Enterprise Products Partners L.P. (EPD) Q1 2014 Earnings Report, Transcript and Summary

Good morning. My name is Tom and I will be your conference operator today. At this time I’d like to welcome everyone to the Enterprise Products Partners Q1 2014 Earnings Conference 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. Mr. Burkhalter. You may begin your conference.

Okay, thank you Tom. Good morning everyone and welcome to the Enterprise Products Partners conference call to discuss results for the first quarter of 2014. The speakers today will be Mike Creel, CEO of Enterprise’s General Partner; followed by Jim Teague, Chief Operating Officer; and Randy Fowler, CFO. Other members of our senior management team are also in attendance today. 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 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 SEC 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 so with that, I’ll turn the call over to Mike.

Thanks Randy. We are off to a strong start in 2014 with first quarter results that included record gross operating margin of $1.3 billion and record adjusted EBITDA of $1.4 billion. We benefited from cash flow and volume growth associated with $4.8 billion of new assets that began operations since the beginning of 2013. These strong results led to distributable cash flow of $1.1 billion for the first quarter of 2014 compared to $897 million for the first quarter of 2013. Included in distributable cash flow were proceeds from asset sales and insurance recoveries of $96 million this quarter and $131 million in the first quarter of 2013. After adjusting for these items distributable cash flow was $972 million for the quarter. In April, we declared a $0.71 per unit cash distribution with respect to the first quarter of 2014. This distribution is 6% higher than the $0.67 per unit paid with respect to the first quarter of last year. This is the 48th distribution increase since Enterprise’s initial public offering in July of 1998 and the 39th consecutive quarterly increase. Excluding proceeds from asset sales insurance recoveries, distributable cash flow provided 1.5 times coverage of the distribution declared. We retained $418 million of distributable cash flow to reinvest in the growth of the partnership and to reduce our reliance on the capital markets. The NGL Pipelines & Services segment reported gross operating margin of $780 million for the first quarter of 2014. That was a record and is 32% more than the $593 million for the first quarter of 2013. Our natural gas processing and related NGL marketing business reported $79 million increase in gross operating margins primarily due to higher sales margins and volumes from NGL marketing partly related to the expansion of our LPG export terminal on…

Thank you, Mike. On our last earnings call we discussed at that time we are in the midst of a significant extended winter, especially in the upper Midwest. When it’s finally over it looks like winter in the Midwest in plain stage ranked in the top 10 coldest in the last 115 years with the upper Midwest officially ranking fifth. This created challenges especially to propane and natural gas. But bottom line is the laws of supply and demand still work. Because of high prices such chemical industry quickly moved up to propane in a meaningful way. Cargoes of LPG were diverted to Northwest Europe to the East Coast and exports from the Gulf Coast were either canceled or deferred. Extremely high natural gas prices, those natural gas to be diverted to meet regional needs. And those who panicked were quickly reminded that price does create supply. Interestingly, the price hikes for both natural gas and propane were not very long, the suppliers responded quickly to this location. Mike mentioned in the first quarter one of our biggest challenge is was an unplanned and significant outage at our base unit. The north to south crude oil spreads were lower and frankly we expected that. We knew $20 spreads couldn’t sustain themselves. Other Enterprise businesses are the including considerable amount of new infrastructure we have added we are quick to pick up the slab. We put in our Mid-America, Rocky Mountain expansion, our Front Range pipeline and our ATEX ethane pipeline. This ATEX pipeline is pretty important to the producers of the Northeast. Now they have the reliable ethane solutions, so they can continue drilling liquids rich gas hence no longer be threatened by too much ethane in the residue of gas. With that we got several other significant projects under…

Okay. Thanks, Jim. I will take a few minutes to discuss additional income state items and capitalization for the quarter. We reported net income of $807 million and fully diluted earnings per unit of $0.85 for the first quarter of 2014. Net income included $90 million or $0.10 per unit gain from asset sales and insurance recoveries. Net income also included, although it was reduced, for non-cash asset impairment, charges of $9 million or $0.01 per unit. After adjusting these items EPU on a fully diluted basis would have been $0.76 per unit. Interest expense increased $25 million to $221 million in the first quarter of 2014 due to a $30 million decrease in capitalized interest as well as interest expense associated with higher average debt balances. We had capital spending of $980 million this quarter, which included $78 million of sustaining capital expenditures. We currently expect growth capital expenditures for the full year of 2014 to range between $3.7 billion and $4.1 billion and expect sustaining capital expenditures for the full year of 2014 to be approximately $350 million. Adjusted EBITDA for the 12 months ended March 31, 2014, was $4.8 billion. Our ratio of debt principal to adjusted EBITDA was 3.6 times for this period after adjusting for the 50% equity treatment of the hybrid debt securities. If we further reduce debt by the $988 million of unrestricted cash on hand at the end of the first, debt to EBITDA would have been 3.4 times. We issued $850 million of 10-year notes at 3.9% and $1.15 billion of 30-year notes at 5.1% in February 2014. The proceeds of this offering repaid debt and are also being used for general company purposes. We are still in the process of deploying this cash. Based on our current plans, we do not expect to be back in the term debt market for the remainder of 2014. The average life of our debt portfolio is now 14.6 years using the first call date for our hybrid debt securities and the average effective cost of debt for this portfolio is now down to 5.2%. At the end of the first quarter we had consolidated liquidity of $5.5 billion, which included unrestricted cash and approximately $4.5 billion of available borrowing capacity under our credit facility. As a result of our liquidity and our performance, we elected to terminate $1 billion 364-day bank credit facility in advance of the scheduled maturity date, which was June 18 of 2014. The effective date of this termination is actually today on May 1. With that, Randy, I think we’ll ready for questions.

Okay, Tom, we’re ready to take questions from our listeners.

(Operator Instructions) Your first question comes from the line of Darren Horowitz from Raymond James. Your line is open. Darren C. Horowitz – Raymond James & Associates, Inc.: Good morning, guys. Jim, congratulations on the ethane export project announcement. I’ve got a few questions for you first and then maybe one for Tony. Recently we’ve heard some of the petchem customers with more domestic capacity publicly state that U.S. Gulf Coast ethane export potential is high risk. And I guess they’re calling into question whether or not the facility is going to get built on schedule and they’re talking about the scale possibly not impacting global supplier, their feedstock costs. But I think there’s also some concern maybe that the market might not be as elusive as what you guys have indicated and I understand that they’re concerned about their feedstock rising. So effectively they’re talking their book, but I’d like your thoughts in regard.

Well, I’m not going to accuse anyone of talking their book. First of all, I think you know as well anyone, Darren, that we have a high regard for the U.S. petrochemical industry. And that is very supportive of their expansions and very supportive to the extent that we’re willing to put money in things like the Aegis pipeline system and the ATEX pipeline system. Frankly producers need market and I know that a lot of people haven’t got the same robust forecast as we do, but invariably when we sit down with a petrochemical company or with a producing company by the time we’re through they have a full understanding of what we’re looking at and they start to have a little more sympathy for it just to become a bigger believer. We also say that when we talk about what we believe our forecast to be, we talk about potential supplier and that potential supplier says it has a market and it has a margin. If I look at our sheet from this morning there’s not a single plant that I see across the country that ethane hidden underwater as much as $0.13 a gallon on a market based TNF basis and still underwater on a variable basis for someone like Enterprise or someone that has demand fee. So in a nutshell, we believe that there’s plenty of ethane. We don’t think that this is going to change things dramatically. We believe producers need markets. If you think about it ethane used to sell at 40% of crude. It’s selling at 12.5% of credit. Propane traditionally sold at 65% to 75% of crude. We are now exporting a lot of propane, yet it’s selling at 45% of crude. So I think exports are a good bridge. Frankly, I’d…

I don’t know the answer to that question. Every plant is different. Obviously it’s going to be plants that have access to water and even being on the water have pipeline to bring feedstock to them. There’s not a generic general answer to your question.

Let me take this, Darren. Everybody has got their cracker model momentum from the right because like [Tony] (ph) said every cracker has its own unique characteristics, but we all have a generic model and our generic model it says basically your cash cost produce an ethylene from methane is $0.13 per ounce. Your cash cost from naphtha is $4.48 per ounce. You got $0.35 of pound difference. Let’s just say you realized $0.02 a pound on that versus naphtha have to break all that stuff. That’s $150 million a half or a $1.5 billion pound year cracker. If you want 20% return, Randy, you could spend $750 million. I mean you can have – likely talk about, Mike mentioned, $20 spreads LLS to WTI first quarter of last year. We knew that was going to last. We knew what is sustainable. Large bridges are not sustainable.

Hey, it’s Mike. The comment that ethane exports were high risk, I listened to that and I listened to that three times and what I took away from there was he was saying that it was high risk for them, that particular petrochemical company, because it’s where their plants were geographically located and their downstream plants, not that it was a high risk proposition for enterprise. Darren C. Horowitz – Raymond James & Associates, Inc.: I agree with you, Mike, and I appreciate the clarification. I was thinking more about the risk that you’re impacting there are actually margins of variability to source fee that’s more competitive for them. I fully agree. Last question for you, Jim, and I hope this is a little bit easier one, but I'm just thinking about the math and not to push on the spot so I’ll give you our math. If we think about the scale or scope of the project for ethane export that you’ve announced. And let’s just say, we assume it's roughly $1 billion cost and we also assume that you got about two-thirds of the capacity committed. Would it be fair for us to assume a low double-digit, unlevered rate of return just based on what you have committed?

You are good, Darren. I've got to give you credit. I’m going to tell you, and we’ve got enough contracts that if we don’t sign another barrel, we’ve got a nice project that it is not low single-digit returns. Darren C. Horowitz – Raymond James & Associates, Inc.: I appreciate it, Jim, and just so you that's state school math for you.

By the way one other question you talked about some comments whether we could build it in the timeframe that we were – that we advertised, those guys forget, we've got a Leonard Mallett and a Richard Hutchinson over here. We’ve gotten pretty good at building stuff on time and under budget. Darren C. Horowitz – Raymond James & Associates, Inc.: Thanks Jim.

Your next question comes from the line of Brian Zarahn from Barclays. Your line is open. Brian Joshua Zarahn – Barclays Capital, Inc.: Good morning.

Good morning. Brian Joshua Zarahn – Barclays Capital, Inc.: I’ll shock you and ask a couple more ethane export questions. So it looks like $1 billion is reasonable on your cost given you’ve increased your project inventory by that amount. How should we think about contracted capacity, contract length?

Before somebody answers that question, the increase in our capital expenditures is – a number of things, it's not just this project. So I wouldn't necessarily assume this is $1 billion project. Brian Joshua Zarahn – Barclays Capital, Inc.: So is that more of …

I’m not going to tell you. Brian Joshua Zarahn – Barclays Capital, Inc.: We’ll use round numbers for now. But I guess maybe a little more additional color on contracts and how you – sort of length?

I think we could say it’s 10 plus years. Brian Joshua Zarahn – Barclays Capital, Inc.: Okay and your – what’s your expectation for your additional discussions with customers for additional contracted capacity?

Let me expand on that a little bit. To me this is like a pipeline. This isn't going to be, in my mind, like a LPG where you have a spot market trade. These ships have been built specific to a need. I think – so you are not going to see a spot trade, I don't think, anytime soon if ever on ethane. But, yes, we have a lot interest, we are talking to a lot of folks. And I fully expect with Al Martinez involved we’ll sign more contracts. Brian Joshua Zarahn – Barclays Capital, Inc.: In terms of geography, how are markets outside of Europe looking?

.: Brian Joshua Zarahn – Barclays Capital, Inc.: Okay, and then Jim how do you expect pricing to beat ethane would it be more naphtha related or sort of will be ethane plus.

The beauty of the U.S. NGL market is there's a pricing point that it can buy all the ethane, you want it and it’s a pretty dynamic market and we are not going to do naphtha related contracts. Brian Joshua Zarahn – Barclays Capital, Inc.: Okay and then last one from me. What type of opportunities longer-term do you see for your marketing business with the export terminal?

The ethane, the LPG? Brian Joshua Zarahn – Barclays Capital, Inc.: Ethane.

Yes, what I think we are going to end up doing is doing our best to contract it up to onto long-term contracts. Brian Joshua Zarahn – Barclays Capital, Inc.: To keep some of that for – to keep some of that for similar to your LPG side to keep some of that for your marketing business?

Absolutely not. Brian Joshua Zarahn – Barclays Capital, Inc.: Okay, thanks Jim.

Your next question comes from the line of Ross Payne from Wells Fargo. Your line is open. Ross Payne – Wells Fargo Securities LLC: How are you doing guys? Two quick questions for you, sticking with the ethylene just for a second. Can you talk about what were the ship development is? How many ships you’re seeing? What the timeline might look like on that. And second of all for Mike, you might have touched on this. But, if you can talk about the utilization on Foothill and Texas Express, thanks.

More ships are being built. Ross Payne – Wells Fargo Securities LLC: Oh, thank you. Yes.

Ships are I think it’s not specific to one of the major ship building facilities, I think ships are being built in the Korean shipyard, the Japanese shipyards and also possibly and also in China. Earlier the three major locations were the ships of this nature the gas carriers, the OTCs and we’ll call the ethane carrier, will look very similar. Ross Payne – Wells Fargo Securities LLC: Okay, do you know how many ships and what the timeline is in terms of delivery might be?

Don’t know many getting the timeline.

So basically all of our discussions are there in concert with our contracts. Ross Payne – Wells Fargo Securities LLC: Okay.

In other words they will have the ships when the facility comes up there. Ross Payne – Wells Fargo Securities LLC: And to refresh my memory – the timeline on that for completion fee on your side?

Randy?

Third quarter.

Okay third quarter 16. Ross Payne – Wells Fargo Securities LLC: Okay great. Okay and then on the utilization of foothills and Texas Express, give us an idea how much ramp up we probably are going to be seeing the future?

Hey, Ross, you mean front range truck? Ross Payne – Wells Fargo Securities LLC: Front range, I am sorry.

Mike, you have that?

Of course there is being impacted by ethane rejection and when I talk about physical volumes we are not talking about contractual because we’ve got deficiencies on there.

70,000 barrels plus.

70,000barrel a day.

Almost 80,000 barrels a day.

Correct. Ross Payne – Wells Fargo Securities LLC: Correct.

For the quarter Ross, Texas Express is more like 67,000 barrels a day. Ross Payne – Wells Fargo Securities LLC: Okay with the contractual agreement it’s higher than that and as…

(indiscernible) Ross Payne – Wells Fargo Securities LLC: Okay thanks guys. That is it from me.

Your next question comes from the line of John Edwards from Credit Suisse. Your line is open. John D. Edwards – Credit Suisse Securities LLC: Yes, good morning everybody. Just Randy, when you running down the financing activity, I didn’t hear you mentioned issuing any equity during the quarter, was non-issued?

John, the only equity that we issued was through the dividend – distribution reinvestment plans. So there was not a follow on equity offering to the public overnight deal nor was there any activity under the ATM facility. John D. Edwards – Credit Suisse Securities LLC: Okay, all right and then just, I guess one more question on the ethane export. I mean at this point what kind of volumes are you anticipating on that?

Order capacity as John…

John we haven’t announced, with respect to the contracted volumes. John D. Edwards – Credit Suisse Securities LLC: Okay.

As we kind of mentioned we are still talking about a lot of other people, but we are confident in the project with the contracts that we have in place today. John D. Edwards – Credit Suisse Securities LLC: Okay, thanks. All right, that’s all I had thank you.

(Operator Instructions) Your next question comes from the line of Michael Blum from Wells Fargo. Your line is open. Michael J. Blum – Wells Fargo Securities LLC: Thank you. Just one worded question on the ethane thing, and I apologize. So just to be clear, the ultimate contracts for supply will be between U.S. producers and foreign petrochemical companies, and you as Enterprise will just effectively clip a coupon to move it through your dock?

We might be the seller, but it is going to be on an (indiscernible) related price, Michael. So effectively you are right, we are going to be flex in the fee. Michael J. Blum – Wells Fargo Securities LLC: Okay, would it be your marketing arm then you will be selling the products?

Yes, but in every…

No we are not taking price risk on that at all. It's strictly a pass through. We are basically accommodating their need, but our contract customers have rights to buy their own, I think, they can either way. Michael J. Blum – Wells Fargo Securities LLC: Okay.

We are offering the service to aggregate product for them or if they buy it or sell it to them, deliver to the… Michael J. Blum – Wells Fargo Securities LLC: Got it. Okay and then just a couple of questions on ATEX. So just based on what you said, running about 30,000 barrels a day in the first quarter. Would you expect based on everything you were saying the reasons for why that wasn't at 60,000 or that’s going to now ramp up to the 60,000 as those fraction come on, et cetera?

We’ve got two plants that are connected to ATEX and we are waiting on two more to connect scheduled either later this month or early in June. So I guess those additional two plants get connected to our system will see the volume to ramp up. Michael J. Blum – Wells Fargo Securities LLC: Okay, and then last question on ATEX. Are there any additional discussions with northeast producers, for propane sellers on that line just giving kind of all the moving pieces up in the northeast?

We are always talking to them as opportunities but nothing specific. Michael J. Blum – Wells Fargo Securities LLC: Okay, thanks guys.

There are no further questions at this time.

Okay, Kyle. If you don’t mind, Kyle would you give our listeners the replay information?

Yes, sir. A replay of today’s conference will be available beginning later today. To access the replay please dial 855-859-2056 or dialing internationally 404-537-3406. To access the call please enter your conference ID number 31363407. Thank you, this concludes today’s conference call you may now disconnect.