Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  
TRANSCRIPT SPONSOR
Wall Street Breakfast

Enterprise Products Partners L.P. (EPD)

Q2 2007 Earnings Call

July 26, 2007, 9:30 AM ET

Executives

Randy Burkhalter - Director, IR

Ralph S. Cunningham - President and CEO

Michael A. Creel - EVP and CFO

James H. Lytal - EVP of Enterprise

Gil H. Radtke - Sr. VP

A. J. Teague - EVP of Enterprise Products

Dan L. Duncan - Chairman

Analysts

Mark Reichman - A.G. Edwards

Yves Siegel - Wachovia Securities

Samuel Arnold - Credit Suisse

Ross Payne - Wachovia Securities

John Edwards - [indiscernible]

Darren Horowitz - [indiscernible]

Mark Easterbrook - RBC Capital Markets

Presentation

Operator

Good morning and thank you for standing by. At this time all participants are in listen-only. [Operator Instructions]. I would like to inform participants that today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd also like to turn the call over to your conference host this morning, Mr. Randy Burkhalter.

Randy Burkhalter - Director, Investor Relations

Thank you. Good morning and welcome to the Enterprise Products Partners Conference Call to discuss earnings for the second quarter. Ralph Cunningham, Enterprise's President and CEO, will lead the call, followed by Mike Creel, the Company's Executive Vice President and CFO. Also included on the call today from enterprise is Dan Duncan, our Chairman and Founder, as well as other members of our senior management team. Afterward we will open the call up for your questions.

I'm sure most of you saw our recent press release announcing some key management changes at Enterprise. Congratulations go out to Ralph Cunningham for being named President and Chief Executive Officer of Enterprise GP Holdings, and to Mike Creel for being elected President and Chief Executive Officer of Enterprise Products Partners, and Randy Fowler, who will succeed Mike as Executive Vice President and Chief Financial Officer.

As a result of these moves, this will be Ralph's last call to lead as CEO of Enterprise Products Partners, as Mike will step into that role in the next quarterly call, and Randy will lead the financial discussion.

With that, I will move on to our forward-looking language.

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

And with that I will turn the call over to Ralph.

Ralph S. Cunningham - President and Chief Executive Officer

Thank you, Randy. Good morning, everyone. Thank you for joining the call today to discuss our second-quarter performance.

We had another solid quarter of operating and financial results. As we stated in the press release this morning, we had very strong performance, supported by record natural gas liquid fractionation volumes and near-record transportation volumes.

The second quarter is normally our weakest quarter, but we not only recorded the second-highest net income in our history, but also saw the start-up of our largest capital project, the Independence Hub platform and Independence Trail pipeline.

Our Independence Hub platform, the largest hub platform in the Gulf of Mexico, was completed in late March and began receiving natural gas in July. As the 80% owner of the platform, we began receiving monthly demand revenues net to Enterprise of $3.7 million from producers in late March. And this week, we began receiving production at the rate of 140 to 150 million cubic feet a day from three wells.

When operating at full capacity of 1 Bcf per day, which the producers expect by year-end, the platform and pipeline will produce annual gross operating margin to the Partnership of approximately $214 million, which incidentally is approximately 16% of Enterprise's total gross operating margin in 2006.

The outlook is promising for the remainder of the year, with continuing strong fundamentals and a significant amount of organic growth projects coming online during the second half of the year. When fully loaded, these projects are expected to generate a substantial amount of incremental gross operating margin and cash flows to the Partnership in the coming years.

Producers are continuing their active drilling plans in the basins where we operate, with significant year-over-year production increases in the Rockies and Barnett Shale, and solid production in the San Juan, Permian Basins and South Texas. Processing margins continue to look favorable for the remainder of 2007, gas to crude price ratios in the 50% range.

Demand for ethane from the ethylene industry is currently about 813,000 barrels per day, and ethylene production is running at an annualized rate of 59 billion pounds. Refinery demand for NGLs also looks bullish, with motor gasoline demand up year-over-year, enhancing the value of our butane and octane enhancement businesses.

Now I would like to turn to our organic growth projects and bring you up to date on them. Our primary focus is in the Rocky Mountain region, which includes some of the most prolific natural gas and NGL-producing basins in the United States, and presents significant growth opportunities.

We have targeted $1.9 billion to our Rocky Mountain growth initiative, reflecting the Partnership's commitment to expanding our integrated value chain, and providing value-added services for our customers and attractive investments for our unitholders.

In the Rockies, our 20% owned Jonah gathering system recently topped 1.75 Bcf per day of natural gas throughput. We are seeing more drilling activity, with 40 drilling rigs currently active in this region, which should lead to higher volumes through the Jonah system that is being expanded in phases through early 2008. Volume growth in the Jonah and Pinedale Fields has averaged more than 30% per year over the past five years.

You will recall that pipeline looping on the Jonah system was completed in December of 2006, and the first phase of the Bridger compressor project is completed, and we expect it to be in service within the next few days. 67,500 horsepower of compression increases the throughput capacity of the Jonah system over 14%, to 2 Bcf per day. This project completes the first phase of the phase 5 expansion.

Enterprise and TEPPCO are participating 50/50 in the expansion of the Jonah gathering system. The second and final phase, which involves the installation of another 102,000 horsepower of compression, is targeted for completion in early 2008, and is expected to increase the capacity of the Jonah gas gathering system to 2.3 Bcf per day.

To handle the increasing volumes of natural gas from the Piceance Basin in Colorado, we are constructing a state-of-the-art cryogenic gas processing facility near Meeker, Colorado that will have the capacity to recover up to 35,000 barrels a day of natural gas liquids.

This 750 million cubic feet a day gas plant will be connected to our Mid-America pipeline through a 50-mile lateral that was completed last quarter. The gas plant and connecting pipeline are expected to be in service next month, and should begin operations with volumes of approximately 400 million cubic feet a day from our Piceance Creek pipeline.

EnCana has exercised an option for us to expand the Meeker facility by an additional 750 million cubic feet a day. This expansion, expected to be completed by mid 2008, will enable us to recover up to an additional 35,000 barrels a day of natural gas liquids.

The Mid-America pipeline system is a key component of our Rocky Mountain initiative. We are in the process of expanding the Rocky Mountain segment of our MAPL system to accommodate the increased NGL production expected from the Meeker and Pioneer processing plants.

Most of phase 1 of the 50,000 barrel a day expansion project is completed, adding 30,000 barrels a day of capacity through 161 miles of pipeline looping. We are on track to complete our pump station work at 20 locations, which will add another 20,000 barrels a day of capacity, in September 2007.

Increased natural gas liquids from Enterprise's new plant and from third-party plants in the Rockies will be separated at our new 75,000 barrel a day Hobbs fractionator. Strategically located at the interconnect of the MAPL and Seminole pipeline systems, this facility is expected to be in service in the next few days.

It will offer flexibility to customers by providing access to the NGL hubs at Mont Belvieu and Conway, Kansas, as well as access to a growing local market, which includes nearby refineries that consume NGLs as a blend stock to produce motor gasoline, and increased propane demand in Northern Mexico.

Our new Pioneer cryogenic natural gas processing plant at Opal, Wyoming is on schedule to be in service during the fourth quarter. This facility is designed to handle up to 750 million cubic feet a day of natural gas, and extract up to 35,000 barrels a day of NGLs from the prolific Jonah/Pinedale Fields.

Two important projects at Mont Belvieu are the propylene splitter 4, which is on budget and on schedule for an early August start-up, and it could produce 15,000 barrels a day of propylene for petrochemical use. And also two refinery-grade propylene gathering lines that are being completed in phases will add up to 50,000 barrels a day of gathering capacity upon completion in March 2008. We expect an increase in our total propylene fractionation volumes as these pipelines are completed.

This is an important year for us in terms of completing significant capital projects, some of which have been in process since 2004. In total, we have $2.5 billion of organic growth projects expected to begin operations this year, providing new sources of cash flow for 2007 and beyond.

In addition to making substantial progress on our capital expenditure program, we have strengthened our organization by adding accomplished industry veterans Chris Skoog and Tony Chovanec to lead our newly formed natural gas marketing business, and Bryan Bulawa has joined Enterprise to enhance our finance team.

With that I'll turn the call over to Mike Creel.

Michael A. Creel - Executive Vice President and Chief Financial Officer

Thanks, Ralph. Enterprise posted near-record results for the quarter, with gross operating margin, operating income, net income and distributable cash flow each exceeding both the second quarter of 2006 and the first quarter this year. In fact, net income this quarter was the second highest in the Partnership's history, even though the second quarter is traditionally our seasonally weakest quarter.

The Partnership benefited from strong demand for natural gas liquids from the petrochemical and refining industries that led to near-record NGL transportation volumes and record NGL fractionation volumes.

Our Offshore Pipelines & Services segment realized incremental revenues as producers began paying demand charges to access the Independence Hub platform in late March of this year.

Revenue for the quarter increased 20% to $4.2 billion from $3.5 billion for the second quarter of last year, and gross operating margin also increased 20% to $373 million this year, compared to 311 million for the second quarter of last year.

EBITDA rose 12% to $335 million in this quarter, compared with 299 million in the second quarter of 2006. And the second quarter this year also included 21.5 million of cash proceeds from business interruption insurance claims associated with Hurricanes Katrina and Rita.

Distributable cash flow increased 35% to $294 million compared with $217 million in the second quarter of last year, providing 1.3 times coverage of the cash distribution to be paid to our Limited Partner. Last week the Board of Directors of our General Partner declared the 12th consecutive quarterly increase in our cash distribution rate to $0.4825 per common unit, or $1.93 per unit on an annualized basis, representing a 7% increase over the distribution rate paid with respect to the second quarter of 2006.

There are a few nonrecurring items in the quarter, and I'd like to kind of summarize those. We did have about $32 million of nonrecurring items that adversely affected earnings. That included a severance payment that we made, an impairment charge for our Nemo pipeline, costs to take out the debt at the Cameron Highway Pipeline System, and a write-off of some leasehold improvements.

Our reported earnings per unit were $0.26. Adjusting for these nonrecurring items, they total about $0.075, so that gets you to a normalized number of about $0.34 per unit before the business interruption proceeds. Business interruption insurance proceeds were about $0.05 per unit. And so, if you subtract that from the adjusted earnings per unit, that gets you to kind of a normalized earnings per unit of about $0.29, again, adjusting for those nonrecurring items, including the business interruption insurance.

From the standpoint of the business, the NGL Pipelines & Services segment had a great quarter, with gross operating margin increasing 43% to $209 million compared with $146 million in the second quarter of last year. Each of the businesses within this segment recorded higher gross operating margins for the third consecutive quarter. This quarter included 20 million of cash recoveries from business interruption insurance, compared with 2 million in the same quarter of last year.

The natural gas processing and related NGL marketing business had gross operating margin of $102 million. That's a 28% increase over the $80 million recorded in the second quarter of 2006. Our Louisiana gas plants generated an increased gross operating margin this quarter due to higher processing margins and higher equity NGL production compared to the second quarter of last year.

Our Chaco gas processing facility also had higher gross operating margin as a result of increased natural gas volumes received from the San Juan gas gathering system.

Equity NGL production, which is the NGLs we earn and take title to by providing processing services, increased 10% to 67,000 barrels per day in the second quarter of 2007, compared with 61,000 barrels per day in the same quarter of last year.

Gross operating margin from NGL pipelines and storage increased 29% to $66 million, compared with $51 million in the second quarter of last year. The largest increase came from the Mid-America and Seminole pipelines as a result of higher tariffs and a 5% increase in transportation volumes. Total NGL transportation volumes in the second quarter increased by 110,000 barrels per day, or 7%, to 1.7 million per barrels per day.

Our NGL fractionation business generated $21 million of gross operating margin this quarter, a 50% increase over the $14 million reported in the second quarter of last year. Total fractionation volumes rose 20% over the second quarter of 2006 to 370,000 barrels per day, primarily due to the performance of our Norco and Mont Belvieu fractionators.

Our Onshore Natural Gas Pipelines & Services segment reported gross operating margin of 83 million this quarter, down a bit from the 87 million in the second quarter of 2006. Onshore transportation volumes increased 7% year-over-year to 6.3 trillion BTUs per day, with the increase largely attributable to our December 2006 acquisition of the Piceance Creek pipeline.

Most of the decline in gross operating margin was due to higher pipeline integrity and operating expenses on the Texas Intrastate pipeline, and a decrease in volumes on the Waha and the Acadian pipeline systems.

Partially offsetting this decrease was an increase in gross operating margins in the San Juan gas gathering system, which benefited from higher gathering fees and decreased expenses. A significant portion of the gathering contracts on the San Juan system have fees tied to natural gas index prices in that region, which averaged $6.47 per MMBtu in the second quarter this year, compared with $5.34 in the second quarter of 2006.

Gross operating margin from our natural gas storage business increased $2.5 million quarter-to-quarter, due to a decrease in repair expenses at the Wilson natural gas storage facility in Texas. This storage facility has been out of service and undergoing repairs since the second quarter of last year, and is expected to resume operations during the second half of this year.

Gross operating margin for our Offshore Pipelines & Services segment increased 48% to $31 million, compared with $21 million in the second quarter of last year. Included in this year's second-quarter result is a $7 million non-cash impairment charge associated with our investment in the Nemo natural gas pipeline, a $9 million charge for our share of the costs of early retirement of project debt at Cameron Highway, and $1 million of cash proceeds from recoveries under business interruption insurance.

The largest contributor to the increase was our platform services business, which generated a record $27 million of gross operating margin in the quarter, compared with $8 million reported in the second quarter 2006. The majority of the improvement was from a full quarter of demand fees from the Independence Hub platform totaling $14 million. We began earning monthly demand fees from the producers when the platform reached mechanical completion in late March of this year.

As Ralph mentioned earlier, the producer group announced last week that first production had been received at the Independence Hub, and that they expect to ramp up production towards the Hub's capacity of 1 billion cubic feet per day by late this year.

The East Cam 373 and the Garden Banks platforms also contributed to the improvement in gross operating margin. If you recall, those platforms resumed operations in May of last year after being shut in due to Hurricanes Katrina and Rita.

The natural gas and crude oil processing volumes at our offshore platforms increased quarter-over-quarter by 19% and 33%, respectively.

Gross operating margin from the offshore natural gas pipelines was $4 million for the quarter, compared with $6 million last year, with the decrease in gross operating margin due primarily to the $7 million impairment charge related to our investment in the Nemo pipeline. This was partially offset by the recognition of deferred revenues and higher tariffs on the HIOS system.

The offshore oil pipelines business reported a loss of $1 million this quarter, compared with $6 million of gross operating margin in the second quarter of last year, again, primarily due to the $9 million of costs associated with the early retirement of project debt at Cameron Highway.

Crude oil transportation volumes for the quarter increased 9% over last year, primarily due to higher volumes on Marco Polo, Cameron Highway, Constitution and the Poseidon oil pipelines.

Gross operating margin for our Petrochemical Services segment was $50 million for the quarter, compared with $57 million last year. Gross operating margin for the butane isomerization business increased 9% this quarter over the second quarter of last year, due to a 7% increase in volumes. Propylene fractionation and petrochemical pipelines had $14 million of gross operating margin in the quarter, compared with $16 million in the second quarter last year, principally due to lower margins on polymer-grade propylene sales.

Our octane enhancement facility reported gross operating margin of $14 million in the quarter, compared to $21 million in the second quarter of last year. The primary reason for the decline was lower margins for isooctane and our accounting for annual turnaround costs at the facility.

Last year's annual turnaround cost of $7 million was incurred in expense in the first quarter. This year's cost was approximately $5 million, but the cost is being expensed ratably over the year, resulting in an approximate $2 million quarter-to-quarter variance.

Operating income for the Partnership was $215 million, a 15% increase over the $186 million for the second quarter of 2006. Depreciation expense increased to $121 million from $108 million in the second quarter of '06, primarily due to increased property, plant and equipment.

General and administrative expenses increased to $31 million this quarter from $16 million recorded in the second quarter, with the increase primarily due to the severance costs we previously mentioned, higher audit fees and legal costs this quarter.

Interest expense was $71 million this quarter, up from $56 million in the second quarter of last year, with average debt outstanding, including 100% of our hybrid debt securities, being $5.9 million for the second quarter this year compared with 4.7 billion last year.

We recorded a credit of 1.9 million in provision for income taxes this quarter, compared to a $6.3 million expense for the second quarter of last year. Included in the tax provision this year are adjustments to the accruals for Seminole and Dixie pipelines, which are both C-corps. Last year's tax provision reflected the initial booking of deferred taxes as a result of the new Texas margin tax.

In 2007, we expect to pay about $2.5 million in cash taxes related to the Texas margin tax, and we estimate that will increase about $14 million in 2008, reflecting a full year of expense.

Net income for the quarter was the second highest in the Partnership's history at $142 million, compared with $126 million for the second quarter of last year. Capital spending in the quarter was about $762 million, including sustaining CapEx of $48 million. We spent approximately $31 million for pipeline integrity this quarter, with $15 million of that recorded in operating expenses and 60 million of it being capitalized.

At the end of the second quarter of 2007, we had $6.3 billion of debt, including 100% of our $1.25 billion of hybrid debt securities, as well as the $190 million of debt of Duncan Energy Partners. Consolidated debt to total capitalization, adjusted for the average equity content of the hybrid debt securities as described by the rating agencies, was 42.5%. And we had liquidity of approximately $814 million, including amounts available under our multi-year credit facility and unrestricted cash on hand.

Our floating interest rate exposure was about 28% of our total debt at the end of the quarter, and the average life of our debt was approximately 19 years, and the average cost of the debt is approximately 6.2%, including the cost of 100% of our hybrid debt securities.

The last 12 months' consolidated EBITDA through the end of the second quarter of '07, including Duncan Energy Partners and adjusted for actual distributions from unconsolidated subsidiaries, was approximately $1.4 billion. And that resulted in a debt to last 12 months' EBITDA at year-end of approximately four times.

Before we finish the call today, I'd like to say a few words about Duncan Energy Partners, which is a partially-owned, consolidated subsidiary of Enterprise Products Partners.

Duncan Energy Partners reported strong operating results for the second quarter of 2007, with consistent performance from the Mont Belvieu NGL storage facility, the South Texas NGL pipelines, and the propylene pipelines. The phase 2 expansion of the South Texas NGL pipeline is on schedule to be completed in the fourth quarter of this year, and is expected to strengthen Duncan Energy Partners' energy value chain as more NGLs are transported from South Texas to its Mont Belvieu NGL storage complex, resulting in increases in fee-based revenues and cash flows.

Revenues for the second quarter 2007 increased 7% to $236.9 million, compared with $221.3 million for the second quarter of '06, and gross operating margin increased 17% to $21.5 million from $18.4 million in the same quarter of 2006.

Duncan Energy Partners reported net income of $4.5 million for the second quarter of 2007, or $0.22 per common unit on a fully diluted basis. The second quarter 2006 numbers are those for the predecessor of Duncan Energy Partners, and are not directly comparable.

Distributable cash flow of $6.6 million for the quarter reflected a higher-than-normal $4.2 million of sustaining CapEx, resulting in 0.8 times coverage of the $0.40 per common unit quarterly distribution. While the sustaining CapEx incurred this quarter were higher than normal, we were pleased with our commercial businesses that performed better than anticipated.

We expect increased cash generated from our improved business operations to largely offset any adverse impact that the higher sustaining CapEx in the quarter will have on distributable cash flows for the remainder of 2007.

With that, we're ready to open it up for questions, Randy.

Randy Burkhalter - Director, Investor Relations

I think we're ready for questions now.

Question and Answer

Operator

[Operator Instructions]

Our first question does comes from Mark Reichman. You may ask your question.

Mark Reichman - A.G. Edwards

Good morning. Just really three questions. The first is, in the release it talked about the Independence Trail volumes increasing throughout the year. How do you expect those to materialize to where they -- to the point where the pipeline reaches its maximum capacity?

Ralph S. Cunningham - President and Chief Executive Officer

I assume you're asking specifically the ramp-up volumes?

Mark Reichman - A.G. Edwards

Right. How do you expect that to materialize?

James H. Lytal - Executive Vice President of Enterprise

Independence Hub is connected to Independence Trail. And there's 15 existing wells that the producers have connected to the Independence Hub. Three of those are on so far, doing, as Ralph said, around 150 million a day. The producers have those additional 12 wells staged to come on over the next several months. So that will give us the ramp-up in volume. They will ramp-up on the Hub, and the same volume goes into the Trail.

Mark Reichman - A.G. Edwards

Also, for Mike Creel, where do you expect sustaining CapEx to fall out for both Enterprise Products and then Duncan Energy Partners for the remainder of the year?

Michael A. Creel - Executive Vice President and Chief Financial Officer

For Enterprise, we've got budgeted about $157 million in total. So we've got probably another 84 million or so for the balance of the year. For Duncan Energy Partners, we expect maintenance CapEx for the balance of the year to be roughly $5 million.

Mark Reichman - A.G. Edwards

Lastly, if you could comment a little bit on your strategy for Enterprise Products Partners increasing their exposure, or I guess Enterprise GP Holdings increasing exposure to interstate pipelines. I know that there's the potential partnership with Boardwalk and the Gulf Crossing pipeline, and then also the GP Holdings investment in Energy Transfer Partners. But could you comment a little bit on your plans there?

Michael A. Creel - Executive Vice President and Chief Financial Officer

I hate to get too far out in front. We do have an Enterprise GP Holdings conference call coming up on Monday. So I'd really prefer to wait until then for that question to come up.

Mark Reichman - A.G. Edwards

Fair enough. Thank you.

Michael A. Creel - Executive Vice President and Chief Financial Officer

Great.

Operator

Our next question comes from Yves Siegel. You may ask you're question.

Yves Siegel - Wachovia Securities

Good morning.

Michael A. Creel - Executive Vice President and Chief Financial Officer

Good morning, Yves.

Randy Burkhalter - Director, Investor Relations

Good morning.

Yves Siegel - Wachovia Securities

Randy and Mike, congratulations. Could you discuss what you might be seeing in terms of lower gas prices? Do you think that may have an impact on drilling activity in the second half of the year?

Ralph S. Cunningham - President and Chief Executive Officer

We have seen some pullback of drilling activity in the Rockies because of basis differentials, lower gas prices and so forth. I know that if you look at some of the earnings forecasts that are coming out currently, earnings releases from some of the producers in the regions where we are, there's no question that they have slowed down as a result of, probably, the gas price. But not substantially.

We still expect pretty prolific volumes coming out of the regions where we operate during the last half of the year. If you look at the strip, yes; gas prices are down current. But if you look into 2008, they're up over $8. So I think that's what the producers are looking at, maybe a short-term blip going down. But I think longer-term, they expect them to go back up.

Yves Siegel - Wachovia Securities

Last question. As it relates to just the ongoing projects, you got a lot done, or will be completed this year. Did you guys have any impact from weather in terms of, I guess, one, operations? And then, two, did the weather have any impact on the timing and cost of getting the projects done within budget and on time?

Ralph S. Cunningham - President and Chief Executive Officer

I don't think that the weather impacted us much, Yves. Always when you're dealing in the Rocky Mountains, of course, you have the cold weather and the snow to deal with. That's all planned into your schedules. But of course, with all the activity going on in the Rockies, I think all of us, not only Enterprise.

But all the other folks who are doing things up in the Rockies, are seeing increased labor costs, increased material costs, and those have been difficult to control. So on average, I would say, our projects are costing more than we had originally planned. But that's not because of the weather. It's just because of the demand for people in that area.

Yves Siegel - Wachovia Securities

Do you think the magnitude -- is the magnitude 5%? Any sense of what the magnitude on the cost side could be?

Ralph S. Cunningham - President and Chief Executive Officer

Probably on average between 5 and 10% for our projects. Some higher. Some are coming in right on schedule and right on budget.

Yves Siegel - Wachovia Securities

Okay. Thank you.

Operator

Sam Arnold, you may ask you're questions.

Samuel Arnold - Credit Suisse

Hi. Good morning, guy. Just a question for you on octane enhancement. Some of the comments that you put out this morning said that the decrease was due to lower demand for isooctane. And my question is this a trend that's going to continue going forward, do you see? And if so, is there any type of change in the mix or anything that you can do to try to offset some of that loss?

Gil H. Radtke - Senior Vice President

It's Gil Radtke. I think, really, the demand we're seeing is really reasonable. It's okay given where the values are for gasoline. A lot of what's really impacted us this year relative to last year is that spread between normal butane and gasoline is not as robust. If you think about last year, we still had a pretty good hurricane premium built into gasoline. It's gone away this year.

So in general, if you look at the results of our octane enhancement business, it's roughly double, even at today's prices, of what we had in our economics. So it's still very good for us. And we can hedge the fourth quarter. We're about 80% hedged right now. So we have ways to be able to lock in our profits, even when the market isn't as good as it was last year.

Samuel Arnold - Credit Suisse

Okay. Thank you.

Operator

Ross Payne, you may ask you're question.

Ross Payne - Wachovia Securities

Thank you very much. First of all, can you speak to what the capacity utilization looks like right now on Mid-America, as well as your fractionation plants as kind of a whole?

A. J. Teague - Executive Vice President of Enterprise Products

Yeah. This is Jim Teague. On the fractionation plants, Mont Belvieu, we are more than full, and in fact, having to offload with other fractionators. In Louisiana, we are -- our Norco facility and our t-bone [ph] facilities are full. And our Promix facility, while not full, we use as an overflow for our excess volumes out of Norco. So by and large, other than our Promix fractionator, we're running full. At our Promix fractionator, we're probably running about 60% when we're not offloading from Norco.

Ross Payne - Wachovia Securities

And I assume Mid-America pipeline is full, even with the expansion?

A. J. Teague - Executive Vice President of Enterprise Products

Mid-America pipeline is full and will be full.

Ross Payne - Wachovia Securities

What is the capacity of that now?

A. J. Teague - Executive Vice President of Enterprise Products

I think going into Hobbs out of the Rocky Mountains with the new expansion, we'll be in the neighborhood of 270 to -- 275 to 280,000 barrels a day.

Ross Payne - Wachovia Securities

Very good. Also, just to help us on the leverage side, can -- Mike or Randy, can you speak to how much debt may be associated with projects under construction?

Michael A. Creel - Executive Vice President and Chief Financial Officer

We really don't look at debt and projects as being linked. We really have looked at our total capital program for the year, and we're very comfortable with where we are in terms of our debt to equity mix. As James mentioned, and Ralph and I have all -- we've all mentioned it, because we're pretty excited about Independence.

That's certainly going to generate some additional revenues for the quarter. We -- really, we're looking at an annual revenue or EBITDA from the project of about $44 million. At capacity that ramps up to $214 million. So as the revenues continue to ramp up from that project and others, then certainly our debt to EBITDA ratios look even better.

Ross Payne - Wachovia Securities

Absolutely. Any target levels for that, just kind of on an ongoing basis?

Michael A. Creel - Executive Vice President and Chief Financial Officer

I think we are comfortable, depending on where we are in a construction cycle, at 3.5 to 4 times debt to EBITDA.

Ross Payne - Wachovia Securities

Okay. Very good. And Mike and Randy, congratulations.

Michael A. Creel - Executive Vice President and Chief Financial Officer

Thanks, Ross.

Operator

John Edwards, you may ask your question.

John Edwards - Analyst

Great quarter. You know, you had a significant outperformance on your gas processing business this quarter. I wonder if you could comment on -- given the strong oil prices and liquids prices relative to gas, are you expecting some more margin expansion there?

Ralph S. Cunningham - President and Chief Executive Officer

Kind of hard to expand on the current frac spread. We do expect -- we expect our margins to continue to be strong, if -- example, in July, in the press release we talk about some 800,000 barrels a day of demand by petrochemicals for ethane. Ethane is pretty key to your processing economics.

I think -- put that number in context, if you back out the off gas out of refineries that are reported in that number, the ethane required from gas processing plants pretty much equaled gas processing plants' capability to extract. So we see continued strength in our processing margins.

We also are going to benefit bringing Meeker on next month. That plant will have 400, 450 million a day of gas. Those margins will be additive to what we have been reporting.

John Edwards - Analyst

So you're expecting your margins to expand?

Ralph S. Cunningham - President and Chief Executive Officer

By virtue of the fact that we're bringing on the Meeker plant. I'd never say that we're going to expand beyond $0.50 a gallon frac spread.

John Edwards - Analyst

Okay.

Michael A. Creel - Executive Vice President and Chief Financial Officer

John, remember that we don't benefit from the full frac spread anymore. We renegotiated those contracts to take volatility out of our business. And so while that's good for the people that do get that frac spread, it's good for us from a standpoint of volumes and throughput.

Ralph S. Cunningham - President and Chief Executive Officer

Good point, Mike. The key at Meeker, if you remember, those are keep whole contracts, where we will, I guess, in effect, see an expansion of margin by virtue of the fact that we will get all of the margin, unlike our Louisiana plants, where we operate within a margin band.

John Edwards - Analyst

Great. Thanks a lot. Good quarter.

Operator

Darren Horowitz, you may ask your question.

Darren Horowitz - Analyst

Good morning. Thank you. My first question is in regards to the NGL transportation volumes. I'm not quite sure if you hit on this. Just looking at the numbers, it looks like one of the highest levels that you've been at since the third quarter of last year. I was curious, given what you've got in the project backlog, how you see those volumes expanding over the next several quarters.

Ralph S. Cunningham - President and Chief Executive Officer

Are you talking about MAPL and Seminole?

Darren Horowitz - Analyst

That's right, yes.

Ralph S. Cunningham - President and Chief Executive Officer

Coming out of the Rocky Mountain area then.

A. J. Teague - Executive Vice President of Enterprise Products

We expect that we will retain the kind of levels, I think, that we have now, by virtue of the fact that we're bringing on both Meeker and Pioneer. If you remember, there is another pipeline that will be built out of the Rocky Mountains into the Mid-Continent called Overland. So that pipeline will move product out of the Rockies. We expect our volume to stay full, driven by our production at Meeker and Pioneer.

Darren Horowitz - Analyst

That's helpful. One quick housekeeping question. On the G&A line, if you ex the severance cost, is it fair to assume between maybe a $16 million and an $18 million run rate for the back half of this year?

Michael A. Creel - Executive Vice President and Chief Financial Officer

That's reasonable. I think it was probably 16.5 or so in the third quarter.

Darren Horowitz - Analyst

Okay. Thank you.

Dan L. Duncan - Chairman

This is Dan Duncan. Let me add a little bit of color to what Jim said. When a statement came up a while ago, where do we stand under the Mid-America, or the MAPL, the Rocky Mountains deal, and Jim's answer was that it was full and will continue to be full, what he really meant is it's scheduled to be full when we bring on Meeker and next month to bring on Opal, our Pioneer plant in the fourth quarter this year.

Then we expand in about new gas going into Meeker. The MAPL expansion that we put on recently by the 40 to $50,000 a day expansion, it would be full in the second quarter of 2008. And at that time, depending on when the Wulno [ph] pipeline comes into play, right now we hear the rumors they will come on some time in the second quarter of 2008.

But based on that type of deal, Wulno coming on, at no time will the Rockies be short of takeaway capacity for natural gas liquids. It is still short of takeaway capacity for the natural gas, but that's being affected in the price that they pay for the Rocky Mountain gas.

But we don't see a shortfall on takeaway capacity on natural gas liquids, unless the Wulno joint venture pipeline would get delayed past second quarter next year. Otherwise we think MAPL can take all the liquid that comes out of the Rocky Mountains, up until that time.

Darren Horowitz - Analyst

Thank you for the clarity.

Dan L. Duncan - Chairman

You're welcome.

Operator

Mark Easterbrook you may ask you're question.

Mark Easterbrook - RBC Capital Markets

Yeah. From RBC Capital Markets. A quick question on the $42 million of cash proceeds from the interest rate hedges. Do you have anymore of those that may be coming out over the third and fourth quarter?

Michael A. Creel - Executive Vice President and Chief Financial Officer

We have some hedges, Mark. And we kind of watch the treasury market pay attention to our financing plans. We did think that the treasury market had gotten a little ahead of itself, so we pulled some of those hedges off. We still have some remaining.

We are very comfortable with our fixed floating mix, but we are looking at potential refinancing of some debt that comes due in October. And if we see treasury is at an attractive rate, we may lock in a forward rate again.

Mark Easterbrook - RBC Capital Markets

What is fixed floating right now?

Michael A. Creel - Executive Vice President and Chief Financial Officer

It's 28% floating.

Mark Easterbrook - RBC Capital Markets

And then, you had uptick in the interest expense up to $71 million for the quarter. Is that a good run rate, or is that going to creep up because of the Independence Hub coming online?

Michael A. Creel - Executive Vice President and Chief Financial Officer

It will increase as we continue to spend capital. But the good news about spending capital for projects that generate more cash flow, one of the things that you'll see year-over-year is that -- remember, we did $1.25 billion of hybrid debt securities, which has a relatively high coupon, but it does get equity content treatment from the rating agencies.

It's a good mix of our total portfolio. And even with those hybrid debt securities, you can see that our average cost of debt is about 6.2%. So I wouldn't look at the year-over-year increase as being reflective of what you ought to expect going forward. But certainly, as we continue to spend capital, the interest expense will go up a bit.

A. J. Teague - Executive Vice President of Enterprise Products

And Mark just one thing or addition to note on that line item, Valero and Enterprise are joint venture partners on the Cameron Highway Oil Pipeline. Historically, we've had project finance debt at that pipeline of about 425 million. Valero and Enterprise elected to go ahead and retire that project finance debt.

And now, if you would, our share of that debt, which is about $200 million, is now on our balance sheet. So you'll be seeing that interest expense associated with our share of that debt on our income statement. But on the other side is we should be seeing more cash distributions coming up out of Cameron Highway as a result of that.

Mark Easterbrook - RBC Capital Markets

Okay. Thanks for this clarity.

Operator

At this time, we show no further questions.

Randy Burkhalter - Director, Investor Relations

Would you give our analysts the dial-in information for the replay, please?

Operator

Yes, to dial in for the replay, you will want to dial 866-469-7804. Again the replay number is 866-469-7804. That does go through August 2nd, 2007.

Randy Burkhalter - Director, Investor Relations

Okay. Thank you, Tray and thank you for joining us today on our call, and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Enterprise Products Partners Q2 2007 Earnings Call Transcript
This Transcript
All Transcripts