Enterprise Products Partners' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Jan.31.13 | About: Enterprise Products (EPD)

Enterprise Products Partners L.P. (NYSE:EPD)

Q4 2012 Earnings Call

January 31, 2013 10:00 am ET

Executives

Randy Burkhalter – Vice President-Investor Relations

Michael A. Creel – President and Chief Executive Officer

W. Randall Fowler – Executive Vice President and Chief Financial Officer

A. J. Teague – Executive Vice President and Chief Operating Officer

William Ordemann – Group Senior Vice President

Thomas M. Zulim – Group Senior Vice President

Analysts

Darren Horowitz – Raymond James & Associates, Inc.

Brian J. Zarahn – Barclays Capital, Inc.

Brad Olsen – Tudor, Pickering, Holt & Co., LLC

Curt N. Launer – Deutsche Bank Securities, Inc.

Michael J. Blum – Wells Fargo Securities LLC

John Edwards – Credit Suisse Securities

Yves C. Siegel – Neuberger Berman LLC

Operator

Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enterprise Products Partners Fourth Quarter 2012 Earnings Conference Call. (Operator Instructions) After the speakers remarks there will be a question-and-answer session (Operator Instructions). Thank you, Randy, you may begin.

Randy Burkhalter

Thank you, Regina. Good morning, everyone. Welcome to the Enterprise Products Partners conference call to discuss results for the fourth quarter of 2012. Speakers today will be Mike Creel, President and CEO of Enterprise’s General Partner; followed by Jim Teague, Executive Vice President and Chief Operating Officer; and Randy Fowler, Executive Vice President and CFO. Other members of our senior management team are also in attendance.

During this call today, we will make forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 based on the beliefs of the company, as well as assumptions made by, and information currently available to Enterprise's management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the Securities and Exchange Commission for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call.

With that I’ll turn the call over to Mike.

Michael A. Creel

Thanks Randy. 2012 was an exceptional year for Enterprise. We had a number of financial and operating records which is remarkable given the challenging ethane and propane commodity markets much as here and the market uncertainty around the financial problems in Europe and the U.S. election.

Our record financial performance in 2012 includes net income of $2.4 billion; earnings per unit are $2.71 on a fully diluted basis; gross operating margin of $4.4 billion with improved results in four out of our five business segments; and distributable cash flow of $4.1 billion, which included $1.2 billion of proceeds from the sale of non-core assets.

We ended the year with a strong fourth quarter that produced record gross operating margin of $1.2 billion and adjusted EBITDA of little over $1.1 billion. This led to net income of $617 million or $0.68 on a fully diluted basis for the quarter. Net income included losses of $27 million or $0.03 per unit on a fully diluted basis with non-cash impairment and other similar charges.

Distributable cash flow provided 1.5 times coverage of the distribution paid with respect to the fourth quarter of 2012.

The NGL pipelines and services segment reported gross operating margin of $632 million for the quarter only slightly below the $635 million for the fourth quarter 2011.

Our natural gas processing and related NGL marketing business reported a $66 million decrease in gross operating margin for the quarter compared to the fourth quarter of 2011 and this was due in large parts of lower processing margins and equity NGL production volumes primarily from our Rocky Mountain, Permian Basin, and East Texas facilities.

Our fee-based natural gas processing volumes continue to increase reaching a record 4.7 billion cubic feet a day this quarter and that's 15% higher than the fourth quarter of 2011. Our NGL pipelines and stores business reported a $50 million or 29% increase in gross operating margin for the quarter supported by record pipeline volumes of 2.5 million barrels per day.

Enterprises South Texas NGL pipeline which includes the new Eagle Ford NGL pipeline completed in mid-2012 reported a $27 million increase in gross operating margin on higher volumes. Our NGL fractionation business continues to perform well, earning a record $82 million of gross operating margin this quarter from a record volume of 707,000 barrels per day.

We had a $24 million increase in gross operating margin from our Mont Belvieu NGL fractionators and a 32% increase in volume. Our sixth NGL fractionators at Mont Belvieu began operations in October 2012 and the seventh and eight fractionators are on schedule to begin operations in the fourth quarter of this year.

The onshore natural gas pipelines and services segment reported gross operating margin of $210 million for the quarter, that’s an 8% increase over the fourth quarter of 2011 and another record. We had $18 million or 29% in gross operating margin from our Texas Intrastate system with a 9% increase in volumes, reflecting the strong production increases from the Eagle Ford Shale.

Our Acadian Gas system reported a $14 million increase in gross operating margin as a result of a full quarter of operations from its Haynesville Extension pipeline, that began service in November 1, 2011.

Our Onshore Crude Oil Pipelines & Services segment continues to knock it out of the park, reporting record gross operating margin of $135 million on record crude oil pipeline volumes of 897,000 barrels per day. This segment more than doubled the gross operating margin generated in the fourth quarter of 2011.

Our South Texas Crude Oil Pipeline System, which includes the new 24-inch pipeline from Lissie to Sealy that began service last June contributed $27 million and our share of Seaway's earnings increased by $13 million with a full quarter of operations after the reversal of the pipeline.

We completed modifications and upgrades to the pumps from the Seaway longhaul pipeline earlier this month, which increased the maximum capacity from 150,000 barrels per day to 400,000 barrels per day.

The Offshore Pipelines & Services segment reported gross operating margin of $42 million in the fourth quarter of 2012 compared to $60 million for the fourth quarter of 2011. Lower demand fee revenues and volumes from the Independence Hub and Trail pipeline led to a $20 million decrease in gross operating margin.

The Independence Hub platform earned demand fees of $4.6 million per month from the time it began operations in March 2007 until the demand fees ended in March 2012. Partly offsetting this decrease was $6 million increase in gross operating margin from offshore crude oil pipelines which benefited from improved results from the Constitution, Poseidon and Cameron Highway pipelines.

Currently there are 37 deepwater semi-submersible rigs and drill ships active in the U.S. Gulf of Mexico, and another nine are expected to arrive by the end of this year. Approximately 45% of these rigs and ships will be focusing on existing fields, many of which are connected to the Enterprise assets.

Our Petrochemical & Refined Products Services segment reported gross operating margin of $143 million in the fourth quarter of 2012, and that’s a 4% increase over the fourth quarter of 2012.

Our refined product pipelines and related services business reported a $35 million increase in gross operating margin, primarily due to lower pipeline repair and maintenance expenses and improved marketing margins, which more than offset a 25,000 barrel a day decline in pipeline volumes.

Partially offsetting this were lower propylene fractionation volumes and sales margins, decreased butane isomerization volumes and revenues from the sale of by-products and lower volumes from our octane enhancement facility. Collectively, these business reported a $31 million decrease in gross operating margin this quarter compared with the fourth quarter of 2011.

We normally do our turnaround on the octane enhancement facility in the first quarter of the year. However, in this year 2012, we started early on the 2013 turnaround and started in December instead. and so we had a decline in the gross operating margin from that business simply because of the timing of the turnaround that facility did resume full operations in mid-January of this year.

The $2.9 billion of major capital projects that began to service in 2012 and started generating fee-based cash flows, we expect to complete another $2.4 billion of project this year, and we have an additional $4.8 billion of projects in the construction that are scheduled to be completed in 2014 and the first half of 2015. The revenues from these projects will be predominantly fee-based and supported by long-term contracts.

In addition to building new projects, we’re also repurposing certain assets, to enhance our return on those assets, meet customer needs and provide solutions for industry bottlenecks. Last May, we reversed service on the jointly owned Seaway crude oil pipeline, reducing the bottleneck at Cushing and providing much needed domestic crude oil for refineries along the Texas, Gulf Coast. This month, we’ve completed marketing, the remaining pumps along the pipeline to enable us to transport up to 400,000 barrels a day.

Another project utilizing existing assets, meet customer needs is the development of our ATEX pipeline to move ethane from the Marcellus, Utica shale areas to the U.S. Gulf Coast. We’re building a new pipeline from the producing areas to an interconnect in Indiana with an existing refined products pipeline that we own, that will be converted to flow ethane south to the Gulf Coast. Through ATEX producers will have access to the largest ethane markets along the Gulf Coast.

Our commercial, engineering and operations teams are doing a great job in developing growth and expansion opportunities for our partnership and to meet the needs of our customers. Our disciplined approach to managing the balance sheet includes retention of cash to lessen the need to access the equity capital market. We retained approximately $1.9 billion of cash flow in 2012. And since our IPO we have retained $5.3 billion or 29% of the total distributable cash flow generated during that period.

We continue to have strong coverage of the cash distribution paid to our partners with distributable cash flow providing 1.9 times coverage of the cash distribution paid for the respective 2012. Excluding the $1.2 billion of cash proceeds from the sale of non-core assets, our coverage was 1.3 times. The record distributable cash flow generated by our fee based businesses enabled us to increase the cash distribution to our partners, each quarter in 2012 extending our track record of distribution increases to 34 consecutive quarters. The distribution we declared with respect to the fourth quarter of 2012 will be paid on February 7 and it’s 6.5% higher than the distribution with respect to the fourth quarter of 2011.

In addition to our growth story, we also set some important safety records. Enterprise had a very good record with respect to safety performance with total recordable instant rates that easily beat industry averages and continue to improve year-over-year. Safety is a core value at Enterprise and we have a strong top led employee driven safety culture. At Enterprise, safety has been and will continue to be a primary focus. And while we are proud of the safety accomplishments of our employees, our goal is to have no incidents.

We continue to provide our unit holders with attractive returns. With our three, five and 10 year total returns at 23.5%, 16.7% and 17.3% respectively, we outperformed nine other diverse asset classes that we’ve been tracking including the Alerian MLP index.

Our disciplined approach to allocating capital and managing our assets to service well and we’re pleased that our accomplishments have been recognized. In 2012, our investment grade credit ratings were upgraded to Baa2 and BBB flat by Moody's and Standard & Poor's, and both of the agencies maintained their favorable outlook for our partnership.

Enterprise was also recently recognized as one of the most honored companies by Institutional Investor magazine in the natural gas MLP sector. These accomplishments would have never been possible without the dedication and hard work of our employees and the disciplined leadership of our management teams.

Our team is focused on a common goal of providing the best total return, possible to our partners, which includes our employees. Our senior management team and our employees are also investors in Enterprise, so you can rest assure that our interest and goals continue to be closely aligned with those of our public unit holders.

Before I turn the call over to Jim, I would like to thank our debt and equity investors, our customers and our bankers for their continued support. 2012 was an exceptional year for our partnership and we look forward to new opportunities in 2013. And with that, I'll turn the call over to Jim.

A. J. Teague

Thank you, Mike. In order to address where we are, I'd like to take a moment to reflect on where we have been. In 2005 Louisiana was devastated by Hurricane Katrina. During that storm, all of our Louisiana operations where impacted, some for as long as a year. Revenue from assets like Pascagoula, Promix, Norco, Calumet, Neptune, virtually all our assets in Louisiana revenue came to a stand still. Every problem in one area invariably creates opportunities in others, and we capitalized on those other opportunities and we achieved a financial growth.

2008, when the financial meltdown hit, crude oil went to $35 a barrel and ethylene plant operating rates went to 55%, although our processing spreads collapsed, we found other opportunities. We captured those opportunities and we achieved our financial goals.

In February 2011, when we suffered a devastating fire at our West Storage site at Mont Belvieu, that would have crippled most other companies. We found ways to overcome the effects of this event, and we did that in days, not weeks, not months and we met that quarter’s financial goals.

Now we are in the midst of another storm; this time it’s a Tsunami. It’s a Tsunami of natural gas liquids, especially in the light end of the barrel; the all axiom the price creates supply certainly proved to be the case in NGLs. The price also creates demand as evidenced by ethylene plant onus conversion to use more NGLs, and the announcement of new crackers and significant expansions by companies like Dell, Exxon, Sasol, Promosa, Chevron Phillips, virtually every ethylene producers expanding for more NGLs.

Price will create demand, but not overnight. Consequently ethane extraction economics for the next couple of years are likely to be anemic on average and volatile as ethane rejection in cracker outages win supply-demand balances. Our margins are good for other parts of the NGL barrel. Producers remained incented to drill rich gas.

Propane is enjoying a better winter than last year, it’s relative weakness I believe is a reflection at least in part and the delay in our export expansion. We believe that once our export expansion is online, propane prices will strengthen.

Finally the heavy end of the NGL barrel is strong and we have exceptionally strong demand for the seaport plus components driving spread beyond our expectations. As with other storms, with weather, this tsunami will result in Enterprise capitalizing on new opportunities. For example, this storm enhances the value of our export expansion. The 40 million barrels we exported last year will grow to over 60 million barrels this year. What we have targeted to sell over our export dock we have sold. But we have purposefully left open a slight month to spot opportunities, our operational issues and have been enjoying even greater margins on our spot cargos. Net expansion will be online in mid-February.

Our crude oil business will have a full year of our Eagle Ford crude oil system from Lyssy, and over six months of benefits from our joint venture system with plants out at Gardendale. We will have a full year of the Seaway reversal at a capacity on a WTI basis of 400,000 barrels a day. The demand for this capacity is strong, and in addition to the tariffs, the capacity we took out as Enterprise is paying additional benefits. When the process commissioning our third train at our Yoakum processing complex. That complex which was designed to process 900 million cubic foot a day is testing during this commission at over a Bcf a day, and we touch north of 125,000 barrels a day during our commissioning.

Yoakum could easily be the single largest producers of NGLs in North America. And our Texas and Louisiana intrastate natural gas systems that not that many years ago transported 4 Bcf a day are now approaching 7 Bcf a day.

With the third train of Yoakum up and running, all of our fractionation trains will be running at capacity even in an ethane rejection environment, and we still expect the need to move product to Louisiana for fractionation. Mike said our seventh and eight fractionation trains are due to be online on the fourth quarter, what he didn’t say, is there will be full at start hub.

Further out we are making progress on our Seaway Loop, are lateral to ECHO and our pipeline to Beaumont, Port Arthur. That system will be completed by the first quarter, with our ECHO lateral online fourth quarter of this year.

We have two tanks up and running at ECHO, with another expected to be available mid-February. We are constructing three more tanks that will have an additional 900,000 barrels of capacity, and be up and running in early ’14, and we are permitting additional package in where exactly what we want to build.

Our Texas Express NGL Pipeline comes online in the third quarter of this year; Front Range the fourth quarter of this year. Our Rocky Mountain expansion into the first quarter of next year. These projects add over 450,000 barrels a day of capacity.

ATEX is under construction will be online in the second quarter of ’14. And we think as all of these projects feed our Mont Belvieu fractionation and storage systems and there are all backed by current demand fees and volume guarantees.

So 2013 will be the year of all the Eagle Ford systems, the Seaway systems, our export dock expansion, and a partial year for Texas Express and Front Range projects.

2014 will be the year of the pipelines, the Rocky Mountain expansion, the Seaway Loop, the pipe to Beaumont and ATEX.

And 2015 will be the year of the PDH plant. This 1.65 billion pound a year plan is sold out to four customers, and we have folks talking to us and interested in building the second PDH. At Enterprise, our role has always been to provide services owned both the supply and demand side of the equation. We focus on giving our producer customers, low assurance market choices. We focus on giving our end-user customers, supply reliability and supply flexibility. As field of growth we’ve experienced, it appealed the growth that we expect.

Finally, having what I believe are the most driven and dedicated employees and the industry insurers as you saw in the beginning of my comments, we always find opportunity in challenging markets.

With that, I’ll turn it over to Randy.

W. Randall Fowler

Thank you, Jim. I’ll take a few minutes to go over and discuss additional income statement and balance sheet items. General and administrative costs decreased to $40 million in the fourth quarter of 2012, from $44 million recorded in the fourth quarter of 2011, primarily due to expenses related to the sale of our Mississippi natural gas storage facilities in December 2011, and the merger with Duncan Energy Partners.

In terms of interest expense, it increased to $199 million for the fourth quarter of 2012 from $183 million recorded in the fourth quarter of the prior year. The $16 million increase is primarily due to $1 billion increase in our average debt principal balance.

In terms of capital spending, we had capital spending of $1.2 billion this quarter, including $1.1 billion spent on growth capital. The majority of this was for our Eagle Ford development projects. For the year we spend approximately $3.9 billion on growth capital projects and we expect to invest approximately $4 billion in 2013 on growth capital projects beginning, generating additional fee based cash flows in the second quarter of this year. Sustaining capital expenditures for $366 million in 2012, and we expect to spend approximately $350 million for sustaining capital expenditures in 2013.

Adjusted EBITDA for the 12 months ended December 31, 2012 was $4.3 billion. Our consolidated leverage ratio of debt principal to adjusted EBITDA was 3.56 times at December 31, 2012, and that's after adjusting debt for 50% equity content in the Hybrid Security. The average life of our debt was 12.4 years using the first call date of the hybrids. We had consolidated liquidity of approximately $3.2 billion at December 31, 2012 that includes the availability under EPD's credit facility as well as unrestricted cash.

Affiliates of privately-held Enterprise Products Company, which owned our general partner and 38% of our outstanding limited partner units have expressed their willingness to invest at least $100 million to purchase additional EPD common units in 2013. The first purchase of which will be through the dividend reinvestment plan in connection with the distribution that we will pay on February 7.

Before I open up the call for questions, I'd like to mention that we expect to complete the mailing of our 2012 Schedule K-1s, by Thursday March 28, 2013. They also will be available online by noon Central Time on Friday, March 22. This should be the last year our K-1’s are mailed out this late in the cycle given that we sold remaining interest in Energy Transfer Equity in 2012. So in 2013 with respect to those K-1’s it will be mailed in 2014. We think we'll be back to our traditional slot of mailing those out in late February of 2014.

With that Randy we can open it up for question.

Randy Burkhalter

Okay, thanks. Randy. Regina, we’re ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Darren Horowitz, with Raymond James.

Darren Horowitz – Raymond James & Associates, Inc.

Good morning guys. Jim I want to go back to your comments on ethane extraction economics being anemic and I know you've seen cycles like this before, but as it sits today we’ve got somewhere around 35 million barrels of ethane in stores, the market is running close to 175,000 barrels a day of ethane rejection. And I think pricing spin to math trade just below fuel value around $0.20. So how long do you think ethane pricing can remain at that level and do see anything on the horizon that can help balance the market or do we have to wait till this new crackers come online in 2016 and 2017?

A. J Teague

I also said in the comments that I think it's going to be quite volatile, I think what you’re going to have are periods of time when it looks like it's a good deal to extract more ethane because right now for example and I am not going to give the exact number, but we are seeing some fairly strong draws of ethane out of – in our storage, that’s a function of like you said a lot of ethane rejection and Cracker’s are running fairly strong right now. So you’re going to go through a period time, that you say, well, this is getting better. You’re going to turn it back on and it’s going to get worse, that’s what I mean by anemic and volatile.

Darren Horowitz – Raymond James & Associates, Inc.

Okay.

A. J. Teague

You’re going to see new demand, but demand is in fact, being created, the other thing that I think ultimately helps ethane to some extent is that propane competing with ethane and the crackers, because of the warm winter we had in the last year primarily, you’re having a little stronger winter this year, when that export terminal comes up, we’re going to be exporting quite a lot more propane. So I think it will have the tendency to pull propane out of that competition with ethane and the Cracker’s.

Darren Horowitz – Raymond James & Associates, Inc.

So that leads me to my follow-up question, and you touched on this earlier. When you think propane supply demand over the next couple of years, do you think that the capacity of your LPG export dock expansion and one of your competitors is going to be enough to balance the market when those expansions are fully online?

A. J. Teague

Well, it’s not that we’ll add to ours.

Darren Horowitz – Raymond James & Associates, Inc.

Okay, okay. I appreciate the color, Jim. Thank you.

Operator

Your next question will come from the line of Brian Zarahn with Barclays.

Brian J. Zarahn – Barclays Capital, Inc.

Good morning.

A. J. Teague

Good morning, Brian.

Brian J. Zarahn – Barclays Capital, Inc.

A question on a business that you all talk about too much usually during the call, the refined products pipeline business had significantly higher results with lower volumes. Can you talk little more about this is it more of a one-time event with marketing and some one-time lower expenses? Are you seeing some improvement within the business?

A. J. Teague

Let me take that and then kick it to Tom Zulim. I think this is a good example of how enterprise will take pipeline systems and say what can we do with more with them and Tom, you might want to explain that?

Thomas M. Zulim

Yeah. What Jim is referring to there is, where we see opportunities to put the pipelines in what haven’t been the traditional service, south to north. We may see opportunities along the Gulf Coast to move them east-west, west-east and then capturing opportunities where we can of going where the markets demand from north to south. Combining that with a good focus on operational costs, what we spend on those pipes has improved our results and I expect our opportunistic focus to continue to take advantage of that site, I think we’ll continue to see this.

Michael A. Creel

But specifically what we did is one of the pipelines on the Gulf Coast that normally flowed west-east, we made it bidirectional.

Thomas M. Zulim

Correct.

Michael A. Creel

Between Belmont and the ship channel and it’s been quite busy.

Thomas M. Zulim

Correct.

Brian J. Zarahn – Barclays Capital, Inc.

Okay, do you seen any additional – Tim, larger scale opportunities to reverse flow certain lines in that business.

A. J. Teague

Yeah, I think we are constantly looking at those opportunities. Nothing that we’ve announced yet certainly, but we certainly see developing opportunities for redeploying existing assets to get better use of them.

Brian J. Zarahn – Barclays Capital, Inc.

Then just a quick follow-up question from me on offshore, seems like we bought them in 2012. So what order of magnitude do you expect to improve, I mean, going forward in offshore crude and then it gets to a lesser degree of gas?

William Ordemann

This is Bill Ordemann. I guess we see kind of incremental improvement over the next year or two. We’ve got some other projects coming on that we see, third parties that will bring additional volumes into our systems and then we have a major project that will come on in 2015, I believe the [Lucius] project, we’re actually building the type 1 right now that will be a little more than incremental to our bottom line, and then we’re working with producers on several other projects that will come on in that 2016, 2017 timeframe.

A. J. Teague

This is Jim again. I think in about three or four years, we’re going to be delighted with outside offshore system.

Brian J. Zarahn – Barclays Capital, Inc.

Okay. Thanks for the color.

Operator

Your next question will come from the line of Brad Olsen with Tudor Pickering Holt.

Brad Olsen – Tudor, Pickering, Holt & Co., LLC

Good morning everyone.

Michael A. Creel

Good morning, Brad.

Brad Olsen – Tudor, Pickering, Holt & Co., LLC

First question is about ATEX, you discussed on the call, how you’ve done a lot in the way of repurposing all the assets. When you look at the amount of fractionation capacity getting built in the Marcellus, and the fact that we’re seeing new fractionators announced, it seems like every week in the Utica. Is there an opportunity to repurpose another portion of the TE Products line for heavier NGL service going forward?

Michael A. Creel

We are taking a hard look at all of those pipelines that go up to the northeast. I am not going to say exactly, what we’re looking at doing, but we do have a 50-50 pipeline with a company called Marathon, and a pipeline called (inaudible). That we’re not doing a heck of a lot, and it doesn’t take a long lateral delay overdue, so anything is possible. We’re going to play that just like we did the ethane out of the Marcellus, close to the best deal with producers.

Brad Olsen – Tudor, Pickering, Holt & Co., LLC

Great, thanks. And my follow-up is related to Seaway. There was an operational issue a couple of weeks ago, that I guess led to some operational limitations on the line. And I was – as you think about kind of developing the ecosystem, is eco going to be something that effectively alleviates those limitations? And I think as kind of another tangent, as you think about your business, and how it might benefit from a situation like that, if refiners are having trouble taking away all the throughput from Seaway, is there a row over where your barge fleet could actually help move some of that crude to other destinations along the Gulf Coast?

William Ordemann

Yes, this is Bill Ordemann again. I think when we get the lateral from Johns Creek to ECHO finish for Seaway, which I believe will be sometime in the third, early fourth quarter this year. I think we will have the ability to alleviate most of the models actually we are seeing right now. Seaway, as we look at it today, is operating as per design on injections out of Cushing and the ability of the pipeline to move crude oil down to Johns Creek, we are seeing some day-to-day fluctuations that we will intend on seeing that will affect the monthly averages that some people are quoting.

Based on the nominations by the shippers of crude out of Cushing and based on the availability of third parties to take their crude at Johns Creek. Again we finished the lateral over to ECHO, we expect a lot of that to all of it essentially to be alleviated, then we will finish the lateral over to Port Arthur in that early 2014, so all that being said, we think it’s heading in the right direction.

As far as barge fleet, we are looking at a project right now that would give Seaway access to the water and give access to potentially margins or potentially even ships, but that’s probably something that looking later this year for we shape up.

Michael A. Creel

And in fact, we are already using our barge fleet to some extend to crude oil barges at (inaudible) point terminal.

Brad Olsen – Tudor, Pickering, Holt & Co., LLC

Great. Thanks guys.

Operator

Your next question will come from the line of Curt Launer with Deutsche Bank.

Curt N. Launer – Deutsche Bank Securities, Inc.

Good morning everybody. Just a couple of unrelated questions relative to first ATEX, there has been some discussions of it becoming a white grade line as opposed to an ethane only line, and would love to hear your perspective on that, given the magnitude of ethane rejection going on, and all the other things that are happening within the Marcellus and then I will just have a quick follow-up after that?

Michael A. Creel

ATEX’s and ethane line were open to talking to producers to meet their needs.

Curt N. Launer – Deutsche Bank Securities, Inc.

And would you see it as any major change in economics, if it would be, Y grade or ethane, I mean I’m certainly remembering the discussion relative to the rates we’re moving the ethane is being a factor there?

W. Randall Fowler

Curt, don’t think we changed the service to Y grade for a lower return.

Curt N. Launer – Deutsche Bank Securities, Inc.

That’s kind of what I was thinking. Anyway, okay, let’s switch gears and talk about, I just want to make sure I heard you right, Mike, I think in your opening comments, you talked about $2.4 billion of organic capital expenditures in 2013 has been completed, and then Randy mentioned $4 billion of organic capital expenditures this year. Can you talk about the reconciliation of that in terms of just what goes into service this year, what’s hanging out for next year, and things like that, there is lots of different names on my pad right now?

W. Randall Fowler

Sure. We had $2.9 billion of projects that started service last year, we got about $2.4 billion that we began service this year. What Randy was talking about was cash out the door on new growth projects being roughly $4 billion. So that is finishing up some of the projects that are going to service this year, and is going into other projects that we’re going to service in 2014 and 2015.

Curt N. Launer – Deutsche Bank Securities, Inc.

Okay, thank you.

Operator

Your next question will come from the line of (inaudible) with Hart Capital.

Unidentified Analyst

Good morning everybody. First of all, happy and healthy belated happy and healthy New Year to everybody, sorry I was interrupted service been, as I’ll just read the transcript. But I was wondering if you can put some color on the gas volumes out from the Gulf has fold off your independent subs not getting the demand payments any more, and I’m just curious if you can give some kind of color, what kind of activity from the drillers are going on, within reach of those assets currently or what you might know or think about their future drilling plans around those assets?

W. Randall Fowler

Yeah, let me start now, hand it off to Bill. In my comments I did give you a communication of what the activity is in the Gulf of Mexico in terms of rigs that are in place, and what’s expected to be there by the end of the year. Currently we’ve got more rigs in the Gulf of Mexico than it were before the Macondo incident. So we feel pretty good about that, but clearly development of these fields takes time and so there is a lag time.

Michael A. Creel

Yeah, and we’re really focused on the Gulf, has been the real province at this point in time. The Russian gas opportunities out there that we’re chasing, but primarily the exploration at Gulf of Mexico today is looking at oil, so my expectation is we’ll continue to see gas volumes declining in the Gulf for a while anyway, and then eventually they’ll come back the other way. But crude oil, I think is what we see as being the big player in the Gulf of Mexico when all these rigs are targeting today, and certainly our crude pipeline group or our offshore group is focused on the crude oil aspect primarily in the gas aspect the secondary.

Unidentified Analyst

Okay. As a quick follow-up, is there any ways into repurpose some of those assets that have been primarily looking at nat gas at some point for crude use or is it just basically going to be the Kenyan assets, until the entire gas market comes back some day out in the future.

Michael A. Creel

I think to be realistic, there is probably limited opportunities to repurpose the floaters anyway that we’ve got for gas like Independence for crude, but other assets we’re looking at some of our existing platforms and infrastructure we’ve got in the Gulf of Mexico we’re certainly looking at as landing points for new crude oil pipelines?

Unidentified Analyst

Great. Thanks a lot.

Michael A. Creel

Okay.

Operator

Your next question will come from the line of Michael Blum with Wells Fargo.

Michael J. Blum – Wells Fargo Securities LLC

Hi good morning everyone.

Michael A. Creel

Good morning.

Michael J. Blum – Wells Fargo Securities LLC

Jim, just want to back to ethane for one minute again, and I apologize for that. So historically when you had ethane drop below it’s gas value, you have ethane rejection, then also quickly correct itself. Now that dynamic has changed obviously and I just want to get your perspective on what’s changed and why, ethane is trading sustainably below that level and how much ethane rejection you think actually is in the market right now?

Michael A. Creel

I think our first question here when he said something like 175,000 barrels a day, one and two out of the market, I think we’re thinking 150,000 to 175,000 barrels a day, Michael.

Michael J. Blum – Wells Fargo Securities LLC

Okay.

A. J. Teague

I think we’re going to live with this for a couple of three years and but I do think that its getting a lot of attention from the demand side of the equation. I mean, I said in my comments that you guys can rate it, every cracker out there is focused on using more ethane that takes time, but that time will come. The other thing I didn’t say is, we then have companies coming in here wanting to underwrite engineering studies on the possibility of exporting ethane. It might be a stretch, but its advantage is not going on no distance and it will be exploited.

Michael A. Creel

And Mike, I think one other thing to know, when you go back to 2003, ethylene produced with U.S. Ethane was one of the expensive, sources of ethylene in the world where now, ethylene produced from U.S. ethylene is one of the cheapest source in the world. So again, I think you may have like Jim talked about more market reaction to take advantage of that.

Michael J. Blum – Wells Fargo Securities LLC

Okay. And then…

Michael A. Creel

Okay. Between ’13 and ’17 if you look at some of the current announcements, I mean you’re north of the 600,000 barrels a day of additional ethane demand just for those current announcements.

Michael J. Blum – Wells Fargo Securities LLC

Okay, that’s helpful. And then I guess on a related – do you have any update on the Ethane Header Project that you have talked about in the past and how that may or may not play into the current sort of market landscape for ethane?

Unidentified Company Representative

You want to take it.

A. J. Teague

We are still actively working that project and talking to potential customers for it. I think that’s going to enhance the demand side of the ethane, because it will make it that much more available to the users I think.

Unidentified Company Representative

I can say something nobody else can say, because I am a retiree of the chemical company, and those guys go slow and they are methodical. I think we have two contracts that are done and we are working two others that if get off road we’ll build.

Michael A. Creel

Correct.

Michael J. Blum – Wells Fargo Securities LLC

Great. Thank you very much guys.

Operator

(Operator Instructions) Our next question will come from the line of John Edwards with Credit Suisse.

John Edwards – Credit Suisse Securities

Yeah, good morning everybody.

Michael A. Creel

Good morning.

John Edwards – Credit Suisse Securities

Just a follow-up on Kurt’s question. You mentioned you expect $2.4 billion of organic growth projects to be completed in 2013, what’s the number for 2014 and 2015?

A. J. Teague

John, we haven’t broken the number down between the two, what strike me was – with $4.8 billion for the 18 months starting 2014 and through the first six months of 2015.

John Edwards – Credit Suisse Securities

Okay, that’s helpful. And then switching over to the natural gas pipeline segment, within that the pipeline and services, that was up quite dramatically year-over-year. I am just wondering, is that reasonable to think about it as a run rate going forward for that piece of that segment – it’s $120 million or so, I think last year it was like a $170 million?

James A. Cisarik

Yeah, this is Jim Cisarik. One of the things that you've seen is a Haynesville Extension, this one came on November 2011. Obviously we had a full year there and in Texas especially we're benefiting from the Eagle Ford and some of the other expansions on a producer side and our assets. So when you look at that, the last couple of years, we've had exponential growth on our Intrastate. And so with us having so much scale now I can see that run rate continuing somewhat obviously in Texas, we’ve doubled the gross operating margins since 2010 in Louisiana, we’ve probably 11 times the operating margin since 2010. Obviously it's not going to grow that much, but we have enough scale now to continue that growth reach certain areas, and obviously you've got – what I haven't seen in probably 12 or 13 years is we have been living on the producer push per se. Now like Jim and Mike had mentioned you have that low natural gas price that's creating significant demand on our asset. So what's going to happen now, we’re having the producer push combined with that new end user demand which we’re going to be targeting as well.

W. Randall Fowler

And John you’ve seen a lot of LNG announcements. So depending on what happens in Texas and Louisiana on LNG exports that might create some additional demand for pipes.

John Edwards – Credit Suisse Securities

Okay. And I was thinking specifically on your NGO pipes and storage. I'm just thinking in terms of sort of a margin run rate there, since it was a pretty significant step-up from the last quarter. Is that reasonable to think about this higher run rate?

A. J. Teague

I’m sorry John, I thought you said natural gas.

John Edwards – Credit Suisse Securities

I’m sorry, I was thinking that, I was talking natural gas liquids, I’m sorry.

A. J. Teague

Okay. If you’re looking at segment performance, remember that there is a whole lot of step in the NGL segment including the marketing and storage processing fractionation.

John Edwards – Credit Suisse Securities

Well, I mean the pipeline from storage subpiece that you break out.

W. Randall Fowler

Yeah, John, on that, I mean if you think about the first Yoakum mine in May last year, the second try and Yoakum came on in July of last year. So when you start doing your year-over-year comparisons, you’ll still pickup NGL growth both in the pipes and also in the fracs.

John Edwards – Credit Suisse Securities

Okay.

W. Randall Fowler

Downstream of that. And then as Jim mentioned the third train at Yoakum should go into commercial operations probably beginning in March. So you should continue to see some quarter-over-quarter growth coming from those.

A. J. Teague

And John, remember, we got text expressed in the front range project that will be coming online and adding additional volumes.

John Edwards – Credit Suisse Securities

Right.

A. J. Teague

So I think that answers your questions. Yes.

John Edwards – Credit Suisse Securities

Yes. Okay, great. And then in terms of capital spend, you’ve been going about 4 billion rate here. Are you continuing to see your backlog increase or was it holding steady, it mean is that working off at all with this kind of stepped up investment?

A. J. Teague

Now with the creative people we have, I am not sure we’ll ever work it all off. What we try to do is to do those projects that makes the most sense for the partnership, as we’ve said in some places in the past there are certain of these projects that that if we don’t do them now, somebody else. We won’t have that opportunity. So a lot of what you’re seeing now is for us position ourselves for the future. We don’t need to spend $4 billion a year on growth capital in order to grow our distribution, but it does really position ourselves for pretty interesting projects going forward.

John Edwards – Credit Suisse Securities

Okay, great. Thank you very much.

Operator

Your next question is a follow-up from the line of Michael Blum with Wells Fargo.

Michael J. Blum – Wells Fargo Securities LLC

Yeah, just one quick follow-up, just what is Seaway flowing out right now in terms of volumes.

Michael A. Creel

It varies day to day Michael again depending on the norms, when the shippers the availability downstream, we’ve had flown as high 380,000 barrels a day physically. I don’t know what’s flowing at the moment?

Michael J. Blum – Wells Fargo Securities LLC

Okay, great thank you.

Operator

Our next question will come from the line of Yves Siegel with Neuberger Berman.

Yves C. Siegel – Neuberger Berman LLC

Good morning this is Yves. Quick question for you, may be not so quick, could you describe the business environment if it’s changed much in terms of what are you seeing on contractual commitments from the customers and by that I mean the willingness to on the processing side, the willingness to fee based or the desire to do fee based contracts and then when you think about the pipeline side, how much of that are they willing to do on a demand charge basis or guarantee volumes, then thirdly Mike based on your last comments as it relates to doing projects now that if you didn’t do it, others would perhaps come in, does that mean that you’re expecting perhaps lower returns today, because strategically just positions you very well for the future.

Michael A. Creel

Why don’t I take that one first, Yves then we’ll come back to your first question. We are not going to take returns that don’t make sense just to do a deal. But you have projects like moving ethane out of the Marcellus for example. If you look back a couple of years ago, there were probably five different projects trying to do that. We were able to do it with some existing pipeline assets that we had, that were under utilized and so for us it was a great project for us, it allowed us to improve the returns on existing assets, and serve the need of the producers up in the Appalachian basin and really provide a low cost solution for them, also adding great returns for us.

So it’s kind of win-win. The things that we are doing in the Eagle Ford really are capitalizing on assets that we already had before the Eagle Ford hit the headlines, and we are filling big top line projects through there and a lot of processing capacity. From there we can easily extent into other areas for less cost, and so while we have good returns on the assets that we have now, we think that will lead to really good projects going forward as well. But the answer is we are not going to pay up either in the acquisition or in a new project just for the sake of getting a deal done.

Now some of the projects that we do, we will have a return on our economics based on the contacted volumes that are going to be lower than what you would normally expect from us, and maybe kind of low double-digits, but that’s only because we’ve got additional capacity that we feel confident that we’ll able to time track for and get those ultimate returns up. I don’t know if that answered the question.

Yves C. Siegel – Neuberger Berman LLC

But you’re also creating a lot of value just because your cost of capital is so cheap. So even if you went down to below double-digits, you still be creating shareholder value by the end of those projects.

Michael A. Creel

Yeah, we don’t like to give away our cost of capital, Yves. And so you are right, from a purely competitive standpoint, if we want to achieve the same rate of return as our competition, we could charge lower rates, but the way we prefer to look at it is that we get these projects on kind of the same terms at the competition where we have gotten and we drive the results to our unit holders and the returns that they get.

W. Randall Fowler

A good example is what Mike is talking about is our PDH plant. We had two customers and we had two customers that PDH plant when we pull the trigger, and announced we are going to build it, it wasn’t kind of the return that we would typically want, but we knew or felt comfortable, we could get others as this is turned down, its sold out and its pretty doing good return, that’s pretty much a classic example.

Yves C. Siegel – Neuberger Berman LLC

Okay. And could you also just speak to the earlier part of the question, which is, are you seeing any change…?

W. Randall Fowler

I forgot the earlier part of the question.

Yves C. Siegel – Neuberger Berman LLC

It really relates to – the way I think about is the sharing of risk. Are the customers willing to or did they have a desire to do fee-based contracts or would they prefer to do on the processing side, are they more willing or more wanting to do EPO? Has that changed at all going forward and what’s the ability of Utica demand charges on the pipeline as opposed to protect yourself on the value metric risk as you look to some of these projects going forward?

William Ordemann

This is Bill. As far as your first question goes on the processing side, we haven’t seen any change in the producers, what in the fee-based contract, what in the liquids, they still want the liquids, they still got good margins on the heavy and from what I have seen, really haven’t seen anything change in that direction that going back toward people or anything of that sort. So we’re still going down the road of mainly fee based contracts on our processing.

On our pipelines, we still see people willing to step up and pay demand charges. I think there may be a little more cautious about the volumes they will except for demands today and keep an eye on that basis, the ethane margins, but other than that, both the pipelines and the fractionations, all the contracts we’re doing right now, primarily have those demand charges embedded in it.

Michael A. Creel

Yves, this is Tony, we always publish what we think a typical processing upgrade is, and it sits in all our material room and what you see is the heavier part of the barrel is very profitable and Jim talked about that in his comments. So producers are very much incented to drill.

Yves C. Siegel – Neuberger Berman LLC

Got it. And my very last question, you may or may not be happy to answer it, but when you think about the pipeline projects that you have underway. How much do you think you’d like to keep all the capacity for your own account?

Michael A. Creel

That depends on large part on what we can sell.

A. J. Teague

And it depends on large part on what hits the pipeline, if you look at Texas Express, we don’t want any of it other than, well I guess we did take a little bit of it, as it relates to our Maple assets. So we took a little bit of that, but we tied it back to what we had on mid-America that we needed on Texas Express. If you look at Seaway, we took some capacity out on Seaway and we extremely grateful for that capacity today. So it depends on the type.

Yves C. Siegel – Neuberger Berman LLC

Okay. So thanks a lot gentlemen.

Michael A. Creel

Thank you, Yves.

Operator

I will now turn the call back over to Randy for any closing remarks.

W. Randall Fowler

Regina, we have no closing remarks, and a few word, go ahead and pass along the replay information for our listeners.

Operator

Thank you for joining today’s conference call. This call will be available for replay beginning today at 1’o clock PM Eastern Standard Time and will run through midnight Eastern Time on Thursday, February 7, 2013. The number to dial to access the replay is 855-859-2056, and for international callers 404-537-3406. The conference ID number for the replay is 88439459.

This does conclude today’s conference call. thank you again for joining and you may now disconnect.

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