Enterprise Products Partners LP reported record profit in the final three months of 2007, but unexpected construction and start-up delays at two of its high-profile Rocky Mountain natural gas processing facilities resulted in lower-than-expected earnings.
The Houston-based midstream partnership posted a hefty 22% increase to net income in 4Q2007, to $161.9 million (30 cents/share) from $132.8 million (25 cents) in 4Q2006. Revenue also jumped 58% to $5.3 billion from $3.35 billion. However, the high numbers were less than those expected by Wall Street analysts, who had pegged average profit of 32 cents/share on revenue of $4.13 billion.
CEO Michael Creel, who presided over a conference call with energy analysts and investors last Monday, said the construction delays cost Enterprise about $85 million, or 19 cents/share, in profit for the final three months of 2007. The delays also resulted in several "lost opportunities," he said.
"We are not pleased with our results in the Rocky Mountains," Creel told analysts. "As good as the fourth quarter of 2007 was, it could have been much better." He estimated that in total Enterprise's cost overruns averaged about 18% in 4Q2007, with most of the costs blamed for problems at its new Meeker gas processing complex in the Piceance Basin of Colorado and the expansion of the Pioneer gas processing plant in Opal, WY.
The delays followed Enterprise's need to replace "defective high-pressure valves and address third-party engineering design problems," Creel said.
The Meeker plant "is now fully operational and has been processing an average of 530 MMcf/d with 27,000 b/d of natural gas liquids [NGL] production in January," said Creel. Phase II of the complex is scheduled to ramp up later this year (see NGI, Oct. 22, 2007). The Pioneer plant expansion had been scheduled to be completed before the end of 2007 to help carry gas supplies from the Jonah field in the Pinedale Anticline of Wyoming. The plant now is "in the commissioning phase and is expected to begin processing natural gas shortly."
Because both plants were expected to be in operation in 4Q2007, Enterprise "entered into transactions to economically hedge a percentage of the expected NGL production at these plants in order to capture near-record natural gas processing margins," the CEO stated. "These transactions entailed the physical forward sales of NGLs and the purchase of natural gas. The unexpected downtime at Meeker and the delayed start-up of Pioneer resulted in actual NGL production and natural gas consumption for the fourth quarter of 2007 being lower than the volume the partnership hedged."
The cost to replace the defective valves and the expense resulting from the noncash, mark-to-market charge on the short, or over-hedged, NGL balance and the liquidation of the long natural gas position totaled $29 million, or 7 cents/unit, according to Creel. The gross operating margin generated by Meeker from actual production was offset by a decrease in gross operating margin from the NGL marketing business.
"The start-up problems associated with the Meeker and Pioneer facilities are atypical for Enterprise, do not meet our engineering and operating standards, and are not consistent with our 40-year history of developing midstream projects," said Creel. "We are actively engaged in efforts to obtain recovery for certain of our losses and to ensure that we do not experience these types of problems on our future projects."
Creel said Enterprise shared in the blame for the construction delays in the Rockies.
"Part of it is a problem with the valves, part of it is outside engineering...and frankly, part of it is a lack of adequate oversight by us. We think we've made the proper changes in oversight for better control. We are pursuing remedies from the outside firms and working to get those back on track...Going forward, we will be more vigilant about providing oversight to third parties...and have our eyes on what they're doing, do independent testing, review the designs," he said. "We don't expect the same kinds of problems going forward. Enterprise has a track record to do things on time and on budget."
Enterprise has invested about $3.9 billion in new projects in just the past two years, including the Independence Hub and Independence Trail gas pipeline projects in the deepwater Gulf of Mexico, which ramped up last year. Enterprise is sole owner of the pipeline, and the partnership's offshore gas pipeline business jumped to $21 million in 4Q2007 from $8 million in 4Q2006. Volumes through the Independence platform and pipeline this month have averaged 900 billion Btu/d.
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