Enterprise Products Partners L.P. (EPD) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Jay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enterprise Products Partners First Quarter 2013 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I’d now like to hand the call over to Mr. Randy Burkhalter.

Thank you, Jay. Good morning, everyone. And welcome to the Enterprise Products Partners conference call to discuss results for the first quarter of ‘13. Our speakers today will be Mike Creel, CEO of Enterprise’s General Partner; followed by Jim Teague, Chief Operating Officer; and Randy Fowler, Executive Vice President and CFO. Other members of our senior management team are also in attendance. During this call today, we will make forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 based on the beliefs of the company, as well as assumptions made by, and information currently available to Enterprise's management team. 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 Mike.

Thanks Randy. I will try to keep my comments briefer than usual since we just had our annual analyst meeting a couple of weeks ago which included a detailed review of our capital projects and business fundamentals. For those of you that are interested, the slides and webcast of that meeting are available on our website. We’re off to a strong start in 2013 with first quarter results that included a record gross operating margin of $1.2 billion and record adjusted EBITDA of $1.3 billion. This led to a record net income attributable to the limited partners of $754 million, earnings per unit of $0.83 on a fully diluted basis. Net income for the first quarter of this year included approximately $64 million or $0.07 per unit on a fully diluted basis, of gains primarily from asset sales and from insurance recoveries. Also included in the net income for the first quarter of 2013 are non-cash impairment charges of $11 million or $0.01 per unit. Now if you are comparing these numbers to the first quarter of 2012, keep in mind that adjusted EBITDA and net income attributable to limited partners for that quarter included gains of $53 million from the sale of ETE units and $3 million gains from the sale of other assets for a combined $0.06 per unit on a fully diluted basis. Net income for that quarter also included an income tax benefit of $47 million or $0.05 per unit on a fully diluted basis. The strong performance from our fee-based businesses resulted in improved overall results during a weak natural gas and NGL commodity price environment, extending a trend that began in the second half of last year. We had higher fee-based gas processing volumes, NGL pipeline transportation volumes, the record NGL fractionation volumes and…

Thanks Mike. As Mike said, you can see that our system continues to show the strengths of a growing fee-based foundation. But I think equally important but may be underappreciated the growing diversification of our businesses. We serve both the supply and demand side of the equation. We have a strong presence across multiple commodities, natural gas, NGLs, petrochemicals, refined products and crude oil. We have geographic diversity within the U.S. and we have a significant and growing presence to global markets. That diversification means we don't try to weather cycles, we capitalize on them. Stating the obvious our processing margins are all considerably compared to this time last year when it and money was fallen from the sky but the reason for the downturn abundant supplies is significantly benefiting our development activities for things like pipelines, processing, fractionation and storage. From a price perspective, we believe ethane prices will remain depressed. We expect some ethane to be in rejection in transportation disadvantaged regions of the country. Propane, however, is enjoying a late but decent winter and more importantly is now also benefiting from our export dock where we are consistently pushing the upper end of our expected delivery capabilities, currently loading in excess of 12,000 barrels an hour and on our way to 14,000 barrels an hour by the end of the week. We aren’t losing much sleep over the heavier part of the barrel. Natural gas prices have recently developed a pulse and we've even seen modest spreads across parts of our system. Crude has become more than just a WTI to LLS story as our crude business has benefited from Midland Cushing opportunities, West Texas to South Texas opportunities and ship channel to Mississippi River opportunities. Our guys and girls in our crude oil business has adopted…

Thank you, Jim. I'll take a few minutes to comment on additional income statement items and capitalization. Interest expense increased to $196 million this quarter from $187 million for the first quarter of last year. The $9 million increase is primarily due to a $2 billion increase in our average debt principal balance outstanding. The provision for income taxes was $6 million this quarter, compared to a benefit of $34 million for the first quarter of 2012. This change is primarily due to the conversion of certain subsidiaries to limited liability companies in the first quarter 2012. We had capital spending of $914 million this quarter, including approximately $857 million spend on growth capital projects. We expect to invest approximately $4.2 billion in 2013 on growth projects. Sustaining capital expenditures were $57 million this quarter. We still expect to spend approximately $350 million in sustaining capital expenditures in 2013. Adjusted EBITDA for the 12-months ended March 31, 2013 was $4.5 billion. Our consolidated leverage ratio of debt to adjusted EBITDA was 3.7 times for the 12-months ended March 31, 2003, that’s after we adjust for the 50% equity treatment of the hybrid securities. If we further adjust debt or unrestricted cash on hand at March 31, which was approximately $1.3 billion, debt to adjusted EBITDA would have been 3.45 times. The average life of our debt is 14.3 years using the first call date for the hybrids. This is also after adjusting for the payment of senior notes that matured earlier this month. Affiliates of privately-held Enterprise Products Company, which collectively own our general partner and 37% of our limited partner interest, expect to purchase another $25 million of common units from Enterprise through the distribution reinvestment plan for the distribution that we will be paying next week. This purchase would bring total purchases by these affiliates in 2013 to $50 million. EPCO had previously stated an interest in purchasing at least $100 million of the Enterprise common units in 2013. We had consolidated liquidity of approximately $4.8 billion at March 31, including availability under EPD's credit facility and unrestricted cash. $650 million of this liquidity was used during the first half of March to repay maturing notes. With that, Randy, I think we are ready for questions.

Okay, Jay. We are ready to take questions from our listeners.

(Operator Instructions) Our first question comes from Darren Horwitz with Raymond James. Your line is open.

Good morning, guys. Jim, just one question for you and it goes back to your comments around the onshore crude oil pipes business. If you back out that 40% increase in gross operating margin from the fee-based projects that came online, I’d just like to get your thoughts on the other side of that business. You mentioned the regional and great quality spreads and how it contributed to Marketing’s profitability and I recognize it’s a tough question to answer. But you all have such a big asset presence really everywhere from West Texas, east to Cushing and then South to the Ship Channel. So I’d appreciate any thoughts that you guys have on supply and logistics, marketing opportunities particularly as you guys see more pipe and storage capacity coming online for this year?

I think Darren, you were at the analyst day and I think I had a slide and Lynn Bourdon had a slide that reflected what we call our enterprise way, I guess that was kind of the theme for the whole thing. And what I have been proudest from a crude oil perspective is how these guys have adopted that way and are working together and wringing every bit of opportunity out that system. Each of our marketing groups effectively have strategies, these strategies reflect what the capabilities of the system are. And every day what they are doing is looking at those strategies and relates to market opportunities and invariably there is something there. I don’t know if that answers your question or not Darren.

It does and I appreciate it. If you break it down a little further Jim, is it a situation where you guys see maybe more opportunities to move physical crude barrels, Eagle Ford barrels out of Corpus East or is it a situation where you might be able to pick up and arbitrage on movements between the Ship Channel and the Mississippi River or is there any one area that stands out to you as having potentially more opportunity in the back half of this year?

Probably if I knew what the answer was to that, Darren, I wouldn’t be sitting here and talking to you.

I know it’s a tough one but -- I mean there was such a huge variance in gross operating profit in the quarter and all of us crunching numbers are just trying to figure out what it means for the back half of the year.

I think for the back of the year we are going to see the same sort of opportunities. I think you are going to -- you may see that the opportunities vary. Frankly what’s surprising to me was anybody could have taken out capacity on Seaway. I don’t -- we took out some. What was interesting to me and what I said in my comments it’s more than a WTI LLS thing because that was probably no more than a third of what our guys realized where they really made -- where we really did some good work was West Texas to South Texas where we put one heck of a lot of trucks in place. Now that’s evaporating, now we're seeing opportunities to move a lot of barrels across our barge dock at Morgan’s Point over to the river. That seems to be creating opportunities to make us a little extra money.

The next question comes from Brad Olsen with Tudor Pickering.

Just wanted to follow up on Darren’s question specifically on the comments you made about Morgan's point. Am I correct in understanding that the spread you're making barging there is the spread between the crude on the west side of the Gulf of Mexico and the east side of the Gulf of Mexico? Tudor, Pickering, Holt & Co.: Just wanted to follow up on Darren’s question specifically on the comments you made about Morgan's point. Am I correct in understanding that the spread you're making barging there is the spread between the crude on the west side of the Gulf of Mexico and the east side of the Gulf of Mexico?

Well, I can’t -- I really don’t know. I will tell you part of the time the spread was -- I am looking at Robbie, the spread was West Texas to LLS, as we had a boatload of trucks moving stuff down to Morgan's Point and barging over to the River. Brad Olsen - Tudor, Pickering, Holt & Co.: I guess one of the segments where you appear to be pretty big year-over-year was the refined products. I know it wasn’t all that long ago that that you all were talking about potentially repurposing the Centennial Pipeline or finding out something new to do, do with that. Given the fact that refined products seemed to be up about 50 million a quarter over the last couple of quarters is that something you're still considering or is there another moving piece that that maybe I am not considering in what’s driving better result in that segment?

Let me take a shot at it and I will throw it to Tom Zulim to talk a little bit about what he is doing on TE products. One of the things we did is that [TEPCO’s] [ph] pipeline that traditionally that went -- that goes from the Ship Channel over to Beaumont traditionally just flowed west to east, and that the TE products pipeline going up to the Midwest. We made that bidirectional and we’ve had a huge increase in business on that pipeline because we can’t go bidirectional, because it can’t be fed by Colonial and moved back to the Ship Channel. So that's been one of the places. The other thing is you’re probably going to get tired of hearing it, we’ve adopted that same enterprise way in our refined products business as we've done in our crude oil business that has served us well in our NGL and natural gas businesses. Tom?

Tim, the only thing I will add to that and on what we call our southern complex and you saw at our Analyst Day is by reconfiguring that both bidirectionally and with greater connectivity, we’ve already increased volumes on there substantially, so you see a lot of that. I think we mentioned almost a 150% more volume on it. Plus you’ve got to remember not only Colonial connections but we’re connected to 10 refineries in that particular area and that system which used to be the feeder system for both the TE pipeline going south to north and Centennial, aggregating volume on the Gulf Coast and moving it to the Midwest has now become a system unto itself, and like we mentioned on Analyst Day, we are working to expand that system both in terms of its capability, directionability, connectivity, and also getting the customers to the water, which they really want to do out of that area. On the TE system, it’s been under a lot of pressure for its traditional south-to-north demand. We’ve already configured or in the process of reconfiguring a major part of that system that’s putting in an ATEX service for ethane coming out of the Marcellus and Utica down of the Gulf Coast. And we’re continually looking at that to see what’s the best and future use of it. And honestly, Centennial falls into that as well. Centennial again was a pipeline that moves south-to-north. It hasn’t been in much use today. It still stands ready to move volume today in that traditional service. As we’d mentioned at the Analyst Day, we’d looked at a lot of different possibilities around it but nothing has really come together yet for it. So, we are always looking at what’s the best use of the assets and Centennial is certainly one of them and I will point out we do have a partner in the assets that we try to work with as well. So… Brad Olsen - Tudor, Pickering, Holt & Co.: Great. And it looks like octane enhancement was another segment that was up very strong kind of year-over-year and is that simply the result of higher gasoline export volumes on the Gulf Coast, was there any quirkiness as the result of the RIN spike that we saw during the quarter or is there maybe another factor at play there?

Yeah. I think the primary factor there was -- is in 2012 -- in 2013 we operated primarily or we had a higher operating percentage a day in the first quarter of 2013 as compared to 2012 which related to a turnaround. We actually started our turnaround on that plant in December 2012 and completed in the early January of 2013. So a quarter-over-quarter comparison is not comparing apples-for-apples because of a turnaround plan on that asset. That’s what driving the difference. Brad Olsen - Tudor, Pickering, Holt & Co.: Great. That’s all for me. Thanks guys.

The next question comes from Brian Zarahn with Barclays. Your line is open.

Good morning.

Good morning, Brian.

Just a little more on Onshore Crude Pipelines because now they came in as your second largest segment and had a very strong quarter I think beating prior older estimates. Beyond Eagle Ford (inaudible), Jim touched on this a little bit, but is the marketing performance ratable, can you give us a little bit of a sense of the growth in marketed volumes in the first quarter?

I don’t remember. So, do you guys remember?

No.

We’re going to get back to you. I just absolutely -- it seems like we handled million barrels a day, but I don’t know what our marketing volume was.

I don’t know what the volumes were but clearly with Seaway being reverse and powered up, we had more capacity there and on the pipelines into the Eagle Ford shale that’s provided some opportunities for marketing.

Yeah. Brian and take a look at it, I mean, volumes were up but they weren’t up that significantly not more than, so I call less than 50,000 barrels a day.

On the marketing side?

Yeah.

Okay. And then with differentials coming in, it sounds like, I mean what impact do you expect that to have, I know, Jim mentioned there was not the majority of the margin, but could you give us a sense of, what -- relative to this quarter’s performance, what type of impact do you think that could have?

I think trying to get us to figure out what the spreads are going to be going forward and…

Well, I guess, it’s directionally because sequentially it was just significant growth over -- about $100 million of gross operating margin and which is terrific. I was just trying to get a sense of do you see a variety of opportunities or is it more just a few different differentials that are driving the marketing growth?

I think for the quarter -- quarter over quarter we certainly had more toys to play with this year. So and we are always looking for more opportunities. You can choose to take the growth that we had in the first quarter of last year, first quarter of this year and kind of make some kind of a trend line.

And then on maybe switching to NGLs, can you talk a little bit about what type of ethane rejection you're seeing in your system and what do you think industry wide is taking place?

This is Tony, Brian. We think rejection somewhere around 175,000 barrels a day industry wide.

And then last one probably for Randy, on your ATM can you give us a sense of how much availability you have on that?

Brian, it would be the same amount that we had at year end which I believe was 795 million ballpark.

The next question comes from Ted Durbin with Goldman Sachs.

First, just trying to figure out here the sequential increase in the equity volumes in the processing business, I guess is that all kind of Yoakum coming online and it’s kind of broken a trend where you had volumes down pretty much every quarter for less call it three or four quarters, now we’re up a lot. And I am just trying to figure out what was the driver of that?

Ted, hang on just a minute. It was principally South Texas being up because of the Yoakum and if you would, better extractions and then Rocky Mountains being down. So if you would, we were up 10,000 barrels and I mean a little bit of noise in here but for the most part call it down 13,000, 40,000 barrels a day in the Rockies and up 27,000 in South Texas.

And then on the fractionation volumes, not a lot of growth here in the first quarter relative to last quarter but margins with the barrel. But I guess I am just wondering is there more sort of spot volume flowing through on the frac side where kind of spot rates for fractionation these days?

I think it’s probably new contracts coming in at higher fees and some others rolling out.

I mean lot of your new fracs are fully contracted, right? A lot of your fracs are fully contracted to your new one, I am just trying to get a sense of how much of it is, is actually your running spot rates versus contracted rates on the fracs?

We are not -- I don’t think we have any spot barrels in our barrel term.

And then last one from me is I know you have been trying to get a market-based rate from Seaway here for a while. I am just wondering if you can give us an update on your outlook for getting market base rates there?

That’s still up with the DC Court of Appeals right now. We’re still waiting to hear back from them. I think we do have a pretty good press that (inaudible).

Hi Ted, one other thing on the fractionator, I think one moving piece in there is our NorthCo fractionator, some of the historical base volumes in that were personal liquids or part of it was type of NGL process, you’ve got lower NGL process plus we had a decrease in volume coming through the NorthCo. So that maybe calls in a little bit of the heaviness that you saw overall in fractionation.

Our next question comes from John Edwards with Credit Suisse.

A couple of quick follow up, so I am not sure -- I get going back here to the onshore pipeline services, is there a sense of how much of that contribution of that increase was from marketing, was it about 100 million or so, to follow on Brian’s question?

That’s about right.

Then also the to the volumes -- the equity NGL volume that have been trending down for some time and in this quarter it reversed back up, is that just because you're counting them differently or if you can maybe explain that a little bit?

Yeah. John, no, it’s really just the, if you would the real principle changes is South Texas versus the Rocky Mountains. Again, with the Yoakum plants, highly efficient plants and where we able to come in and increase volumes by filling up the Yoakum plant. So, again, South Texas’ plants were up about 27,000 barrels a day equity NGL production in the first quarter and then the Rockies if you would were probably down about 15,000 barrels a day. And that’s, again, you just got less drilling activity to a degree and where the Rocky still have rich in NGLs, if you would a lower GPM content where you might see a little bit of decrease in drilling and a little bit less volume flowing through to the plants.

Okay. So equity volumes should be trending now at about this level. You said around 100, about 120 is that fair to assume.

Yeah. This is Bill. I think additional piece of color we need to put on that is, a lot of that increase in South Texas barrels or what I call opportunistic barrels. I don’t think they reflect that we changed our portfolio back to people. I think what’s happen in there is we have producers that have elections under their contract to reduced recoveries in plants like Yoakum. When they elect not to recover those barrels we can step in and take those barrels or we can reduce the recoveries in the plant, since we are operating on a variable costs with the pipeline and the fracs. We tend to continue to produce those barrels a lot further than other people will. So I don’t know that’s a permanent picture that you are going to see those volumes worth in South Texas, but I think that’s really what’s driving, we haven’t gone out and signed up a bunch of new people contracts, its really that opportunistic barrels that I think is causing that growth.

Okay. So that could come back down on the depending upon the behavior of your customers?

That’s correct.

Okay. All right. Fair enough. And then, probably, question for Mike, I know in the past I’ve asked about project backlog and you gave on to [Karl Segan] is, could you give us a little more detail on what that is?

Yeah, John. There is not a whole lot to add from the slide that we showed on Analyst Day, but we are looking at a number of projects that we think are pretty exciting. If you look at what we have approved and announced capital spend for 2014, it looks like it’s going to be light compared to last couple years, I wouldn’t expect that number to stay there, I would expect it to be more in order of $3.5 billion, maybe $4 billion again.

Okay. All right. And then any plans to breakout the LPG facility on your selected financial data?

Not at the current time.

Okay. All right. Thank you very much. That’s all I had.

Our next question comes from TJ Schultz with RBC Capital Markets. Your line is open.

Great. Thanks. Good morning. Just first on the proposed diluent project, I guess, you just completed the Open Season, so first any comment coming out of that? And then, I guess, kind of the follow up understand that the connects to southern line Cushing would take some time, but maybe if you could discuss what needs to be done at Mont Belvieu or how extensive some of the projects that would be required there?

Yeah. TJ. This is Tom. Our Open Season on the diluent did close we have not announced anything yet around it. But I will say that watch for positive information to come from that, we just haven’t formally announced the results yet. Secondly, I think your second question was, what’s on the south end of the system and there is really a couple of facilities that they are not within the pipeline or either not part of the regulated-pipeline that would move diluent, but there are treating facility at Mont Belvieu for the diluent quality natural gasoline and the degassing facility, once its treated its got a certain compound of gas and its got to be degassed. So that’s what’s being built there in connection with the diluent projects or will be built.

Okay. Thanks. And then just a follow up again on the refine products or your southern complex, understand the volumes are up from the bidirectional move? I guess, just as a refiners continue to retool, what’s the potential or the capacity there to keep increasing volumes? And then, secondly, what kind of capacity would you look for export capabilities?

Well, as far as the first part of that question, TJ, I think the customers are looking for greater connectivity that not only pipes that go to other markets than the Midwest like Colonial but also to get to the water. And as we mentioned in our analyst day, we’re looking really hard at those projects now that would use that system to give access to the customers to not only different markets from the Midwest Pipeline but also waterborne markets. Honestly, I don’t remember the second part of your question.

It’s just the capacity that you look for…

I don’t know. I don’t know. We haven’t looked into that yet.

Okay. Fair enough. Thanks guys.

(Operator Instructions) Our next question comes from Michael Blum with Wells Fargo. Your line is open.

Thanks. My questions have been answered. Thank you.

The next question comes from Noah Lerner with Hartz. Your line is open.

Thank you. Good morning, everyone. I guess, this question is really directed towards Jim. I do appreciate the diversification as though -- as I was going through the press release this morning in everything and how some business lines have helped out the softening, that’s going on in the NGL markets. I was just wondering, do you guys think, is there any holes within any of your systems that you think need to be filled. I mean, as far as you know other products that you’re not touching or the parts of a value chain for any of the products you do that you’d like to add on to -- add some more diversification and eliminate some of the yins and yangs that go on in the commodity markets?

Always, always holes that you see but any time you pulled that hole, you’ll find another hole that you’d like to play off. But I mean, Tom’s mentioned it. Water access has some refined products. It’s obviously a focus that we have. When you look on the Houston Ship Channel at connectivity from -- for crude oil deliveries, that’s an obvious hole that we would like to be trying to pull. You look at C4s and you think of the backend being created by ethane cracking. We’ve said before creating an on-purpose butadiene plant might be something that we would like to look at in the future. And then, we export a lot of propane. We think we’re going to export a lot more butane and we’re going to be looking at what we need to do to increase that capability. But invariably, once you fill a hole, you find another one.

That’s great. Thanks a lot, Jim.

The next question comes from the Jason Stevens with Morningstar. Your line is open.

Hi, guys. Looking at maybe spinning at last year but looking at marine transport business, it's been pretty steady for a long time. Given the increase in activity moving around the gulf and looking to me like life eventually trying to move up towards the East Coast. Is there room for this to expand?

We are always looking to fill hole as Jim said. And so there is also room for that business to expand. Yeah.

Right. Thanks.

There are no further questions at this time. I’ll turn the call back over to Mr. Burkhalter.

Thank you, Jay. We have no further comments. So if you would, please give our listeners the replay information.

Certainly. At this time, ladies and gentlemen, if you would like to take down the replay information, you can call the replay by dialing toll free 1800-585-8367 or you can dial locally 404-537-3406 and please enter the conference id number 37143147. The conference replay will be available starting at 1 p.m. Eastern time, noon in Central today until May 7 of this year. Once again to hear a replay of today’s call, please call toll free 1800-585-8367 or locally dial 404-537-3406 and enter the conference id number 37143147. Thank you very much. This concludes today’s conference call. You may now disconnect.

Thank you. Good bye.