Enterprise Products Partners L.P. (EPD) Q2 2016 Earnings Report, Transcript and Summary

Randy Burkhalter - Vice President, Investor Relations James Teague - Chief Executive Officer of Enterprise's General Partner Bryan Bulawa - Chief Financial Officer Daniel Boss - Senior Vice President, Accounting William Ordemann - Executive Vice President, Commercial Anthony Chovanec - SVP, Fundamentals/Supply Appraisal, Enterprise Products Holdings LLC

Darren Horowitz - Raymond James Jeremy Tonet - JPMorgan Jean Ann Salisbury - Bernstein Brandon Blossman - Tudor, Pickering, Holt T.J. Schultz - RBC Capital Markets LLC Kristina Kazarian - Deutsche Bank Securities, Inc. Brian Gamble - Simmons & Company John Edwards - Credit Suisse Securities Danilo Juvane - BMO Capital Markets Faisel Khan - Citigroup Global Markets, Inc. Richard Verdi - Ladenburg Michael Blum - Wells Fargo Securities LLC Selman Akyol - Stifel Tom Abrams - Morgan Stanley Ross Payne - Wells Forgo Gabriel Moreen - Bank of America, Merrill Lynch Helen Jung Ryoo - Barclays Capital, Inc. Chris Sighinolfi - Jefferies

Good morning. My name is Jenifer and I will be your conference operator today. I would like to welcome everyone to Enterprise Products Partners Second Quarter 2016 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 would now like to turn the call over to Mr. Randy Burkhalter. Sir, you may begin.

Thank you, Ginger. Good morning, and welcome everyone to the Enterprise Products Partners Second Quarter 2016 Earnings Conference Call. Today our speakers today will be Jim Teague, Chief Executive Officer of Enterprise's General Partner; and Bryan Bulawa, Chief Financial Officer. Other members of our senior management team are also in attendance for the call today. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. This is 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, 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. Before turning the call over to Jim, I’d like to point out as you’ve probably noticed there are a few minor format changes in the earnings release. Based on recent public company guidance from the SEC, these changes give GAAP measures equal or greater to prominence to non-GAAP. We will continue to disclose the performance and liquidity measures that we use in the management of our business, which include non-GAAP measures that are reconciled to the nearest GAAP counterpart. And with that, I'll turn the call over to Jim.

Thank you, Randy. Today, we reported total gross operating margin for the second quarter of $1.3 billion, essentially the same as we reported in second quarter of last year. This led to distributable cash flow slightly greater than $1 billion, which was 5% higher than last year. Distributable cash flow provided a solid 1.2 times coverage and the $0.40 per unit distribution we declared for second quarter ‘16, which was a 5.3% increase over the same quarter of last year. This quarter marked our 57th distribution increase since our IPO in 1998 and our 48th consecutive quarterly increase. As twelve years, we’ve increased the quarterly distribution to our investors, which is unprecedented in our sector. Our systems and our people continue to deliver in a great challenging environment. We reported record onshore liquid pipeline volumes and marine terminal volumes in the second quarter. Total volumes in our on-share NGL, crude oil, petrochemical and refined product pipelines were up 5.2 million barrels a day for the quarter, compared to 4.9 barrels a day for the same quarter of last year. Our NGL transportation volumes were a record 3 million barrels per day for the quarter, compared to 2.7 million barrels a day in the same quarter of last year. The third and final segment our Aegis ethane pipeline was completed in December, which were in these numbers and these numbers also reflect the continued ramp up of our front range in Texas express pipelines. As to our terminal and dock activities, total NGL, crude oil, refined products and petrochemical marine terminal loading and unloading were 1.4 million barrels a day for the second quarter, compared to 1.3 million for the second quarter of 2015. Natural gas activities, total onshore natural gas pipeline volumes for the second quarter of 2016 were 12.1 trillion Btu’s a day, compared to 12.5 for the second quarter of ‘15. Fee-based natural gas processing volumes were 5 Bcf a day, compared to 4.9 Bcf a day last year. Our equity NGL production increased 16% to 143,000 barrels a day, compared to last year. Our NGL production volumes nation volumes for the second quarter increased 840,000 barrels a day that compares to 822,000 barrels a day last year. These results continue to reflect the fact that we’re being very aggressive in tying up volumes for our assets. There’s a lot of detail in our press release, so we’re just going to summarize the results. Our NGL businesses continued to show strong results led by new assets and volume ramp ups. Processing margins remained challenged. However, integration has worked in our favor. Our crude oil pipeline and services business remains under pressure, negatively impacted by weak regional spreads generally caused by high inventories and falling domestic production. Nonetheless, demand is expected to continue to increase especially at these low prices and we believe we’re well positioned for the volatility and the growth that is an [indiscernible]. Natural gas pipelines and services business were hurt by weak regional spreads because of nagging oversupplies largely caused by last year’s lack of winter and falling production. We believe natural gas demand the required domestic suppliers needed to support that demand have significant upside, which will increase demand across all of our natural gas systems. Gross operating margin from petrochemical and refined product services segment was lower compared to the last year because of tighter margins mostly caused by an oversupply of gasoline that effects our beat plan. Conversely we’re seeing nice increases in other of our refined products businesses, where our volumes continue to grow as we expand and integrate the former oil tanking assets with our legacy assets. Our petrochemicals and refined products are activities that compliment several of our businesses that we definitely are focused on continuing to grow. As to capital projects, we began commercial service on $600 million of growth capital projects during the second quarter. These included the South Eddy natural gas processed in the Permian and the completion of over 2 million barrels of additional crude oil storage at our terminals in Houston and Beaumont. We are on schedule to put another 1.4 billion remainder of this year, including our ethane export facility on the Houston Ship Channel and the Waha natural gas processing plant in the Delaware Basin. And in fact we are in the process of provisioning both of those projects as we speak. In addition, we have $5.2 billion of growth capital projects scheduled to be completed in 2017 and 2018, which include our PDH facility, our Midland to Sealy pipeline, and completion of a crude JB dock in Corpus Christi. Our commercial teams continue to progress on several projects that are in various stages in development. Our midstream is more focused on market related projects than we are, but it’s important to note that we have announced several substantial supply oriented projects since the downturn at the end, including three processing plants, and supporting NGL takeaway in the Permian and of course our Midland to Sealy pipeline. We are building organic projects during the draught period. To me that speak volumes about our people’s creativity and the faith our customers have in us. These types of supply projects confirm that there still is demand from producers for new midstream assets but more importantly, it speaks to the fact that producers don’t necessarily want a one off project from a niche player whose business plan to put their assets, producers prefer someone with systems, yet that give them low assurance and market choices as do consumers. For our customers, reliability is more than a word that says you should expect an asset to run. Real reliability is having systems backing you that will allow you to do things when unexpected operating or market conditions occur, that’s what we bring to our customers and while other projects come our way. In addition, virtually every project we do has a knockdown uplift effect across our systems. Last I want to take a minute to just take a look at what we see in the U.S market. Commodity prices have moved up significantly from the low set in the first quarter of 2016, which is a positive to everyone in value chain even the consumer. The move from $26 to over $40 in crude oil and natural gas from less than $2 to $3 frankly was an easy call. The reality is these prices simply don’t work, this cannot be sustained. The next $10 may not be smooth sailing, but it will be a key indicator for the world as to what U.S. producers can and will do. We believe that U.S. producer was the first barrel off, but we also believe that it will easily be the first barrel back home. When forward prices crossed the $50 threshold in the second quarter, we begin to see a sense that U.S. producers and the capital markets that support them positioning the growth. Producers are hedging, rig counts are creeping up, docks are being completed. More importantly, we are having a lot of discussions with our customers and our producers and potential acreage buyers about services we can provide and these are positive signs that better to have. Before I turn it over to Bryan I want to give you a quick update on our incident at Pascagoula. On June 28, we had a significant fire at our Pascagoula, Mississippi processing plant. Most important thing was no one was injured. At the time of the fire, the plant was processing about 500 million of rich natural gas from various offshore facilities. As of today, virtually all of the gas has been rerouted to other plants in the area, and most of these deliver NGLs in to our systems. Investigation of the Chemical Safety Board is still underway and we are cooperating. At this time, our best testament is the plant will return to operation in the fourth quarter. And with that Bryan.

Thank you, Jim. I’ll discuss a few additional income items for the second quarter, provide an update on our growth to maintenance capital spending during the quarter along with expectations for the balance of the year, and close with an overview of our capital raising activities and related balance sheet metrics. Net income attributable to limited partners for the second quarter of 2016 was $559 million or $0.27 per unit on a fully diluted basis, compared to $551 million or $0.28 per unit on a fully diluted basis for the second quarter of 2015. Net income and fully diluted earnings per unit include a non-cash asset impairment and related charges of $30 million or a penny per unit for the second quarter of 2016, and $190 million or $0.06 per unit for the second quarter of 2015. Depreciation, amortization and accretion expense for the second quarter of 2016 was $360 million compared to $385 million for the same quarter of 2015. The second quarter of 2015 included approximately $61 million of expenses related to our divested offshore business. After adjusting for these expenses, depreciation for the second quarter of 2016 was $36 million higher, with the increase primarily attributed to our acquisition of EFS Midstream assets that we acquired in July 2015, and new assets placed into service since the second quarter of 2015. G&A expenses decreased to $10 million this quarter primarily due to overall compensation expenses, and reimbursement of certain legal expenses. Total capital spending in the second quarter of 2016 was $884 million including $58 million for sustaining capital expenditures. We expect organic growth capital expenditures for 2016 to be approximately $2.8 billion and sustaining capital expenditures to come in around $275 million this year. At June 30, 2015, our total debt principle outstanding was $23 billion. The average of life of our debt portfolio was 17.1 years, and our effective average cost of debt was 4.8%. Adjusted EBITDA for the 12 months ended June 30, 2015 was $5.3 billion, and our consolidated leverage ratio of net debt to adjusted EBITDA was 4.2 times after adjusting for the 50% equity treatment described by the rate with hybrid debt securities. I will point out that leverage is elevated by approximately 0.2 times due to over $800 million of working capital dedicated to NGL, crude oil and refined products containing opportunities. In the second quarter, we raised $877 million in net equity proceeds to our distribution reinvestment program, employee unit purchase program and our aftermarket or ATM program. This includes $592 million of proceeds from the ATM issuances previously disclosed during the first week of April and further discussed during last quarter’s earnings call. We have consolidated liquidity of $4.7 billion at June 30, 2016, which included available borrowing capacity under our credit facilities and non-restricted cash. On July 11, we paid the second and final installment of $1 billion for the EFS Midstream assets that we acquired in July of last year. Following this payment, our consolidated liquidity was approximately $4.1 billion on July 11. As of this morning, our consolidated liquidity is approximately $4.3 billion. And with that I will turn the call back over to Randy.

Thank you, Bryan. Jennifer, we are ready to take questions from our listeners.

[Operator Instructions] Your first question comes from the line of Darren Horowitz with Raymond James.

Good morning guys.

Good morning, Darren.

Jim, if I could I had a quick question for you first on the LPG cargo cancellations, and I realized you guys have covered on the deficiency payments and of course the offset is high LPG exports. When you start thinking about some of the headwinds out there, lack of economic incentive between the Gulf Coast and Northwest Europe, or even Southeast Asia. The fact that we have seen incremental butane being released into the market, and also now we have got this headwind of weaker crude oil prices hurting the NGL spreads, what impact do you think that has on the back half of this year’s LPG loadings, and do you think the weakness last maybe into the first half of next year.

Yeah before answering your question you got to know I leaned over to Randy and I said I bet Darren is the first question on the line. This stuff has got to export, I mean it has got to price to export. So you know some price in other parts of the world has to go up, other price here has to go down, because I think the pride has fallen to levels that I haven’t seen since I was your age. So basically spread has got a wagon, and what that says is probably the price goes down here, spreads has got a wagon, otherwise you got to build too much inventory and it’s got to price to export.

Yeah, if I could as my follow-up, I just want to go briefly over to the ethane export facility, I assume you always stored about 160,00 capacity committed, I am wondering what the headwind as you see it is to getting the rest of the capacity committed. Is it fair to assume that the first cargo should be loaded around August, and how does that volume ramp exit this year through 2017, how does that volume ramp increase?

Let me, can you help, you can use that after I answer this yeah, okay. The first cargo, once it comes in, first of all August 1st, our first ship will come in during August 1st. We have an arrangement, that’s basically a way for us to start commissioning and our customer to start commissioning their ships. But we will load our first cargo in August and what is the ramp on balance of the thing Joseph, do you know?

The ramp is throughout the remainder of the year, a lot of it is being determined by the completion of projects on our consumer side will be coming up throughout kind of the balance of the year.

No, by end of the year, everybody should be on schedule to load the cargos that they contracted for?

Yeah, by the end of the year, we should be roughly at maybe 1.9 million barrels of exports per month.

Per month, okay.

Does that help Darren?

It does, yeah, thank you.

Your next question comes from Jeremy Tonet with JPMorgan.

Good morning, I just wanted to touch on ethane at first, with the crackers coming online in 2017 and call for ethane increasing at point, I was just wondering if you could walk me through how to think about what type of EBITDA uplift, Enterprise could enjoy from the end of ethane rejection across your system.

Jeremy I will take the first say about it and then turn it over to Tony. From a EBITDA standpoint, I think you know on the call back in may we came in and gave you an estimate of 5% to 10% and we came back in and work some back of the arm calculations and really that is about the range 5% to 10% and really where it is within that range is what your assumptions are, so with that I will turn it back over to Tony.

How we see the demand coming in and [indiscernible].

Hi, we can’t really hear you there.

Sorry, I didn’t have my - my microphone off. So let’s call it remainder of 16 and remainder of 17, somewhere over 300,000 barrels of incremental demand is how we have it for the crackers. We have about another 218 and another 219 and maybe another 120. It is hard to tie these projects down, even for the operators. This is no way, this demand is not going to ramp up nicely over the next call it, 24 to 30 months and of course you have exports on top of that, that we think total for the industry, call it 300,000 barrels a day, so significant ethane demand is coming.

Great, thank you for that and just turning over to gasoline inventories being elevated here. Just wondering if you could share your views as far as how you think that place itself out here and what you packed, that could have for crude oil price?

So, gasoline inventories obviously are elevated, refiners have been running hard around the world and some refineries in certain places of the world and think in Europe are going to have to throttle back to get it back in line, that’s what will happen, margins will take them there. I hope that answers your question, that’s the way we see it.

That’s helpful, thank you and then just last one I didn’t quite catch ATM issuance, could you repeat that for us Bryan?

Sure, as far as the second quarter, I think I gave you the combination, I didn’t give you the specific with respect to the ATM issuance but in the first we $877 million for the quarter which that was inclusive of distribution reinvestment program, our employee unit purchase program and out ATM and of that 877 million, 592 million was from off of the ATM that we had mentioned last quarter in our earnings call that occurred during the first week of April.

Great thank you for that, that’s it from me.

Your next question comes from Jean Ann Salisbury with Bernstein.

Hi guys, just a follow up on the ethane question, so of the let’s say 500,000 plus new ethane demand is coming, what do you see as Enterprises largest constraints of anything to getting large share of that increase?

First of all we have capacity out of Permian, existing pipeline capacity, out of the Permian, out of the Rockies, so to the extend processing plants out there, we act to increase demand and we are going to have a lot, we are going to have capacity to handle that, where we would be little, we can add capacity down in south Texas Bill, to bring on more ethane and then Bill where we constrained is where as I’m concerned the one place we are - we have some constrains is our ability to move more ethane on ATEX in order to move more ethane or on ATEX it is not a small project, to expand that capacity on ATEX and I think that capacity to [indiscernible] is what right now, 150ish[ph].

Yeah, latest expansion there has to be about 145.

Okay, sorry capacity is 145, virtually with 10% walk up, we are fully subscribed. So any incremental that’s where the constrain is in our system. Any incremental requires an expansion of that type.

Okay. Thank you that’s helpful, and then on fractionation, it seems like you guys are, you actually don’t have that much fair capacity on your sort of net fractionation capacity to that bit, other potential constraint?

Fractionation is never a constrain, we always figure something out, we got, you know we were on our fractionation, as a complete, I don’t care where it is, if it is in Louisiana, if it is Hobbs or in South Texas, we run our fractionation as one like it is in one location, we can move wag great around, so we can always find a way to handle more wag rate.

Okay, great that’s all for me thank you.

Your next question is from Brandon Blossman from Tudor, Pickering, Holt.

Good morning, gentlemen.

Good morning.

I have one that circle back to LPG contract cancellations, any further detail on kind of the dynamics around, sorry lifting or cargo cancelations, any further detail around, it is the dynamics there, our cargos being source somewhere else as far as you know or these just not being delivered to the end user.

I think it has a couple of things Brandon, first of all, you know we are in the middle of the summer, so this isn’t the highest demand period of the year. From a petrochemical perspective I guess there is a pretty good opening of naphtha, which maybe hoarding the appetite of frackers in other parts of the world but bottom-line as what I said earlier, it has got export and it will export in my mind. The beauty for Enterprise is that as you read in the press release what we have is more than an LPG facility, we have a facility that can export things like polymer grade propylene and crude and refined products. So, yeah we had few cancellations but we had a record month in polymer grade propylene out of our facility too. But to answer your question low demand period, [indiscernible] naphtha but it will price to export because it has no choice.

Okay, fair enough. On ethane, it looks obviously price has been fairly volatile at least in the last two or three weeks, it looks like we may have a saturated that kind of incremental demand and perhaps a little bit of market share gains and then losses to propane domestically. Do you have any color on that in terms of where we are today versus a couple of months ago? Supply demand.

I don’t think ethane is the only thing that is volatile, that’s the whole market seems to be volatile. The difference with us, we kind of embrace volatility. Tony can you answer this.

We look at the pit stop preference for ethylene crackers[ph] every day and what is happening today is propane is pricing itself to [indiscernible] crack in the United States. So everybody can see it, to James point earlier about propane has got to go, it either has to go in a cracking United States, it has to go to storage, storage numbers are very high or has to create demand by price in the U.S. in progress.

So you know that’s you know 50,000 or 100,00 barrel when propane gets in the crack that over a time period didn’t happen overnight, you see propane coming up.

But to your earlier point to the extend propane prices is well into crackers, now you’ve created a nominal effect on that.

Okay, thank you for that. So I guess that’s it for me for right now. Thank you.

Your next question comes from T.J. Schultz with RBC Capital.

Great, thanks. So just first one quick follow-up on LPG, look cargoes specifically were cancelled or where were they headed?

I am being cute, but if they are cancelled then doubt they were headed anywhere.

Now exactly right there, they may have not had a home to begin with.

Okay, fair enough. On the PGP exports you’ve talked about the short term benefits due to some alleges in Europe, but you’ve also thought that customers have been looking to lock into longer feedstock contract somewhere to your NGL export. So you know as we look at the PGP exports offsetting some of the cancellation, just any update on the ability to contract that on longer term basis?

Yeah, our strategy around propylene frankly is evolving, what I believe, I’ll be RB jump in but what I believe is I believe it will be another product out of the U.S. and parts of the world have an appetite for which is why we put the capability to export propylene at our shipped facility and we can expand that. We are in fact in negotiations with people for supply out of the Gulf Coast of the parts of the world. And frankly I think that has the potential to grow. RB, did I say it all right.

You got it.

Okay, thanks. Just lastly, quickly, in the Delaware Basin, you’ve talked about the potential for I think multiple additional cost beyond Eddy and the Delaware Basin JV, so you’ve announced that they are plan, but as you look forward you talked bit about your integrated system kind of offering advantages on these supply type projects, could you just frame what the potential is for additional capacity that be added in the Delaware specifically? And then maybe if we look at that 5.2 billion number, you have coming online in 2017 or 2018, are there additional premium plants in that number beyond what you just announced or is there upside there?

There is not - there is no premium plants in that number but I’ll let Bill address that right.

There is no any additional plants in that number but we believe there is significant upside. We built the NGL takeaway capacity from that area to handle significant upside and we also built - we’ll be building the gas take away from that area that we’ve talked about to handle that upside as well. So really to plug in the upside all we would need to build is the processing plant itself.

Okay, thanks everyone.

Your next question is from Kristina Kazarian with Deutsche Bank Securities.

So a follow-on on the ethane side, it looks like we got an uplift from, some increase recoveries in the quarter, but we - although we talked about there’s being several year process to that you know EBITDA uplift number, so how should I be thinking about this quarter-over-quarter trend, maybe continuing throughout the year if the proper demand having come on yet, just general thoughts there would be helpful?

Kristine, this is Tony. So let’s just assume that it’s volume driven. And largely when you look at these volume in some former fashion, enterprises is going to participate, will get our share, whether it be in liquids pipelines or ethane distribution pipeline and our fractionators. But I can’t tell you. While we look at say, look we think there will be 350,000 barrels of implemented ethane demand in the ‘17 timeframe, we can’t tell you what quarter it’s going to come on. And I think the people that are building those plants don’t know that. So it’s not a straight line, it’s somewhat lumpy and it appears generally between the ‘17 and ‘19 timeframe that it’s front and loaded. I really don’t know what else to say about it.

That’s helpful. Thank you. And then just you guys touched on this earlier as well, but just to make sure by here on the 1.4 billion of capital projects you had coming online in the second half of the year. Just remind me how I should be thinking about that cash flow ramp up on both the ethane export terminal in Waha?

The cash flow will be ramping harder in the fourth quarter than the third and then it really comes on strong in the first next year. Bill?

I think Waha is a cash flow ramp up, it’s going to be fairly quick, I think it’s going to be full fairly quick. Well that’s third quarter, early fourth quarter, I don’t know, but we got a lot of gas buying price today that we can put into that plan as we speak. I think we talked about ethane export facility already is in round number. I think about half the ramp up will take place by the end of the year give or takes and then rest of the ramp up will take place in the first half of next year.

Okay, thanks guys.

Your next question comes from Brian Gamble with Simmons & Company.

Good morning, guys. Hey Tony, do you think the - you guys building I think cracker think the same way there or you think they are little bit more certain about when that demands come in online?

You know, it’s Tony. We watch what they say every quarter and there are customers also and you see some that say underlain and then you some say, hey I am going to be overlain. So I don’t know how to gauge it.

That’s fair, I agree with your original statement. I think they are just confused as anybody. Jim, you’re talking about the PGP evolving strategy there, I love the flexibility, do you think longer term or maybe even shorter terms the potential for PGP contracting can be as profitable for you as LPG contracting could be or is there something there that would be a sticking point change the margin structure between the two types of opportunities?

I think it’s all relative I mean LPG must be the market part. So in terms of size, no. In terms of opportunity, yes. We firmly believe that we - this market will export. And like I said earlier we’re negotiating contracts with people. Mostly in this hemisphere, we are insulating just made me think that this is going to become more global opportunities for our propylene in just this hemisphere. RB? RB is doing good, he is agreeing with me.

Smart man. Switching gears maybe talking pet refine products for a second, I know you have the MTBE facility turnaround in Q1, a little bit bigger than normal bounce back in margin but maybe not quite for the impact, I thought it might for Q2, can you talk about how that facility came back online in Q2 and what to expect as we going into the rest of the year?

This is RB. That still is operating very well, it’s just a function of the weakness in the refine product side the pricing, the gasoline pricing that the MTV pricing is low, but operationally it’s performing very well.

So the gasoline overhang that we are looking at right now really limit some of that outside in the back half of the year and so we work on those inventory off, is that a fair characterization?

That’s fair, yes.

We do that, some hedge owned in the back half of the year.

Yes, we did. Our back half budget is pretty well.

Okay, great, thanks guys.

Your next question comes from John Edwards with Credit Suisse Securities.

John. Good morning, John.

Yeah, good morning. Can you hear me?

Yeah, we are hear you.

Okay, yeah. Just I want to follow-up on the answer you gave to Jeremy question earlier. So if I heard you why I think you were saying there was - you expect 300,000 of ethane demand for ‘16-’17, I think you said 218, 119 and 120 and then another 300 of exports from adding that price, that’s a million barrel of day of demand coming. So do you expect I guess A, what kind of ethane price uplift and B, do you expect shortages?

You know - John, this is Jim. I’ll turn over to Tony.

Those assumption - there is an assumption in there that crackers that are coming on - come on at the time we think they will. More importantly that they run at rates. When you have this much ethylene come on, I am not going to bed if they are going to run at 90 plus percent. I am sure my colleagues down love me when I say that. But in theory yes, you are to the extent that you have to attract barrels from further away, and then had a minimum. You got to look at the T&L associated with that in a gas basis. Then we should margins expand on ethane as that rose forward. And we’d said all along that what’s needed is a pricing on to producers. And that is just what has to happen. So and I think just about that analysis that ethylene market that’s not a market we are in, but everybody to analyze this is as ethylene is going to be oversupplied in the U.S.

Which is frankly we are looking at an ethylene export facility.

So translating that some of that steam cracker demand may not be as strong as maybe in answering Jeremy question earlier?

That’s right. This is - when I gave you those numbers, we look at traditional operating rates that are operationally dictated right, because that’s been the environment in the U.S. except for some stocks switching. Now we’re talking about on the commodity side that you are creating you are talking about what you do with all that commodity.

Yeah. And one more point. We say well ethane well ethane prices, will they go up and what will the margin be and it still comes down to gas to crude. And you still - if you believe crude prices are not sustainable at this level and you believe there is plenty of natural gas in the U.S. then you have to believe that the gas to crude price is going to supporting but ethylene plants in the U.S. versus ethylene plants in other parts of the world. So you can have ethane go up. You can have margin expansion between ethane and natural gas and it’s still be cost advantage relative to other parts of the world.

In other words there is room here for everybody to win.

Alright, that’s really helpful. Thanks so much.

Your next question comes from Danilo Juvane with BMO Capital Markets.

Good morning, everyone. Most of my questions have been hit, but I did have one quick question on the quarter. I think you reported 1.2 billion in gross margin but was that a clean number, where there some non-cash items there in that number?

Bryan?

Well those are kind you - hi Danilo, this is Randy. It’s fairly clean number. We had the onetime items that you saw in the press release were below gross operating margin. So it’s fairly clear.

So the number includes or excludes the 47 million mark-to-market loss from crude oil marketing?

Well - yeah it does that - I am sorry, I just spoke on that.

Okay, so there were no -

So, that’s in, yeah.

Okay, got you. Alright, thank you.

Your next question comes from Faisel Khan with Citigroup.

Hi, good morning, guys. Going back to the export - LPG export, is they are going to ask the question as a way, the cancellation, did they come from customers that are based in Europe, Asia or in the U.S., so we should include your marketing business?

Well, our marketing business does lift cargoes, we sell FOB and probably we’re going to answer the other part of question.

Okay, fair enough. Is it fair to say that you know the - as you cancel the propane export cargoes but then you’ve ramped up the PGP exports, at the end of the day the propane is being used produce propylene, so is it just satisfying that end demand to the export of PGP, because this PGP volume sort of came out of nowhere, so I am just trying to understand the market dynamic there?

We’ve been exporting PGP for a period - for a while. The change is we are exporting more than we ever have, we think it will grow and we are exporting it from our own facility. So - and yeah, we talk about, okay we’ve had a few cancellations. Frankly those were not surprised us and we’re still going to export 11-12 barrels a month. So you know we get a little bit hung up on oh god there is cancellations, we can’t expect them. We didn’t make any less money. We are backfilling with propylene. And let’s say it’s pretty good position we have.

Okay. I guess my question is, the backfilling with propylene, is that to satisfy the end demand that’s being the end demand for propylene that may have not being - there was no being supplied by the use of the propane cargoes being used in MBPD facilities in other parts of the world?

I think most of the propylene, we’ve exported has gone to - this has stayed in this hemisphere, most of those PDHs are in Asia, RB?

Yes.

So, no, it hadn’t displaced PDH produced propylene in China, it’s in this hemisphere.

Okay, okay, got you. And just on the consistently sort of high volumes for NGL equity volumes that are 143,000 during the quarter, was there any sort of benefit from the ramp up of the new South Eddy plant?

I think very little in the quarter, we started up that plant through the end of the quarter. I think the big change in the equity was our ability under variable economic to recover a lot more ethane and we’ve recovered in the second quarter last year, that lack on the discretionary ethane when our producers are lack to reject to ethane, we have the opportunity to recover it, now I think we were - lifted the number not believe would be - we were covered a hell of lot more in the second quarter this year then we covered in the second quarter of last year.

Okay. And then last question for me. Your CapEx spending plan, I make sure I understand this. Has this spending plan changed at all for the rest of this year and for go into next year?

Not really, we’ve been pretty consistent on the 2.8 for the year and there really hasn’t been any change with the exception of adding another processing plant that we announced last quarter.

Okay, just wanted to make sure. Thanks guys, I appreciate that.

Your next question is from Richard Verdi with Ladenburg.

Hi, good morning and thank you for talking my call here. So I just have a couple of high level questions here. You looking back, enterprise has clearly been very successful in organic and inorganic growth strategy and currently there is a few billion dollars of capital projects on the table. So I am wondering on that in organic side, I am sure the company sees a number of potential deals on a daily basis. So I was wondering if you could give us a sense of where enterprise is potential for inorganic growth on both the type of markets on and from of region standpoint?

I guess - I think sometimes people overlooked it. Within the last two years, we’ve done over $8 billion of acquisitions and we successfully digested those, sometimes we just do it more quietly. And we continue to look at M&A opportunities and that’s one part of the thing we’ve always done. And that’s part of one of the way we think about growth in the future. But we’re pretty choosy on the opportunities that we pursue.

Is there any area of interest or is it just broad and we’ll take the opportunities as they come?

You know I think it’s more broad and we’ll take the opportunities as we go.

Okay, thanks. And then the second question is you know looking through the facilities under the enterprise umbrella, it appears the company, it’s been more supply driven rather than demand with the demand side picking up over recent time and then when considering the ethane export facility, we expect to up and learning, that appears we used to put enterprise more of a 50-50 split of being supply versus demand driven. So if I am correct, was there an internal decision that transform the company into more of a demand business and can we expect that trend to continue more and moving forward or can we expect the supply driven side to pick up once again or maybe even remain a 50-50 split? Just some color would be really helpful here.

You know I think we have always been equally purposed on the demand side as we are on the supply side. And if you look at some of our more recent projects, is a demand projects, Aegis is a demand project, it has - it’s an ethane it goes from Corpus Christi, Texas to the Mississippi River to be there is no decline curve. The PDH plant is a demand projects. Our exports as you rightly point out are demand projects. We like the idea. The PDH was an extension of our C3 value chain. We’ve said before that we would like to extend our C4 value chain. And we’ve said before we’ve been very help and we’re looking at an IBDH plant. So I think your observation is right that we have been - we are looking at demand projects but it’s long and we’ve always looked at equally at demand projects. Will we do supply projects? I think the Midland, Sealy is a pipeline, is an indication that yes, we will for the right basin. I think what we are doing in the Delaware Basin is an indication that we like that basin but we’re going to pretty picky in that regard.

Okay, that’s great. That’s great color. Thank you very much for the time guys.

Your next question is from Michael Blum with Wells Fargo.

Hi, everyone. Just quickly, so what is total ethane rejection across your system and then totally if you have updated view of kind of where we are from an industry perspective? Thanks.

Yeah, we never quote what ethane rejection is on our system. And one of the issues that we have is people define that different ways. And so I know that I can look at enterprises number where we’ve been saying that look we think it exceeded 60,000 barrels for the industry, while other people have quote much smaller numbers at that time and I think it really is from a definition standpoint. So the way we look at it is what’s coming out of the rock is ethane. And then what’s being actually produces ethane, we take the difference. So ours is probably on the extreme side when you define ethane rejection, okay. With that said for us I have to tell you it varies almost day to day. We look at every day at every plant in every recovery and determine what we think. I mean to the air what we should be doing. So it is not static at all. What we are doing today could change and probably will change tomorrow. That’s just how it works. Using the big example, you know you are - over 500,000 barrels day using our methodology today. They’ll not be the same for tomorrow.

Got it, thank you very much.

Your next question comes from Selman Akyol with Stifel.

Thank you. Good morning. Just - I think you’ve alluded to this one already but on the margins for octane enhancement, they were down pretty significantly, all tied into refine product demand?

Yes.

Okay and so we got to look for the rest of the year there is well then?

We can’t look for the rest of the year but it as Jim mentioned earlier fourth quarter we did hedge fourth quarter and so as far as plan, we are pretty secured in that plan.

Okay. And then just in terms of storage with all the inventories out there, can you just talk a little bit what you are seeing in the storage market in terms of rates?

It’s probably the most undervalued service in the industry right now. But we’re seeing a high demand for storage. All you got to is look at the numbers and you can probably back calculate that well everybody’s got a lot of stuffs stored in their cabins and we’re not unique in that respect. But from an enterprise perspective, it’s been - it’s opened up quite a lot of Contango opportunities as Brian mentioned, you said we got about $800 million start up in working capital in Contango and we’re not going to be afraid to do more. To your point, we see storage. Yeah, I remember one that many years ago that NGL storage went for $0.65 a barrel and that give a couple of returns and maybe you’d get a nickel throughput. Today we’re probably getting, we’re knocking on the door $3 a barrel and between $0.14 and $0.20 throughput with no returns. So in crude oil storage, you are not having any trouble, you guys aren’t having any trouble leasing out your storage tanks we bring them out. And I think the same things true in refinery products and we - when we have some leftover, we’ll do a little bit after RB for petrochemicals.

Alright, thanks very much.

And your next question comes from Tom Abrams with Morgan Stanley.

Hey good morning and thanks. Just couple or three questions. Propylene versus LPG profitability, you suggested when you answered that they were similar in the second quarter, is that true? And then secondly what is the historic relationship between those two? Are they - can you flip between them quite easily without profit concerns?

Yeah, first of all, I am sorry, I don’t remember saying that, so if I did it was a misunderstanding.

Well, you said you replacing LPG exports with propylene, didn’t matter to you.

Oh, didn’t matter? Well I’d rather export LPG with the contracts we’ve got frankly but I also said propylene is an evolving strategy. To your point, we don’t interrupt any LPG by exporting propylene. We’ve got the capability to do both. We may slow one down in order to take advantage of the other but those were filtrations systems we put in can load either. RB, is that good?

That’s good. Just a reminder, the volume of propylene compared to LPG is just a small fraction.

I mean we are loading 50,000 barrels ships and make them pretty damn good money on those 50,000 barrels ships, RB?

Right, yeah.

Hey Tom, this is Randy. And what we had in the press release, the cancellations that we’re speaking to were with respect to June and August, so not in the second quarter. And really it was the combination of the cancellation fees plus the incremental margin from doing the PGP exports that together offset the LPG.

Okay. And then just remind me on the Pascagoula fire, the net financial impact you expect and it’s timing differences with insurance and the actual costs?

Yeah. Tom, this is Randy again. In the second quarter number, I believe there was a $7 million charge with respect to the Pascagoula facility that’s based on the information we have at this time. As Jim pointed out, the chemical safety board is still coming in and evaluating the facility. So we’re beginning evaluate the facility but as far as coming in and really knowing what the cost to get that facility backup and the definitive timing, we’re still developing that.

And lastly on the crude segment, it looks you have that non-cash item in there and maybe some volumes where we can differentials, how does that move forward of next couple of quarters, how should we think about that profitability evolving?

As far as the mark-to-market piece on our crude hedges?

Whatever is moving in that segment that might drive it one way the other?

So obviously as prices come down from a mark-to-market perspective, that’s going to show up on the crude books for this month. So it’s really a relative of the price of crude. As crude goes down, it’s positive; as crude goes up, it’s negative.

Is it volume in any particular basins that we should be watching?

I am sorry?

Are there volumes in any particular basins we should be tracking or concerned about?

No, those are just hedges across the board and so it’s not necessarily specific to one area.

Alright, okay, thanks a lot.

Your next question is from Ross Payne with Wells Forgo.

Good morning, guys. Hey Bryan, some MLPs are given as pro forma leverage metrics for partially completed projects that are not yet providing cash flow, I know you may not have the specifically but given the substantial CapEx spend for this year and next, can you give us a general range of how much lower leverage might be at pro forma treatment might be applied? Thanks.

Sure, Ross. It would be somewhere around 0.3 times.

Perfect. Thanks.

Your next question comes from Gabriel Moreen with Bank of America, Merrill Lynch.

Hi guys. Most of my questions have been answered. Thank you.

Your next question comes from Helen Jung Ryoo with Barclays.

Yes, thank you, good morning. Just a quick follow-on on ethane export project, so on the contracted volume, you guess full economics is cargos are not listed or is it of the similar to the LPG contract where you get some type of cancellation fee if cargos are not listed.

It is similar to the LPGs cancellation fees, little bit lower than the full loading fees but that can be offset some by variable cost as well.

All right, is it in terms of magnitude more than sort of 50% or you able to quantify what that level is when you get paid if it is not listed?

I can barely hear you.

Sorry, is it better, so I was just asking the cancellation fee, are you able to quantify, what that level is versus the full economics.

I think in general and all that bills, tell me if I am wrong, in general, while the cancellation fee may be lower than the term length if they lived, it is only, you are still making the same, pretty much the same amount of money because you don’t have the variable cost associated with loading the bill.

I think it is pretty close and the cancellation fees, you know the ratio of the cancellation fees to the loading fees and that thing is very, very close to what it is now in our LPGs.

Got it. Thank you very much.

Jenifer this is Randy, we have time for one more question, if you have one in the queue, if not.

And our final question from Chris Sighinolfi with Jefferies

Jim, I am not sure this is for you or for Bryan, but I was just - one question I guess on structure for me, you clearly guys don’t have any challenges raising capital but thinking about at least from our vantage point we see some what we would categorizes interior companies relative to enterprise trade, either on top of it or add a premium to it merely to the fact that they are structured as C-corps [ph]. So just curious if you had any thoughts of that structure over time to perhaps introduce the security that would be organized that way.

Hey Chris this is Bryan, we certainly we look at lot of things and certainly study different structures, we are pretty happy with where we are at and things what works pretty well and certainly over the long run it has proved well, if you have the right, rates structure and actually perform or use the structure not abuse the structure, works quite well so, will continue to evaluate other options but at this stage we are happy with where we are at but the one security and keep the storage simple.

Okay, thanks again guys.

Okay Jennifer, if you would - would you give our listeners the replay information for our call today.

A replay of this call will be available beginning today July 28, 2016 at approximately 12 PM Central Time until August 4, 2016 at mid night. To access this replay you may dial number is 800-585-8367, 855-859-2056 or 404-537-3406 at any time during those days. You will be asked to provide the ID number of 50282348. Again the phone numbers are 800-585-8367, 855-859-2056 or 404-537-3406 with the ID number of 50282348.

Okay, thank you, Jennifer, and thank everyone for joining us today had have a good day. Thank you, good bye.

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