Enterprise Products Partners L.P (EPD) Q2 2013 Earnings Conference Call August 1, 2013 10:00 AM ET
John R. Burkhalter – Vice President, Investor Relations
Michael A. Creel – Director and Chief Executive Officer
A. J. Teague – Director and Chief Operating Officer
W. Randall Fowler – Director, Executive Vice President and Chief Financial Officer
Anthony C. Chovanec – Vice President
Darren Horowitz – Raymond James
Brian Zarahn – Barclays Capital
Ross Payne – Wells Fargo Securities
Bradley Olsen – Tudor Pickering Holt
John Edwards – Credit Suisse
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.
John R. Burkhalter
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.
Michael A. Creel
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 to the second quarter of 2013. This is our 36th consecutive quarterly increase in our cash distribution per unit and a 7.1% higher than the cash distribution paid with respect to the second quarter of 2012. Distributable cash flow provided 1.5 times coverage of the cash distribution for the second quarter of 2013 and after adjusting for the proceeds from sales it would have provided 1.4 times coverage.
We retained $318 million of distributable cash flow this quarter and $621 million through the first six months of the year, we also raised $214 million through at the market for our ATM program and $135 million from our distribution rate investment plan or DRIP and our employee unit purchase plan in the first half of the year, when adding to the $487 million of proceeds – from our equity offering in February, we have raised to retain approximately $1.5 billion of cash this year is available to reinvest in growth capital projects reduced our debt and decrease our reliance on capital markets.
As in an acquisition, we expect our ATM and distribution reinvestment plan will be sufficient for remaining equity needs for 2013 and we don’t not otherwise expect to be in the public equity markets. The NGL Pipelines & Services segment reported gross operating margin to $540 million for the quarter, slightly down from the $566 million for the second quarter of 2012.
On natural gas processing and related NGL marketing business had $75 million papers decrease in gross operating margin, compared to the second quarter of last year. Like last quarter, we had lower processing margins across all of our processing facilities and reduced ethane extraction, partially offsetting the impact of lower natural gas processing margins was an increase in gross operating margin from fee based processing in NGL marketing.
Higher sales volumes which include propane sold for export more than offset lower margins in our marketing business. Our fee based natural gas processing volumes increased to 4.6 billion cubic feet per day this quarter, from 4.2 Bcf per in the second quarter of last year. Fee based natural gas processing volumes rose 40% and equity NGL production from our South Texas processing plans increased 460% to 40,000 barrels per day, as a result of production growth in the Eagle Ford Shale.
The three natural gas processing trains at our Yoakum facility continue to perform above expectations. The increase in fee based processing and equity NGL production for the South Texas plants more than offset a decline in fee based processing in equity NGL production from our Rocky Mountain plants due to the lower production and reduced recoveries of ethane.
Gross operating margin for our Ngl Pipeline in the storage business increased 19% to $188 million this quarter, from a $158 million for the second quarter of last year. Our South Texas NGL Pipeline System contributed $21 million of this increase, primarily due to a 125,000 barrel a day increase in transportation volumes on increased Eagle Ford shale production.
Our LPG export facility and our later channel pipeline reported a $12 million increase in gross operating margin and 202,000 barrels per day increase in propane volumes. We increased refrigeration capacity of our export facility in March of 2013 and are now loading an average of 7.5 million barrels a month of propane compared to 3.5 million barrels a month before the expansion. NGL Pipeline transportation volumes were record 2.7 million barrels per day this quarter.
Our NGL fractionation business report a gross operating margin of $93 million this quarter compared to $69 million in the second quarter of 2012. This 35% increase was primarily due to higher average fractionation fees and increased volumes from our Mont Belvieu fractinators. Our six NGL fractinator at Mont Belvieu began service in October of 2012 and Frac 7 and 8 are scheduled to begin operations in the fourth quarter of this year.
Gross operating margin from the Onshore Natural Gas Pipelines & Services segment was $198 million this quarter, $22 million higher than the second quarter of last year primarily due to higher firm capacity revenues and volumes from our Texas Intrastate pipeline System, which benefited from increased production from the Eagle Ford shale. Our Onshore Crude Oil Pipelines & Services segment reported strong results again this quarter with growth operating margin of $197 million compared with $96 million for the second quarter of 2012.
Total Onshore Crude Oil Pipeline volumes were record 1.1 million barrels per day this quarter up 58% from 725,000 barrels a day in the second quarter of 2012.
Our South Texas Crude Oil Pipeline System, which includes the new 24-inch pipeline from Lissie to Sealy that began service last June and Seaway Pipeline which was reversed in June 2012 and fully powered up during the first quarter of this year was responsible for 83% of the increase in gross operating margin. Enterprise and Plains All American announced the formation of the 50/50 crude oil pipeline joint venture in the Eagle Ford Shale in the third quarter of 2012.
A portion of this system is in service now and we realized equity income from this joint venture in the second quarter of this year. The remaining part of the system is scheduled to be placed in service during the third quarter. Our Petrochemical and Refined Products and Services segment reported gross operating margin of $163 million this quarter compared to $157 million in the second quarter 2012.
Gross (inaudible) products Pipelines and services business reported a $31 million increase in gross operating margin primarily due to higher transportation fees on our TE products pipeline included in these fees is a $24 million that is recognized in connection with a settlement of a rate case, we also had higher intrastate petrochemical and refined products transportation volumes.
Total pipeline transportation volumes for the business were 555,000 barrels a day in the second quarter compared to 482,000 barrels a day for the second quarter of last year partially offsetting this increase were decreases in gross operating margin from our propylene fractionation, octane enhancement and high-purity isobutylene business.
Propylene fractionation business was impacted by lower sales margins and the octane enhancement facility had an unplanned outage for our catalyst change out and maintenance this facility was down 11 production days during the second quarter and 10 production days in July. We estimate loss to gross operating margin was approximately $9 million in the second quarter and will be about $11 million for July.
In addition to the strong operating performance this quarter we also completed the construction and began operations of approximately $700 million of growth capital projects included in these projects is the expansion of our Propylene – Mont Belvieu, the completion of our NGL Pipelines from Yoakum to Alvin, Texas and an extension of our West Texas crude oil pipelines system.
In the first six months of this year, we place $1.1 billion of capital projects and service and we have another $1.5 billion of projects that we expect to be completed in the second half of this year. These projects include the Texas expressed pipeline and gathering system in the seventh and eighth fractionators of Mont Belvieu, a new pipeline connecting Jones Creek to our ECHO crude oil terminal and the joint venture crude oil pipeline with plays that I mentioned earlier.
We’re pleased with the solid cash generated by our businesses this quarter, especially given the week NGL prices that affected our processing and marketing margins. We do not expect the NGL prices, especially ethane to improve significantly near-term, given the continued increase in natural gas production from shale plays. This growth in natural gas production and NGL supplies however, will create additional investment opportunities for our partnership at Jim will discuss in a few months.
While new supplies of outpace demand for some parts of the NGL barrel, demand side in the U.S. is responding with a large projects like new world scale ethylene crackers, a new PDH facilities. In the meantime, increased international demand for domestic LPG is helping balance to market through expired LGP exports.
Although, this transition period is proven to be challenging for some midstream operators, we feel good about our ability to deliver and continue to grow, given our predominantly fee-based diversified portfolio of assets and solid balance sheet, strong liquidity and significant growth opportunities.
I’m confident that our team with dedicated employees will continue to execute our growth plans and find new opportunities and we are continued to excited about the prospects available to Enterprise and we look forward to working for our investors to create even more value.
And with that, I’ll turn the call over to Jim.
A. J. Teague
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 $0.35 and Enterprise’s processing income is on the receiving end of that slump.
However, Petrochemicals finally get it. I understand the size of the shale resources and I know that they have to participate in order to be competitive and as Mike said the U.S. is witnessing a large petrochemical expansion along the Gulf Coast, most of it focused on low cost ethane, I started to say that they had the largest petrochemical expansion in history, but I haven’t had a chance to compare that to the second half of the 80s.
In Enterprise we have said before we connected every major ethylene plant in the U.S. we understand their needs and that is why we are building a dedicated U.S. Gulf Coast ethane header to meet their growing needs. Other parts of the barrel have also suffered and I think sometimes in sympathy to ethane, but generally because of the ability to compete with other hydrocarbons including their ability to be exported in some form or fashion this new NGLs are making their way into domestic and global markets and we are participating in that.
We have seen propane spreads between the Gulf Coast and Northwest Europe almost double over the last two years. We also recently completed agreements besides [war bond] exports; we completed agreements that will enable us to deliver substantial amounts of natural gasoline from Mont Belvieu to customers in the Chicago area. These volumes ultimately bound for the (inaudible) markets in Western Canada.
Looks out of this life of NGLs is the investment opportunities it has created for Enterprise, Mike mentioned a lot of the pipelines we are bringing home that is about 800,000 barrels a day of new capacity between Maple, Texas expressed front range ATEX and Aegis that are all underwritten by fixed fee contracts.
We currently have an open season underway to gauge shipper interest in modifying ATEX to also ship propane. Mike mentioned Fracs VII & VIII and to put in this context in just three years we will have added over 400,000 barrels a day of fractionation capacity at Mont Belvieu, when these last two trains are on land, we will have over a million barrels a day or right at a million barrels a day of the fractionation capacity as a company. And all of our contracts are fixed fee contracts.
Mike mentioned, Yoakum, which may depreciate, I don’t know that Yoakum is the largest plant in terms of gas throughput, but we do believe it is the largest NGL producing processing complex and that we are producing some wafer between 100,000 and 135,000 barrels a day.
And last but not least, the LPG export facility is performing beyond our expectations. We’re contracted through 2015 and we have contracted that extend out to 2022. We’re also looking at another expansion of that that’s low cost and gets us pretty immediate capacity.
In crude oil, as Mike mentioned, our gross operating margin is up approximately $100 million, compared to last year at this time. But it’s down somewhat I think compared to last quarter primarily the result of narrowing WTI to LLS spreads. I’m not one that believes in the sustainability of wide spreads and realistically we can expect a large spreads we saw in the first quarter to continue this north and south pipeline expansions including our own lands.
So we expect this windfall is not well of course, virtually all the North America’s crude oil growth is coming from places that have improved up in recent years and like Western Canada, the Bakken, the Permian, Eagle Ford and the Gulf of Mexico.
Between the same to be loops Seaway Pipelines, our assets in the Permian, our Eagle Ford assets and our Gulf of Mexico crude oil pipelines including the Lucius project we have underway. We’re pretty well situated at that most if not all of these new supplies. Incidentally, we’re not sure these producers are through. We’re also watching activities in new plays like Niobrara and the Mancos and the San Juan.
With significant inland barrels of various crude lives number coming available to Gulf Coast for refiners, we’re focused on building downstream crude oil assets through our ECHO and Houston Ship Channel expansions. We really believe that our ECHO terminal and its supporting distribution network that we’re building, we believe that’s going to play a strategic role in linking these new suppliers to Gulf of Coast refining complex.
Our crude oil position the Seaway Pipeline – summarizing that position Seaway is fully reversed and we don’t talk about and being looped and what we don’t talk about a lot is that the loop includes an extension to the Beaumont, Port Arthur area. Our Eagle Ford crude assets are in service or nearing completion and we are now – and then our ECHO build out is underway.
We remain excited about our progress in crude oil, we’re never satisfied, but we are excited and we’re excited about its importance to us. We recently announced plans to build refined products export facilities in and around what we call our Southern Complex on the Gulf Coast. U.S. refining industry is running at high utilization rates upgrading and expanding and it’s become a significant ex-quarter refined projects.
With this project we will build capacity to export refined products by upgrading our refined products pipeline that connects 12 Gulf Coast refineries and connecting it with export facilities at both Beaumont and the Houston Ship Channel.
This project part of which will be up in running in 2014 is another example of existing assets being repurposed and expanded as industry conditions change. Our Eagle Ford build out for natural gas NGL and crude is just about complete well most of the assets currently in service.
In NGL’s we’re nearing the completion of the major build out we started three year ago we’re most of our large transportation, fractionation initiatives, terminal over the next few months. Oil continues to be a growing part of our business. And our natural gas assets situated throughout the Texas, Louisiana, Gulf Coast are seeing growth in both supply and demand and are perfectly situated to serve some very large demand markets that would be constructed over the next several years.
In NGL’s we’ve always had a strong franchise and we said that we serve both the supply and demand side of the equation. We’re going to also concentrate on both the supply and demand side of the equation for other parts of our businesses, for Petrochemicals, this demand side focused has been confirmed by the inches pipeline and our PDH plant. And refine products, our Southern Complex export project is another validation of our determination to be on the demand side of the equation for refine products.
And for crude oil build out of the ECHO terminal and its downstream pipeline to support the very large Gulf Coast refining industry as an example of focus on the demand side of the equation. As an industry continues this transition from a state of shortage of hydrocarbons that require waterborne imports of natural gas, LPG, crude oil and refined products to the significant growth of Inland domestically produced hydrocarbons we feel like we are pretty well situated to capitalize on that.
With that, I’ll turn it to Randy.
W. Randall Fowler
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 due to recording a deferred tax expense and a related liability, with respect to certain changes for the Texas Margin Tax that were enacted in June 2013. Our capital spending was over $1 billion this quarter including approximately $990 million spend on growth of capital. We expect to invest an additional $2.4 billion in growth capital expenditures through the remainder of 2013.
Total growth capital expenditures for 2013 are expected to be approximately $4.2 billion, sustaining capital expenditures were $75 million this quarter compared to $90 million for the second quarter of 2012. And they were $132 million through the first six months of this year compared to $180 million for the first six months of 2013. We still expect to spend approximately $350 million in sustaining capital expenditures this year but we will have to hurry.
Adjusted EBITDA for the 12 months ended June 30 was $4.5 billion, our consolidated leverage ratio where debt principal to adjusted EBITDA was 3.6 times for the 12 months ended June 30, 2013 and this adjusted debt for the 50% equity treatment of the hybrid securities that average debt life of the average life of our debt is 14 years using the first call date for the hybrids, 18.5 years that we use final maturity. And as I said our effective average cost of debt is 5.4%.
We raised approximately $280 million through our ATM distribution reinvestment plan and employee unit purchase plan programs in the second quarter which includes $25 million invested by privately held affiliates of Enterprise Products Company through the dividend reinvestment plan or distribution reinvestment plan.
EPCO expects to purchase another $25 million of Enterprise common units through the distribution reinvestment plan for the distribution to be paid on August 7 which would bring total purchases this year to $75 million as you remember earlier this year they expressed a interest to purchase at least $100 million of Enterprise common units in 2013.
On the liquidity front in June, we had great support from our Bank group and increased our liquid by refinancing and extending the maturity dates of commitments under our multiyear bank credit facilities in our $3.5 billion multiyear credit facility we extended the maturity date from September 2016 to June 2018. And we also added a new $1 billion, 364-day credit facility and the additional liquidity will provide us more flexibility in funding our capital investments. Finally, at June 30, we had consolidate liquidity of approximately $4.5 billion including availability under our credit facilities and unrestricted cash.
And with that Randy, I think we’re get ready for questions.
John R. Burkhalter
Okay Jennifer, we are ready to take questions now from our audience.
Earnings Call Part 2: