Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Enterprise Products Partners LP (NYSE:EPD)

Q4 2007 Earnings Call

January 28, 2008 10:00 am ET

Executives

Randy Burkhalter - Director IR

Mike Creel - President and CEO

Randy Fowler - EVP and CFO

Dan Duncan - Chairman

Jim Teague - EVP

James Lytal - EVP

Analysts

Yves Siegel - Wachovia Securities

Ross Payne - Wachovia Capital Markets

Sharon Lui - Wachovia

John Edwards - Morgan, Keegan & Company

Barrett Blaschke - RBC Capital Markets

Darren Horowitz - Raymond James

Lewis Sammie - Zimmer Lucas Capital

Operator

I’d like to welcome you to the EPD and DEP Fourth Quarter Earnings Call. (Operator Instructions).

I'd now like to turn the call over to Randy Burkhalter. You may begin.

Randy Burkhalter

Thank you, Danielle. Good morning and welcome to the Enterprise Products Partners conference call to discuss earnings for the fourth quarter. Mike Creel, Enterprise's President and CEO will lead the call, followed by Randy Fowler, the Company's Executive Vice-President and CFO. Also included on the call today Enterprise is Mr. Duncan, our Chairman and founder, as well as other members of our senior management team. Afterwards we will open the call up for your questions.

During this call we will make forward-looking statements within the meaning of Section 21-E 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, they can give no assurances that such expectations will prove to be correct. Please refer to our latest filings with the Securities and Exchange Commission for a list of factors that may cause actual results to differ materially from those in the forward looking statements made during this call.

With that I will turn the call over to Mike.

Mike Creel

Good morning, and thanks for joining us on this call today, I am pleased to report another quarter of strong operating results. In the third quarter of 2007, we announced record transportation volumes from our pipelines. In the fourth quarter we surpassed those numbers by transporting a record two million barrels of natural gas liquids, crude oil and petrochemicals, and more than 8.5 trillion Btus per day of natural gas through our integrated network of pipelines. We also fractionated a record 400,000 barrels a day of natural gas liquids, led by production in our Mont Belvieu and Hobbs facilities.

This led a record gross operating margin of $431 million for the quarter. We are continuing to realize increasing cash flows and capital projects that began operations in the later part of 2007, and we expect these assets would generate significantly higher cash-flows in 2008 with a full year of operations.

In spite of our strong performance this quarter, the results could have been better. Our Meeker gas processing facility got off to a slow start, pampered by various issues such as faulty valves and flawed engineering designs. The startup of our Pioneer gas processing plant was also delayed due to similar problems.

These issues in the late startup of both facilities caused the partnership an estimated $85 million or $0.19 per unit, in terms of expense and lost revenue opportunities. We have replaced the defective valves and corrected the engineering design at both facilities, and we're actively pursuing recoveries from the manufacturer of the valves and certain of the engineering design's firms that worked on these projects.

These types of problems are not acceptable to us, and they do not meet the engineering and operating standards that we've established in over 40 years of developing midstream projects.

I would like to recognize the employees that we've working on these projects in Colorado and Wyoming. They've worked very long, in difficult hours and very demanding conditions, to mitigate these setbacks. We've seen weather conditions at the very extreme end in the Pioneer worksite with subzero temperatures all day and winds at times exceeding 50 miles or 60 miles an hour. In spite of those conditions, our employees have performed admirably.

We recently announced the appointment of Leonard Mallett, as Senior Vice-President of all our engineering activities for EPCO partnerships. Leonard brings 28 years of experience to this position and we expect Enterprise to benefit from his exceptional technical and managerial skills.

This will be important as we continue to grow our cash flow through our organic growth projects. We've also made other organizational changes in engineering that we believe will lead to better control over projects in the future.

Three of our four business segments reported higher gross operating margins this quarter, compared to the fourth quarter of 2006. New segments reported significant increases with our Onshore Natural Gas Pipelines segment reporting a 40% increase in gross operating margin, and our Offshore Pipelines and Services segment posting a 174% increase in gross operating margin.

The Independence Hub and Trail added $48 million to gross operating margins in the fourth quarter 2007. The distributable cash flow for the quarter was $262 million, providing 1.05 times coverage of the cash distribution of $0.50 per unit paid, with respect to the fourth quarter.

Randy will discuss the earnings and cash flow in more detail in just a few minutes. Jonah gas gathering pipeline is currently moving an excessive 1.8 billion cubic feet a day of natural gas from the prolific Jonah and Pinedale fields.

We expect gathering volumes to ramp up to 2 billion cubic feet per day by the third quarter and to about 2.2 billion cubic feet by the end of the year. This is primarily as a result of the final portions of the Phase V expansion program, which involves the completion of the Phase II of the Bridger compression project. This project will add 1,200 horsepower of the electric compression and is expected to be completed by the end of this quarter.

We're currently working with producers for additional expansions of the Jonah and Pinedale gathering system. I am pleased to report that our major cryogenic gas processing facility is now processing an average of 530 million cubic feet a day of natural gas, and extracting an average of 27,000 barrels per day of natural gas liquids. The gas volumes are expected to increase as production from existing dedicated producers rise, and we continue to sign contractors with additional producers.

We've now executed processing contracts with approximately 50% of the top 12 producers in the Piceance Basin, including deals completed with OXY and Chevron in this last quarter. Most of these processing contracts are 10 to 15 year contracts with the EnCana agreement being through the life of lease.

We now have contract dedications in place to process from 2.4 billion to 2.6 billion cubic feet a day of natural gas in our Meeker facility. We expect Meeker 1 to be full by late 2008 and the Meeker 2 facility to begin operations in the third quarter this year, bringing our total processing capacity to 1.5 billion cubic feet a day in the Piceance Basin.

We continue to pursue other producers in the Piceance Basin with proposals to three producers to process up to 400 million cubic feet a day of natural gas. During the fourth quarter there were 736 wells permitted by 21 operators in the Piceance Basin, and of those 55% were by operators with Enterprise dedications.

With our connection to the Rockies Express Pipeline, the Meeker lateral and processing facility and increased natural gas liquid takeaway capacity on our Mid-America pipeline, we are able to offer our producers better optimization and flow assurance, as well as access to the highest value markets for there natural gas and natural gas liquids.

Our Pioneer cryogenic processing plant in the Jonah/Pinedale field is in the commissioning phase and is expected to begin operations shortly. We are currently processing more than 500 million cubic feet a day through our silica gel plant in that location.

After the start-up of the cryo plant this gas will flow through the new plant, which is expected to extract approximately 23,000 barrels per day initially, and up to 30,000 barrels per day of natural gas liquids when full.

We have long-term processing contracts with EnCana and Ultra, and we are currently renegotiating a long-term deal with British Petroleum. These three producers account for approximately 85% to 90% of the expected natural gas deliveries to the Pioneer plant.

Pioneer plant will join Meeker 1, which began operations last quarter. Meeker 2, which we expect to begin operations in the third quarter. We are providing additional natural gas liquid volumes to complement other completed projects that are part of our Rocky Mountain growth initiative, including the 50,000 barrel per day expansion of our Mid-America Pipeline and Hobbs NGL fractionator.

The Hobbs NGL fractionator has been operating at or near capacity, currently fractionating an average of 70,000 to 75,000 barrels a day of NGLs. This facility provides shippers the flexibility to ship purity products to the two major NGL market hubs in the U.S. located at Mont Belvieu, Texas, Kansas and Conway. It also provides access to the local refinery markets in West Texas, the propane markets in Mexico and an ethylene facility in Odessa.

Pipeline from Hobbs to the refinery in Odessa is near completion and expected to be in service in the second quarter of this year. Our largest capital project today, the Independence Hub and Trail, is performing quite well. As I mentioned earlier, the Independence Hub platform and the Independence Trail pipeline contributed a combined $48 million of gross operating margin, and an average throughput of about 719 million cubic feet a day in the fourth quarter.

So far this year the volumes from the platform and the pipeline have averaged about 900 million cubic feet a day. The future value of the Independence project was further validated last October with the Gulf of Mexico Lease Sale 205. In that auction, producers paid for rights to explore 80 blocks within a 50-mile radius of the platform.

We are excited about BP's commencement of its Atlantis development in December. That has resulted in an increase in volumes on our 50% owned Cameron Highway Oil Pipeline, to 100,000 barrels per day for the fourth quarter 2007, compared with 52,000 barrels a day for the same quarter 2006.

In January, total volumes on Cameron Highway have averaged 151,000 barrels per day, and the pipeline is currently flowing 185,000 barrels per day of crude oil, so a very positive development for Cameron Highway project.

Construction continues on our Sherman Extension Pipeline in the Barnett Shale region, which is expected to be placed in service in the fourth quarter of this year. This 178-mile, 36-inch pipeline will connect our Enterprise Texas Pipeline from Morgan Mill, Texas, southwest of Fort Worth, to Boardwalk's Gulf Crossing pipeline near Sherman, Texas.

The combination of our Sherman pipeline and capacity on the Gulf Crossing Pipeline, who provide producers with multiple market outlets for up to 1.1 billion cubic feet a day of their production, originating from the Barnett, Waha and East Texas regions.

Gas production out of the Barnett Shale region is expected to grow from 3.4 billion cubic feet a day currently to approximately 6.4 BCF per day by 2013. However, in the best case scenario, it could be as early as late 2010.

Demand continues to grow for natural gas storage, especially in and around the Gulf Coast. We currently have 27.5 billion cubic feet of natural gas storage capacity at Petal and Hattiesburg, Mississippi, Napoleonville, Louisiana, Mont Belvieu, Texas, and Wilson some storage southwest of Houston. With planned editions, we expect to have approximately 73 billion cubic feet a day of capacity by the end of 2013.

We recently added 1.6 BCF of gas storage capacity at our Petal facility, increasing its capacity to 13.5 BCF, and this capacity is fully subscribed. We are currently developing a new 5 BCF cavern and expect to place that in service in the second quarter of this year, with about 3.2 BCF of that capacity committed for an average 7.5 years. We are also developing additional caverns and expect firm contracts for another 10 BCF of capacity as a result of a non-binding open season held recently.

Demand for petrochemicals in December was as strong as it had been in some time, with ethylene steam crackers averaging 92% of operating capacity.

The industry benefited from two steam crackers in southeast Texas, returning to service after extended turnarounds.

Ethylene output in December increased 8% over the November production, and it peaks for the year at 157 million pounds per day in December. This equates to 57 billion pounds on an annual basis.

According to the Hudson report, ethane feed stocks were a robust 821,000 per day in December, and that compares with an average of 770,000 barrels per day for all of 2007.

The gas-to-crude oil price ratio averaged about 47% during the fourth quarter and currently is about 52%, and that compares with a five-year average of nearly 70%.

As a result, ethane and propane have been the preferred feedstocks for ethylene producers rather than naphtha, which has been relatively expensive due to the price of crude oil.

We are extremely excited about current capital projects, our backlog of organic growth, and the contributions we expect in May to our offshore and onshore integrated value chains. The outlook for Enterprise is very promising and is supported by strong fundamentals, increased volumes of hydrocarbons into our pipelines and downstream facilities, and a significant amount of organic growth project coming online.

We have invested approximately $3.9 billion in capital projects over the last 2 years. With the completion of the Meeker and Pioneer plants, and given the performance of our Independence project, we expect 2008 to be an exceptional year, as we begin to generate increased cash flows from these investments for the partnership and for our partners.

And with that I will turn the call over to Randy Fowler

Randy Fowler

Thank you, Mike. As Mike mentioned earlier, Enterprise reported a record performance this quarter as new projects began operations and started to contribute to cash flow. The partnership posted a 27% increase in gross operating margins to a record $431 million on record volumes for our liquids pipeline, onshore natural gas pipelines, and NGL fractionators

We reported a net income of $162 million or $0.30 per unit for the fourth quarter of 2007. This is a 22% increase from net income of $133 million, or $0.25 per unit for the fourth quarter of 2006. After adjusting for unusual nonrecurring items, net income was $182 million or $0.35 per unit. Running through what we did there, as far as actual cost related to replacing valves or loss over hedges, at Meeker and Pioneer that was about $29 million or $0.07 per unit you would add back.

As far as increased cost and volume loss on the Dixie pipeline rupture, that's about $10 million, or $0.02 per share. Then subtracting from that, recoveries from business interruption insurance was $11 million, or $0.02 per share. Settlements of various imbalances and measurement disputes, and other, were about $7.5 million or $0.02. That comes into that $0.05 adjustment that I just made.

Distributable cash flow was $262 million in the fourth quarter, compared to $240 million in the fourth quarter 2006. DCF this quarter provided 1.05 times coverage of the cash distribution to be paid to partners with respect to the fourth quarter. For the year, distributable cash flow was a record $1 billion, and provided 1.03 times coverage of the almost $1.95 per unit that we declared with respect to 2007.

A couple of weeks ago our Board of Directors of our general partner declared the 14th consecutive quarterly increase in the cash distribution write-up to $0.50 per unit. This is a 7% increase over the cash distribution that was paid with respect to the fourth quarter of 2006.

EBITDA for the quarter was $403 million. This is 26% higher than the $319 million reported in the fourth quarter of 2006. As I mentioned earlier, our record performance this quarter was a result of new capital projects coming on. That began to contribute to earnings and cash flow.

Consolidated EBITDA's, that's EPD and Duncan Energy Partners added together for 2007, after we adjust for actual cash distributions received from unconsolidated affiliates, was a record $1,431 million.

Since the press release provided a comprehensive analysis of changes in gross operating margin, I would just like to turn now to the remainder of the income statement.

Depreciation expense increased to $139 million for the fourth quarter of 2007, from $115 million for the fourth quarter 2006. This is primarily due to new assets that were put into service during 2007, including Independence, Meeker Hubs, MAPL, Seminole expansion and also our new propylene fractionator.

G&A expense increased slightly to $21 million for the quarter, compared to $18 million in the fourth quarter of 2006. The increase was primarily due to increases in accounting and tax services, and then also some non-cash amortization expenses for an employee comp plan that actually bears EPCO economic liability.

Our interest expense was $92 million for the fourth quarter of 2007, that's an increase from $61 million for the fourth quarter of 2006. This is largely on an increased and average debt balance in the fourth quarter of 2007. Debt averaged about $7 billion for the quarter, compared to $5.2 billion for the fourth quarter of last year.

Our provision for income tax has decreased $2.6 million for the fourth quarter of '07, compared to fourth quarter of 2006. This is largely a decrease in corporate taxes with respect to Dixie on lower pretax income. This was partially offset by an increase in taxes with respect to the Texas margin tax.

Capital spending in the fourth quarter of 2007 was approximately $500 million for growth capital projects, and another $43 million for sustaining capital expenditures. For 2007, we invested about $2.1 billion on growth projects and had $162 million for sustaining CapEx.

As we look out into 2008, we currently estimate growth capital expenditures to be approximately $1.4 billion of which $1 billion will be for announced projects, or projects which are already under construction. This includes the Sherman Extension, which is about a $438 million project, and the second train of the Meeker processing plant, which is about $285 million. Then a couple of others are the Exxon central trading facility, and also the natural gas storage projects that Mike mentioned earlier.

Currently our sustaining capital expenditures for 2008 are forecasted to be about $200 million. At December 31, 2007 we had about $6.9 billion of debt outstanding. This includes 100% of our $1.25 billion of hybrid securities and it also includes the $200 million of Duncan Energy Partners' debt, which is consolidated, but EPD does not have the payment obligation for this.

We have liquidity at year-end of about $1 billion, and this is comprised of availability under our credit facility and unrestricted cash. Floating interest rate exposure was about 27% at December 31, 2007, and the average life of our debt was approximately 19 years, with an average cost of debt of about 6.4%.

Our leverage ratio, in terms of the last 12 months consolidated EBITDA, which would include both EPD and Duncan Energy Partners, was about 4.3 times. This is based on an adjusted debt of $6.1 billion, which includes the DEP's debt, but is also reduced by 58% of the $1.25 billion of hybrid securities that the rating agencies on average give us equity credit for.

This is an improvement if you'll recall at September 30, 2007 when this leverage ratio was 4.5 times. We expect it to trend for our target range of 3.5 to 4 times as new capital projects begin operations, volumes ramp up and cash flow increases in 2008. We think this will provide us a good financial flexibility on how we financed our growth in 2008.

Before I finish the call today, I would like to make just a few comments about Duncan Energy Partners, which also reported its fourth quarter earnings this morning. Again, Duncan Energy Partners is a consolidated subsidy area of Enterprise. It reported net income of $6.3 million for the fourth quarter of 2007, or $0.13 per common unit on a fully-diluted basis.

Duncan Energy Partners reported solid operating result this quarter with performance from the Mont Belvieu NGL storage facility, the Acadian Intrastate Natural Gas pipeline system in Louisiana, and the South Texas NGL pipeline that was put in to service in January 2007.

Distributable cash flow for Duncan Energy Partners was $9.4 million for the fourth quarter of 2007. This provided 1.1 times coverage of the quarterly cash distribution. The Board of Directors of Duncan Energy Partners declared a quarterly cash distribution of $0.41 per common unit with respect to the fourth quarter of 2007, which is $1.64 on an annual basis.

DEP's performance this quarter completes a successful first year for the partnership, with strong operating results and coverage of its cash distribution. Now I think we're ready to take questions Randy I'll turn it back it over to you.

Randy Burkhalter

Okay Danielle we are ready to take questions now.

Question-and-Answer Session

Operator

(Operator Instructions). The first question is from Yves Siegel of Wachovia Securities.

Yves Siegel - Wachovia Securities

Good morning guys.

Mike Creel

Morning Yves.

Yves Siegel - Wachovia Securities

Just a couple of question. Number one, can you just discuss how you're thinking about processing commodity exposure going forward, especially in light of the great environment that we're in. That's number one, and the second question was could you also discuss what you are seeing now on construction costs and so the confidence level that you have that you can execute the rest of the expansion program within a reasonable budget and time schedule?

Mike Creel

Yeah, let me take the second question first, then, I will pass it over to Jim Teague to talk about processing exposure up in the Rockies. On construction costs, you could tell from the tone of our press release and the conference call that we're not pleased with the result up in the Rocky Mountains; the Meeker plant and the Pioneer plant have both taken longer to build than we expected. Part of that was a problem with valve manufacturers, part of that was outside engineering firms and their design work, and frankly, part of that was lack of adequate oversight by us.

We are making changes to remedy the internal problems that we had with the lack of proper oversight. We think that we've made the proper changes and that we're going to have much better control over that in the future. We're pursuing remedies against some of the outside firms that we feel are responsible for some of the cost overruns and delays in the projects and working to get those back on track.

Going forward, I think we're going to be much more vigilant about providing oversight to third parties making sure that we have eyes on what they are doing, that we review their designs that we do some independent testing, though we don’t expect to have the same kinds of problems going forward. We've got a long track record of successfully building projects on time and under budget and we expect to get back to that position as well.

On the processing environment, Yves, I think what you're really alluding to is the fact that in the Rocky Mountains we've got some exposure there and it was intentional and I'll let Jim Teague talk about that.

Jim Teague

Yeah, Yves, we have a couple of things working for us besides the fact that we are having record margins right now and processing spreads. First of all, as good things weaken we're in a better position than anyone given the value chain we have. You look at our plants up there we can -- we'll be going through our own pipelines into our own fractionators with the ability to go to the highest value markets, be it in the Midwest or on the Gulf Coast. So, in a sense, we are well positioned from a value chain perspective to be able to mitigate any processing exposure.

Worse comes to worst, we've spent the kind of money to put these plants to where we have a tremendous amount of extraction flexibility. We can literally turn these 650 million to 750 million a day train, a full extraction, fully loaded, it will be about 35,000 barrels a day. We can literally turn that down to 3,000 barrels per day and meet our downstream pipeline residue specs.

So, we understood what we were doing when we got into these deals and we built the kind of flexibility into the plants to be able to manage that exposure. But, we feel pretty confident given the value chain that we have, in terms of our Mid-America pipeline, our fractionation, and our distribution pipelines, that we are going to be able to manage it a lot better then anyone else would.

Dan Duncan

Yves, this is Dan. Let me add a little bit of additional color, because we haven't rehearsed inside what we want to what we would talk about. But if you go back to the press release that we sent out and what Mike talked about, I think in the deal, the amount, I guess the $75 million to $85 million of loss as well, loss of opportunity in 2007 over into 2008. A lot of that money we will get back. We went in to probably a forward sales type deal in 2007 and that because of a lack of productivity coming on at Meeker and Pioneer that cost us some money in 2007 which we'll make back in 2008.

But, a majority of liquid, because of the high prices of liquids relative to the processing side for 2008, we have hedge going forward; so we're in a lot better position with these high price liquids. Those prices will stay with us all this year. We're not trying to get into the deal of giving forecast on earnings, but we bought it up in what caused us in [2000 fourth quarter]. We also did that in 2008. So, based on the value chain, that Jim brought up, based on all the things that we've got going for us, we feel we're in very, very good shape in 2008.

Yves Siegel - Wachovia Securities

And, if I could just follow up, last question. Given the terrific processing margins that are out there and it sounds like you've captured a lot of that upside for 2008; when you think about the distribution and setting distributions going forward, are you allowing for somewhat of a cushion with the sort of expectation that you might have excess cash flow in 2008, because of the environment that may not be repeatable. So how do you think about that when you are setting distribution targets right now?

Dan Duncan

What I think about, I am going to pass it back to Mike. Mike has a tendency of saying we are not going to get into a forecasting deal. So Mike, it's back to your deal.

Mike Creel

Yeah, Yves. We've talked about this before. We are in a very robust processing environment. Conditions are great. We are not going to base our distributions in 2008 on a fairly heady market environment. We've, in fact, maintained a fairly disciplined approach towards our distribution growth retaining cash flows and we certainly expect to do that in 2008, yet still be able to increase distributions to our unit holders. So we are not going to give it all away.

Yves Siegel - Wachovia Securities

All right. Thank you

Operator

Our next question comes from Ross Payne with Wachovia Capital Markets.

Ross Payne - Wachovia Capital Markets

How are you doing guys?

Mike Creel

Great.

Ross Payne - Wachovia Capital Markets

First question, on natural gas pipelines, you mentioned that there was a measurement issue that was settled. Can you speak about how big that might have been?

Mike Creel

Well, Ross, that was where we came in on the non-recurring. That was sort of, when you add everything up, about $7.5 million.

Ross Payne - Wachovia Capital Markets

Okay. It's not a lot there. Okay. Certainly looks like a great '08 shaping up here. You did have some startup costs obviously in the fourth quarter. Can we expect a little bit of the same, although not as large in Q1? Or what should we be thinking about there?

Mike Creel

Well, we've got Pioneer, that's got some startup costs involved. But, I don't think you are going to see anything like what we had in the fourth quarter that a lot of those costs really were replacing faulty valves and the like, and that was about little over $6 million.

Ross Payne - Wachovia Capital Markets

Okay, All right. Cameron Highway looks like it's ramping up nicely. You mentioned that there was some falloff in other production. Can you be a little more specific on that? And are we going to see earnings in that segment pick up notably as well?

James Lytal

Hi Ross, this is James. We have seen some declines on some of our pipes in the Eastern Gulf. Although, we are working on some new deals, that probably wouldn't have much impact in '08, that would be positive for '09 to add volumes to those pipes. So, Central Gulf, Atlantis, doesn't only benefit Cameron Highway, it also adds gas production too. We have ownership in Manta Ray, Nautilus and also bringing new, very rich gas to our Neptune plant. So, we should see some gas volume ramp-up in the Central Gulf.

Ross Payne - Wachovia Capital Markets

Okay. And one final question. I think, when you guys were talking about Hobbs, you were saying that some of its startup costs were offset by its profitability. Is that also behind you? And what kind of contribution do you expect going into '08?

James Lytal

Yeah, it's running pretty much at capacity 70,000 to 75, 000 barrels a day. So it seems to be pretty lined out.

Ross Payne - Wachovia Capital Markets

Okay. All right. Thank you very much.

Operator

Our next question comes from Sharon Lui with Wachovia.

Sharon Lui - Wachovia

Hi, good morning. These questions are for Duncan. Can you just touch upon the sequential improvement in NGL and Petchem results for the quarter?

Dan Duncan

On the Petrochemical pipeline results, I think what you are seeing there is, with the contracts that we have there with Shell, there are some minimal volume requirements. I think some of what you saw in the fourth quarter is just a catch up from lower volumes in previous quarters. And, then also we just saw better activity around the NGL storage business.

Sharon Lui - Wachovia

Okay. And then turning to sustaining CapEx, do you have a forecast for '08?

Dan Duncan

We are still finalizing the plan for Duncan Energy Partners for 2008. So, at this point, we don't have a forecast thus far on maintenance CapEx. But, we will be coming back out. Honestly, what we are focusing on is trying to come in and line up an analyst meeting in, like, March. We should be getting some save the date notices here shortly on that and we will be able to have more information around then.

Sharon Lui - Wachovia

Okay. And, I guess, looking at maintenance CapEx at EPD, there is a ramp up from '07. Can you just touch on what's the increase?

Dan Duncan

I think some of it is just continuing on the pipeline integrity where we had a few projects that are coming up in 2008 around our Texas Intrastate Pipeline. Again that pretty much explains the bump up that we're seeing there, that was the largest part of the increase in 2008 and then also just more assets that work also.

Sharon Lui - Wachovia

Okay .Thank you.

Operator

Our next question comes from John Edwards of Morgan, Keegan & Company. Your line is open.

John Edwards - Morgan, Keegan & Company

Yeah, good morning, everybody. Can you hear me?

Mike Creel

Yeah, John, good morning.

John Edwards - Morgan, Keegan & Company

Can you talk a little bit about how Rockies Express might impact your liquid volumes as that shapes up here?

Mike Creel

I don't think it has any positive impact or negative impact on our liquids volumes. What it really does is it gives producers another outlet for their gas. It changes perhaps the pricing dynamics of natural gas in the Rocky Mountains.

John Edwards - Morgan, Keegan & Company

Okay. But, you're not going to see additional volumes because more gas will be flowing, you don't expect more volumes to come through your assets?

Mike Creel

To the extent production ramps up because there is more takeaway capacity and clearly there is more gas available for us to produce, yes.

John Edwards - Morgan, Keegan & Company

Okay. And then can you talk a little bit about on the octane segment. What happened there? That came in quite a bit below what we were expecting. Can you talk about that? And, then I presume it's going to be back up going forward?

Mike Creel

John, I think a couple of things in the octane enhancement business. One, we had lower volumes in 2007 than in 2006. A couple of things that we've benefited from in 2006 that did not, if you would, re-occur in 2007, was we had some hedges in place on that business in 2006 that helped us generate positive operating margin in that business in '06.

We still look for octane enhancement to be somewhat seasonal with the most of the money being made there in the second quarter and third quarter. And, I think what you saw in 2007 in the fourth quarter of '07, we just didn't have the opportunities early in '07 to put on the hedges to hedge the profit margins in 2007, like we were able to do in 2006.

John Edwards - Morgan, Keegan & Company

Okay. And then, could you talk a little bit about what, in terms of potential upsides to your budget for '08, what you'll be looking for?

Randy Fowler

Well, we think our budget for '08 is pretty good, we just haven't made it public. And, frankly, we don't give guidance. We do try to make sure that analysts, and the public for that matter, know what makes our business tick. Those external items that can affect our cash flows and profitability, and clearly with the Meeker 1 project that just came out in November, Pioneer that we expect to come up very shortly, Meeker 2 later in the year. And a number of other projects, that we think that 2008 is going be a very good year for us, not only are we having a lot of new organic growth projects coming online but they are coming online at a great time in the marketplace. Industry fundamentals are really good, margins are strong, but in terms of guidance, we haven't given any guidance and we don't expect to.

John Edwards - Morgan, Keegan & Company

Okay, fair enough. And can you talk a little bit about your financing plans for the capital spent?

Randy Fowler

John, I think right now as we look at the capital budget of $1.4 billion, we really think we’ve got a lot of flexibility out there on how we financed it, I think, as Mike mentioned earlier, we're not going to distribute out all of our distributable cash flow next year. So, if we would that's where the first tranche of equity that we can apply towards it, plus we’ve been running probably about $60 million a year in our dividend re-investment plan. So, if we would, there is another chunk of equity.

Then, from that I think we'll, again, we should continue to see cash flows ramp up from these projects which will reduce leverage. So, I think, we'll have a lot of flexibility as to how we come in and finance next year in terms of debt and equity.

John Edwards - Morgan, Keegan & Company

Okay great, nice quarter. Thanks.

Mike Creel

Thanks, John.

Operator

Our next question comes from Barrett Blaschke with RBC Capital Markets. Your line is open.

Barrett Blaschke - RBC Capital Markets

Good morning guys, just a one quick question and it's going to be on DEP. Basically, as you are looking out on your EPD budget, do you see DEP as being a beneficiary of maybe some dropdowns to help finance that?.

Mike Creel

Well, I guess, I'll approach it in two ways as one; Randy did say that we've got a lot of flexibility at EPD in terms of how we finance our growth budget, but flashing back to February of last year when we were on the road show for Duncan Energy Partners, we did say that while there was no promise of future dropdowns, it’s clearly unlikely that we would have taken Duncan Energy Partners public for a one-off transaction.

So, I think, definitely it is part of the plan for Enterprise going forward to use Duncan Energy Partners to foster its growth, and that would entail dropdowns. As far as when that might happen, or order of magnitude, we really don't have much to say about it right now.

Barrett Blaschke - RBC Capital Markets

Okay. Thank you.

Operator

Our next question comes from Darren Horowitz with Raymond James.

Darren Horowitz - Raymond James

Yeah, good morning guys, thank you. My first question is on the NGL pipeline on the services side. With Meeker 1 approximating full and Meeker 2 beginning here in the third quarter, and, as you mentioned, with Pioneer getting up to surge, you are surely, what we are trying to get a feel for the operating margin of all three in aggregate based on the forward pricing curve. Can you give us a bit of a forecast as to how long do you think it is going to be before all three reach full capacity?

Jim Teague

Big question.

Mike Creel

He is looking for what the ramp up time is for Meeker 1-2 and Pioneer, when they might hit full capacity.

Jim Teague

With respect to the end of Meeker 2, I am looking at [Bill], by September timeframe maybe in Meeker 2. As Mike said earlier, Pioneer will have 500 million a day, and 750 million a day, train the day, we turn it on. We expect that to ramp up and be full, I would think by the end of the year. So, we will be well into Meeker 2, I would expect we'll have 300 million a day of Meeker 2 by the end of the year and the other Meeker 1 and Pioneer about full.

Darren Horowitz - Raymond James

Okay. And based on the forward curve today, does it still look like all three of those would be about 350 million in operating margin? I think that was the range that was loosely quoted quarter last quarter.

Randy Fowler

Yeah, I think you’ll find it, just take a look at the forward curve and come up with the numbers, but that may be a bit conservative.

Darren Horowitz - Raymond James

Okay. And, then my second question is on the Cameron Highway, with it being about 185,000 a day where do you think it’s going to be running by the end of this year? I know there is a lot of opportunity for that side in that fuel chain to come online, but do you have any benchmark as to where you think you could be at the end of the next 12 months?

James Lytal

Based on -- this is James. Based on BP and BHP's projections for Atlanta’s Cameron Highway it has the potential, which would be around 300,000 barrels a day by the end of year.

Darren Horowitz - Raymond James

Okay, thank you.

Operator

(Operator Instructions)

Our next question comes from Alex Meier from Zimmer Lucas Capital. Your line is open.

Lewis Sammie - Zimmer Lucas Capital

Actually guys, it is [Lewis Sammie] from Zimmer Lucas. My question was regarding your growth CapEx for 2007. It seems that $2.1 billion number is pretty much higher than the $1.7 billion that was originally in your publicly disclosed budget. I was just wondering how much of that is due to the, let’s say, cost overruns and how much is due to let’s say accelerating spending from ‘08 and beyond and maybe new projects that were introduced over the course of the year?

Mike Creel

Lewis, I am -- I think one thing that that you may be missing is the fact that just as we progressed this year, we have more and more projects that we hadn't contemplated earlier. If you remember back in the beginning of 2007, I think we started off with the capital budget of that $1.2 billion. It is just that we keep finding more projects as we go on. In terms of cost overruns, we had some modest cost overruns at projects, but the biggest have been at the Meeker and Pioneer. On average, you try looking at cost overruns for the year or about, let’s call it 18%, and, again, with most of that being at Meeker and Pioneer; so, not good news there. But, on a more positive note, the gross operating margin estimates for 2008 for Meeker and Pioneer are 38% over what we've previously thought they were. So, even with the cost overruns, those assets are going to perform much better than we'd anticipated.

Lewis Sammie - Zimmer Lucas Capital

It's excellent. Thanks a lot.

Mike Creel

Thank you.

Operator

And at this time there are no further questions.

Randy Burkhalter

Okay Danielle, if you would give our participants the replay information.

Operator

To dial-in to today’s replay, you may dial 1-800-406-7492. Once again, in the replay phone number of today’s call is 1-800-406-7492.

Mike Creel

Thank you, Danielle, and thank you for joining our call today and have a good day. Goodbye.

Operator

This concludes today’s conference. You may disconnect at this time.

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 LP Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts