The months of June and July were the “low water mark” for Enterprise Products Partners LP’s natural gas liquids (NGLs) business — especially for ethane — but CEO O.S. “Dub” Andras said Monday he was “encouraged and cautiously optimistic” in recent activity for liquids.

Andras presided over a conference call to detail third quarter earnings, and he said that ethane business began to see an upturn in business beginning in August. Houston-based Enterprise is the second-largest publicly traded midstream energy partnership in the United States with an enterprise value of about $7 billion.

For the third quarter, the company reported adjusted net income of $19.2 million (7 cents/unit), in line with earnings guidance issued a month ago. Adjusted income excludes a non-cash charge of $22.5 million for the book value impairment of the MLP’s ownership interest in an octane enhancement production facility. Without this charge, Enterprise would have had a $3.3 million net loss (minus 4 cents/unit) in the quarter, compared to net income of $34.9 million (18 cents/unit) for 3Q02.

“The third quarter was a difficult quarter for our partnership due to weak demand for ethane (the most prevalent NGL product) as a result of the prolonged recession in the manufacturing sector and higher natural gas prices,” said Andras.. “We believe business conditions hit a low point in June and July, and the improvement we saw in August and September has continued into October and November.”

The demand for ethane by the petrochemical industry “bottomed out in June and July at an average of 574,000 bbl/d, which was 23% below the five-year average of 750,000 bbl/d,” Andras said. However, beginning in August and through October, average demand increased to approximately 700,000 bbl/d. The increased ethane demand and a “moderation” in natural gas prices resulted in the indicative gross processing spread on the U.S. Gulf Coast for the month of October averaging approximately 15 cents a gallon, he said.

Noting that Enterprise is “encouraged by the improvements” in its businesses, Andras warned that the company still had “not yet returned to a normalized level of business activity,”…but “we do believe our partnership’s financial results will improve with the overall growth in the U.S. economy and the manufacturing sector.” The focus will remain on managing through the “short-term challenges associated with this business cycle” to position for future growth opportunities.

Enterprise reported revenue of $1.2 billion for the quarter, compared with $943.3 million of revenue for the same period of 2002. Gross operating margin for the third quarter of 2003 was $68.5 million, including a $22.5 million non-cash impairment charge related to the octane enhancement facility, compared with last year’s $107.2 million. Operating income was $30.6 million, compared with $68.3 million in 3Q02.

“Our financial results for the third quarter of 2003 were primarily affected by lower volumes and gross operating margin from our Mid-America and Seminole pipelines, lower unit margins in our NGL marketing business and lower gross operating margin from natural gas processing activities,” stated Andras.

Enterprise’s pipeline earnings increased to $66.6 million, up from $63.9 million for the same period of 2002. Net pipeline segment volumes were 1.678 MMboe, down slightly from 1.682 MMboe for 3Q02. Gross operating margin from the Mid-America and Seminole pipelines increased by $2.6 million to $32.7 million on aggregate volume of 735,000 bbl/d, compared with the two months of 3Q02 that Enterprise owned them, when operating margin was $30.1 million on volume of 868,000 bbl/d.

“Volumes and gross operating margin for the third quarter of this year were less than normal due to weak demand for NGLs and poor processing economics for most of the quarter, which caused natural gas processing plants in the Rocky Mountains to reduce the amount of ethane extracted,” the company said in a statement. “This resulted in lower transportation volumes on both the Mid-America and Seminole pipeline systems.”

In its fractionation segment, gross operating margin was $30.6 million for the quarter, down from $34.6 million in 3Q02. The decrease was mostly because of lower unit margins and a slight decrease in volumes from Enterprise’s propylene fractionation business on weak demand. Increases in unit margins and volumes at its Mont Belvieu NGL fractionator and in-kind fractionation fees and volumes at the partnership’s Norco NGL fractionator offset a decrease in gross operating margin from the partnership’s remaining NGL fractionators because of a decrease in volumes.

“Overall, NGL fractionation volumes decreased by approximately 14,000 bbl/d to 233,000 bbl/d, reflecting weak demand for NGLs and below average natural gas processing economics that reduced the amount of NGLs extracted from natural gas and available for fractionation,” Enterprise said.

Gross operating margin from natural gas processing was $1.6 million, a decrease of $7.3 million compared to the third quarter of last year. “This decrease was due to depressed processing economics early in the current quarter as a result of weak demand for NGLs and higher gas prices.”

Historically, Enterprise processed gas under keep-whole arrangements, but beginning Aug. 1, the partnership converted to fee-based arrangements. Nearly 200 MMcf/d of production volume was flowing into the partnership’s facilities for processing — approximately 10% of its total processed gas — as of Aug. 1. Under the fee-based processing arrangements, Enterprise now receives a tolling fee based on the volume of gas processed, does not earn title to the NGLs extracted and does not bear the economic cost of plant fuel to process the gas.

“Enterprise processes approximately 2.1 Bcf/d,” it said in a statement. “For the remainder of 2003 and for 2004, we estimate that approximately 49% of this gas will be processed under a margin-band agreement with Shell Oil & Gas Co.; approximately 40% will be processed under percent-of-liquids arrangements; 10% under fee-based agreements and 1% under legacy keep-whole arrangements.”

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