Enterprise Products Partners L.P. — 2013 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. The financial statements are unaudited. Enterprise is a large North American midstream energy partnership operating across natural gas, NGL, crude oil, refined products and petrochemicals, through five reportable segments.
Financial results and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $11.15 billion | $9.79 billion | $22.53 billion | $21.04 billion |
| Operating income | $774.2 million | $749.1 million | $1.73 billion | $1.50 billion |
| Net income | $553.3 million | $567.2 million | $1.31 billion | $1.22 billion |
| Net income attributable to limited partners | $552.5 million | $566.3 million | $1.31 billion | $1.22 billion |
| Basic / diluted earnings per unit | $0.62 / $0.60 | $0.66 / $0.64 | $1.48 / $1.43 | $1.42 / $1.37 |
| Segment gross operating margin (non-GAAP) | $1.14 billion | $1.03 billion | $2.37 billion | $2.09 billion |
Cash flow: For the first six months, operating cash flow was $1.53 billion, versus $1.34 billion a year earlier. Investing used $1.80 billion, including $1.45 billion of capital expenditures and $547.9 million invested in unconsolidated affiliates. Financing provided $300.9 million. Cash and cash equivalents ended June at $45.3 million; restricted cash was $26.3 million.
Debt and liquidity: Debt principal totaled $16.97 billion at June 30; balance-sheet debt was $16.97 billion, including $540 million of current maturities. Consolidated liquidity was $4.46 billion, defined by the partnership as unrestricted cash plus available borrowing capacity. The partnership reported compliance with debt covenants and expects to refinance current maturities. It issued $2.25 billion of senior notes in March, entered a $1.0 billion 364-day revolving credit agreement, and extended its $3.5 billion revolving facility to June 2018.
Margins and distributions: Gross operating margin is management’s non-GAAP segment measure, not a substitute for GAAP operating income. The Q2 common-unit distribution was declared at $0.68 per unit, compared with $0.67 for Q1. The 4.52 million Class B units converted into distribution-bearing common units on August 8, 2013.
Material changes versus the prior comparable periods
- Q2 revenue rose about 14%, but net income fell about 2%; basic earnings per unit declined from $0.66 to $0.62. For the first half, revenue rose about 7% and net income about 7%.
- Crude oil operations were a major earnings driver: Q2 onshore crude oil segment gross operating margin increased to $197.2 million from $95.8 million, and first-half margin to $433.6 million from $135.1 million. Higher pipeline volumes, marketing results and joint-venture earnings contributed.
- NGL Pipelines & Services margin declined to $544.9 million from $565.8 million in Q2 and to $1.14 billion from $1.22 billion for the first half. Lower processing margins, including weaker ethane and propane economics, weighed on results; pipeline and fractionation performance improved.
- Equity income from unconsolidated affiliates increased to $37.6 million for Q2 from $11.3 million, and to $82.1 million for the first half from $21.2 million, primarily reflecting crude oil pipeline joint ventures.
- Q2 interest expense increased $13.6 million year over year, partly because completed assets began generating expensed interest rather than capitalized interest. First-half other income was lower than in 2012, which included $68.8 million of gains on sales of Energy Transfer Equity units.
- First-half operating cash flow improved, while investing cash use increased substantially from 2012, which had included $1.10 billion of Energy Transfer Equity sale proceeds. First-half capital expenditures were lower, but investment in affiliates was higher.
Outlook, commentary, risks and unusual items
- Management estimated 2013 consolidated capital spending at approximately $4.6 billion: $4.2 billion for growth projects and $350 million for sustaining capital. The forecast depends on available operating cash flow and access to debt, equity and other funding; management may adjust timing or amounts.
- Management expected about $1.5 billion of growth projects to enter service during the remainder of 2013, including the Texas Express and Front Range pipelines, additional Eagle Ford and Seaway pipeline capacity, and two Mont Belvieu fractionators. The two fractionators, developed with Western Gas, were expected to start in Q4 2013 with combined capacity of about 170 MBPD.
- Announced development plans included refined-products export facilities targeted to begin service in 2014, about 4.0 million barrels of new crude storage and connecting pipelines targeted for completion by Q4 2014, and the 270-mile Aegis ethane pipeline expected to begin operations in 2014. A further LPG export expansion was under evaluation.
- Management cited potential persistence of ethane oversupply, which could prolong ethane rejection, reduce the value of equity NGL production and lower volumes on fractionation and pipeline assets. Commodity price, volume, demand, competition and market-access changes may affect results; some derivatives are marked to market and can cause earnings volatility.
- Enterprise elected not to purchase windstorm coverage for its Gulf of Mexico offshore assets for the June 2013–June 2014 policy period, citing uneconomic deductibles and premiums. Producers affiliated with the Independence Hub and Marco Polo platforms provide certain physical-damage coverage for those assets.
- The partnership was negotiating with insurers over an estimated $91.9 million of remaining West Storage claims related to a 2011 NGL release and fire; further proceeds, if received, are expected to be recorded as gains. Management reported no pending litigation expected to have a material effect; litigation accruals were $4.9 million.
- First-half 2013 included $38.1 million of noncash asset impairments, mainly abandoned crude-oil pipeline, refined-products terminal/storage and NGL cavern assets. Asset-sale and insurance gains totaled $58.2 million, including a $52.5 million gain on the Seminole Pipeline segment sale and $8.8 million of insurance recoveries. Texas Margin Tax changes produced a $13.1 million net tax expense in Q2.
- Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting. It cautioned that forward-looking statements are subject to risks and may differ materially from actual outcomes.
Important facts for investors to verify
- Whether the forecast $4.6 billion 2013 capital program and announced projects remain on schedule, within budget and supported by customer commitments.
- How much of revenue and earnings growth reflects durable fee-based services and pipeline volumes versus commodity marketing, changing prices, joint-venture contributions and one-time gains.
- Debt refinancing and funding needs, including the effect of continued capital spending, distributions and unit issuance on leverage and per-unit results.
- Progress and recoverability of the remaining $91.9 million West Storage insurance claims, and the financial exposure from self-insuring offshore assets against windstorm damage.
- The effects of ethane supply-demand conditions, natural gas and crude oil prices, derivative mark-to-market volatility, and any related changes in throughput or margins.