Enterprise Products Partners L.P.

Ladies and gentlemen, thank you for standing by, and welcome to the second quarter Enterprise Product Partner Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, please press star 1 on your telephone. Please be advised today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Randy Burkhardt. Please go ahead.

Good morning and welcome to the Enterprise Products Partners conference call to discuss second quarter earnings. Our speakers today will be co-chief executive officers of Enterprise's general partner, Jim Teague and Randy Fowler. Other members of our senior management team are also in attendance and will assist on the call today. 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 the enterprises management team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in any forward-looking statements made during this call. And with that, I'll turn the call over to Jim. Thank you, Randy. I said at the beginning of the last call, we were talking about first quarter earnings. While it was supposed to be an earnings call, I thought it was going to be a COVID call, and that's what it turned out to be. So sticking with that theme, I guess today we're going to tell you our COVID story. For the second quarter of 2020, we reported EBITDA of $2 billion compared to 2.1 for the same quarter last year. Our DCF, I think you saw in the press release, was 1.6 times coverage. And year-to-date, we've retained $1.2 billion. And something else we're quite proud of is this is the best first-half safety performance that we've ever had at Enterprise. Given what we've all gone through, as you would expect, our volumes were down as a result of the pandemic and the oil price crash. But they are quickly improving. With all of the events, our results for the second quarter highlight the diversification of our system, the quality of our customers, cost control, and the responsiveness of our assets and our employees during what was probably the most challenging quarter of my career. Our profits were protected by a strong base of firm customer obligations and the natural edge we have and our storage and marketing activities, which enabled us to largely offset the weakness in our natural gas gathering and processing and petrochemical businesses. The facts are we are in the commodity service business, for us both on the supply and demand side of the equation. We transport, store, upgrade, and buy and sell multiple energy commodities. Because we're so tightly integrated, we have a lot of tools at our disposal. When the market says store crude, we can. When the market says store diesel but give me LPG, we convert wells and do so. When the market says store Y-grade, we store Y-grade. In addition, our people and our systems have a strong history of performing, no matter the type of crisis. Our balance sheet always has the dry powder to move quickly. we usually get the question of how much our results are non-recurring. It's the same question we got when Katrina blew through south Louisiana and literally knocked out every plant we had. Narco was down for months, as was Promix, Menace, and Neptune. Demand came back before indigenous supply, and we made more money with our west to east pipelines than if those plants had been running. So it was non-recurring. We got that question during Hurricane Ike in 2008, which went right over Maubelview. We had Maubelview up before producers could even get their supplies back on. Got that question in Hurricane Harvey in 2017 when production never stopped, but virtually all of our customers quit taking, in some cases for months, and we never interrupted a single contract customer. Events like what we are going through now and the opportunities they present may be labeled as non-recurring, but our performance and our results are recurring, regardless of the environment. We outlined in today's earnings release that petrochemical and refined product service segment was particularly hit hard due to the decrease in demand for those products. However, we might remain encouraged by the efforts of most companies to reopen their economies. In addition to being one of the largest refined products consumers in the world, the U.S. is also a substantial exporter of refined products, especially to Latin America. As you all know, during the second quarter, refining utilization rates bottomed in April, which negatively impacted our propylene and octane enhancement businesses due to lower feedstock availability and a decrease in international demand. Currently, the refining industry has recovered to near 80%, which has facilitated an improvement in both propylene and octane enhancement. On the production side, our natural gas gathering and processing were impacted by low prices and some shut-in production. While those shut-ins were not insignificant, for the most part, they were relatively short-lived, and volumes on our system are recovering. We've made substantial progress in deferring and reducing capital by a billion dollars, and we continue to discuss JV opportunities, which could further reduce our capital. In addition, Graham and his folks have reduced 2020 sustaining CapEx by $100 million. That said, we have some important projects coming online over the next few months. In the third quarter, our 11th fractionator and the echo segment of Wink to Webster are expected online. And in the fourth quarter, we expect to complete our rich gas pipeline to Carthage, add a DIV at Montbellevue, and complete a strategic ethylene tank and pipeline build-out. We continue to make strides in our petrochemical segment, which we have always described as an extension of of our NGO franchise and our value chain. Because we are probably the only midstream that's fairly big in the petrochemical midstream space, it's easy to underestimate the long-term strategic importance of what we're doing. Rather than being a feedstock-starved olefin industry with a handful of players, the United States, especially in ethylene, has quickly moved into being the world's incremental supplier. This is really no different than what has happened in LPG over the last 10 years, where the U.S. has moved from being an importer to supplying over 75% of the world's demand growth. In short, to meet the world's growing demand for primary petrochemical products, Enterprise built the world's first open-access hub for polymer-grade propylene. Now we have developed the first hub for ethylene. These hubs are transforming how ethylene and propylene markets transact, and will create a true marketplace for the world's primary petrochemical producers, consumers, and traders. These hubs provide the essentials for an efficient market, reliable supplies, price transparency, and access to domestic and global markets. In June, we loaded a record-sized ethylene cargo of 44 million pounds. Then in July, we successfully loaded combination cargos of NGLs and olefins on the same vessel, including the simultaneous loading of propane and polymer-grade propylene into separate compartments on the BLGC at our ship channel facility, as well as a simultaneous loading of ethane and ethylene on a vessel at our Morgan's Point facility. Both vessels were the first export cargos of their kind from the U.S., Co-loading olefins on larger vessels with NGLs allows for more efficient use of dock capacity, but it also provides significant freight benefits to petrochemical export customers. I thought I'd also spend a minute to talk about what we're doing to keep our business running while keeping our people safe. We started out the quarter with much of our headquarters staff working from home, But over the last few weeks, we've been gradually bringing our headquarters personnel back into the office, and they're essentially staffed at this point, fully staffed. In addition to helping our employees understand social distancing, we also now require face coverings at all times in our office. It's an adjustment, but we have adjusted. And thanks to our people taking personal responsibility both in and out of the office, our case count has been minimal. I sincerely want to thank our people for their flexibility, their adjustments, and their sacrifices. And I'd also like to give a shout-out to our operations and commercial folks that were not able to work from home. Plants and pipelines don't run themselves. There's no such thing as a home-based control center. And the collaboration between our commercial people that we ask to be here – went a long way to achieving those results. I guess finally, I'd just like to say that I think we've got the best employees in the business, and I think their performance this quarter reflects that, and I just want them to know how much they're appreciated. Randy? Thanks, Jim.

Good morning. I'll start with the income statement for the second quarter, net income attributable to limited partners. For the second quarter, 2020 was $1 billion, or 47 cents per unit on a fully diluted basis. This compares to 55 cents per unit for the second quarter of 2019. Net income for the second quarter of 2020 included $51 million, or 2 cents per unit, of the expense related to an increase in the deferred tax liability associated with with the OTA Holdings Corporation we acquired from Marquardt and Falls in March 2020 in the settlement of the liquidity option agreement related to our acquisition of oil tanking back in 2014. Moving on to cash flows, cash flow from operations was $1.2 billion for the second quarter of 2020 compared to $2 billion for the second quarter of 2019. Changes in operating accounts, or think of it as working capital, accounted for approximately $660 million, or 80% of the $842 million decrease in cash flow from operations between the two periods. We used working capital to fund our marketing and contango activities during the quarter. We currently expect this usage to peak during the third quarter of 2020. Excluding changes in working capital accounts, cash flow from operations for the second quarter of 2020 was about 10% lower than the second quarter of last year. The change in distributable cash flow between the two periods mirrors this with a decrease of approximately 8.4%. Free cash flow, which we define as cash flow from operations, less cash used in investing activities, plus contributions from our joint venture partners, was $305 million for the quarter, which again was reduced by our use of working capital. Free cash flow was $2.7 billion for the 12 months ended June 2020, which was 27% higher than the comparable trailing 12 months ending in June of last year. We defined payout ratio as the sum of cash distributions and buybacks as a percent of cash flow from operations. Our payout ratio was 83% for the second quarter of 2020, which is an inflated percentage due to our use of cash flow from operations used for working capital purposes. For the trailing 12 months, it was 62%. We declared our distribution of 44.5 cents per unit with respect to the second quarter on July 7th, and it will be paid August 12th. This distribution represents a 1.1% increase when compared to the same quarter of 2019 and is flat to the prior two quarters. As we stated on our first quarter call, given the uncertainty of the macroeconomic backdrop, our board will continue to evaluate our distribution growth quarter by quarter in 2020. Additionally, EPD's distribution reinvestment plan and employee unit purchase plan purchased a combined 1.9 million EPD units in the open market during the second quarter, which rivals the purchase activity of our typical institutional investor. Moving on to capital expenditures, We have recently placed approximately $150 million of assets into service in the second quarter and have another $6.6 billion of projects under construction and underwritten by long-term contracts. Our capital investments were $910 million during the second quarter, which includes $74 million for sustaining capital expenditures. We still anticipate spending between $2.5 and $3 billion in growth capital projects for this year and approximately $300 million for sustaining capital expenditures. For 2021 and 2022, we currently anticipate growth capital investments to be approximately $2.3 billion and $1 billion, respectively. This is an aggregate $700 million reduction from guidance we provided for 2021 and 2022 at the end of the first quarter. The changes were largely attributable to the indefinite deferral of several expansion projects, of which some of the largest were at our Houston Ship Channel facility. We continue to engage with industry participants regarding potential joint ventures or sanctioned projects. but the pace of these discussions have slowed due to COVID-19. Our capital expenditure forecast excludes our proposed spot offshore crude oil terminal that is subject to government approvals. Currently, we do not expect to receive these approvals in 2020. Moving on to capitalization, our total debt principal outstanding was approximately $30 billion at June 30, 2020. Assuming the first call date for our hybrids, the average life of our debt portfolio was almost 16 years. Assuming the final maturity date for the hybrids, the average life was almost 20 years. Our effective average cost of debt is 4.5%. Adjusted EBITDA for the trailing 12 months ended June 30, 2020 was $8 billion, and our consolidated leverage ratio was 3.4 times after adjusting debt for the partial equity credit for the hybrid debt securities, and also further reduced by unrestricted cash. Our consolidated liquidity was approximately $7.3 billion at June 30, including availability under our existing credit facilities and approximately $1.3 billion of unrestricted cash on hand. Finally, before we open it up for Q&A, I want to mention that that we also announced this morning in a separate press release that our 2019-2020 sustainability report, which reflects our latest environmental, social, and governance disclosures, is currently available on our website. We have also initiated the annual review process with the independent sustainability rating providers and believe our disclosures and initiatives which are described in this comprehensive 104-page report, will be reflected in updated scores. We believe our stakeholders will find these efforts beneficial. We thank our customers, community leaders, banks, debt and equity investors, and board members for their participation in our sustainability survey that drove the outline for this report. With that, Randy, I think we can open it up for questions.