Enterprise Products Partners LP Q2 2010 Earnings Call Transcript

Jul.26.10 | About: Enterprise Products (EPD)

Enterprise Products Partners LP (NYSE:EPD)

Q2 2010 Earnings Call

July 26, 2010 9:00 AM ET

Executives

Randy Burkhalter – Vice President, Investor Relations

Randy Fowler –Executive Vice President and CFO

Jim Teague – EVP and Chief Commercial Officer

Mike Creel – President and CEO

Chris Skoog - Senior Vice President, EPGP

Mark Hurley - Senior Vice President, Crude Oil & Offshore, EPGP

Bill Ordemann - Executive Vice President, EPGP and Chief Operating Officer

Analysts

Darren Horowitz – Raymond James

Steve Maresca – Morgan Stanley

Xin liu – JPMorgan

Ted Durbin – Goldman Sachs

John Tysseland – Citi

Ross Payne – Wells Fargo

Sharon Lui – Wells Fargo

Operator

Welcome to the Enterprise Products Partners and Duncan Energy Partners Second Quarter 2010 Earnings Conference Call. Thank you for standing by. At this time, all participants are in a listen-only mode. Today’s call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to introduce Mr. Randy Burkhalter, Vice President of Investor Relations. You may begin.

Randy Burkhalter

Thank you, Jessie. Good morning. And welcome to the Enterprise Products Partners and Duncan Energy Partners joint conference call to discuss second quarter earnings. Our speakers today will be Randy Fowler, Executive Vice President and Chief Financial Officer, the General Partner of Enterprise; and President and CEO, the General Partner of Duncan Energy Partners; and Jim Teague, Executive Vice President and Chief Commercial Officer.

The Enterprise portion of the call will begin with a few comments from Randy, filling in for Mike Creel, who is out of the office but listening in on the call, followed by Jim to discuss commercial operations and then Randy will wrap up with a financial discussion.

Randy will then make a few comments about the quarterly performance of Duncan Energy Partners before we open the call up for any questions. Also in attendance today are other members of our senior management team.

During this call we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 based on the beliefs of the company, as well as assumptions made by and information currently available to management of both Enterprise and Duncan.

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 SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call.

And with that, I’d like to turn the call over to Randy Fowler.

Randy Fowler

Hi. Thanks, Randy. Good morning. We are pleased to report solid results again this quarter supported by increased gross operating margin from our NGL segment, Petrochemical & Refined Product segment and offshore segment.

Our NGL business continues to post solid results, benefiting this quarter from record equity NGL production, strong natural gas processing margins, higher NGL transportation and fee-based gas processing volumes.

The improved results from the petrochemical business were primarily a result of increased demand for polymer grade propylene, which led to higher volumes and improved margins. We also had record onshore natural gas transportation volumes and higher offshore crude oil transportation volumes. This performance resulted in 18% year-over-year increase in gross operating margin after adjusting second quarter 2009 results for the $68 million charge for exiting the TOPS joint venture.

Based on continued strong performance, we announced the 24th consecutive increase in our quarterly distribution rate this month, increasing it to $0.575 per unit, or $2.30 on an annualized basis. This is a 5.5% increase over the distribution declared with respect to the second quarter of 2009.

Enterprise generated $532 million of distributable cash flow, which provided 1.3 times coverage of the distribution to the limited partners for last quarter. One of our important financial goals is also to retain a portion of our distributable cash flow to reinvest in the growth of the partnership. This quarter we retained $100 million or 19% of total distributable cash flow and for the first six months of this year we retained $256 million.

Now, I’d like to take a few minutes to discuss some segment highlights. The largest increase in gross operating margin was from our NGL Pipelines & Services business, which reported gross operating margin of $441 million this quarter, up 21% from the second quarter 2009.

Fundamentals continue to be strong for this segment, which benefited from higher equity NGL production and gas processing margins, primarily from our Rocky Mountain processing plants, increased transportation volumes on most of our pipelines and higher tariffs on Dixie and the Tri-States pipeline.

Our NGL marketing business had higher sales margins as petrochemical demand for NGL feed stocks remained strong. Exports of NGLs, primarily propane, averaged 93,000 barrels per day this quarter compared to 35,000 barrels per day in the second quarter of last year, as pricing differentials remained favorable between the United States and other regions of the world.

Gross operating margin for the onshore natural gas pipeline and services segment decreased $14 million from the second quarter of 2009 primarily due to our natural gas marketing business, which had a non-cash mark-to-market loss swing of approximately $17 million the second quarter of this year, compared to second quarter of last year, from a $5 million gain last year to approximately a $12 million loss this year associated with financial transactions for hedging our natural gas transport book.

Substantially all of these losses are expected to be reversed in future periods when physical delivery of the gas is made. In addition, this segment was negatively impacted by the delay in the Trinity River Lateral by approximately $9 million for the quarter. The Trinity River Lateral is expected to be in service later this week.

While historically Enterprise did not benefit from the natural gas price spreads across Texas in the first half of last year through our marketing company we did benefit. And approximately $5 to $6 million of the decrease in gross operating margin from the second quarter of 2009 to the second quarter of this year was due to lower spreads across Texas.

Collectively, gross margin operating margin this quarter increased by $19 million from our Texas intrastate natural gas pipeline, the State line and Fairplay natural gas gathering systems, which we acquired effective May 1, 2010 and the partnerships natural gas gathering and treating facilities in the Piceance Basin in Colorado.

Included in gross operating margin for the Texas intrastate system this quarter is capacity reservation fees of approximately $15 million, principally from the Sherman Extension pipeline, which went into commercial service in August of last year.

Gross operating margin from our Onshore Crude Oil Pipelines & Services segment was $26 million for the quarter, compared to $42 million for the second quarter of 2009, primarily due to lower sales margins from our crude oil marketing activities due to a very competitive trading environment, increased transportation costs and a weaker contango market this quarter.

Gross operating margin for the Offshore Pipeline & Services segment was $83 million this quarter, compared to a $1 million loss recorded in the second quarter of last year. Gross operating margin for the second quarter of 2010 includes $10 million of proceeds from insurance claims associated with hurricanes in prior years and $4 million of revenues from a tariff rate case settlement on our High Island Offshore natural gas pipeline system. The second quarter of 2009 includes charges of approximately $68 million associated with the termination of TOPS.

Gross operating margin from Enterprise offshore crude oil business includes increased to $26 million for the second quarter of 2010, compared to $14 million for the second quarter of 2009, excluding the charges associated with Texas offshore oil port. Substantially all the partnership’s offshore crude oil pipelines reported increases in gross operating margin and volumes.

Gross operating margin from our Independence facilities decreased by $12 million. Natural gas volumes decreased to 635 billion Btu’s per day this quarter from 891 billion Btu’s per day in the second quarter of last year due to depletion and one large well watering out. Well workover’s have been generally delayed due to uncertainty from the federal drilling moratorium in the Gulf of Mexico. We expect volumes on the Independence system to average between 5 and 600 billion Btu’s per day for the remainder of this year until well workovers are completed and new wells are drilled.

The Petrochemical & Refined Product Services segment reported record gross operating margin of $158 million, a 65% increase from $96 million reported in the second quarter of 2009. Our propylene fractionation business was responsible for most of this improvement, benefiting from higher sales margins and higher propylene fractionation volumes, reflecting increased demand for polymer grade propylene.

Now, I’d like to turn the call over to Jim to discuss the commercial business in a little more detail.

Jim Teague

Thank you, Randy. I’d like to start with a little bit of a market review or update. The relationship between crude oil and natural gas prices continued to remain low, with natural gas prices drifting between 30% and 40% accrued on a Btu basis.

In the second quarter, the average natural gas futures price closed at 33% of the corresponding crude contract, down from 37% in the first quarter of this year and 38% second quarter 2009. Low gas prices relative to crude creates economic incentive for natural gas producers to pursue liquid rich natural gas plays such as the Eagle Ford Shale in South Texas.

NGL supplies from natural gas are plentiful in developing shale plays but require infrastructure to capitalize on opportunities to recover those liquids, process them and deliver to market. The industry has already addressed many of those issues associated with developing these shale plays, but as the market develops, additional challenges will present themselves and we’re well-positioned to continue to bring solutions to that market.

We’ve seen a structural change in the petrochemical industry as we’ve talked about over the last year. Light feedstocks, primarily ethane and propane, continue to be preferred by ethylene crackers over their heavier crude oil feedstocks. Approximately 82% of feedstocks consumed by U.S. crackers this quarter were NGLs versus traditional naptha or gasoline.

We are benefiting from this because what we are today we created some five years ago. You remember five years ago we built over 2 Bcf a day of cryoprocessing capacity in Wyoming and Colorado. We expanded the Mid-America pipeline Rocky Mountain system and build the Hobbs fractionator, all of which are feeding our integrated value chain with over 100,000 barrels a day of natural gas liquids.

We’re reaping the benefit of this change in the petrochemical industry because of those investments. Plant outages tightened olefin supply this quarter, while demand for ethylene and propylene remained steady, resulting in higher ethylene and propylene prices and higher margins for all feedstocks.

Average cracker margins of $19.50 a pound this quarter were highest on record according to CMAI data, except for the fourth quarter of 2005 as a result of Katrina and Rita. This compares to cracker margins of $0.03 a pound for the second quarter of last year. An additional Enterprise benefit comes from a position that was created many years ago but expanded some five years ago.

When crackers consume light end feedstocks, they produce less propylene. We have benefited from this as our propylene plants are running at capacity and recording record margins. Ethylene producers with available capacity ran hard to capture those margins as U.S. ethylene supplies remained tight and ethylene prices increased.

Even as ethylene prices eased in late June as maintenance outages were completed, the ethylene market remained tight. Just a couple of weeks ago a cracker on the Texas Gulf coast tripped and spot prices instantly jumped $0.045 to $0.05 a pound, demonstrating just how tight that market place is.

Last quarter on this call, I talked about a U.S. vinyls producer that the recently announced an expansion that could consume an incremental 975 million pounds of ethylene, derivatives intended for international markets. Now, we’ve seen more evidence from other chemical producers that domestic chemical production remains competitive.

Eastman Chemical said last month that it will restart its cracker in Longview sometime during this first quarter of 2011. This unit, which has the capacity to consume 10,000 barrels a day of ethane and propane feedstocks, has been down since November of 2008.

We just noticed over the weekend that Amerada Hess and NOVA announced an ethane pipeline project from the Williston Basin to NOVA’s crackers in Alberta. They announced that they would transport initially 40,000 barrels a day from their Tioga gas plant with the capability to increase to 60,000 barrels a day.

You have to ask yourself what does this say about what we have always called the Alberta advantage when those plants have to import ethane from the U.S. Further, there have been announced several announcements of U.S. midstream companies working to export in ethane to NOVA’s Sarnia cracker site. And we continue to see traditional naphtha crackers on the Gulf Coast continue to seek ways to use more ethane in place of naphtha.

So to those naysayers that think that ethane supply will swamp demand, our response is that while prices create supply, price also creates demand. U.S. ethylene operating rates were approximately 88% of nameplate capacity again this quarter, producing an average of 50 billion pounds a year of ethylene, which is in line with the average of the last five years.

Industry consultants estimate that U.S. crackers are currently operating at 91% of capacity. That would equate to a 53 billion pound a year run rate. In spite of the strong demand for light end feedstocks, we believe that an incremental 6.6 million barrels of ethane was not consumed due to the active cracker turnaround season and unplanned outages during the second quarter. As a result, ethane inventories grew.

But now, with major cracker turnarounds completed and given the tight ethylene market and strong margins for ethane and EP cracking, we expect ethane inventories to draw down for the balance of 2010. I fully expect to hear a question as to why ethane prices have come down. Hopefully, this answers that question.

We think olefins demand will remain strong and demand for NGL feedstocks will continue to grow. Solid margins for light feedstocks fracturing keep U.S. olefins producers highly competitive across the globe and keep downstream derivative arbitrage windows open to other regions.

We continue to see high industry inventories in the refined products sector although U.S. refiners are seeing margins that enabled them to continue to running hard. The EIA said they topped at 91% operating rates last week.

With refinery operations strong, our pipeline assets continue to see solid throughput, including our crude oil storage facilities in Cushing. As Randy mentioned earlier, our NGL business performed well this quarter posting a 21% increase in gross operating margin.

Our assets in the Rockies continue to perform well, benefiting from increased gas volumes into our gathering pipelines and processing plants. Natural gas production in the West has again been resilient with quarter-over-quarter growth in volumes on our Wyoming and Colorado assets.

This is significant, as historically we’ve experienced declines in the late first and early second quarters of each year as winter conditions led to reduced drilling activity. We’ve not seen this downturn this year, as producers continue to improve drilling and completing efficiencies especially through the winter and spring.

Our cryogas processing plants currently operating at over 90% capacity. Our assets and the agreement which we structured in both Wyoming and Colorado allow us flexibility in determining the quantity of gas that flows into our cryos. If they’re full, we can either send the gas into our adjacent [DuPont] facilities or offload through agreements we have with third-party facilities.

We’re not obligated to expand our asset base if we’re running near capacity until we are comfortable with the long-term market conditions and supply assurance for any new plants or other facilities. Our Rockies processing margins continue to be strong, with approximately 78% of keep-whole production for the remainder of 2010 hedged at a gross spread of around $0.56 per gallon. Our NGL business also benefited from increased transportation volumes while most of our NGL pipelines and increased transport fees from higher tariffs on the Dixie and Tri-state pipelines.

On July 1 each year, tariff rates on Dixie are adjusted based on the Producer Price Index, and on Tri-state’s the tariff was increased on January 1. Our fractionators at Mont Belvieu and Hobbs consistently run at or near full capacity as NGO receipts from the Rockies, midcontinent and Barnett production areas continue to be strong.

Construction of our new 75,000 barrel per day NGL fractionator at Mont Belvieu is progressing on schedule to go into service early in the fourth quarter of this year. And we expect it to be full on day one.

As a matter of fact, we recently announced plans to build another 75 -- that was late fourth quarter of this year. Bill Ordemann almost had a heart attack.

As a matter of fact, we recently announced plans to build another 75,000 barrel per day fractionator at Belvieu that will be needed to accommodate additional volumes, including incremental volumes from expected production out of the Eagle Ford. Strong fundamentals continue to drive NGL marketing results this quarter, which benefited from higher NGL throughput and margins primarily from propane exports, isomerization demand and regional basis differentials.

Propane exports were so strong this quarter that our terminal on the ship channel was completely sold out, and it’s sold out for July and August with the majority of the cargoes headed to Latin America. This export facility has been sold out since July of last year with loading fees almost three times what we realized prior to July 2009.

On the Onshore Natural Gas Pipelines & Services segment had record gas transportation volumes this quarter, primarily from the gathering systems in the Rockies, South Texas and our two new systems in the Haynesville that we acquired from M2 Midstream in May of 2010. The addition of the State Line and Fairplay systems is expected to enhance our opportunities for future development and expansions in the Haynesville.

We recently completed a 300 million cubic feet a day expansion of the State Line system, which increased its capacity to 700 million cubic feet a day. And we’re aggressively pursuing new shipper agreements for those systems.

Currently, the State Line system is flowing just under 500 million a day and Fairplay has been steady at 175. Our Haynesville extension pipeline is on schedule to be completed in the third quarter of 2011. Currently, we have locked in our steel cost, nearly completed all of the survey in permitting work and acquired approximately one-third of the write away.

We expect most of the capital spending for this project to begin in the fourth quarter of this year and in 2011. Our schedule calls for us to begin laying pipe next January. We recently announced a new shipper commitment for an additional 200 million cubic feet a day of capacity on the Haynesville pipeline, which continues to gain support. We’re on track to quickly have this pipeline fully subscribed.

Turning to the Eagle Ford, there are 77 rigs now drilling in this play. Actually, I heard last night 93, which is a significant increase from the 10 rigs we were working beginning at the beginning of the second quarter last year. And we expect this trend to continue as producers were successful in drilling more wells.

Total Eagle Ford production feeding our system today is in the neighborhood of 200 million cubic feet a day. By comparison, this was relatively non-existent at this time last year.

Last month, we announced several new projects that will extend and expand our natural gas and NGL infrastructure in the Eagle Ford and at Mount Belvieu to accommodate rolling production volumes for that region. As part of this initiative, we plan to install 350 miles of pipe, build a new cryo plant and a new 75,000-barrel-a-day fractionator.

We’ve completed several key projects including the initial 34 mile segment of the East-West rich gas mainline and the final leg of the 62 mile White Kitchen Lateral. We continue to build our footprint in this region that will allow us to provide a greater flexibility to meet the needs of our producers.

I said earlier that what we are today was created years ago. What we will be in the future depends on what we do today. Our M2 acquisition, our Haynesville extension pipeline, our Eagle Ford initiatives are examples of what we’re doing today to position for the future.

We know what we want to look like in five years. These projects are just a few of the components of our vision, believe me, there are others. Drill -- and crude oil drilling is active in Texas and Oklahoma, which should lead to increased volumes into our onshore crude oil systems. We completed a new project in West Texas and we expect to complete another project in the third quarter that will result in additional volumes.

During the quarter, we announced the construction of a 140-mile crude oil pipeline in South Texas to facilitate expected incremental crude oil production from the Eagle Ford. We’ve signed a letter of intent with a major Eagle Ford shale producer that will provide a long-term transportation commitment to anchor this project.

We are in discussions with other producers in the Eagle Ford to provide oil transportation and marketing services through additional connections to the pipeline. When completed, Enterprise system will provide access to refining markets in Houston area as well as the major storage hub in Cushing, Oklahoma. This pipeline -- before I give the call back to Randy, I would like to speak just a moment to praise our propylene business, which reported strong results again this quarter, more than double what we reported in the second quarter of 2009.

Propylene prices this quarter were twice as high as those in the second quarter of 2009 as a result of lower cracker source propylene production and improved product demand. This business continues to continue to do well, reporting an 18% increase in propylene fractionation volumes.

With that, I will breathlessly turn the call back over to Randy.

Randy Fowler

Thanks Jim. I will briefly discuss some items below the operating income line, liquidity and capitalization. G&A expense for the second quarter of 2010 decreased by $8.2 million, primarily due to $11 million of TEPPCO merger related expenses that were incurred in the second quarter of last year.

In terms of capital spending, we invested approximately $1.6 billion in growth capital expenditures in the second quarter which includes approximately $1.2 million for the acquisition from M2 Midstream. Through the first six months of this year, we’ve spent $2 billion and expect to spend approximately $1 billion during the remainder of the year.

Some of the larger approved capital projects for 2010 include the Haynesville extension pipeline, projects in the Eagle Ford, the Mont Belvieu NGL fractionator that will be, as Jim said, completed late in the fourth quarter and then Trinity River Basin lateral, which again we expect that to be completed later this week. And then finally the Anaconda pipeline expansion.

In the second quarter, we spent $73 million in sustaining capital expenditures and $105 million through the first six months of this year. We still believe we will spend in the range of $225 million to $250 million for maintenance CapEx this year.

Turning to capitalization, adjusted EBITDA for the 12 months ended June 30, 2010 was approximately $3 billion. Adjusted EBITDA is -- we define that as EBITDA less equity earnings, plus actual cash distribution received from unconsolidated affiliates. Our consolidated leverage ratio of debt to adjusted EBITDA for the last 12 month was 4.0 times at June 30, 2010 after adjusting debt for 50% equity treatment of the hybrid securities.

Netting out the $495 million of unrestricted cash that was on our balance sheet at June 30, our debt-to-EBITDA ratio was 3.8 times. Our floating-rate interest exposure was approximately 10% at the end of the quarter. The average life of our debt was 10 years, which incorporates the first call date for the hybrids and our effective average cost of debt was debt was 6%. At the end of June, we had liquidity of about $2.3 million.

Now, I would like to take just a couple minutes to turn to Duncan Energy Partners before we open the call up for questions. This quarter, we reported improved results, with each of our business segments reporting higher gross operating margin than last year. Distributable cash flow for the second quarter increased to $32.8 million and enabled us to increase the quarterly cash distribution rate for the seventh consecutive quarter, exceeding what was paid to our partners in the second quarter of 2009 by 3.4%, while providing 1.3 times coverage of the quarterly distribution to our limited partners.

We retained about $7 million of distributable cash flow this quarter after giving effect to the declaration of the distribution and thus far, this year we’ve retained $13 million that we will keep to reinvest in the growth of the partnership. Now, briefly turning to our business performance, gross operating margin was up 25% this quarter compared to the second quarter last year.

Starting with our natural gas pipeline business, we reported a 23% increase in gross operating margin due primarily to the Sherman extension pipeline that began commercial service in August of 2009. After adjusting for operational measurement gains and losses associated with our NGL storage complex, which are allocated to Enterprise products, our NGLs Pipeline & Services business segment reported a 10% increase in gross operating margin primarily attributable to higher storage fees and volumes at our Mont Belvieu facility.

Last quarter, we mentioned one of our growth projects was a conversion of two NGL storage caverns to refine product service at our Mont Belvieu facility. We expect to have the first cavern, which will store up to 2 million barrels of refined products, in service by the end of November of this year. We’re currently leaching the second cavern, which should be completed sometime next year.

DEP had growth capital expenditures of $221 million in the second quarter of 2010, including approximately $119 million spent on the Haynesville extension pipeline project. The total expected cost of the 270 mile Haynesville extension pipeline project is approximately $1.56 billion, including capitalized interest, of which Duncan Energy Partners’ 66% share is a little over $1 billion.

Construction on the Haynesville extension pipeline is progressing on schedule and is expected to be completed in the third quarter of 2011. At June 30, 2010, DEP’s debt to last 12 month EBITDA ratio per as calculated per its bank credit facility was 3.1 times.

Under this facility, DEP’s maximum allowed debt to EBITDA is five times. However it does -- there is a calculation in there to allow for pro forma calculation of EBITDA associated with the growth project in calculating that ratio, a growth project such as the Haynesville extension. Sustaining capital expenditures were $17.9 million this quarter compared to $12.7 million spent in the second quarter of 2009.

We are on track to spend approximately $55 million this year with $29 million spent in the first half of the year. We had total liquidity of approximately $260 million at June 30, 2010 which includes cash and availability under the partnership’s revolving credit facilities.

In closing, we were pleased with the continued strong performance of our businesses this quarter and are encouraged by the prospects of our existing assets. With that, Randy, we’re ready to turn the call over to questions.

Randy Burkhalter

Jessie, we’re ready to take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Darren Horowitz with Raymond James.

Darren Horowitz – Raymond James

Hey, good morning, guys. Congratulations on the quarter.

Jim Teague

Good morning, Darren.

Darren Horowitz – Raymond James

Hey, Jim, now that you’ve caught your breath, a couple questions for you on the NGL business along the theme of price creating demand for NGLs. We’re looking at industry that continues to add more processing and fractionation infrastructure, the key paces with productivity through the drill bit. So can you give us some insight into the incremental ethylene demand? I mean, with steam crackers operating north of 90% as you said, is there more capacity that can be utilized or have we reached a level of full effective utilization?

Jim Teague

Darren, do you think I’m a prophet?

Darren Horowitz – Raymond James

I hope so.

Jim Teague

I think what we see is there is more capacity that can consume ethylene and propane, notwithstanding whether or not there is more ethylene required. If you remember in my comments about -- around 80%, 82% of ethylene, I think was produced from NGLs. That says 20% is still coming from naphtha and gas oil and that’s 10 billion pounds a year of equivalent. That’s about 300,000 barrels a day of feedstock or in that neighborhood.

The other thing that is interesting that I have seen is, I was impressed with this announcement that Hess came out with that they’re going to export ethane from the Williston Basin to Alberta. Quite frankly, I hadn’t thought of that and then I think you’ve seen a number of other announcements of people trying to export ethane into Sarnia’s -- Nova’s Sarnia site.

It really boils down -- from our perspective, when we say price creates demand, I think that is a pretty good indicator when you’re exporting ethane and converting naptha crackers. I don’t know if I answered your question, Darren, it’s the best I can do.

Darren Horowitz – Raymond James

No, I appreciate it, Jim. I think what we’re trying to do here is kind of piece together all the different aspects of a lot of this unconventional production. When you look at what is happening out of the Eagle Ford and the Granite Wash. Over the intermediate term, it sounds like you think domestic petrochem demand and export potential to international markets. It is going to be enough to keep the market balanced with the pace of ethane supply growth.

And I don’t think there’s any question from our standpoint whether or not ethane is going to be the dominant feedstock and yield ethylene producers the highest margin. The question that we have is at what price per gallon is ethane going to be and more importantly at what frac spread are you guys going to realize on your unhedged NGL volumes?

Jim Teague

I think what it boils down to -- I don’t -- there’s no way of knowing. The reality is when, you have gas selling at this relationship to crude oil, that is an incentive not only for petrochemicals to convert but frankly we’ve had meetings with petrochemical companies recently who are talking about de-bottlenecks and expansions. We were with one last week that was talking about an incremental 500 million pounds of production. That’s another 15,000 barrels a day of ethane.

I was with a second one three or four weeks ago that said it is not out of the question that we will expand. I think what you are beginning to see in the petrochemical industry is much more comfort that this is something that they can take advantage of through, if nothing else, expansions of existing facilities.

Darren Horowitz – Raymond James

Sure.

Jim Teague

I’ll go back and tell you I remember in 1980 when this market had 35 billion pounds a year of ethylene production and word was, you will never see another cracker built. We’re pushing 60 billion pounds now. We hear the same thing. I’m not going to say you will never see one built.

Darren Horowitz – Raymond James

Right. Last question for me, on the propylene side, given the cost of cracking ethane are expected to continue and the tightness across that market. How close are you to an inflection point on price where customers want to commit to term contracts? And then secondly, when you sustain max ethane cracking for three or four months, the co-products tend to go out of balance. So can you does give us some insight as to how Q3 looks on the propylene side of the business?

Jim Teague

We’re forward selling as hard as we can, Darren.

Darren Horowitz – Raymond James

I figured you would say that.

Jim Teague

I didn’t get the first part of that question. You asked…

Darren Horowitz – Raymond James

Just term contracts for the propylene.

Jim Teague

We’re pretty well termed out.

Darren Horowitz – Raymond James

Okay. All right. I appreciate the color. Keep up the good work guys.

Operator

Your next question comes from Steven Maresca, with Morgan Stanley.

Steve Maresca – Morgan Stanley

Steve Maresca. How you guys doing?

Jim Teague

Good morning, Steve.

Steve Maresca – Morgan Stanley

Good morning. Thanks a lot for all the detail, really appreciate it Jim and everyone. My question is, you mentioned, Jim, you have -- I think you said 200 million cubic feet a day feeding into your Eagle Ford systems. And two parts, one is, you said current production or I read recently is about 250 million from producers in the area. What are you hearing for expectations of where that goes to? And then, how soon do you think you get up to filling your 1.5 Bcf/d of capacity at the processing facilities?

Jim Teague

We know when we expect to have our plants down there full before we need.

Randy Fowler

Yeah. The 1.5 of existing capacity, we’re getting really close to filling that up today. Our efforts really are on the expanded capacity for additional volume commitments, but that 1.5 is virtually full today.

Steve Maresca – Morgan Stanley

Okay. And then are you hearing, just broader speaking, from producers what is expected out of the area now?

Randy Fowler

It depends on what production profile you look at, honestly, speaking.

Mike Creel

But they’ve all been fairly robust in their projections. So it could come on fairly soon and some of them are very aggressive with their projections.

Steve Maresca – Morgan Stanley

Okay.

Jim Teague

It depends on the price of natural gas, doesn’t it?

Steve Maresca – Morgan Stanley

Right. Switching over to the Acadian system, the Haynesville Extension, I guess you signed on another 200 million cubic feet a day. What is the outlook going forward in connection with other commitments for that? Is there any impact that the State Line expansion is going to have on that system?

Jim Teague

We are going to be full when it’s operating, right Chris?

Chris Skoog

We’re working with producers right now to enhance – when we get coordinated to State Line, its expansion up to 700 million. They obviously have to all go into third parties. Just right now – but when we get in service the third quarter of 2011, we believe will be at the fully subscribed 1.8 Bcf and then just setting compression to get us up to 2.1 level, 2.1 Bcf/d level.

Steve Maresca – Morgan Stanley

Okay. And then my last question, you mentioned in your comments or in the release that you had NGL production in South Texas was down a little bit. Is there any color as to why and outlook for that?

Mike Creel

I think what you’re seeing is a little bit of a decline still in the traditional or the legacy production in those areas, where the producers are focusing more of their activities around the richer gas production and crude oil plays like you’re seeing in the Eagle Ford.

Jim Teague

We also took our Shoop fractionator down in the second quarter and that reduced our throughput pretty good during that two-week period. We took it down to expand it.

Steve Maresca – Morgan Stanley

Okay. All right. Thanks a lot, guys.

Jim Teague

Thank you, Steve.

Operator

Your next question comes from Xin Lu for JPMorgan.

Xin liu – JPMorgan

Good morning, guys.

Jim Teague

Good morning, Xin.

Mike Creel

Good morning.

Xin liu – JPMorgan

All right. Can you comment on the activities at around your Fairplay and State Line systems? With gas prices still pretty weak and service costs going up, have you seen slowdown from producers?

Jim Teague

Chris?

Chris Skoog

At this point in time, we haven’t seen much slowdown. Obviously, the rig count has been holding its own. The production – It’s more of a function of getting the gas out of there right now, still building the infrastructure to get to the main lines. I think when some of our competitor’s pipelines get on midyear, next year and we get on in the third quarter next year, you’re going to see another 1 to 2 Bcf jump out of the basin.

With regard to State Line and Fairplay, our Fairplay system, which is the traditional East Texas side we have been holding steady there, not seeing a lot of drilling. Although, we’re starting to see some Haynesville drilled wells activity picked up a little bit over on that side. But at this pricing level, I’m talking with some of the key producers in the region over the last two weeks. We’ve got a couple of them that have preferred acreage position that did not pay up for the high dollar leases and they are continuing to drill. Other ones are kind of focusing back on just drilling the whole production by – just trying to hold their acreage position.

Xin liu – JPMorgan

Got you. And on Independence Hub, you guys mentioned that you expect the rest of the year to average between 500 million and 600 million per day. In the past month and a half, you’ve been averaging below 500 million. What kind of activities do you expect to see to bring that up to 500 million to 600?

Randy Fowler

Mark Hurley will take that question.

Mark Hurley

Yeah. We expect the volumes over the remainder of the year to be in the 500 million to 600 million range. We’ve seen volumes slip below 500 million on a very short-term basis, just due to some operating problems. But those have been corrected and the platform is now ramping back up.

Xin liu – JPMorgan

Got you. Thank you.

Operator

Your next question comes from Ted Durbin with Goldman Sachs.

Ted Durbin – Goldman Sachs

Hi, guys. In terms of the next fractionation capacity, the next 75,000 barrels, how much of that are you thinking about potentially contracting out? We have heard people talk about doing fracker pay type contracts. And then, how much of that, when you’re looking at the Eagle Ford volumes ramping up, is that Fractionator expected to take Eagle Ford volumes, or is it just generally you’re seeing all overall liquid volumes being higher? Just talk about the expansion a little bit more.

Jim Teague

Yeah. The Fractionator will be full the day it comes up with existing contracts. Right now, we’re moving an awful lot of our [raw white grade] to our Louisiana plants. That Fractionator will be full with existing contracts. We just won’t send as much to Louisiana. That spare capacity in Louisiana will be what we used to bridge Eagle Ford.

Ted Durbin – Goldman Sachs

Got you. Okay. And then you said, you were hedged on 2010. I missed the number. But I think it was a high number. Have you done any hedging for 2011 on your keepwhole?

Jim Teague

Not really, not yet. It’s funny. It’s not nearly as liquid forward as it was last year when we were able to put on a lot of hedges. But we managed to get about 78% of the later balance of the year.

Ted Durbin – Goldman Sachs

Got it. And then if I could just follow-up on the Independence. How are you thinking about the volumes going forward in 2011 and then even just bigger picture, future investments in the deepwater as we’re looking at things post the oil spill?

Jim Teague

I will speak to future investments. We are spending what is it – 140s, which we’re extending the Anaconda Pipeline System into – is it Nautilus, which will feed our Neptune gas processing plant. So we’re making a pretty sizable investment, as we speak on tying that Anaconda system into what we like to call our value chain into our own plant.

Randy Fowler

Just Independence and overall volumes in the Gulf of Mexico, generally speaking there is a natural decline that occurs in the Gulf, somewhere between 5% and 10% per year. And you can only counter that with a robust drilling program and redevelopment program. So until the moratorium gets lifted and the regulations become clearer, we expect to see that natural decline occur. Specific deals and specific wells sometimes do play out. We had one of those occur on Independence, when one of the wells watered out during the second quarter. So those specific situations can lead to step changes in volume, but we think our number of 500 million to 600 million is generally good into next year. But a lot depends on what happens with the drilling program.

Ted Durbin – Goldman Sachs

Okay. That’s great. Thanks for answering my questions.

Jim Teague

Thanks, Dad.

Operator

Your next question comes from John Tysseland with Citi.

John Tysseland - Citi

Hi, guys, good morning.

Jim Teague

Good morning, John.

John Tysseland – Citi

With Conway and Rockies ethane prices during the second quarter, I guess compared to Mont Bellevue being relatively weak, can you guys describe how Enterprise’s Rockies processing plants have continue to perform so well? Is that something that is due to predominately hedging? Or is it your connectivity to Mont Bellevue market through your mid-American pipeline? Is it something that you expect to continue even if ethane prices at midcontinent continue to stay weak?

Jim Teague

Our Rocky Mountains production goes to Mont Bellevue. As far as weak prices in Conway, we’ve been fairly successful in arbitraging that by just buying the Conway, selling Bellevue using our pipeline system to using that to top off our pipeline system. But Conway doesn’t affect our Rockies production. It goes to Bellevue.

John Tysseland – Citi

So you can – Can you actually backhaul out of the Conway market onto mid-American as their capacity there?

Jim Teague

We can take – for out of Conway down to Hobbs and on into Bellevue through Seminole.

John Tysseland – Citi

Got it. And then also, we’ve heard a lot of expansions on fractionation processing and transport on the NGL side, any indication on the NGL storage, like your fees and length of contract there? Do you see producers or even petrochemical companies more interested in NGL storage in and around Mont Bellevue?

Jim Teague

Our contracts, on our storage has been – Our fees were up dramatically. I think we spoke to that last quarter. Our fees are up dramatically in our storage business and people are much more interested. This whole Contango thing, we went through last year I think made storage much more valuable. It is not just the hole in the ground that gives us an advantage. It is the brine system we have. We have one heck of a lot of deliverability. So what attracts people to our storage is our ability to deliver to their plants.

John Tysseland – Citi

Is that an area that you – I remember thinking about potentially switching some over to natural gas storage, but at this point is it something that you might be able to expand NGL storage?

Jim Teague

What you will see – We did look at natural gas. We didn’t do anything with that. We are expanding into it into refined products. I think we’re adding two wells – we’re converting two wells to refined products.

John Tysseland – Citi

On the NGL side are you extending anything there for the NGLs?

Bill Ordemann

We’re also continuing to develop an NGL well and we’re putting a new brine pond in to increase our deliverability as well.

Jim Teague

That’s Bill Ordemann and he’s right. You’re right. We are adding another brine pond.

Bill Ordemann

… NGL well.

John Tysseland – Citi

Quarter-on-quarter.

Bill Ordemann

Yeah. And on the exact date.

Jim Teague

So we’re increasing our capability to provide NGL services. We’re adding one well and we’re converting two to refined products.

John Tysseland – Citi

Great guys. Thank you very much.

Jim Teague

Thank you, John.

Operator

Your next question comes from Ross Payne with Wells Fargo.

Ross Payne – Wells Fargo

Nice quarter, guys. First question is State Line, the M2 acquisition? Is that going according to plan? I know you only had a couple of months but just want to know how that is progressing generally speaking.

Chris Skoog

Yeah. Thus far we’re happy. 60 days into it, we’re doing just as we had planned. We were probably a week late on getting one of our compression stations up and running, but other than that, everything has been going as planned. And like I said were up 500 million a day of flow on the system, so we’re very pleased.

Ross Payne – Wells Fargo

Okay. And Chris also, is Haynesville basically spoken for at this point for current capacity and how spoken forward is it with additional compression?

Chris Skoog

I don’t understand.

Jim Teague

He wants to know are you fully subscribed today?

Chris Skoog

Are we fully subscribed in our existing Haynesville takeaway? No, we’ve got a little bit of room left. And then, we’ve got the 300 million expansion that we can do.

Ross Payne – Wells Fargo

Okay.

Chris Skoog

By setting compression to get us from the 1.8 to 2.1.

Ross Payne – Wells Fargo

Can you throw a number out that is committed on the 1.8?

Chris Skoog

We talked about on the call. We’re north of 1.5 on a firm subscription.

Ross Payne – Wells Fargo

Okay. All right. Very good. And also Teague, if could talk generally speaking about what you’re seeing for natural gas rigs in the Rockies and just general production in the area. I know you guys are doing quite well. But just have things stabilized somewhat from what you are seeing out there?

Jim Teague

They have stabilized. Our throughputs continue to grow, frankly.

Mike Creel

They are relatively flat to little bit of an increase in the drilling activity, but I think a lot of what you see are the increases in the efficiencies of the drilling rigs up there, fewer rigs producing more wells, etc. They have become much more efficient in their activities in the Rockies.

Ross Payne – Wells Fargo

All right. Great. Thanks guys. That’s it for me.

Mike Creel

Thanks, Ross.

Operator

Your next question comes from Sharon Lui with Wells Fargo.

Sharon Lui – Wells Fargo

Hi. Good morning.

Jim Teague

Good morning, Sharon

Sharon Lui – Wells Fargo

Question on the DEP, I was just wondering if you have a growth CapEx number for 2010.

Jim Teague

Sharon, I thought we had that for – I thought we laid that out in the first quarter call. I tell you what I may need to do is get – if I could refer you to Randy.

Randy Burkhalter

I’ll call you back off-line on that.

Sharon Lui – Wells Fargo

Okay.

Jim Teague

Okay. The bulk of it will be DEP’s share of the Haynesville plus its share of one of these NGL caverns that we are converting to refined products service, but Randy can get that number for you.

Sharon Lui – Wells Fargo

Okay. I guess is there any benzene associated with some of the Haynesville projects that touch on DEP’s assets?

Randy Fowler

Sharon. I’m sorry, could you repeat that?

Sharon Lui – Wells Fargo

For the – Some of the Eagle Ford projects that were outlined touch on DEP’s assets. I was wondering if there’s any opportunities for DEP to participate.

Randy Fowler

The Eagle Ford assets principally are in the – if you would, the DEP2 assets. So, the extent to which DEP could benefit from that is, once Enterprise earns its preferred return on investment just like the DEP earns its preferred return on investment, then there is a sharing ratio with which 98% goes to EPD, 2% goes to DEP. And then frankly that is with DEP not funding any of the capital investment in those Eagle Ford projects. That’s the way that’s set up in the agreement.

Sharon Lui – Wells Fargo

Okay. So right now there is no plan for DEP to invest?

Randy Fowler

No. Because, Sharon, frankly, DEP -- between the Haynesville extension and these NGL caverns, I think from a capital standpoint, DEP has a lot of good opportunities just in those two projects and frankly has its hands full on the capital – contributing the capital for those two.

Sharon Lui – Wells Fargo

Okay. Any update on the Evangeline pipeline options?

Randy Fowler

Chris, do you want to?

Chris Skoog

We are continuing to work with other counterparty that has the right to buy it back at the end of book value at the end of the contract, so they are doing their evaluation.

Sharon Lui – Wells Fargo

Okay. Thank you.

Jim Teague

Thanks, Sharon. Jessie, probably with that, being mindful there was some other companies that announced earnings today and I think another few conference calls this morning, I think we could probably go ahead and wind it up if you would mind giving the replay information.

Operator

If you’d like to listen to the encore playback please dial 1-800-642-1687 or 1-706-645-9291.

Randy Burkhalter

Thank you, Jessie and thank you everybody for participating and have a good day.

Operator

This concludes today’s conference call. You may now disconnect.

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