Enterprise Products Partners LP (EPD) 2008 Q2 法說會逐字稿

Good morning and thank you all for standing by. This is the conference coordinator. All lines will be placed on listen-only until we're ready for the question-and-answer session of today's conference. I would like to remind you that this call is being recorded. If you have any objections please disconnect at this time. I would now like to introduce your first speaker, Mr. Randy Burkhalter, Vice President of Investor Relations. Sir, you may begin.

Thank you Laurie. Good morning and welcome to the Enterprise Products conference call to discuss earnings for the second quarter (inaudible) 2008. Mike Creel, Enterprise's President and CEO will lead the call today followed by Randy Fowler, 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. Also Hank Bachmann will lead the discussion on our Duncan Energy Partners earnings today. 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, 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'll turn the call over to Mike Creel.

Thanks, Randy, and good morning and thank you for joining us on our call today. We had another quarter of record operating and financial results supported by strong performance for each of our business segments.

As we noted in the press release, this is the third consecutive quarter for our pipelines to transport an excess of 2 million barrels per day of natural gas liquids and 8.5 trillion BTUs per day of natural gas. Also for the third quarter in a row, we fractionated more than 400,000 barrels per day of natural gas liquids.

We benefited this quarter from volume and cash flows related to new assets and expansions we completed in the last 12 months. The Meeker and Pioneer gas processing facilities which were completed in the fourth quarter of last year and the first quarter of this year respectively, contributed about $75 million to gross operating margin this quarter. And the Hobbs NGL fractionator completed in the third quarter of last year, generated $9 million of gross operating margin this quarter.

Gross operating margin for the Mid-America and Seminole NGL pipelines was $77 million this quarter, a 61% increase over the second quarter last year driven in part by the 50,000 barrel per day expansion of the Rocky Mountain leg of the Mid-America pipeline which was completed late last year. Despite being down or operating at reduced volumes for 66 days during the quarter due to repairs, Independence Hub and Trail contributed $12 million of gross operating margin this quarter.

These strong operating results underscore the benefit of our geographic and business diversification especially since gross operating margin this quarter was $52 million lower than it otherwise would have been due to lost opportunity from the downtime and repair expenses associated with the Independence project and the Pioneer gas processing plant. About $43 million of this was related to Independence which was taken out of service for repairs on April 8 and then returned to partial service on June 3 and full service on June 14.

Pioneer was out of service for 24 days in April for repairs. Nevertheless, this was our second consecutive quarter of both record gross operating margin and record net income and our third consecutive quarter of record EBITDA. We had $534 million of gross operating margin and for the first time exceeded $500 million of quarterly EBITDA at $506 million. Adjusting for earnings and distributions from unconsolidated affiliates, EBITDA was $515 million for the second quarter.

Distributable cash flow totaled $375 million this quarter after excluding gains and losses associated with interest rate hedging activities. Even with a loss on these hedges, distributable cash flow produced 1.4 times coverage of the $0.515 per unit distribution we declared with respect to the second quarter this year.

We retained approximately $86 million or 25% of our distributable cash flow this quarter while still increasing the quarterly distribution rate by 6.7% year-over-year. For the first six months of 2008, we have retained $212 million of distributable cash flow which provides us flexibility to reinvest in growth capital projects and reduce debt and further reduces our need to access the capital markets. We believe this is very important for our limited partners given the current volatility in the capital markets.

Turning to our business segments, each of our four business segments reported higher gross operating margin this quarter compared with the same quarter of last year. Our NGL Pipelines & Services segment benefited from strong overall demand for NGLs from the petrochemical and refining industries reporting a 52% increase in gross operating margin in the second quarter to $318 million.

Each of the businesses in this segment reported higher gross operating margin this quarter compared with the same quarter of last year. NGL demand for petrochemical production was strong in the second quarter despite annual turnarounds at several ethane cracking facilities. Ethylene steam crackers produced an annual rate of 54 billion pounds or an operating rate of approximately 88% and in June the operating rate increased to 89%.

This high operating rate coupled with natural gas currently priced at approximately 47% of crude oil on a BTU basis resulted in ethane, propane and butane continuing to be the preferred feedstocks. According to the [Hodson] Report, ethane feedstock consumption by the US ethylene industry increased to the highest levels this year averaging 812,000 barrels per day in the second quarter of 2008 compared to 749,000 barrels per day in the second quarter of last year.

Our natural gas processing business posted a 92% increase in gross operating margin of $196 million in the second quarter of 2008 as a result of strong processing margins and increased volumes. About $74 million of the increase was from the Meeker and Pioneer processing plants. If Pioneer had operated for the full quarter, gross operating margin would have been higher by approximately $9 million.

This month Meeker has been extracting an average of 30,000 to 31,000 barrels per day of NGLs on inlet gas volumes of about 600 million cubic feet a day while Pioneer is averaging 29,000 to 30,000 barrels per day of NGLs on inlet volumes of about 650 million cubic feet a day. Construction is well underway on Meeker II which should double the inlet capacity of the Meeker complex to 1.5 billion cubic feet a day and should increase the liquid extraction capability to approximately 70,000 barrels per day. We expect this expansion to be completed in the fourth quarter this year.

Our processing business benefited from strong gas processing margins this quarter. We've taken steps to preserve the attractive margins we have had by hedging approximately 80% of the NGLs we expect to extract from our Rocky Mountains plants during the remainder of this year and about 58% of our expected 2009 NGL production from these plants.

We also had increased gross operating margin this quarter from our South Texas and Chaco plants due to improved gas processing margins and higher volumes. Increased drilling activity in South Texas has resulted in more natural gas being processed by our plants in that region.

We've completed several expansions (inaudible) in the process of expanding other plants in South Texas that in the aggregate will increase our gas processing capacity by about 15% over what it was a year ago adding an additional 250 million cubic feet a day of gas processing capacity. We've also renegotiated roughly a third of our contracts that extended the terms for approximately 550 million cubic feet a day with major producers through 2012 to 2014.

Gross operating margin from our NGL pipelines and [storage] business increased $94 million in the second quarter of 2008 and that is a 42% increase over the $66 million reported in the second quarter of last year. This increase was due primarily to a $29 million increase in gross operating margin from the Mid-America and Seminole pipelines.

Mid-America pipeline benefited from 114,000 barrel per day increase in NGL volumes and higher revenues due to a systemwide tariff increase. Gross operating margin from the NGL fractionation business was $27 million this quarter compared with $21 million reported in the second quarter of last year.

This business benefited from the addition of the Hobbs NGL fractionator which began service in the third quarter of last year. Our onshore natural gas pipeline and services business reported a 48% increase in gross operating margin to $123 million for the quarter compared with $83 million for the second quarter of last year. Most of our natural gas pipelines reported improved results this year.

Gross operating margin for the San Juan system increased $18 million this quarter primarily due to higher transportation fees that are indexed to natural gas prices as well as from NGL and [condensate] sales. The Texas Intrastate System was up $9 million dollars to the increased volumes and higher average transportation and reservation fees.

The Acadian Gas System in Louisiana reported a $5 million increase and our share of the Jonah Gas Gathering System was up almost $4 million. In addition, natural gas storage reported an increase of $2 million primarily from new capacity and pipeline fees at (inaudible).

Gross operating margin for the Offshore Pipelines & Services segment was $35 million in the second quarter 2008 compared with $31 million in the second quarter of last year. Independence contributed a net $12 million to gross operating margin this quarter consisting of about $19.5 million from the Hub Platform offset by a loss of $7.7 million from the pipeline which includes $14 million of repair expense. As I mentioned earlier, the pipeline and the platform were out of service for about two months and a quarter for repairs.

Gross operating margin from the oil pipelines was up $16 million quarter to quarter primarily due to Enterprise's 50% ownership interest in the Cameron Highway Oil Pipeline which benefited from 119% increase in transportation volumes and the retirement of project debt in the second quarter of last year. Our Petrochemical Services segment trended in another solid quarter with 16% increase in gross operating margins of $58 million. The butane isomerization business continued to perform well benefiting from strong demand for high purity isobutane and the increased value of byproducts.

We're very pleased with our performance this quarter setting new operational and financial milestones as well as retaining a significant amount of distributable cash flow to provide us with additional financial flexibility. Our latest distribution increase was our 16th consecutive quarterly increase and the 25th increase we've had since our IPO 10 years ago.

The outlook for the remainder of 2008 continues to look favorable with the Meeker Phase II expansion, the Sherman Extension still on schedule to be completed and to begin operations during the remainder of this year. We expect the Exxon central treating facility to be completed in the fourth quarter this year and to begin operations in the first quarter of 2009 along with our Shenzi oil pipeline.

We're also pursuing a number of other opportunities to develop additional growth projects that would be completed and begin operations in 2009, 2010 and beyond. With that, I'll turn the call over to Randy Fowler for a financial review of the quarter.

Good morning. I will pick up where Mike stopped and briefly discuss the income statement items below gross operating margin. Depreciation and amortization expense increased to $136 million in the second quarter of 2008 from $121 million for the second quarter of 2007 primarily due to increased property plant and equipment from the additions of Independence, Meeker, Hobbs, the (inaudible) expansion, Pioneer, and the propylene fractionator that we put in service last year.

G&A expense decreased to $24 million this quarter from $31 million in the second quarter of last year. If you recall, G&A expense for the second quarter 2007 included approximately $10.5 million of executive severance costs.

Interest expense in looking at that, we reported $96 million of interest expense this quarter compared to $71 million for the second quarter of last year basically on higher average debt balance. Average debt outstanding including 100% of our hybrid securities was $7.6 billion this quarter compared to $5.9 billion for the second quarter of last year. At the same time, capitalized interest decreased $2.8 million this quarter compared to last year due to a decrease in construction work in progress as these new projects have come online.

The provision for income taxes was $7 million for the second quarter of 2008 versus a credit of $2 million for the second quarter of 2007. This increase was due to higher Texas margin tax accruals and higher corporate taxes at the [Ford] Dixie Pipeline Company.

Turning to capital expenditures, we invested $425 million in growth capital projects and spent $44 million in sustaining capital expenditures in the second quarter of 2008. The majority of the capital spent during the second quarter of 2008 was attributable to the Sherman Extension pipeline, the Meeker (inaudible) plant, the Exxon central treating facility and the Shenzi oil pipeline.

Through the first six months of 2008, we've invested approximately $1 billion in growth capital expenditures and spent $69 million in maintenance capital expenditures. Based on our current slate of projects, we're still on track to invest approximately 1.6 to $1.7 billion on growth capital projects this year and between 175 and $200 million in maintenance capital for the year.

At June 30, 2008 we had $7.7 billion of debt including 100% of our $1.25 billion of junior subordinated hybrid securities and $208 million for DEP debt. EPD has liquidity at June 30 of approximately $1.3 billion. Our floating interest rate exposure was approximately 15% at the end of the quarter and the average life of our debt was 17 years with an effective average cost of debt of approximately 5.8%

A key credit metric for Enterprise is our consolidated leverage ratio of debt to last 12 months EBITDA. Consolidated debt includes DEP's debt and is adjusted to exclude 58% of our hybrid debt principal to recognize the average equity content credit given by the rating agencies.

At June 30, our consolidated debt was $7.12 billion. EBITDA for the last 12 months after adjusting for equity earnings and actual cash distributions received from unconsolidated affiliates was $1.77 billion resulting in a consolidated leverage ratio at June 30 of 4.0 times. We've improved this ratio from 4.3 times at the end of 2007 and from 4.5 times at its peak at September 30 of last year.

As I mentioned in last quarter's call, we expect for this ratio to improve as we realize a full 12 months of cash flow from our new major growth projects. Before I finish the call today I'd like to turn it over to Hank Bachmann, President and CEO of Duncan Energy Partners, to briefly discuss DEP's second quarter results.

Thank you Randy. Duncan Energy Partners had another quarter of solid operating results reporting a 45% increase in net income to $6.6 million or $0.32 per common unit for the second quarter of 2008 compared to $4.5 million or $0.22 per common unit for the second quarter of 2007.

Distributable cash flow for the second quarter of 2008 increased 65% to a record $10.8 million from $6.6 million in the second quarter of 2007. In recognition of DEP's improving businesses, the Board of Directors of DEP's general partner increased the quarterly cash distribution rate to $0.42 per common unit, a 5% increase from the $0.40 quarterly distribution rate for common unit paid for the second quarter of last year. The $4.2 million increase in distributable cash flow was primarily a result of higher sales volumes and improved sales margins on the Acadia Natural Gas pipeline system including a decrease in losses from lost and unaccounted for gas, increased NGL storage fees and volumes at our Mount Bellevue NGL storage facilities and lower sustaining capital expenditures.

As we discussed in our annual report last year, in connection with pipeline integrity work on our Acadian pipeline system we encountered significant losses arising from lost and unaccounted for gas which had historically not been experienced by the pipeline system. As a result of a great deal of effort over the past year, we've been able to correct the situation and have alleviated these losses. This quarter, the partnership recorded its highest net income and distributable cash flow since its initial public offering in February 2007.

I believe we can continue to post solid results given the attractive markets we serve, our efficient operating systems and our affiliation with Enterprise Products and it's comprehensive network of integrated assets. Randy?

Thank you Hank. Laurie, now we're ready to take questions both on Enterprise and Duncan Energy Partners.

(OPERATOR INSTRUCTIONS) Mark Reichman, SMH Capital Inc.

Good morning, just a couple of clarifying items. With regard to the three large capital projects that will go into service in the second half, are all three of those slated to -- looks to me they're slated to go into service in the fourth quarter. Are you able to provide any guidance in terms of what the expected gross operating margin contribution should be in the fourth quarter or address it in kind of a volumes context?

Mark, as is typical for Enterprise, we haven't given guidance on the Company in general. We don't give guidance on specific assets. We do talk about obviously with the margins in the area, the volumes that are there - Jim, do you want to talk a little bit about volumes that you're seeing currently at Meeker or what you might see there?

We expect within a couple of months with Meeker II coming up we'll have a couple hundred million a day in Meeker. We expect that we will improve our ethane recoveries by virtue of the fact that we will be able to run both plans together in the intern at an optimum level and we expect the volume to ramp up as we have got a number of projects within the Piceance Basin that's going to enhance the flow of gas to that Meeker plant.

In terms of margins, if you look in the fourth quarter of 08' in the Rocky Mountain area you are seeing margins in the -- and the Rockies from a composite perspective in the fourth quarter -- anywhere from $0.75 to $0.95 a gallon gross processing spread. So we expect pretty strong margins to continue through the year.

We've got Jim Cisarik (inaudible) talk a little bit about the Sherman Extension. You might want to pull that microphone up. You want to just talk a little bit about what you're seeing in the Barnett Shale and kind of what you think the ramp up might look like for Sherman?

Thank you Mike. Actually with the Sherman Extension we are scheduled sometime next week (technical difficulty) a portion of the Sherman Extension in service. So we will put it in interim service and flow it back into our traditional Enterprise Texas pipeline. As of this time, the full-service we are thinking it will be in late Q4 when the Gulf Crossing project becomes in-service as well. At that time, we are projecting that our capacity will be full and flowing approximately a BCF or slightly more.

And then finally, Mark, the Exxon central treating facility, we expect to have that completed by the end of the year but volumes won't be ready to start flowing until the first quarter of '09.

Okay and the other question on the offshore natural gas pipeline business, I noted that there were some producers that had shut in wells for workovers. What would the volumes have been at more normal levels and do you expect that most of that activity is complete?

Yes, I'm not sure we can speak to what volumes would have been on more normal times. These aren't exactly normal times (multiple speakers) we are seeing new production coming on which is always a good thing. But there's always ups and downs out there. We have got Jim (inaudible). Do you want to talk a little bit about any production downtime that might have been offshore?

I think most of the production downtimes that we see, Mike, are introduced (technical difficulty) strictly to maintenance that they've performed on their wells. And due to the current prices, I doubt that they will go ahead and have any gas that they won't put on as quickly as they can. So a lot of the maintenance work is probably going to be curtailed until we see what happens in the winter months [or] gas prices, Mike.

Let me ask -- this is Dan Duncan. Let me ask a question to either one of the Jims. I thought that BP -- one of the BP (inaudible) is now flowing and it started in the first quarter and it's going to keep ramping up; either Atlantis or one of the big BP fields out there?

The Atlantis field for BP has ramped up. They currently have I think six wells flowing which is currently what they anticipate flowing. So we have seen that on our oil volumes through Cameron Highway. We're not seeing a great deal of gas but they hadn't anticipated (technical difficulty). Will that do it, Mark?

Yet it does, thank you very much.

Michael Blum, Wachovia Securities.

Hi, good morning. A couple of questions. One, could you just give us your outlook going forward for what the pet. chem. market looks like in terms of demand both I guess domestically and internationally?

Let me let Jim Teague field that one.

I think as you saw and as you heard in Mike's comments as he was reporting on our second quarter earnings, you saw extremely strong petrochemical demand for natural gas liquids in particular for ethane. What we're seeing today is the products we produce overwhelmingly being preferred by petrochemical plants.

If you look at cash cost to producing ethylene, producing ethylene on a cash cost basis from heavy liquids like (inaudible) and gas oil, you have lost money relative to the ethylene market price. The only products that you make money on from a cash cost perspective producing ethylene through the second quarter and continuing today is ethane, propane and normal butane. So we see not only strong demand from those crackers that have had the flexibility to consume our products, we see increasing demand from those crackers that have traditionally used very little NGLs as they have if you would tweaked their operations to use it and are making capital expenditures to increase their ability to use it.

Jim, let me ask you a question on that and I think they can understand it better if you're dealing with cents per gallon rather than cents per pound. (multiple speakers) The difference on (inaudible) I think it's (inaudible) that those aren't ever weak and shows the differential between the heavy end of the market to gas oils and the (inaudible) versus light end is (inaudible) $0.20 a pound? $0.80 to $0.90 a gallon? That's a number they would understand.

Yes, the difference -- you are in the -- my petrochemical background, I think pounds when I'm thinking ethylene. But to convert it to gallons, $0.02 per gallon, Dan's right. You probably produce an ethylene at about $0.80 per gallon cheaper using ethane than you are (inaudible) gas oil.

Okay and then I guess maybe the next step in that question is has the overall production of ethylene stayed steady? Or I guess what I'm trying to get at is are you seeing any reduction in overall demand for the end product given the slowdown in the economy?

No, what you have seen in reality with the weak dollar is you've seen quite a lot of -- as I understand it, a pretty strong export market for ethylene derivative producers.

Okay, that's helpful. Just had one other question. You talked about the potential for a lot of additional growth CapEx projects for '09 through 2011. I wonder if you could just -- any way you can comment about that both in terms of the magnitude of capital you're looking at, what areas or what types of projects you're considering? And I don't know if you've provided -- what level of capital spending do you think you could have in 2009?

Michael, we have been laid out anything specific for 2009 but if you look at the capital spend for the last several years and we have stated publicly that we see $1.5 billion a year easily for the next three to five years. In terms of specific projects, we rarely roll out any projects until they are pretty firm.

We're working on a number pipeline projects in the US. We've got a number of opportunities that we're looking at in the Gulf of Mexico. We have got if you look at the production in the Rocky Mountains, you can see that there's plenty of opportunities left there for further expansion of our facilities. We continue to work on our storage assets. Really it is across our entire value chain. There's no one specific area that we are overly concentrated in.

Okay. Thanks, Mike.

Darren Horowitz, Raymond James.

Good morning, thank you. My first question is on the second Meeker plant. If memory serves correct, I thought that the initial expectation was for the completion date to be somewhere around the third quarter, the end of the third quarter and now it looks like it's going to be in the fourth quarter. So could you give us an update as well in terms of the scale of the cost to complete that plant? If it is pushed back is there any incremental cost associated with it?

Before I turn it over to Jim, we had really looked at that as a third quarter project but it was late third quarter, now it's early forth. So it slipped a little bit but not actually a lot. Jim, you got anything to add to that?

No.

Great.

And then just a follow-on question on something that you mentioned earlier, Mike, when you were discussing natural gas storage and you're looking at your asset footprint; can give us a little more insight into the ultimate goal for your natural gas storage, the type of optionality or flexibility that it could provide and the costs associated with that?

Well obviously as we look at natural gas storage we're also looking at the storage market itself and we have some opportunities at (inaudible) that we have worked on. We had considered converting some of our caverns at Mount Bellevue but the economics today just don't really makes sense. It may be something we look at in the future.

From a marketing standpoint -- and I will let Chris Skoog talk to that a little bit. He looks at storage assets whether we own them or not where it makes sense for us. And Chris, you might want to speak to that a little bit.

Thanks Mike. We're looking at storage all over the country right now. We are starting to build this marketing company. We like the Upper Midwest, we like being closer to the marketplace. We think there's going to be ample storage here along the Gulf and that's kind of why we held off in the Mount Bellevue for right now. It looks like there's an overbuilt situation coming on. With the imports of LNG in here it looks like there could be constraints here to get the gas north and east out of the Gulf Coast. So we're looking more that direction, Upper Midwest.

All right, I appreciate it. And then just one final question. As it relates to Duncan and you mentioned this in the prepared commentary discussing pipeline integrity issues on the Acadian line, when you're looking more broad-based throughout the entire NGL pipelines towards business, are there any integrity issues that you see could be popping up in the third quarter here that we should be aware of?

No, we really haven't seen a lot of surprises as we've gone through this. It's been a multi-year program that we have been going through and we've gotten smarter each quarter. Let me let Bill Ordemann talk to it.

I don't see any surprises coming up right now. In fact everything this year seems to be going pretty well. We're right on track of what we got we're going to spend or slightly below and really no surprises we have come across at all at this point.

I think one of the things that we have been recently is done some hydrotesting on the Dixie pipeline and then actually came out better than we expected with fewer costs.

Okay, thanks guys. I appreciate it. Keep up the good work.

Chris, let me ask you a question about (inaudible). From the time that you came on with your business plan last year and I know Jim Teague has talked about this when we made the decision last year to bring experienced people onto the deal, and give us a quick update on the amount of -- the number of people you brought into your group. Also, how much total intrastate marketing gas are we handling now relative to the total United States? Do you have that off the top of your head?

In the relative terms, Dan, we have built them -- the marketing company up to where we're handling about 1 billion cubic feet of gas a day as Enterprise now up from where we were about 500 or 600 million cubic feet second half of last year. I don't have it in relative terms to the national market but at 58 BCF annual supplies on a daily basis this time of year (inaudible) 1 or 2%.

But we're rapidly growing. We've been focused on mostly working with producers and with the end-users direct. We're not in the trading business. We're in the physical merchant business of handling gas, handling it physically, putting in and out of storage and meeting the at-needs market.

Jim, do you want to add anything to Jim Teague?

When we've added -- we're up to 32 people for me down to through all of the scheduling and commercial folks I think there's about eight commercial traders right now, four schedulers and then the rest are accounting and contract admin folks.

Chris, of the 32, how many are new additions versus how many only people have you just pulled in from other parts of the organization?

About 20 people have come in from internally and about 12 new people from the outside.

Great.

And roughly how much touches -- how much gas touches the Enterprise facilities right now?

You know I think 8 to 10 BCF a day is what -- between all of our gathering transmission. That does not include our processing. Our gathering and transmission pipelines I think we're at 8 to 10 BCF a day. Jim (multiple speakers)

We've quoted 8.5 (multiple speakers)

I'm right in there.

I think the main thing that brought this up is we are developing a natural gas as planned type of a business unit just like we do the the NGL business plan. We only market gas basically around the owned facilities. We're not out taking positions or hedging of gas other than [expanding] if we do buy gas now, we sell it in December.

But we are really what we call flat book on natural gas relative to (inaudible) on natural gas liquids. There's no gambles that we're taking. I know that's a hot issue in Tulsa, Oklahoma right now. But we are staying clean. We're not having no type of problems [or we'll] not have those type of problems. And we're building a natural gas and Chris is doing a super job coming in and moving the natural gas in the same type of format that Jim Teague has always done (inaudible) natural gas liquids.

And we only trade or we build natural gas around our own assets which also gives us more transportation volume through our pipelines and that was one of the reasons Duncan Energy on their Acadian gas moved up this year. But he had done a lot of business not making actual large margins on his profits, but he was moving gas through that system.

So that was a main reason Acadian moved up this year over and above last year. He came in here -- what, a year ago, Chris? (multiple speakers) I was just throwing those in to make sure you all understand where we're trying to go with natural gas. Now we will go to the next question.

Laurie, we can take the next question.

Sharon Lui, Wachovia Securities.

Good morning. My question relates to DEP. Acadian's results have been quite strong year-to-date. I was wondering if you could just comment on the incentive margins that you guys received and whether this is sustainable?

Jim, do you want to talk about Acadian?

The incentive margin under one of our contracts, that I think average to the last seven years is about 1.8 to $2 million a year of gross profit that is attributable to that. But with that it ranges from 0 to perhaps 3.5 or 4 this year. That is accounting for a couple million dollars or will by the end of the year. But again, we never really know until the end of the year for the next year if we are going to have any incentive margins. But this year that will attribute a couple million dollars.

Jim, at a pretty high level you might want to explain what gives rise to that incentive margin.

Actually what happens on that is under a long-term utility contract we have -- we're basically graded each month during the year and that grade is how our weighted average cost of gas is under that contract compares to certain postings in the marketplace. With that we do have a grade each month and those 12 grades during that calendar year are weighted average and that results in a computation of the incentive margins for the subsequent year.

Okay, so is the benefit from the second quarter from these incentive margins?

Actually, the benefit in the second quarter compared to last year really includes three to four items, one of which Hank mentioned -- the alleviation of the LAUF is a pretty significant item. Secondly, we have had opportunities for spot sales in the second quarter.

We have positioned ourselves in the gas supply area in order to make those sales to traditional customers that have needed more load during Q2. And actually we're starting to see the full results of an initiative we started about 18 months ago where the transportation and sales margins had been increasing. About a year and a half ago we are really started initiating those increases and I think you're seeing the full results of those now in Q2 as well.

And, Jim, you might want to touch just a little bit on the initiative you've had looking at your ability to expand Acadian in certain areas and to capture additional markets.

That's right. We put a team together about eight months ago and that team has initiated several projects, not only expansion in some of the other end-users along our system but really even more geared to the expansion of acquisition of supply bases and throughputs through the system.

We have initiated several new interconnects with some of the interstate pipelines and we are working on several end-user locations now to which we're not connected. And I think probably in the next six to seven months you'll see the results of those efforts as well.

Okay, thank you. I guess moving on to potential drop-downs, I was wondering if there was any update on your outlook for drop-downs to DEP?

I think from Enterprise's standpoint we are kind of in an enviable position among MLPs where the business is going great. We have got a very solid balance sheet. As Randy showed you our financial ratios are in line and improving.

We really don't have a need to go back to the capital markets either debt or equity this year. But obviously we continue to look at our assets as Hank looks at opportunities; no definite timeline in place but as we've stated before, there certainly wasn't -- the objective was not to do a one-off transaction when we took DEP public. The plan was for DEP among other things to help facilitate the growth of Enterprise. So, while you may not see anything near-term, certainly stay tuned.

Terrific, thank you.

Basically under that particular deal though, we're probably looking long-range -- and this was our plan when we went into it -- is probably 40 to 60% drop-down -- approximately 40 to 60% including organic and actually buying assets from other type of companies in DEP.

We're looking at several different directions for DEP to grow and even working with TEPPCO too. We work in both TEPPCO, EPD and DEP. So we feel long-range the business plan that we formed when we did DEP and we did the roadshow on it is very much in tact and we plan on staying with that business plan.

Okay. Thank you.

[Brian Zaran], Lehman Brothers.

Can you comment on how the cost escalation for construction is impacting your future capital expansion plan?

Let me turn that over to Bill Ordemann.

I don't know [if at this point] if I would say it's impacting our future capital expansion plans. We're constantly looking at the economics of these projects and if they're good projects, we're proceeding with them. The cost escalation right now has been a little volatile. We see steel prices go up, come back down, go back up again. So I think we have seen in my mind anyway maybe a moderation in what's going on.

We understand some new capacity will be coming on in the steel markets and I think our general expectation is that the rate of increase at least is going to slow if not flatten out on steel. Labor has been very regional. We have had a few areas where labor costs continue to go up and others where we don't see that happening and don't see any problem getting labor. So it's been kind of volatile. I guess overall I would say right now I see it kind of moderating compared to what it's done for the last two years, say.

Brian, for better or worse, we did have a big slug of construction work in progress beginning probably late 2005 and just starting to go into commercial operation late 2007. So we're past that big slug. Our biggest areas of cost overruns were in the Rocky Mountains with Meeker I and Pioneer. And the returns on those projects far exceeded what we ever thought we would see.

So kind of a good news/bad news. We did have higher costs but the economics are much, much better than we had expected. And all that is starting to show up now in the results that you've seen the last several quarters.

I would say from the industry as a whole, we would not see the missed cost increases as we did from the late 2005, 2006 timeframe. I think now we're all up to speed on what our costs are. I think from the industry as a whole right now we won't see those big misses that we've had for the last couple of years.

I think anything we started in the past year, we stayed on top of and we've not had cost increases in the last 15 months that we didn't anticipate. So we're not missupplying our costs relative to the revenue going forward now like everybody was for about a two-year timeframe there.

That's helpful. Can you remind us on your [drip], what that contributes to your reinvestment in the business on an annual basis?

On an annual basis it's about 75 to $80 million a year.

Can you also provide what the cash distribution paid to the GP [while it was in] the second quarter?

It was (inaudible) just a second. It will be paid at the beginning of August. It's $36.6 million.

But the second quarter payment that was made --

Well it hasn't been made yet. It will paid in August with respect to the second quarter -- are you talking about the first quarter payment?

The payment that was made in May was about $35 million.

Xin Lu, JPMorgan.

Good morning. In terms of your distribution coverage can you give us your thoughts on how you decide how much cash to be returned?

There's no formula. As we said before we do have a fair amount of capital to spend. This is not a time where you want to be going to the equity or debt capital markets if you don't need to.

So our view is it makes a whole lot more sense for our unit holders and for our debt holders if we retain a certain portion of our cash flow to reinvest in the Company rather than distributing it out and then having to go back out the next quarter and raise additional equity. So we think this is a smart thing not only for the debt but also for the equity. We think it provides a better long-term return.

So if the capital markets get better, we will see a step function in terms of your growth?

Well I think that it's a combination of things. As we get more comfortable with our new assets, as we see how they're going to perform longer-term over a longer cycle, as the capital markets get a little more favorable, we probably wouldn't see a need to have a 1.4, 1.5 times times distribution coverage but we also wouldn't go down to a 1.05 or 1.0 times. So we take a lot of different factors into consideration in determining what the appropriate distribution increase is.

Okay, also can you give us an update on the hedges for your (inaudible) exposure in Meekers and Pioneer second half of this year and '09?

Let me flip that ever to Jim Teague.

For the balance of the year, I think in the Rockies if I'm not mistaken were about 80% hedged and in 2009 the Rockies were between 55 and 60% hedged for the year.

And the price?

I didn't understand you -- price?

The average frac spread that you locked in?

In 2009 we're in the neighborhood of $0.75 to $0.80 a gallon but that is driven by the fact that we primarily did our propane plus. So the ethane we have done less of.

Really you can go out and look at the forward curve and kind of figure out what that spread ought to be.

I don't know that Enterprise hedges directly to a cents per gallon type of deal. We hedge more to natural gas liquids relative to natural gas, so how much natural gas liquid we get out of natural gas. So we hedge on what we call a differential between natural gas itself and natural gas liquids. And it doesn't really -- it doesn't come into play on cents per gallon of actual selling the natural gas liquids.

That's the only true hedge that we have figured out in the natural gas liquids world where you're not doing what we call dirty hedges. Although I think all of us in the past have tried to hedge natural gas liquids with crude oil and we've tried to hedge with motor gasoline. The only true hedge we have come up with is natural gas liquid relative to natural gas which is your cost of all your natural gas liquids. That's your base cost that you start off with.

Also follow on the question natural gas marketing, how much gross margin contribution is from that -- from the gas marketing and which segment do you report it -- the earnings?

We include that in our onshore natural gas segment. We don't break it out separately because frankly it's hard to do that. As Jim Cisarik mentioned, part of reason the that the Acadian systems saw an improvement was because of some marketing effort around that system. They also do some things around our Texas system to improve the transportation volumes. So the marketing gets spread among a lot of different segments so we don't try to re-create that in the (inaudible).

John Edwards, Morgan Keaton.

Good morning everybody; very nice quarter. Just going off the question Xin Lu was asking on the natural gas marketing segment, how are you doing would you say relative to plan?

I think we are ahead of plan. But let me let Chris talk about that a little bit.

We are ahead of plan and like I said we are focused -- and then Dan and Mike have both alluded to we're focused about physically marketing around this system to make sure we increase throughput. This is a physical marketing shop.

We physically handle the gas. We do supplement financial hedging with our storage when we don't buy and sell in the open market on a daily basis. We don't have a sale today, we put it in storage. If we need to make an extra sale today, we pull it from storage and we use the appropriate financial tools to make that work.

This is a speculative shop. We currently have around 4 billion cubic feet of gas in the ground right now (inaudible) possible 6 BCF of total capacity that we have leased right now.

Let me say this too. What Chris and what Jim Teague brought him on for -- and Jim is overseeing that department -- it's a value chain deal the same as we have in natural gas liquid. So most of Chris's margin that flows back into the Enterprise family is through the value chain and it goes back into the pipeline.

So you continue to see the pipeline go through all of our different assets -- intrastate Texas, intrastate Louisiana and also the interstate market that we are now getting involved in. That is where the value is going to show up more so there than it is on his actual profit and loss as a marketing tool. He makes two ways. He makes a value chain through those assets and he also makes profits back in there because it's all blended into that value chain of natural gas just like we do natural gas liquids.

Okay, great. I appreciate the background on that. And then any update you can provide on progress with Pathfinder?

We had the open season. We're pretty pleased with the results we have seen [there]. We're continuing to work on the preceding agreements but beyond that we don't have a whole lot that we're prepared to report on.

Okay, and then the last thing, on the -- since you've already met your goal for cash vis a vis your target -- you were talking about $200 million by the end of the year. You're already above that. Do you have a revised goal now that you've already met the original budgeted target?

No, but it's in a constant state of revision. So we will let you know next quarter what it is.

All right. Thanks, nice quarter.

(inaudible) vision changes every time we look at Jim Teague or Chris or Jim Cisarik or Jim Collingsworth or (multiple speakers)

The good news -- it continues to move up.

John, just for clarification, our objective this year was $200 million plus. (multiple speakers)

$200 million plus. I'm sorry, okay. So you're into the plus part of the goal (multiple speakers) all right. Thanks.

Lewis Shamie, Zimmer Lucas.

Hi, good morning everyone. Excellent quarter. So I just wanted to drill a little bit more into the margin that you've achieved on the Meeker and Pioneer plants in the second quarter. Can you guys give me the hedge and unhedged margin per gallon that you saw there?

We don't Lewis. I think what we try to do is break it out in sufficient detail in our earnings release and in our Q. But we aren't prepared to go into a lot of long division on specific hedges, specific plants.

In terms of the number you tossed out -- the $0.75 $0.90 for Q4 (multiple speakers)

On the forward hedges, right.

On the forward hedges, how does that compared to what you've realized in this quarter?

Probably around 50 to 60 ballpark on our hedges for second quarter

So it compares pretty well.

Okay, that's great. And then in terms of hedging for '09, when you quote the $0.75 to $0.85 that you've locked in on 58% of the volumes; first off, do you guys -- are you willing to provide what that volume number is that you used to come up with that 58%?

No.

Didn't think so. It was worth a shot. In terms of I think you mentioned you hedged ethane a little bit less than the other NGLs.

Obviously when we're looking to hedge we're looking at the more liquid markets, we're looking at the ones where we think we can lock in the best rates. It's not to say that later in the year we might not do something more with ethane. Jim?

The other thing is ethane is so backwardated we just don't believe the backwardation.

I think that's fair. I guess the question is when you're quoting $0.75 to $0.85, is that including the proportionate amount of ethane compared to your production?

We have some of that hedged and I think what Jim is talking about is kind of hanging in the aggregate. That's kind of the ballpark.

Okay, great. Well thanks a lot and again congratulations on the quarter.

Sir, at this time I'm showing no further questions.

Laurie if you would, would you give our listeners the replay information please?

To listen to the replay dial toll-free number of 1-866-383-2967. There's no pass code. Just dial in on the number and you should be able to listen to the replay.

Thank you Laurie.

You're welcome.

And thank you for joining us on our call today and have a good day. Good bye.

Thank you. That does conclude today's conference call. Thank you all for joining. You may disconnect at this time.