Business context and reporting period
Enterprise Products Partners L.P. (NYSE: EPD) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. It is a North American midstream energy partnership operating pipelines, processing, storage and terminal assets across natural gas, NGLs, crude oil, petrochemicals and refined products. The filing was signed August 11, 2014.
Financial performance and position
Dollars are in millions except per-unit amounts. Comparisons are with the corresponding 2013 period.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $12,520.8 | $11,149.3 | $25,430.7 | $22,532.4 |
| Operating income | $884.3 | $774.2 | $1,917.0 | $1,731.9 |
| Net income attributable to limited partners | $637.7 | $552.5 | $1,436.5 | $1,306.0 |
| Basic earnings per unit, pre-split | $0.70 | $0.62 | $1.57 | $1.48 |
| Non-GAAP gross operating margin | $1,263.2 | $1,142.2 | $2,593.0 | $2,373.3 |
| Non-GAAP distributable cash flow | $953.8 | $924.7 | $2,040.8 | $1,821.7 |
| Operating cash flow | Not separately shown for the quarter | $1,871.9 | $1,530.9 |
- Q2 revenue increased about 12%, operating income about 14%, and limited-partner net income about 15%. For the first six months, revenue rose about 13%, operating income about 11%, and limited-partner net income about 10%.
- Six-month operating cash flow increased $341.0 million. Investing used $1,554.9 million, including $1,186.4 million of capital expenditures and $498.8 million invested in unconsolidated affiliates. Financing used $131.9 million; cash and cash equivalents ended at $242.0 million.
- At June 30, total assets were $41.57 billion, current assets $7.47 billion and current liabilities $8.47 billion. Principal debt was $18.38 billion, including $1.30 billion of current maturities; long-term debt carrying value was $17.06 billion. Debt principal increased from $17.36 billion at year-end 2013.
- Management reported $3.74 billion of consolidated liquidity: $242 million of unrestricted cash and approximately $3.5 billion of available revolving-credit capacity. The partnership was in compliance with debt covenants.
- Quarterly distribution declared for Q2 was $0.72 per common unit pre-split. Six-month distribution coverage was 1.6x, and $729.3 million of distributable cash flow was retained. These are non-GAAP measures defined by the partnership.
Material changes versus the prior comparable period
- NGL Pipelines & Services gross operating margin rose to $680.9 million from $544.9 million in Q2, supported by ATEX, higher NGL fractionation volumes and fees, and pipeline expansions. ATEX contributed $35.3 million of Q2 segment gross operating margin, including deferred shipper make-up-right revenue.
- Onshore Crude Oil Pipelines & Services gross operating margin declined to $184.0 million from $197.2 million in Q2 and to $343.7 million from $433.6 million for six months. Lower crude-oil regional price spreads reduced marketing margins, partly offset by higher pipeline volumes and joint-venture earnings.
- Offshore segment gross operating margin declined to $33.6 million from $39.7 million in Q2, partly due to lower Independence Hub throughput and a roughly two-month outage after a small fire at the Marco Polo platform. Marco Polo operations resumed in July.
- Petrochemical & Refined Products Services gross operating margin was broadly flat in Q2 at $161.7 million, but fell to $292.1 million from $333.6 million for six months. An extended unscheduled maintenance outage at the octane enhancement facility and prior-year pipeline-related benefits contributed to the decline.
- Six-month results included a $95.0 million gain from final insurance proceeds for the 2011 West Storage incident, versus $8.8 million in 2013. Results also reflected $12.5 million of non-cash impairments, down from $38.1 million. Higher interest expense—$449.8 million versus $396.1 million for six months—partly offset operating growth.
Outlook, management commentary, risks and unusual items
- Management forecast 2014 total capital spending of $3.7 billion to $4.1 billion, including $350 million of sustaining capital. Approximately $3.4 billion of major projects entered service in the first six months; about $820 million of projects were expected to be completed or begin commercial operations in the rest of 2014. The company had about $1.1 billion of outstanding capital purchase commitments.
- Growth projects include ethane infrastructure and exports. The Houston Ship Channel ethane export facility, supported by long-term contracts, was expected to begin operations in Q3 2016. The Aegis ethane pipeline was expected to reach full operations by the end of 2015. Management cited domestic ethane supply growth and new market access as opportunities.
- Management stated that liquidity, operating cash flow and capital-market access were expected to be sufficient for capital spending and working-capital needs. It expected to refinance current debt maturities at or before maturity. No specific earnings or distribution-growth guidance was provided.
- Material litigation: A jury awarded Energy Transfer Partners $319.4 million in a dispute concerning a cancelled proposed pipeline project. On July 29, 2014, after quarter-end, the court entered a $535.8 million judgment including $150.0 million disgorgement and $66.4 million prejudgment interest, plus post-judgment interest at 5% compounded annually. EPD said it would appeal and did not accrue a provision at June 30 because management considered payment not probable.
- Insurance exposure: EPD elected not to purchase windstorm coverage for its Gulf of Mexico offshore assets for the 2014 hurricane-season policy period because of premiums and deductibles; certain producers provide some coverage for two key platforms. Insurance may not cover all losses.
- New long-term terminal and railcar leases increased estimated operating lease obligations by approximately $34 million over five years and $144 million overall. Commodity prices, regional crude spreads, demand, project execution, weather, regulation and access to capital are among the disclosed business risks.
- A two-for-one common-unit split was announced July 15, 2014, with additional units to be distributed August 21 to holders of record August 14. Reported unit counts and per-unit results are pre-split; pro forma six-month basic and diluted EPU were $0.78 and $0.76.
Important facts for investors to verify
- Track the ETP judgment and appeal, including potential damages, interest, timing and any future accounting accrual.
- Separate recurring operating performance from the $95 million West Storage insurance gain and review the partnership’s non-GAAP gross operating margin and distributable-cash-flow reconciliations.
- Assess whether project spending, capital commitments and planned start-up dates remain on schedule, and whether the $3.7–$4.1 billion capital-spending forecast can be funded without undue dilution or leverage.
- Review debt maturities, refinancing execution, borrowing capacity and distribution coverage; coverage and distributable cash flow are non-GAAP measures and do not equal cash available without adjustment.
- Evaluate exposure to commodity prices and crude-oil basis spreads, offshore operating interruptions, and the decision to forgo Gulf of Mexico windstorm insurance.
- Consider related-party arrangements: EPCO affiliates owned 36.4% of limited-partner interests, EPD had no employees, and EPCO provided operating and administrative services.