the depreciation starts on day one based on 100% of the cost. And so, really, the focus is probably more appropriate on the cash flow that it generates as opposed to the depreciation. But having said that, we're looking at 121 million now, and that will probably go up. Maybe 5 million a quarter is a guess.

I just wanted to calibrate my model; that was the main thing. And then, you guys were talking a bit about how fast production is ramping up. Do you know where Barnett is now in terms of the actual numbers?

It's about 2.25, 2.2, 2.25 Bcf a day. Is that right, James?

That's correct.

And then, just kind of following up on Yves' question on acquisitions. In terms of the total, I guess, total number of deals you're seeing, and approximate dollar volume of deals now versus a year ago, can you comment on that?

We don't track it that way. Frankly, we see a lot of transactions that come through, and a lot of those we kind of disregard up front because they're not connected to any of our assets, really don't provide any strategic value. But I will say, as Bob mentioned before, that we don't see as many transactions coming up. Some of the things that we're seeing are probably lesser quality. And certainly in this kind of a pricing environment, I think, people are having a more difficult time making sense of it.

This is a very subjective cancer. We are seeing a definite slowdown in asset sales from the majors. That doesn't mean there aren't any out there. There are a couple that we're working on that are out there. We're also seeing a pickup in the sale of smallish-type midstream companies that have private equity support. And there's a sense that it's time to sell those assets at these prices. So those are the two trends that I think Mike and I agree that we are seeing right now.

I guess the other thing I was thinking about is, do you think -- with your setting up Duncan Energy Partners, do you think you're going to see competition in that front, other people trying to set up, in effect, MLP affiliates that will have zero IDRs as a low cost to capital funding mechanism?

We've been focused on the cost of capital for years, going back to December 2002, when our general partner eliminated 50% (inaudible) distribution right. We've not seen a lot of other partnerships that are either that focused on it or that really want to talk about it. Certainly for a sponsor of the Partnership that owns the general partner and doesn't own much of the common units, their focus is really on how do you increase distributions and get catch up to the GP, as opposed to Enterprise, where we're really looking at how do you grow the total value of the Partnership, which benefits not only the common unitholders, but also the owners of Enterprise GP Holdings as well. So we think we've got a more balanced, more sustainable approach. The short answer is I don't expect a whole lot of other MLPs to follow us.

Ross Payne.

Just for budgeting -- I mean, for modeling purposes, can you tell us roughly what the CapEx numbers are going to be for Q2, 3 and 4, individually?

I can call you after the call.

I don't have it broken down. But obviously, for the benefit of everyone else, total CapEx for the year is in the range of 1.7 billion to 1.8 million. And I wouldn't expect a whole lot of variability quarter-to-quarter.

That's good. Also, any idea, guys, on how much debt is outstanding currently associated with projects that have not started to generate EBITDA, so we can apply some kind of multiple to that to get to a pro forma number on what we can expect EBITDA-wise out of some of these substantial projects coming on for the remainder of the year? That may be something you have to get back to me as well.

If you go back to the presentation that we gave to analysts a month or so ago, we've got capital laid out there, capital that's going into service; about $550 million in the first quarter this year; about 330 million in the second quarter. Third quarter is a banner quarter for us; it will be about $1.25 billion of capital that goes into service, and about $350 million in the fourth quarter of this year.

Now, having said that, some of these projects, like the Independence Hub, went into service, or at least started earning some fees in March. But it won't be at full capacity probably until sometime in 2008 at the earliest. We don't expect first flows until late summer, and it just takes a while for that production to ramp up. It's kind of hard to predict when those volumes are going to get to us and how fast they're going to ramp up.

Some of these projects, a little more immediate, but it's hard to kind of predict with a lot of certainty the total cash flow with respect to all of that capital. We also have capital that we put into service last year that's still ramping up, and some of our 2005 projects still have room to increase volumes and cash flows. So I wouldn't look only at the assets that go into service this year; I'd look back at 2005 and 2006, because some of those are going to add to cash flows this year as well.

Great. Mike, also, should we -- is there any kind of level of debt to EBITDA we ought to be thinking about here? Run rate -- you're at 4.5, and you've got a good amount of CapEx for the rest of the year. Are you going to keep it in that ZIP code, or -- via raising additional equity along the road? Or should we expect to see that rise somewhat, and need to look at pro forma numbers to show that going down over time?

I don't think that you're going to see a whole lot of change. I think, if anything, that debt to EBITDA will decline a little bit. Certainly we're spending more money, but we're also having additional assets come online. So we're very cognizant of our credit ratings, want to make sure that we keep the rating agencies happy, to the extent we can. And we think we've done that so far.

We did say, I think, in our last conference call, that in terms of our capital program this year -- 1.7, $1.8 billion -- that the majority of that is being pre-funded with equity, both through the hybrid debt securities, the equity offering we did back in September. And so, I think, for 2007 we're in really good shape. We may do another hybrid debt security sometime this year. Kind of hard to tell; look at the market and see what makes sense. But that's about it.

One last question. Year end, what do you -- I asked that question during the analyst meeting; I'm not sure I got very far. Where do you guys want coverage to be of the distribution, just over the cycle or over time?

We recognize that we have a lot of capital that we're spending to grow this business. And as a result, we've been increasing our distribution coverage. You can look at first quarter and say 0.9 times; that doesn't look like an increase. But we look at it more over the year. We, frankly, like distribution coverage to be in the kind of 1.1 to 1.25 times, depending on where we are in the lifecycle of some of these projects. Having said that, we do have a strong desire, though, to consistently increase our cash distributions.

[Louis Shamie].

Congratulations on the quarter, everyone. I just was wondering about maintenance capital, in terms of a run rate that you kind of expect by the end of 2007, going into 2008, if (inaudible) any guidance there.

It's in the range of 150 to 160 million this year; don't really see a huge increase or decrease next year. A lot of this is related to pipeline integrity costs, which we had planned over a long period of time. And it also includes well connect, to maintain our gas flows into our pipeline system.

The other question I had was regarding the Piceance Basin gathering and processing for Exxon. At what point do you think they'll -- they're projected to exceed that 200 Mmcf a day?

I'm not sure I remember. I think that's about -- I think -- they're going to have gas behind that plant ready to turn on whenever we bring that plant on. And I think it's looking at about three years out that they expect to be at the 200 million a day.

Okay. And then at that point you'd look to see if there's potentially some expansion that you could do for your infrastructure to support their drilling?

We're beginning the process of working that today, now.

Barbara Chapman.

Some analysts have speculated that as Anadarko works through asset sales at Independence, properties are something that they could be looking to reduce or sell. Can you review for me the exact ownership of the Hub? And then, what are the properties in the Independence system, for lack of a better term, that Anadarko owns, and if they sell out or sell down, what kind of effect that could have on your investment in Independence?

I'm glad you asked the question the way you did, Barbara, because it allows me to clarify what is a continuing confusion out there about the ownership of the Hub. Anadarko does not own any of the Hub; they lease it from us. Enterprise owns it 80%. Helix owns it 20%. It's like an apartment building that we built and we lease it out to our tenants. The tenants are four companies -- Anadarko, which owns a little over 50%, because of their merger with Kerr-McGee, who was an original Atwater Valley producer in the group; Devon; Dominion, which Dominion of course is being sold now as well; and Hydro, which is a new player who just bought Spinnaker's interest. So it's not unusual for producers in the deepwater trend to buy, sell or trade interests. In fact, that producer group is nowhere near the original six producers that we had when we sanctioned the project some four years ago.

So it won't -- I guess it won't concern us that Anadarko may be looking to sell their interest. I'm quite surprised I've not heard that before. Haven't even heard that speculation. Let me tell you, Anadarko is a very experienced deepwater operator. They are our partner, collaborator on the Marco Polo project. We're all going together at the Offshore Technology Conference next week to receive (technical difficulty) achievement award between Enterprise, Helix and Anadarko for Marco Polo. We just don't see any indication from them that they're looking to exit the deepwater trend or to sell those properties over there. We think that they promote those properties as part of their long-term value creation proposition out in the deepwater trend. We know that from our estimate and the producer estimates, there's almost 2.5 TCF of reserves associated with all those fields that are dedicated to us. It's a long-term project. Anadarko has been an aggressive leaser out there as the MMS has put additional lease properties on the market. So I just don't think it's going to be a problem for us. Certainly it will depend on who they sell it to, if they sell, because they are in fact the operator of that field out there. I hope that answers are question.

One follow-up question. If, though, they were to sell the lease, the field leases, would somebody else have to come in with equipment to drill, and is there the equipment available? Could there be a lag time in when you have the oil -- the product coming out of the wells?

That's a great question. Let me take you just a couple of steps back. All of these leases were purchased by these different operators many years ago. They started in 2001 drilling wells out there. The very first well was drilled in 2001. The last well was -- the first well was Merganser. The last well was [Q]; it was drilled about 18 months ago.

There are 10 fields and 15 wells already drilled, 12 of which have already been completed. So there's only three wells left to get a piece of equipment out there and complete those wells. There are eight separate flowlines that Anadarko has laid up to the Hub. That's effectively the gathering system. All eight of those lines are laying on the seabed floor. Four of them have actually been interconnected to the Hub; the other four need to be interconnected over the next couple of months before they can turn those completed wells on and we'll first production. So, if they sold the leases, they would be selling the leases, the wells, the reserves, and all the equipment that's already been installed to gather that production from the wellhead up to the Hub. Does that answer your question?

So even if there was a change of ownership from the Anadarko position, it sounds like there's very little risk there's any kind of reduced flow through the Independence investment.

But we think none whatsoever. I'll give you one last tidbit so you can feel better about this. The producers have indicated to us something on the order of a 15 to 18-week ramp-up period from the time that they bring the first well on, which we're hopeful it's going to be some time in mid to late summer -- we're still saying third quarter. 15 to 18 weeks -- we should see pretty good flush production by the end of this year.

Yves Siegel.

Just a quick follow-up. Bob, I sort of misunderstood the comments that you made regarding the results in the first quarter and the intrastate Texas market. I wasn't quite sure I understood why you had some -- why they were down a little bit.

Mike, you want to --? Let me just start, and then Mike can follow-up, because he's got the financial and operating statistics.

The Texas market was very solid for us from a volume standpoint. On our Texas pipeline system, our volumes were only down 1% year-over-year. When you're looking at first-quarter volume comparisons, that's all about winter weather. We had a couple of cold fronts that came through here, but frankly, it wasn't much of a winter down here in Texas. So I don't take a lot away from being down 1% year-over-year.

Where we had a problem in Texas were a couple of things. Number one, we had a leak on an offshore intrastate gathering line. Because of that leak we had to shut the pipeline system down; that's a line down that comes in near Freeport. We had to shut that line down, and we had some gas losses. So we accrued for those gas losses in the quarter.

The second thing is, remember that we roll up storage into our pipeline segment there. We continued to have repair expenses at the Wilson storage facility. That was several million dollars as well.

Also in this segment are our Permian Basin gathering systems. And the Permian Basin gathering systems add both a line leak and a higher loss (inaudible) accounted for than they normally have, so we had several million dollars of costs that were accrued there.

And then, the final and biggest impact, negative impact, was our San Juan gathering system. And that rolls up into that segment as well. And so it's hard to just spike out the Texas pipelines and say Texas pipelines did poorly because the segment was down $20 million. It wasn't just the Texas pipelines; in fact, volumes were flat, but we did have a slight decrease in earnings associated with Texas pipelines because of the Wilson storage and that TPC offshore pipeline leak.

I think the other thing is that gas prices in the San Juan Basin were lower this quarter, and we have the gathering contract for index at that price. So consequently, the gathering fees were lower as well.

Sam Arnold.

You've already answered this partially, but the question is on the Independence Hub. You have, I guess you said, 15 slots that are being drilled from the platform, correct? And 12 of those have been completed?

Sam, great question. It again allows me to clear up some confusion. This is a gathering and compression platform. It's not a drilling platform.

So there's no drilling on it at all?

No, sir.

So these are all subsea tieback (multiple speakers)

The drilling has already taken place over the last five years. The producers have used drill ships to drill those wells. Some of them are as far as 60 miles away.

Bob, there's over 200 miles of flowline that's gathering -- the wellheads are sitting on the sea floor, some, as Bob said, 60 miles away from (multiple speakers)

How many subsea tiebacks do you have?

There are eight flowlines going to 15 wells.

Eight flowlines to 15 wells.

And the flowlines are already laid. Four of them are laid and fully connected; the other four are on the seabed floor, and we're waiting for a heavy lift vessel to come back, pick them up and hang the risers. And Anadarko right now is focused on their umbilical program. So the umbilicals are how they control those (multiple speakers) as far as 60 miles away.

So the umbilicals have been late or have not?

About half of them have. They're in the process of doing that right now. That's a different vessel that does the umbilicals.

And have they -- the ones that they have put in, have they tested those, to make sure they do have communication? And they've actually been strung up to the platform itself?

Absolutely. And you have to appreciate the fact that we're not speaking for Anadarko (multiple speakers) ask them those questions. But we do get information as a part of our integrated project team. It was a group of engineers and project managers from all the companies combined that collaborated together to build this monster facility out there. So we get continued information through the integrated project team group at their weekly meetings. And that's what I'm conveying to you is information that we've heard on the status of their operations.

Got it. So, sounds like four of the flowlines have been hooked up and the risers are already connected to the spar. It is a spar, right?

It is not a spar. It is a semisubmersible. It's comparable to a DDCV, deep draft caisson vessel. It's not a spar and it's not a tension leg platform. Why don't you call into Randy and we'll send you a copy of the DVD that National Geographic did and played on Discovery Channel about this as a mega-project.

That would be great.

I'll send that to you, Sam.

One other thing. Ross Payne asked a question about our CapEx spend for the balance of the year, and focusing really, I think, on growth CapEx. Without trying to get too precise, because these are subject to construction schedules, and these are heavily rounded numbers, but it's roughly about $600 million of growth CapEx that we'll expect to spend in the second quarter, about 450 million in the third quarter, and somewhere around 300 million in the fourth quarter.

Fran, I think we're ready to close the call. If you'd give our listeners the replay information please.

To dial into the conference to hear a replay, the toll-free number is 866-378-7468, no passcode required. That will be available through May 4 at midnight.

Thank you, Fran. And thank you, everyone, for listening to our call today, and have a nice day.

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