TEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
The information contained in Item 2 updates, and you should read it in
conjunction with, information disclosed in Part II, Items 7, 7A and 8, in our
Annual Report on Form 10-K, as amended, for the year ended December 31, 2003, in
addition to the interim financial statements and notes presented in Item 1 of
this Quarterly Report on Form 10-Q.
We have experienced substantial growth over the last several years through
a series of large strategic acquisitions including our San Juan gathering and
processing system in New Mexico and our Texas intrastate gas gathering and
transmission system, both of which were purchased from El Paso Corporation in
2002. In the future, we expect to continue our growth strategy from our
significant portfolio of organic development projects located in the Gulf of
Mexico, which are slated to be completed in the second half of 2004 to 2006 time
period. This expansion strategy started with a first generation of offshore
projects initiated by us in the mid to late 1990s. These projects included the
acquisition and construction of oil and natural gas pipelines and hub platforms
situated along the edge of the outer continental shelf (OCS) to serve
discoveries beyond the OCS. Subsequently, we developed a second generation of
projects which consisted of interconnecting GulfTerra-owned and producer-owned
gathering systems to our OCS pipeline headers and hub platforms, giving us a
competitive reach into the prolific areas of development in the deepwater trend.
In recent years, we have moved into a third stage of offshore infrastructure
projects which consist of interconnecting our earlier generation offshore assets
through the construction of deepwater pipeline extensions to newly installed
GulfTerra-owned and producer-owned deepwater hub platforms. These third
generation projects, which are anchored by major discoveries in the deepwater
area, are expected to create a seamless infrastructure which should accelerate
the development of satellite fields and competitively position us for the next
generation of deeper discoveries.
During the second quarter of 2004, we completed the installation of our
Marco Polo oil and natural gas pipelines, and we began receiving first
production on our 50 percent owned Marco Polo TLP in July 2004. Additionally, in
July 2004, we received first production from the Red Hawk field through our
recently completed Phoenix gathering system. Further, during the quarter we
reached agreement to build another pipeline project in the deepwater Gulf of
Mexico to provide oil and natural gas gathering services from the Ticonderoga
and Constitution fields, which are 100 percent owned by Kerr-McGee Oil & Gas
Corporation (Kerr-McGee), a wholly owned affiliate of Kerr-McGee Corporation.
First production from this project is scheduled for the first half of 2006 and
is dedicated to our 50 percent owned Cameron Highway oil pipeline system which
is nearing completion.
MERGER WITH ENTERPRISE
On December 15, 2003, we, along with Enterprise and El Paso Corporation,
announced that we had executed definitive agreements to merge Enterprise and
GulfTerra to form one of the largest publicly traded MLPs.
In April 2004, Enterprise and El Paso Corporation amended their agreement
with respect to the ownership of Enterprise's general partner interest upon the
completion of our merger with Enterprise.
As originally envisioned in the merger agreement, El Paso Corporation was
to contribute its 50-percent ownership interest in our general partner to
Enterprise's general partner, in exchange for a 50-percent ownership interest in
Enterprise's general partner. Under the amended transaction, El Paso Corporation
will still contribute its 50-percent ownership interest in our general partner
to Enterprise's general partner, but in exchange, El Paso Corporation will
receive a 9.9 percent ownership interest in Enterprise's general partner and
$370 million in cash. The remaining 90.1 percent ownership interest in
Enterprise's general partner will continue to be owned by affiliates of
privately-held Enterprise Products Company.