Jul 31, 2014
Executives
Michael Creel – Chief Executive Officer Randy Fowler – Chief Financial Officer James Teague – Chief Operating Officer Anthony Chovanec – Senior Vice President Al Martinez – Senior Vice President Randy Burkhalter – Vice President, Investor Relations
Analysts
Brian Zarahn – Barclays Darren Horowitz – Raymond James Sunil Sibal – Global Hunter Securities Michael Blum – Wells Fargo Mark Reichman – Simmons Ted Durbin – Goldman Sachs John Edwards – Credit Suisse
Presentation
Operator
Good morning. My name is Brandi and I will be your conference operator today.
At this time, I would like to welcome everyone to the Enterprise Products Partners Second Quarter 2014 Earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.
If you would like to withdraw your question, press the pound key. Thank you.
Mr. Burkhalter, you may begin your conference.
Randy Burkhalter
Thank you, Brandi. Good morning everyone and welcome to the Enterprise Product Partners conference call to discuss results for the second quarter of 2014.
Our speakers today will be Mike Creel, CEO of Enterprise’s general partner, followed by Jim Teague, Chief Operating Officer and Randy Fowler, Chief Financial Officer. Other members of our senior management team are also in attendance today.
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 team. Although management believes that the expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to be correct.
Please refer to our latest filings with the Securities and Exchange Commission for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. With that, I’ll turn the call over to Mike.
Michael Creel
Thanks Randy. We reported good results this quarter, highlighting the consistency of our business model.
The diversification we have among our business segments and geographic areas of operation reduce our exposure to temporary fluctuations associated with a single asset or commodity. We continue to move to more of a fee-based business model with approximately 85% of our gross operating margin this quarter generated from fee-based contracts, and that’s compared to 75% just two years ago.
This quarter featured record volumes in our liquid pipelines of 5.2 million barrels per day, record NGL fractionation volumes of 845,000 barrels a day, and record fee-based gas processing volumes of 4.9 billion cubic feet a day. In what is seasonally a weak quarter, we had an 11% increase in gross operating margin over the second quarter of last year, helped in part by approximately $6 billion f new assets that began operations since the beginning of 2013.
Adjusted EBITDA increased 13% over the second quarter of last year and net income increased 17%. These results led to strong distributable cash flow of $954 million for the quarter.
Excluding proceeds from sale of assets in both periods, distributable cash flow increased 9% or $81 million over the second quarter of last year. Earlier this month, we declared a $0.72 per unit cash distribution with respect to the second quarter, 5.9% higher than the distribution paid with respect to the second quarter of 2013.
This is our 49thdistribution increase since our IPO in July of 1998 and our 40thconsecutive quarterly increase. Ten years of consecutive quarterly distribution increases is a record we’re proud of and one that has not been matched by any other publicly traded partnership.
Distributable cash flow provided 1.4 times coverage of the distribution declared. We retained $293 million of distributable cash flow for the quarter and approximately $730 million through the first half of this year to reinvest in the growth of the partnership and reduce our reliance on capital markets.
Gross operating margin from the NGL pipeline in the services segment was $681 million for the second quarter, a 25% increase over the second quarter of last year. Our natural gas processing and related NGL marketing business reported a slight increase in gross operating margin primarily due to higher equity NGL production and record fee-based processing volumes which led to a $26 million increase in gross operating margin from our natural gas processing business.
Gross operating margin from our NGL marketing business declined $24 million primarily due to lower sales margins and scheduled downtime associated with maintenance and activities in preparation for the 2015 expansion of our LPG export terminal. The export terminal resumed operations on July 7.
Gross operating margin from our NGL pipeline and storage business increased $73 million or 39% to $261 million for the quarter. Our ATEX ethane pipeline, which began commercial service in January of this year, generated $35 million of gross operating margin for the quarter on average transportation volumes of 44,000 barrels a day.
As I mentioned last quarter, there were third party upstream infrastructure issues that reduced ethane available for ATEX. Currently three of the four planned NGL fractionator connections into ATEX are completed and we expect the fourth to be completed this quarter.
Our Mid-American and Seminole pipeline systems reported a $19 million increase in gross operating margin primarily due to fees related to the expansion of the Rocky Mountain Pipeline which began service in January of this year and higher tariffs that went into effect in July 2013. Partially offsetting these increases were higher operating costs on the Mid-America and the Seminole systems.
The South Texas NGL pipeline system benefited from increased Eagle Ford shale production leading to an $11 million increase in gross operating margin on a 78,000 barrel a day increase in transportation volumes. Our NGL fractionation business has gross operating margin of $154 million for the quarter, a 65% increase over the same quarter in 2013 primarily due to higher volumes and fees from our Mont Belvieu NGL fractionators.
Fractionators 7 and 8 began commercial operations in the third and fourth quarters of last year. Total fractionation volumes increased 25% to a record 845,000 barrels a day for the quarter primarily due to higher volumes from the Eagle Ford and the Rockies.
Gross operating margin from the onshore crude oil pipeline and services segment declined $13 million from the second quarter of last year. Lower sales margins from crude oil marketing and related activities resulted in a $55 million decrease in gross operating margin as lower basis differentials continued to impact our business.
This quarter, the average indicative price spread between LLS and WTI was $2.56 per barrel, and that compares to $10.41 a barrel in the second quarter of last year. Partially offsetting the decrease in crude oil marketing was a $34 million increase in gross operating margin due to increased volumes on our South Texas and West Texas pipeline systems and our Eagle Ford joint venture pipeline.
We also had a $6 million increase in gross operating margin on the Seaway pipeline. Total onshore crude oil pipeline volumes increased 13% over the second quarter of 2013 to a record 1.3 million barrels per day.
Gross operating margin for the offshore pipelines and services segment declined $6 million to $34 million primarily due to lower volumes on the Independence Hub platform and Trail pipeline. Petrochemical and refined products services segment reported gross operating margin of $162 million, and that’s relatively flat with $163 million that we reported in the second quarter of 2013.
Gross operating margin from our refined products pipelines and related marketing activities declined $25 million, and that’s primarily due to the $24 million benefit that was recognized in connection with a rate case settlement in the second quarter of last year. Gross operating margin from the propylene business increased $16 million largely due to higher propylene sales margins.
The octane enhancement business reported a $3 million increase in gross operating margin while butane isomerization had a $4 million increase in gross operating margin. We completed $1 billion of capital projects this quarter, including the Seaway pipeline loop, the modification and expansion of our refined products marine terminal in Beaumont, and the construction of three additional tanks at our Echo crude oil storage facility.
Our asset footprint continues to provide capital growth opportunities with approximately $6 billion of new assets scheduled to begin service between the second half of this year and 2016. Most of these projects are supported by long-term fee-based contracts.
As recently completed projects ramp up and new assets begin service, the cash flows from those investments should support future distribution growth. Unlike some MLTs that seem to add projects to their backlog as soon as they start thinking about them, we only disclose backlog numbers for projects that actually have contracts to support them and that have made it through our approval process.
We are evaluating a number of capital projects that have not yet been announced, but as we move these projects to the development stage, we will share the details with you. We’ve been very pleased with the quality of the many new investment opportunities we’ve seen since the beginning of the shale revolution, and we believe the best is yet to come.
With that, I’ll turn the call over to Jim.
James Teague
Thank you, Mike. Today I’m going to spend time updating you on the progress of some of our larger projects, but I also want to spend a couple of minutes reviewing with you our philosophy on how we think about investments, which include both our time and our capital.
At Enterprise, we’re constantly focused on building and improving the systems around which we build our businesses, which is very different from managing a portfolio of assets. We work both the supply and demand side of our businesses.
People who come here from other companies have told me that it takes them a while to grasp the Enterprise integrated value chain model, but they soon realize it’s more than a model – it’s our culture. At Enterprise, we understand our role on each side of the supply-demand equation, the value of bringing supplies and markets together.
Our job is to give producers flow assurance and market choices, and give consumers supply reliability and supply choices. Over the last couple of years, it’s become clear that the U.S.
supply buckets were filling up much faster than the demand buckets and that we need to focus on creating new outlets for producers. Creating avenues to new outlets sometimes takes major new builds like our Aegis ethane pipeline and our PDH plant.
Sometimes it takes a combination of both existing assets and new assets like our ATEX ethane pipeline out of the Marcellus, and sometimes it takes just plain old fashioned thinking out of the box, doing your research, paying attention to the details, and going to the BIS and laying out your facts. Our actions over the last two years should tell you that we believe that the U.S.
now finds itself in the envious position of having significant excesses from many of our hydrocarbons and some of these must be exported or they simply can’t be produced, and if not produced, that creates its own consequences. We continue to work at creating outlets for U.S.
production. In April, we announced the world-scale ethane export facility, a concept that we’ve been discussing from two years ago.
To be honest, three years ago I didn’t think this was something that we would pursue. When we first started talking about this, we knew that the opportunity needed time to be evaluated by the markets, but we felt the supply and demand fundamentals were in favor of U.S.
ethane exports. Over the last two years, our folks have spent countless hours on airplanes and with potential customers around the world, and ultimately they secured the commitments to base load a project.
Even after we announced our ethane export project, many still doubted its viability; however today, just three months later, our project is 85% subscribed and I expect it to be fully subscribed in a matter of weeks, and we’ll go one step further and tell you we believe given the continued interest in expansion is imminent, and that expansion will be a lot cheaper than a new build. In May, we announced that we began exports of diesel from our Beaumont refined products marine terminal, and we began exporting motor gasoline from that facility in August.
We expect this terminal will also be fully subscribed very soon, and with growing supplies and falling demand in the U.S., the fundamentals side of this project will be very successful. This project is made up largely of repurposed assets, and we already know how additional docks will be configured.
We have the room and the layout for more tankage. We are progressing on our LPG export expansions with our 1.5 million barrel a month expansion expected to come online in the first quarter of next year, and our larger 7 million barrel a month expansion in the fourth quarter of next year.
When both are completed, we’ll have LPG export capacity of approximately 16 million barrels a month. These are exporting both propane and butane and are fully committed for the next several years, and we have some contracts that go out to 2024.
Then there’s processed condensate. We’ve probably taken an untold number of questions in the past about when we were going to announce the condensate splitter.
If you follow the news, you now know why we weren’t building the splitter. Bill Ordemann had other ideas.
Bill and his folks did their homework and did a great job of laying out facts that facilitated focused and thoughtful discussions with the BIS through normal channels. Bill and his people were focused on facts, not loopholes.
These discussions led to a proper ruling on the export of processed condensate that is consistent with current regulations and did not require a change in law or a change in policy. This has generated a mountain of questions and policy conjecture that frankly we’re not going to address, and as you’ve read, these rulings are private and I hope you can appreciate that at this time, we consider the privacy of our ruling to be commercially sensitive.
In other crude oil projects, we’ve completed construction on the 500-mile Seaway loop, the pipeline from Jones Creek to Echo – that’s Freeport area to Echo, and the extension from Echo to the Beaumont-Port Arthur areas. We continue to add tanks at Echo where we’re heading to over 7 million barrels by next year, and given our footprint and interest from our customers, we don’t think that will be enough.
With our access to crude supplies and the infrastructure we are building accessing 8 million barrels of refining capacity, Echo and its distribution network are key to our crude oil strategy. Our PDH plant is now fully permitted and under construction.
I think we started construction the day after we received the final permit and commissioning is expected in the first half of 2016. This project is a great fit and is fully subscribed by a very strong customer base.
Work also continues on the Aegis pipeline, the ethane header system from Corpus Christi to the Mississippi River to supply the ethylene expansions happening along the Gulf Coast. While this is not the biggest project we’ve ever built, it is one of the most strategic demand-side projects I’ve been involved in, and it’s exciting to see how the list of new petrochemical facilities is developing around this pipeline.
When you think about it, we’re creating the supply artery for tens of billions of dollars of new petrochemical plants. We’ve gotten a little press coverage over the last couple of months but things really haven’t changed here.
We’re still about building systems that complement our businesses and providing services to both our producer and end use customers. We still understand our role – we provide flow assurance and market choices to producers and we provide supply reliability and supply choices to our consuming customers.
With that, I’ll turn it over to Randy.
Randy Fowler
Thank you, Jim. I’ll take a few minutes to discuss additional income statement items and capitalization.
We reported net income attributable to limited partners of $638 million and fully diluted earnings per unit of $0.68 for the second quarter 2014. A reconciling item between our non-GAAP gross operating margin and net income are the non-refundable deferred revenues attributable to shipper make-up rights on certain new pipeline projects such as ATEX, Seaway, Texas Express, and Front Range.
Deferred revenues are excluded from net income. Deferred revenues attributable to these make-up rights totaled $22 million for the second quarter of 2014, which equates to approximately $0.02 per unit, so as a reminder when you are modeling us, remember to subtract your estimate of deferred revenues from your estimate of gross operating margin to arrive at EPU for Enterprise.
Depreciation and amortization expense for the second quarter of 2014 was up 8% or $23 million to $312 million as a result of new assets going into service over the last 12 months. Interest expense increased $29 million to $229 million in the second quarter of 2014 due to an $18 million decrease in capitalized interest and an $11 million net increase in interest expenses due to a higher average debt balance in the second quarter of this year versus last year.
This was somewhat offset by lower interest rates. Capital expenditures for the second quarter were $697 million, which includes sustaining capital expenditures of $77 million.
We currently expect growth capital expenditures of $3.4 billion to $3.8 billion in 2014, and we still expect sustaining capital expenditures of approximately $350 million for 2014. Adjusted EBITDA for the 12 months ended June 30, 2014 was approximately $5 billion.
Our consolidated leverage ratio of debt to adjusted EBITDA was 3.5 times for the 12 months ended June 30, 2014, and this is after adjusting for the 50% equity credit that we get for the hybrid securities from the rating agencies. We received net proceeds of approximately $140 million from equity issued through the total of our at the market equity issuance program, our dividend reinvestment plan, and the employee unit purchase plan in the second quarter of 2014.
This amount included $25 million of common units that affiliates of privately held EPCO purchased through the partnership’s distribution reinvestment plan. The average life of our debt is now 14.3 years – this is using the first call date for the hybrid securities, and our effective average cost of debt is 5.2%.
At June 30, 2014, we had consolidated liquidity of approximately $3.7 billion – this included $242 million of unrestricted cash and $3.5 billion of available borrowing capacity under our revolving credit facility. On July 15, we announced that our board approved a two-for-one split of our common units.
We will distribute one additional common unit for each common unit outstanding on August 21 of 2014 to holders of record as of the close of business on August 14. With that, Randy, we’re ready for questions.
Randy Burkhalter
Okay Brandi, we can take questions now from our audience.
Operator
[Operator instructions] Our first question comes from the line of Brian Zarahn with Barclays.
Brian Zarahn – Barclays
Good morning everyone. Just a couple questions on the ethane export project.
Of the 85% contracted capacity, does that begin in 2016 or is that sort of a rolling state for the contracts?
James Teague
That all starts at once.
Brian Zarahn – Barclays
And then Jim, any additional color on the geography of the customers for the ethane facility?
James Teague
No.
Brian Zarahn – Barclays
I had to try. Is it similar to one of the customers that’s announced in terms of geography?
James Teague
I didn’t understand, Brian.
Michael Creel
Yeah Brian, some of the customers may announce themselves, but we’re not going to.
Brian Zarahn – Barclays
Okay. Then seems you’re making progress and seems you’re pretty confident that the remaining 15% will be contracted soon, how are you thinking about upsizing the project in terms of additional capacity?
James Teague
We’ve got a couple of options, Brian, and we really haven’t landed on one. We don’t know if we’re going to build one big refrigeration or two refrigeration units, and we’re still working that.
Brian Zarahn – Barclays
Okay. Sticking with the export theme, I know you don’t want to get too granular on the condensate export, but from a high level how do you view the export opportunity for Enterprise, and are there any additional midstream investments you would need to continue to see—optimize that opportunity?
James Teague
Not really. We’re in pretty good shape.
Brian Zarahn – Barclays
In terms of storage and dock capacity, you think you have enough?
James Teague
We think we’re in pretty good shape, Brian.
Brian Zarahn – Barclays
Okay. Lastly on 2014 expansion capex, it looks like it was revised down a little bit.
Any color on that change?
Michael Creel
I think that’s just the timing of the spending on some of our projects. Some of the permits took a little longer to get than we expected, but nothing material.
Brian Zarahn – Barclays
Thanks Mike. That’s all from me.
Operator
Our next question comes from the line of Darren Horowitz with Raymond James.
Darren Horowitz – Raymond James
Jim, a couple questions for you on the ethane export capacity. Now that you’ve got those contractual commitments for about 85% of the existing terminals capacity, do you guys have a better feel for how much either northwest European or southeast Asian naphtha feedstock capacity could be displaced by Gulf Coast exported ethane?
Michael Creel
Well, I know what we’ve contracted is going to displace—I really don’t. Tony might.
Anthony Chovanec
Not really. We also think some ethane is going to go to new markets, not just displace naphtha.
James Teague
That’s a good point – not all of this is—we don’t expect all of it to displace naphtha. Some could go to peel (ph).
Darren Horowitz – Raymond James
Are you guys still thinking that, let’s just say over the next six or seven years, we could be looking at a market that is still 700,000 barrels oversupplied on ethane? Is that still fair?
Anthony Chovanec
It is, before exports, Darren; so we show in our materials, I think, 450 to 700.
James Teague
Let me hasten to add, Darren, we don’t think this export facility is going to solve the ethane problem, if that’s what you’re asking.
Darren Horowitz – Raymond James
Well, I appreciate that, Jim. I think where I was going with this is let’s just say under current capacity, you guys could do 185 or 200,000 barrels, and I know you’re in the very early stages of evaluating what expansion potential of the terminal could look like.
Obviously it’s not just going to be one terminal that solves the problem, but the way that we see it, there’s the opportunity at least based on initial scale for you guys to increase how much ethane you export across expanded terminal by almost 50%, if not more. Is that fair?
James Teague
That’s probably fair, but the reason I said possibly or probably imminent is our capital isn’t the only capital being spent. I question how many people are going to step up and spend the money necessary to build the ships, to build the receiving facilities.
So these folks that have signed up so far, they’re making a heck of a capital commitment to this program, and it’s going to be interesting to see who else will do that.
Darren Horowitz – Raymond James
I appreciate that, Jim. If I could, I just want to switch gears over to condensate for a quick second and talk really from a more macro perspective.
As you guys are talking with producer customers regarding specifically South Texas Eagle Ford condensate supply growth, do you have a sense of the timing and magnitude as to when that supply growth really hits the Gulf Coast in a big way and how much oversupplied we could be waiting on export capacity to ramp?
James Teague
Tony, do you want to take it?
Anthony Chovanec
We think the supply growth is in the Gulf Coast today, and there’s obviously in our view a ramp that’s going to continue on through the rest of the decade, anyway.
Darren Horowitz – Raymond James
But do you think that—just looking at things right now, and last question from me, is it fair to assume that we might have 500,000 barrels of just South Texas Eagle Ford condensate currently in terms of supply, and that could grow anywhere between 15 and 20% year-over-year for the next couple years? Is that the right way to think about it?
Anthony Chovanec
That’s a fair way to think about it.
James Teague
It’s a function of these guys having markets though, Darren, in the final analysis.
Darren Horowitz – Raymond James
Yeah, and I think also too, Jim, it’s a function of what their notebook economics look like, and if there’s a tremendous amount of supply sitting on the doorstep of the Gulf Coast waiting for export and it starts to dislocate price, that could be a pretty big incentive to get that stuff out of there pretty quick. We can only send so much north as a diluents for oil sands production, so it seems like there could be a significant infrastructure response in the short term to handling all this supply.
James Teague
Hell Darren, you should be sitting here giving this presentation!
Darren Horowitz – Raymond James
Well I don’t work for Enterprise, Jim, but—
James Teague
It sounds like you just did! We appreciate it.
Darren Horowitz – Raymond James
I’m just a simple analyst trying to make heads and tails of all this, but I appreciate the color. Thank you.
James Teague
Yeah, one last comment. The reality is you’re right – condensate has been selling at a very deep discount, and for these guys to continue to produce, they’ve got to have markets.
That’s our position.
Darren Horowitz – Raymond James
Okay. Thank you, Jim.
Operator
Our next question comes from the line of Sunil Sibal of Global Hunter Securities.
Sunil Sibal – Global Hunter Securities
Hi, good morning guys. Most of my questions have been answered, but just a couple of follow-ups on the ethane contracts.
Could you talk a little bit about the term of the contracts? Is it fair to assume they’re pretty long-term and (indiscernible)?
Anthony Chovanec
Did you ask about the term of the ethane contracts?
Sunil Sibal – Global Hunter Securities
Yes.
Anthony Chovanec
I think all the ones we have so far are 10-years plus.
Sunil Sibal – Global Hunter Securities
Okay. And then on the LPG maintenance downtime that you had during the quarter, I was wondering if you could talk a little bit about what was the impact of that on the gross margins this quarter, and also what kind of trends are we seeing in terms of the propane exports during this quarter versus last quarter?
Michael Creel
We’re not going to talk about the impact that it had on the earnings, but there were four cargoes that were impacted. The downtime was 10 days, and of that there was only three days in the second quarter.
The seven days was in July.
Sunil Sibal – Global Hunter Securities
And any color on the trends for propane exports during Q2 versus Q1?
James Teague
Did you say propylene exports?
Sunil Sibal – Global Hunter Securities
Propane exports.
James Teague
Okay. I didn’t understand the question.
Sunil Sibal – Global Hunter Securities
When you look at propane exports for the second quarter, how are they trending versus the first quarter, propane exports?
James Teague
We’re full.
Sunil Sibal – Global Hunter Securities
Okay.
Anthony Chovanec
We’re not going to change or speculate until we get the expansion done.
Sunil Sibal – Global Hunter Securities
Okay, that’s all. Thank you.
Operator
Our next question comes from the line of Michael Blum with Wells Fargo.
Michael Blum – Wells Fargo
Good morning everybody. I had a couple questions.
I wanted to just ask some questions about returns. I was curious, number one, when you think about the returns you’re going to get on the ethane project, are those similar to what you’re getting on the LPG project, is that different, or how should we think about that?
Michael Creel
Well Michael, as you know, we don’t talk about returns on specific projects. That does kind of cut against us in some fashion, but suffice it to say that the returns that we’re getting on the ethane project are attractive returns to us and they certainly are well in excess of our cost of capital or we wouldn’t be doing them.
Michael Blum – Wells Fargo
Okay. Then as it relates to the returns you’re getting on the LPG, are there any spot volumes you’re getting right now that are contributing to maybe what you’d call an excess return above your baseline return that you’re getting from your contracted volumes?
And then as more capacity comes online next year, you and Targa, do you think that that could continue, or do you think that sort of gets eroded?
Al Martinez
This is Al Martinez, Mike. Our goal, our direction and goal has been for long-term contracts, we are basically contractually committed for the facility with the expansion through ’17.
We have a very small percentage in 2018. We’re 91% committed on long-term contracts.
That’s based on our assessment of the capacity of the facilities. The spot opportunities we create through efficiencies and optimization during each month, and it’s very hard to project but we expect, based on our conservative nature, that we will have spot opportunities on a monthly basis in the future.
James Teague
But Michael, we’re focused on selling the thing out on long-term contracts. We’re not hanging out hat on spot opportunities.
Michael Creel
And I think it’s fair to say that with more experience in operating the facility, we have a better idea of how many term cargoes we can load, which leaves less opportunities for spot, but nonetheless, there are still opportunities.
James Teague
We’re currently—in 2018, we’re at 81% commitment, and I plan to have 2018 at 100% commitment within the next few months.
Michael Blum – Wells Fargo
Okay. That’s very helpful.
You threw out that 85% fee base number for this quarter. Is that kind of the new mix going forward, or was there some sort of anomaly this quarter where maybe commodities were lower for some reason?
Michael Creel
No Michael, I think it’s just a function that all of our new contracts are essentially fee-based, and to the extent that we had take-or-pay, a lot of those got renegotiated or they are just contributing a whole lot less to our gross operating margin.
Michael Blum – Wells Fargo
Okay. Then just two more quick ones.
One, on the condensate exports, I realize you’re not going to say much here, but I just wanted to clarify that there was that Reuters article that I’m sure you saw, which the government’s sort of put a moratorium or reevaluation, however you want to say it. I just wanted to make sure that that—I wanted to confirm that does not impact the private ruling that you received, correct?
Michael Creel
Our ruling is intact.
Michael Blum – Wells Fargo
Okay. Last question, just if you have any updated thoughts on M&A.
I know you’ve got a big opportunity set in front of you organically, but just given your really attractive cost of capital, do you see that as sort of—do you see any reason to sort of strike while the iron is hot here and you’ve really got a competitive advantage in that market as well?
Michael Creel
A couple things on that. We see reports from time to time that talk about the fact that we have no backlog beyond 2016, which is kind of why I stuck one of those comments in my remarks.
It is kind of humorous for us in the room because we had a meeting yesterday talking about other projects that we’re looking at that haven’t been announced, and it’s a bit overwhelming. So we’ve got a lot of opportunities, but that doesn’t mean that we’re not looking at acquisitions from time to time.
Frankly, some of the acquisitions that may make sense for us are smaller assets that we can put into a different service or we can plug into our system and get more value out of than the current owners. For large-scale acquisitions, even though we’re in a position to be able to do those and to make them work, if they don’t return the kind of returns that we can get from our organic projects, or if they don’t lend to future growth, there’s just not the industrial logic to do those just because we can.
Michael Blum – Wells Fargo
Okay. Thank you very much, Mike.
Appreciate it.
Operator
Our next question comes from the line of Mark Reichman with Simmons.
Mark Reichman – Simmons
A few questions. While the construction of the Seaway twin is complete, I think there was a little bit of a delay in the Flanagan South pipeline that will feel the Seaway twin.
There’s been speculation that the Seaway twin shippers that would be getting their oil from Flanagan South, that they’re not obligated by those take-or-pay contracts until Flanagan South is operational. I was just wondering if you could provide some color on the start-up of the Seaway twin and talk a little bit about line pack and when deliveries would begin.
Anthony Chovanec
I’m going to leave the Flanagan South questions to our friends at Enbridge, I think. I don’t want to speak for them and speak wrongly.
I think they’ve got some ideas of when they’re coming on, and I’m sure they’ll make that public in due time. As far as Seaway goes and the Seaway twin goes, now that we’re complete, that essentially started a clock whereby the payments for the Flanagan South shipments will start on a day certain at this point.
Mark Reichman – Simmons
Okay, I understand why you wouldn’t want to comment on Enbridge, but because the Enbridge capacity into Flanagan is not sufficient to result in the high utilization of Flanagan South pipeline, are you at all concerned about underutilized capacity downstream of Flanagan in the event that Enbridge doesn’t get approval to establish a new receipt point on the Lakehead system, you know, or their Alberta Clipper expansion gets delayed? I just mention that because I know that you’d announced the potential for a Bakken to Cushing pipeline.
Anthony Chovanec
Seaway has demand charges on all the volumes that would be committed out of the Flanagan South system that, again, will start on a date certain, so from a Seaway perspective, I’m not worried about that – we’ll get paid whether the oil ships or not. Frankly if there is additional capacity and some of that oil doesn’t ship, we’ll look for other ways to utilize it.
Mark Reichman – Simmons
Okay, and then on the ethane export terminal, with the new ethane export terminal agreement that was announced this morning, I think the long term commitments represent 85% of the capacity of the terminal. I was just wondering if you could quantify the capacity – I mean, if the terminal has the capability to load 10,000 barrels per hour, how many hours per day and days per week does that 85% represent?
Anthony Chovanec
We’re thinking the operational capacity of the terminal with the efficiency of the docks and movements of ships and everything else considered and ramp-up and ramp-down, it’s going to be about 200,000 barrels a day.
Mark Reichman – Simmons
Okay. Lastly, during your analyst day, I think Jim had mentioned that you might be interested in increasing Enterprise’s presence in the Permian.
Are you able to comment on some of the opportunities that you’ve identified, whether it be on the crude or national gas side?
James Teague
We continue to work projects in the Permian, and we’re probably not in a position to say what they are.
Michael Creel
Mark, that kind of goes back to my other remarks that we are evaluating a lot of projects, but frankly we’re going to wait until they get more fully developed before we start talking about them in public.
Randy Fowler
But I think suffice to say to your question, we are working on both natural gas, crude oil, and NGL projects in the Permian.
Mark Reichman – Simmons
Right, right. Lastly, distillate loading at Enterprise’s Beaumont refined products terminal I think began in May, and gasoline loading is expected to commence in the third quarter, so what are your expectations for volume growth beginning in the fourth quarter throughout 2015, and also could you comment on plans to add tankage and perhaps a second dock?
James Teague
RB, I think we expect to have that thing sold out in a matter of two to three months, is that right?
Randy Burkhalter
That’s correct.
James Teague
At that point in time, like I said, we’ll look at what we think our expansion needs are and we know what we need to do. We’ve got plenty of land for tankage and we know how to configure the docks.
Mark Reichman – Simmons
Great. Thank you very much.
Operator
Our next question comes from the line of Ted Durbin with Goldman Sachs.
Ted Durbin – Goldman Sachs
Thanks. There was press reports around you all potentially building a Bakken pipeline – I think 340,000 barrels a day was the number that was out there.
Can you just talk about where you are on that? Do you have enough commitments to make that project a go?
Michael Creel
Yeah, I think that’s another one that we’re looking at a lot of things, and once we get further down in the development stage on a project, we’ll talk about it; but it’s premature to talk about it now.
Ted Durbin – Goldman Sachs
Okay. Would something out of the Bakken—would you think about that as a standalone return project or would it be, kind of coming back to the previous question around pull-through for Seaway volumes, if there is maybe not enough coming out of Cushing for you?
Michael Creel
You know, on all of our projects, we look at them on a standalone basis and then we look at how they might add value downstream, but until we actually have a project that is firmed up, it’s hard to tell how we’re going to look at it.
Ted Durbin – Goldman Sachs
Understood. Then just coming back to the gas processing margins again in the quarter, volumes were up pretty well but it just didn’t seem like we got the margin pull-through.
Anything else that you can help us with in terms of what was happening in the quarter there? Again, equity volumes were up on the NGL side.
I was just struggling a little bit with what the margin there.
Michael Creel
Well equity volumes were up primarily because some companies have decided not to collect processing, and we have the option to process if we want to, and if we can make money at it we will, because we’re looking at it on a variable cost.
Ted Durbin – Goldman Sachs
But the fee-based processing volumes were up as well, but the overall margin was pretty flat year-over-year.
Randy Fowler
So I think maybe to clarify what Mike said, the fee-based margins are based on the volumes of gas we’re processing, and the volumes of gas we’re processing continues to rise, so the fee-based volumes are up. The equity volumes are up mainly for ethane elections where a producer has the ability to—they’ll continue to pay their fee-based volumes, but they can reject the ethane and not recover the ethane, and we have the option to step in and recover that ethane; and again, we’re doing it on a variable cost, so our economics to do are typically much better than the producers.
So I think throughout the second quarter, anyway, we recovered most of that ethane that producers were not.
Ted Durbin – Goldman Sachs
Got it. That’s very helpful.
That’s all I have, thank you.
Operator
Our next question comes from the line of John Edwards with Credit Suisse.
John Edwards – Credit Suisse
Mike, if you could just clarify on the backlog. I think you said in your opening remarks that you’re going to put in $6 billion between now and 2016.
I guess first, is that correct; and then what’s your total backlog now?
James Teague
Good lord!
Michael Creel
Well, the $6 billion between now and 2016 is correct if Leonard’s guys get done, which I’m sure they will – they always do. And again, those are projects that have been approved, sanctioned.
We’re actually doing work on them, so it’s not pie in the sky stuff. Beyond 2016, we don’t have too many projects that take three or four years to build, so it’s a little far out for us to have things that are already defined and board-approved.
We constantly are looking at new things and we have a lot of projects that we are considering that would fall into the 2016, ’17, ’18 timeframe, but again they are not baked enough for us to put into a backlog, if you will. I know a lot of our competitors do that – anything that moves, they’ll throw into a backlog and it’ll look like a big number.
We don’t do that. You could look at our historic spend rate and see what we’re talking about between now and 2016, and I’ll tell you that we’ve got a lot of opportunities.
John Edwards – Credit Suisse
All right, fair enough. I’ll leave it there.
Thanks for the clarification.
Operator
There are no further questions at this time. Do you have any closing remarks?
Randy Burkhalter
No we don’t, Brandi. If you would again just go ahead and relay the replay information to our listeners, that would be great.
Thank you.
Operator
Thank you for participating in today’s Enterprise Products Partners conference call. This call will be available for replay beginning at 1:00 pm Eastern Standard Time through 11:59 pm Eastern Standard Time on Thursday, August 7, 2014.
The conference ID number for the replay is 74829671. Again, the conference ID number for the replace is 74829671.
The number to dial for the replay is 1-855-859-2056, or 1-404-537-3406.
Randy Burkhalter
Thank you, Brandi, and thank you for joining us today, and have a good day. Goodbye.
Operator
This concludes today’s presentation. Thank you for participating.
You may now disconnect.