Enterprise Products Partners L.P. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; filed May 10, 2011. Financial statements are unaudited. Enterprise is a North American midstream energy partnership operating pipelines, storage, processing, fractionation and related assets across six reportable segments.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior balance-sheet date |
|---|---|---|
| Revenue | $10.184 billion | $8.545 billion |
| Operating income | $624.9 million | $558.9 million |
| Net income | $434.5 million | $392.4 million |
| Net income attributable to partners | $420.7 million | $69.9 million |
| Basic / diluted earnings per unit | $0.52 / $0.49 | $0.33 / $0.33 |
| Operating cash flow | $802.7 million | $696.4 million |
| Capital expenditures | $713.5 million | $347.8 million |
| Cash and cash equivalents at period-end | $150.4 million | $65.5 million at Dec. 31, 2010 |
| Debt principal outstanding | $14.038 billion | $13.527 billion at Dec. 31, 2010 |
| Total assets | $31.821 billion | $31.361 billion at Dec. 31, 2010 |
Revenue increased 19% year over year, while operating income rose about 12%. Operating margin was approximately 6.1%, compared with 6.5% in Q1 2010. Management’s non-GAAP total segment gross operating margin increased to $875.4 million from $806.0 million. Net income attributable to partners and per-unit results require care in comparison: the November 2010 Holdings merger changed the accounting predecessor and the allocation of income between partners and noncontrolling interests.
Operating cash flow increased $106.3 million. Investing activities used $726.4 million, mainly reflecting $713.5 million of capital expenditures; financing activities provided $8.6 million. Cash included $191.6 million of restricted cash, held principally for commodity-derivative and related purchase requirements. Current assets were $5.447 billion against current liabilities of $6.458 billion. Management reported $2.38 billion of available capacity under consolidated revolving credit facilities, including $634.5 million under Duncan Energy Partners’ facility.
Material changes and segment developments
- Revenue growth primarily reflected higher sales volumes and higher prices for most energy commodities. Crude oil sales revenue rose $982.1 million; NGL sales revenue rose $393.0 million. Lower natural gas prices contributed to a $262.6 million decline in natural gas sales revenue. Higher commodity prices also raised marketing costs, which increased $1.28 billion.
- Gross operating margin improved in NGL Pipelines & Services ($504.4 million versus $437.3 million), Onshore Natural Gas Pipelines & Services ($159.2 million versus $130.3 million), and Onshore Crude Oil Pipelines & Services ($31.8 million versus $26.7 million). Offshore Pipelines & Services declined to $61.3 million from $81.1 million, partly reflecting lower Gulf of Mexico throughput and prior-year insurance gains. Petrochemical & Refined Products Services declined to $112.4 million from $120.0 million, including weakness in refined-products pipelines.
- Capital expenditures increased substantially with construction of Eagle Ford and Haynesville pipeline projects. Construction in progress rose to $2.169 billion from $1.607 billion at year-end.
- In January, EPO issued $1.5 billion of senior notes: $750 million at 3.20% due 2016 and $750 million at 5.95% due 2041. Proceeds partly repaid $450 million of notes that matured in February and temporarily reduced revolver borrowings. EPO’s $1.75 billion revolving facility had no borrowings outstanding at quarter-end. The partnership reported compliance with debt covenants.
Outlook, risks and notable items
- Management estimated approximately $3.0 billion of capital spending for the remainder of 2011, including $2.8 billion for growth projects and $200 million for sustaining capital. It expected to fund recurring requirements with operating cash flow and borrowings as needed, and stated it believed liquidity and capital resources were adequate. The filing cautions that spending plans may change.
- Pipeline integrity spending was forecast at approximately $84.6 million for the remainder of 2011. Capital-project purchase commitments were approximately $1.64 billion at March 31.
- A February 8 NGL release and fire at the Mont Belvieu West Storage facility caused one fatality. The site and associated wells remained partially inoperative; staged repairs were expected through early 2012. Estimated total incident costs were approximately $150 million, including the $5 million insurance deductible recorded in Q1. Outstanding estimated property-damage claims included $12.8 million related to the incident.
- Commodity and interest-rate exposures are managed with derivatives. Management warned that non-cash mark-to-market earnings volatility may be material. It expected $114.3 million of commodity-hedge losses and $6.5 million of interest-rate-hedge losses to be reclassified from accumulated other comprehensive loss to earnings over the next twelve months.
- Risks include commodity-price and demand changes, offshore production declines and uncertainty about Gulf of Mexico drilling, potential insurance shortfalls, greenhouse-gas regulation, and legal claims. Management said it knew of no litigation likely to have a significant adverse financial effect, but merger-related and Duncan Energy Partners transaction lawsuits were pending. Certain claims against the partnership were about $96 million; management considered a material adverse outcome remote.
- On April 28, 2011, Enterprise agreed to acquire the remaining Duncan Energy Partners common units in a merger, exchanging 1.01 Enterprise common units per Duncan unit, subject to approvals and other conditions. Enterprise and Energy Transfer Partners also announced a proposed 50/50 Cushing-to-Houston crude-oil pipeline joint venture; service was expected in Q4 2012. Enterprise announced Eagle Ford pipeline extensions and a Houston Ship Channel NGL terminal expansion.
- The Board declared a $0.5975-per-unit distribution on April 14, paid May 6, 2011. No earnings guidance was provided in the supplied filing text.
Most important facts for investors to verify
- Assess underlying earnings and per-unit trends using the Holdings merger accounting and the sharply different noncontrolling-interest allocations in the comparative periods.
- Track whether operating cash flow supports the planned $3.0 billion of remaining 2011 capital spending, distributions and debt service, and whether additional financing or equity issuance is needed.
- Monitor Mont Belvieu repair progress, total incident costs, insurance recoveries and any operational or regulatory consequences.
- Review commodity-hedge positions and the timing and earnings impact of expected loss reclassifications.
- Confirm Duncan Energy Partners merger approvals, conditions, exchange terms and resulting unit dilution; evaluate related litigation and other material contingencies.