Enterprise Products Partners L.P. (EPD) Q2 2013 Earnings Report, Transcript and Summary

Good morning. My name is Jennifer. And I will be your conference operator today. At this time, I would like to welcome everyone to the Enterprise Products Partners Second 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 and Mr. Burkhalter, you may begin your conference.

Thank you, Jennifer. And good morning everyone. Welcome to the Enterprise Products Partners conference call to discuss results for the second quarter. 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 were also in attendance. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 based on the beliefs of the Company, as well as assumptions made by, and information currently available to Enterprise’s management team. 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. With that I’ll turn the call over to Mike.

Thanks, Randy. We reported strong results this quarter with four of our business segments hosting improved results compared to the second quarter of last year. Record NGL and crude oil transportation volumes and contributions from new assets put into service more than offset the impact of lower NGL commodity prices and our natural gas processing business leading to 11% increase in gross operating margin for the quarter. These increases were primarily driven by growth in NGL and crude oil production in the Eagle Ford shale, higher crude oil volumes flowing on Seaway an increase propane loading that are export facility. Net income attributable to limited partners was $553 million and earnings per unit on a fully diluted basis were $0.60 for the second quarter of 2013, this compares with net income of $566 million in earnings per unit of $0.64 for the second quarter of 2012. Included in net income this quarter was approximately $46 million or $0.05 per unit of non-cash charges related to asset impairments, non-cash expense for changes to the Texas margin tax and our loss related to the sale of assets. Net income for the second quarter of last year included non-cash gains of $45 million or $0.05 per unit related to the sale of assets and insurance recoveries. Distributable cash flow was $925 million this quarter compared with $876 million in the second quarter of 2012. Included in distributable cash flow were proceeds from asset sales and insurance recoveries of $69 million this quarter and a $159 million in the second quarter of last year. After adjusting for these non-recurring items distributable cash flow increased 19% over the second quarter of 2012. Distributable cash flow generated are predominantly fee based businesses allowed us to increase the quarterly cash distribution to $0.68 per unit with respect…

Thank you, Mike. With Mike’s comments, and a little bit of perspective, I think about two years ago, natural gas was [$4] in a quarter, oil prices were $100, ethane were $0.75 of gallon, propane was $1.5 and are processing margins anywhere from $0.80 to a $1. And our gross operating margin was just north of $900 million. Last year at this time, oil prices were $90. Natural gas fallen below $3. Ethane had loss of $0.35. Propane, $0.50 and our processing margins were $0.60 a gallon, down from close to $1 and we were just over $1 billion in gross operating margin. Today we got ethane trading gas value, virtually propane at about $0.95 and processing margins are in the neighborhood of $0.35 a gallon. We come in at something just north of $1.1 billion in gross operating margin. Our earnings continue to share the strengths of diversification. And when I say diversification, I mean the new assets we’re bringing home, but also mean how we have changed our contracting strategy on existing assets. The strengths of that diversification can weather that processing margins, so many of you worry about. As Mike mentioned, over the next couple of quarters, we’re going to be bringing a large number of new assets into service across all of our business lines. If you can call $3.50 to $4 stable, natural gas has stabilized from a downward spiral. U.S. oil prices have been pretty stable and in around $100. But NGL prices have really suffered, as demand has not been able to keep up with the rapidly growing suppliers from the shale plays. Led by ethane falling apart, ethane is now in the firmly in the excess category and trading as I said it is natural gas values, processing margins are around that…

Thank you, Jim. A better housekeeping before we get started, some general business media customarily overemphasize either changes in our revenues or changes in our operating expenses and isolation. This is not necessarily a good use of time, or reporting when evaluating the midstream energy company or utility for that matter. These income statement items are influenced in large part by changes in commodity prices from one quarter to the next. In general, higher commodity prices result in a increase in our revenues attributable to the sale of NGLs, natural gas, crude oil, petrochemicals and refined products. At the same time, however, higher commodity prices will also increase the associated cost of sales as purchase cost rise. Therefore, an increase or decrease in revenues due to an increase or decrease in commodity prices may not generate a corollary increase or decrease in gross operating margin, or in distributable cash flow, because cost of goods sold would also increase or decrease with commodity prices. This is why we believe gross operating margin is a better performance based financial measure than isolating on either revenues or cost of goods sold and while our earnings press release and this conference call focus on gross operating margin. So pardon from me for preaching to the choir to those investors and security analysts who follow us closely. Now, interest expense increased $200 million in the quarter of 2013 from $187 million recorded in the second quarter of 2012. Our average debt balance for the second quarter of 2013, increased $2.4 billion from same quarter last year, our weighted average cost of debt decreased to 5.4% at June 30 compared to 5.8% a year ago. The provision for income taxes increased to $20 million this quarter from $9 million for the second quarter of 2012 primarily…

Okay Jennifer, we are ready to take questions now from our audience.

(Operator Instructions) And your first question comes from the line of Darren Horowitz with Raymond James. Darren Horowitz – Raymond James: Good morning guys. Jim I’ve got a couple of questions for you around some comments that you made with regard to how strategic ECHO and the Ship Channel expansions could be regarding export of a fine product. As you guys talk with customers whether or not it’s about moving crude or condensates at South Texas, West Texas and moving those barrels East. How big do you think ECHO could being capacity and more importantly you would seem like you – greater distribution outlets in the Texas City Morgan’s Point Beaumont and that even mention going in Park, so your thoughts there would be appreciated.

I think what we’ve said is the property we owned at ECHO, I think we’re seeing about 7 million barrels of tankage that we could stores in the neighborhood and the project we announced there would in fact echo into all the Texas City refineries, all the refineries in the Houston area along the ship channel and then through a – the Seaway lateral over to Netherland into that refining complex. We are driven by – everything has always been water borne in, that is why this system is designed as we brought home Seaway and Eagle Ford what we blend is trying to schedule a barrel liquid from Point A to Point B is typically a three bank pool shot and we wanted more direct access, we feel like that distribution will be supportive of our storage. Has that answer it? Darren Horowitz – Raymond James: Yeah it does and then the second part to that question is more specifically focused on Morgan’s Point, you have talked about moving barrels across Morgan’s Point of the Mississippi River but I’m wondering about the opportunity at that location for either additional gasoline or gas oil exports or the opportunity for a larger scale kind of say splitter where you can start exporting like naphtha across the dock?

What we are looking – what we are doing in terms of Morgan’s Point as well as Belmont lot of people don’t appreciate we had a ship dock in Belmont that came with our TEPCO acquisition, we have got a lot of storage, we have to facility at Morgan’s Point this isn’t a high dollar capital project and the way that I’ll have start it is where TE Products Pipeline that goes from the ship channel over to the Belmont area always flowed west to east as a feeder for the TE products pipelines that went up to the Midwest. We converted that pipeline to be bi-directional and we saw business jumped pretty dramatically, then we looked at the ship dock we had in Belmont, we looked at our ship channel facilities there at Morgan’s Point, we figured out that we were tied to about 12 refineries stake something in that neighborhood, so it just seem like a natural, – is together and doing the business with exporting refine products. So that’s what we’re doing. Darren Horowitz – Raymond James: Okay. And then last question for me, Jim, more of a big picture question around your commentary in terms of looking at expanding that LPG Dock capacity. Within the overall context of the market, as you’re talking with customers and you’re looking at current spreads and you’re also considering how much paying capacity by the industry has already been announced? How much more incremental capacity do you see could be added before it starts to actually have an impact between that Gulf Coast and Northwest Europe spread?

You’re asking internal question, I ask myself constantly. I don’t have clue there and I know this. We’re being pretty discipline with what we’re doing. We are selling as much as we can, as far as we can. And I think what we’re benefiting from is we’ve been in this business 30 years or something like that. I mean we know what we’re doing. Our customers have the high level of confidence in this. And then like other people that are trying to enter the business, we know how to run the ship. So I don’t know the answer to your question. I know the expansion we have, we’re going to be taken a look at is not high dollar, it’s fairly immediate and what we’ve learned is that you can give barrel, if you can give business to these guys over the next two years and use that, you can leverage that into multiyear contracts and that’s what we’re doing. Darren Horowitz – Raymond James: Thanks. Jim. I appreciate it.

Your next question comes from the line of Brian Zarahn with Barclays Capital. Brian Zarahn – Barclays Capital: Good morning.

Good morning. Brian Zarahn – Barclays Capital: In the NGL Pipelines segment, can you talk a little bit about the change in gross operating margin versus the first quarter of 2013, volumes were up versus the first quarter, I know seasonality place a role, but volumes are up, propane export facility was fully in service, but the margin was down. Can you talk a little bit about some of the moving parts?

Brian this is Randy Fowler, without sort of getting too granular, I think probably one of the main features in there is just if you would propane or heating load in the first quarter was really strong and so I think you probably saw that on Mid-America you saw it on Dixie then probably saw it on Texas Eastern Products Pipeline also. I will tell that would be the biggest deltas there. Brian Zarahn – Barclays Capital: Okay. And then on Front Range and Texas Express can you remind us for the volume commitments today, they kick in immediately when the projects start up or is the ramp – talk about so the contract, the directed capacity?

And Brian there is always a ramp, I don’t know what it is on Front Range on Texas Express. We just start about 80,000 a day in that neighborhood? What is in the Front Range do you know?

The unit volume but yeah there is always a ramp. Brian Zarahn – Barclays Capital: Okay.

You know a lot of people, a lot of people Brian look at that and say oh my god, we’re going to be washing NGLs because they assume that if it’s a 300,000 barrel a day pipeline it’s full day one, it’s never full day one. Brian Zarahn – Barclays Capital: Can you give us sort of rough time period of one on commitments that will hit the 90% or so level?

I don’t know because I don’t know that we hit 90%, we hit a level that supported during the project and I guess it’s probably last three to four year ramp on those typically on these things. Brian Zarahn – Barclays Capital: Okay. I know you’re in the middle of open season on ATEX, but can you give any color on the propane service?

We got some people interested in somewhat? I don’t know what odd give this thing, you know the people getting hammered with their winter time profits and then by suffer in the summer time and this were in the project were we can they seasonal loans. So, I think rushes is right in the middle of negotiating and talking to some of these people and think a lot on where it’s going to come out. I think over the long hall I think it’s needed, given what I read and what we see in that Marcellus. So, it could be that it didn’t have at this time, but it happens later, ultimately I think there’s a need. Brian Zarahn – Barclays Capital: The last one from me on Seaway, can you mention how many water volumes were in the second quarter and then served approximate mix of light and heavy barrels?

Yeah, but we’ve average Randy run 300.

Yeah

In that neighborhood, we been the size 400. We touch 400 and it was here recently, and that right. And what’s your mix roughly 30% maybe.

Yes, correct. Brian Zarahn – Barclays Capital: Thanks, Jim.

Your next question comes from the line of Ross Payne with Wells Fargo Securities. Ross Payne – Wells Fargo Securities: Good morning guys. I was just kind of curious what kind of EBITDA and multiple we can assign for these expansion programs. So just can you give us a wide range that will be appreciated?

You keep trying not wrong. It depends on volume, but as Jim said we’ve got the commitments to get a rate of return that we’re very comfortable with and there’s plenty of outside. Ross Payne – Wells Fargo Securities: Nice Mike. Thank you. I appreciate that. Also can you talk about what percentage of the business now is fee based or what are your expectation is, as we get towards the end of the year? Thanks.

Yeah, Ross this is Randy. We’ve really don’t come in and take a look at that from a quarter-to-quarter standpoint. So, again directionally, this year the expectation was where we were last year and we were around 73%, 74% 75%, and directionally we were thinking we were head towards 80% this year. And I think if you come in and you look at the results first half of the year, I think that’s what you’re seeing. Again if we windup with a lower percent of fee-based gross operating margin that’s actually a good thing. Ross Payne – Wells Fargo Securities: Okay, great. That’s good color. In terms of the EBITDA multiple, can we assume that something close to historical norms or maybe even a little better given the robustness of fundamentals is this?

Yeah, Ross I didn’t get scare for regulator pipelines, if you compare an apples-to-apples. Another thing I’d consider is that as Jim and [Rob] said these tend to have a ramp up periods, once they go into service, you should see some expansion of cash flow often for the first couple of years at least. Ross Payne – Wells Fargo Securities: Okay, great. Thanks guys.

Your next question comes from the line of Brad Olsen with Tudor Pickering. Bradley Olsen – Tudor Pickering Holt: Hey, good morning everybody.

Good morning. Bradley Olsen – Tudor Pickering Holt: Recently we’ve seen some moves in the crude oil market that I think we’re unexpected to a lot of industry observers and participants with and onshore rally and pretty steady Contango moving into sharp [backwardation]. How do those trends change your outlook or maybe some of the opportunities you presented with on the crude side of your business?

I’m not sure they changes a lot...

Yeah, Brad. In all of our businesses, as we understand, we see Contango, we see degradation, whatever opportunity is we try to capitalize on it. Bradley Olsen – Tudor Pickering Holt: Right. I guess I was thinking that we’ve had basically five years of kind of uninterrupted Contango at least around WTI, which has been has obviously been very good for storage as well as the discount between WTI and global crudes. And given the fact that WTI is kind of trading around parity with the rest of the world sort of the first time in a few years, I don’t know if that there have been opportunities may be to move more crude towards LLS on the Gulf Coast, which is in routing or something along those lines?

Yeah, I’ll try to answer it. I think maybe the pricing mechanism is changed down here a little bit and we’re seeing more people wanted to sell on an LLS basis. So it’s affected us like that. I think it just in terms of storage. We’re not keen to build storage on a five year contracts and gushing. We’re keen to build storage on the Gulf Coast and we’ll look at five year contracts. So it tells you where we’re shifting our focus. Bradley Olsen – Tudor Pickering Holt: Okay, Great. And on the NGL side of things, obviously the NGL or the ethane content in the Y grade arriving in Bellevue is substantially lower than it has been in the past. Does it having ethane content flowing through your system? Did that cause any issues or present any opportunities in your fractionation business or potentially even create opportunities around providing some kind of ethane disposal solution?

There is a point, which if ethane content in the wide grade (inaudible) it could affect your throughput in your fractionators. We haven’t gotten there yet. So, so far it hadn’t been an issue. Bradley Olsen – Tudor Pickering Holt: And with the start up of ATEX in early 2014 is there any expectation that we might swing into that scenario where the ethane content or the value of ethane get so low on the Gulf Coast, you are effectively being forced to reject more than the system is really capable of rejecting?

I guess anything is possible, but I think what you are going to find I mean you are selling at gas value now virtually. So as it goes below the gas value I think you will see people reject more if you bring more supply on, I guess that’s just intuitive. Bradley Olsen – Tudor Pickering Holt: I guess my question would more focus on whether or not there is a limit to the amount of ethane that can practically be rejected into the gas stream?

I don’t know the answer, I think it gets bad enough; people get created and look more in. Bradley Olsen – Tudor Pickering Holt: It has been locations.

It depends on location and the type of contracts. Bradley Olsen – Tudor Pickering Holt: Okay, fair enough and finally at the Analyst Day this year it sounded and maybe this was just my interpretation but it sounded as though you guys were getting incrementally more open or maybe more constructive on the state of the M&A market? Would you mind sharing some thoughts about maybe what you are seeing or whether or not that is an accurate take on your attitude towards maybe doing something acquisitive?

Yeah I think that was probably a misinterpretation. I think what Jim said was that if there are acquisitions out there that make sense for us and we are going to look at them. We haven’t see a whole launch, because of the way that they have been priced, the amount of competition, but there are opportunities for us in the future to find one-off deals that for an single asset that make sense for us, a big acquisition of an existing company, probably then make a lot of sense. Bradley Olsen – Tudor Pickering Holt: You didn’t say that we haven’t looked?

Yeah, we look at lot of stuff. Bradley Olsen – Tudor Pickering Holt: Okay.

Brad, I think what that also highlights is because we’ve got a great portfolio of growth opportunities with reasonable returns, we’re not forced to go to the more expanded M&A market in (inaudible) acquisitions. Bradley Olsen – Tudor Pickering Holt: Okay great that’s helpful. Thanks a lot for your time guys.

(Operator Instructions) And your next question comes from the line of John Edwards with Credit Suisse. John Edwards – Credit Suisse: Yeah, good morning everybody.

Good morning John. John Edwards – Credit Suisse: If I could maybe ask Ross’s question in a different way. Are you seeing EBITDA multiples on new project, are they – are you seeing them improve or stay the same or maybe go down a little bit?

And John you’re asking the same question, you want a different answer? John Edwards – Credit Suisse: The answer I got last time was no it was no answer. What that maybe ask you about is a little insight.

I don’t think returns has change materially over the years. We said before we see a lot of projects a lot of opportunities that are available to us and one of the challenges that we have is really sitting through those opportunities and trying to figure out which ones will make the most sense for us. So I don’t think that the returns on our projects are significantly different today than they were five years ago. What you do see obviously and we have always seen this is sometimes these projects take a few years to ramp up to full cash flows and when we look at them really do we have for example a pipeline that has contracted 100%. So we contracted a way where we have available capacity over and above what we got commitments for and so there is a lot of upside over and above the returns that we looked at when we sanction the project. John Edwards – Credit Suisse: Okay. Fair enough and then as far then as the kind of your cash spending run rate you are still looking at roughly $4 billion a year is that for modeling purposes is that reasonable to assume?

It is probably not unreasonable given where we have been for the last several years frankly we wouldn’t mind being in a point where we are down to $2.5 billion to $3 billion it just as to projects keep looking so good that we have made $4 billion run rate for few years. John Edwards – Credit Suisse: So you are not seeing any kind of slow down in terms of opportunity?

I haven’t seen any slowdown here from 10 years or more, 15 years.

John I think we said at the beginning of this year we had $7.5 billion worth of growth projects under construction and as Mike said earlier we put $1.1 billion into service and I think we are sitting here today with about $7.5 billion worth of growth projects under construction. So the guys are doing a great job with new projects and when you just look at the projects that are approved the carryover of those projects into 2014, we are probably already at growth CapEx of $3 billion. John Edwards – Credit Suisse: Okay, that is really helpful and then in terms of ethane rejection, what are you guys seeing on your system now?

It’s hard to say exactly. I think this is an industry.

From an industry standpoint this is Tony. We think it’s somewhere north of 200,000 barrels a day. You see some larger numbers quoted and I especially struggle to get there. The other thing I would like to add on ethane rejection is we proceed some times that there’s going to be this wall that you’re going to hit on ethane rejection as an industry. And it’s just not the way it’s going to – it’s not the way it happens and it happens to date. It happens very like Mike said very regionally it happens back in the field in isolated places. And so just if we can get off the concept that we’re going to hit this wall as an industry it’s just not what’s going to happen.

Okay. And I think one follow-up on Brad Olsen’s question earlier. I think one of the things and again on the ethane rejection, we came out of if you would fourth quarter, first quarter we’re before our propane dock opened up, where propane was probably the most advantaged feedstock and this slowed. And you had less pull on ethane, while since the dock has come on, you’ve had ethane now resume those profitable feedstock and now by our estimation over a one million barrels a day of pull. So I think one of the things that it will impact that ethane rejection number is the strength of the demand on the downstream side and the reliability of the crackers to run.

Yeah. John Edwards – Credit Suisse: Okay and then as far as the dock expansion what kind of volume are you contemplating? And then just if you could remind us, you said you’re running full plus for minus, what that export volume number is?

The current rate is about 7.5 million barrels a month. John Edwards – Credit Suisse: Are we talking about three cargoes?

Yeah two to three cargos a month potentially. John Edwards – Credit Suisse: Okay. And then as far as expansion what’s the thought there?

No, that would be the expansion. John Edwards – Credit Suisse: And we are doing that 14 now?

Yeah. John Edwards – Credit Suisse: Of two or three cargos would be the expansion, okay. Okay, and you’re running about 7.5 million barrels a month right now?

Right. John Edwards – Credit Suisse: Okay, great. All right, thank you very much. That’s all I have.

And your next question comes from the line of [Matt Phillips] with (inaudible).

Good morning guys. Apologies if you already cover this, but is there an update on PDH 2? And what are you seeing with regard to space concern is that a Mont Belvieu, I mean is there give opportunities for NGL storage that’s one in the Gulf that you could (inaudible) like that down?

Say that again on storage if you don’t mind, Matt?

I mean elsewhere in the Gulf where you look, you have access to NGL storage and where you could put an asset like that.

Good, well, on the PDH, we’re building it. We’re pretty pleased…

Format two.

Oh PDH 2.

It sounds PDH.

We’ve got people interested in it. And our guys are talking to them. I’m going to say we’re not going to do it, because I’ve got propylene guys sit next to me. But I’m not going to say we’re going to do it. If we get the right contracts with the right customers and with the right return, we’ll take a hard look at it.

Okay, thanks.

What was your question on storage? I didn’t…

Yeah, so are you bumping up against any space constraints, Mont Belvieu and do you have access to NGL storage elsewhere in the Gulf where you could put an asset like that?

We have storage open in Louisiana, but nothing like what we got at Mont Belvieu. We got it in Arizona. We got it up in Kansas. But Mont Belvieu is kind of special and in my mind I think storage is going to be an high demand in the future. And I think our earnings have upside.

With the additional capacity.

Yeah, we got so we can watch more wells.

Okay. Thank you.

We have gas storage in certain locations that we convert to NGLs, if we need that for instance in Williston.

Okay. This is Mont Belvieu.

South Texas.

South Texas. Okay. Great, thank you.

Your next question comes from the line of TJ Schultz with RBC Capital Markets. TJ Schultz – RBC Capital Markets: Hey, guys good morning. Just two quick ones, first on ATEX just kind of construction update, I guess as we get closer to in service, can you just discuss the progress on the repurposing of some of the products system and construction of the new pipe, and mainly just looking for the comfort level on in service time for ATEX if the scope as it stands now?

I think we maybe lintel in before the end of the year. TJ Schultz – RBC Capital Markets: Okay, great. Randy the ATM you’ve obviously had success here, should we expect you all to continue utilizing that lever and can you tell me how much remaining capacity you have under the current ATM program?

As far from our standpoint again we are a little bit rookies at the ATM program compared to some of the other companies in the space, but I mean what we’ve seen is we’ve liked the results of it seems like an effective program after the $214 million that we issued in the second quarter Brian you what were the main expense is.

$560 million.

So 569 – and to Mike’s point we can always come back with another filings in top that– when we need to. TJ Schultz – RBC Capital Markets: Great, thanks.

We have no further questions at this time. And I will now turn the call back over to Mr. Burkhalter.

Thank you, Jennifer. At this time if you would – if you give listening to the replay information for our call. Thank you.

Absolutely. There will be an audio recording available after this call has ended. To listen to this recording you may dial 1-800-585-8367 or 1-855-859-2056 and enter in the ID number 19880846. This recording will be available for replay until August 8, 2013 at midnight.

Thank you, Jennifer. And that concludes our call today. Thank you for joining us and have a good day.

Thank you. This does conclude today’s conference call and you may now disconnect.