Enterprise Products Partners L.P. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; unaudited. Dollars are in millions except per-unit amounts. Enterprise is a North American midstream energy partnership operating across five segments: NGL, onshore natural gas, onshore crude oil, offshore, and petrochemical and refined products services. Comparisons reflect the TEPPCO merger, but the filing notes that 2009 partnership-attributable results did not include TEPPCO’s results for the comparable periods.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $8,067.8 | $6,789.4 | $24,155.7 | $17,110.6 |
| Operating income | $569.2 | $356.3 | $1,668.2 | $1,212.4 |
| Net income | $385.9 | $187.8 | $1,153.0 | $715.8 |
| Net income attributable to EPD | $371.9 | $212.9 | $1,106.9 | $624.8 |
| Diluted earnings per unit | $0.47 | $0.36 | $1.44 | $1.09 |
| Segment gross operating margin (non-GAAP) | $820.8 | $638.7 | $2,430.9 | $1,974.9 |
- Q3 revenue rose 18.8% and nine-month revenue rose 41.2%. Management attributed most of the increases to higher commodity prices and sales volumes in marketing activities; revenue growth therefore does not by itself indicate comparable growth in underlying margins.
- Segment gross operating margin increased 28.5% for Q3 and 23.1% for the nine-month period. Q3 gains were led by petrochemical and refined products, onshore natural gas, and reported offshore results. Nine-month margin also improved in NGL and petrochemical/refined products, while onshore crude oil declined.
- Q3 operating income increased 59.8%; nine-month operating income increased 37.6%. Interest expense rose to $179.7 for Q3 and $496.9 for the first nine months, reflecting higher debt balances. The filing does not present a consolidated gross-margin percentage; revenue includes substantial commodity marketing pass-through.
Cash flow, balance sheet and distributions
- Cash flow, nine months: Operating cash flow was $1,415.1, versus $891.7 in 2009. Investing used $2,501.5, including $1,405.1 of capital expenditures and $1,233.0 for acquisitions. Financing provided $1,074.1. Cash and cash equivalents were $42.7 at September 30, down from $54.7 at year-end 2009.
- Operating cash flow less capital expenditures was approximately $10.0; this measure excludes acquisitions, distributions, and other investing and financing needs. Cash distributions to partners were $1,263.1 for the nine months, versus $860.1 in 2009.
- Liquidity: Management reported $1.8 billion of available borrowing capacity across revolving facilities, including subsidiary capacity. Current assets were $4,643.4 and current liabilities $4,590.7; current assets included $3,338.6 of accrued product payables. Restricted cash was $32.5 and was not freely available for general purposes.
- Debt: Principal debt outstanding was $12,655.0; reported long-term debt was $12,704.8, including non-principal adjustments. Debt principal rose from $11,297.0 at year-end 2009. EPO issued $2.0 billion of senior notes in May and used proceeds in part to repay notes and fund the State Line and Fairplay acquisition. The partnership reported compliance with debt covenants at quarter-end. EPO’s senior debt ratings were investment grade, with Moody’s Baa3 and S&P and Fitch BBB-.
- The Q3 distribution rate was $0.5825 per common unit, up from $0.5525 a year earlier. The filing declared the Q3 distribution payable November 8, 2010.
Material changes and notable items
- In May, Enterprise acquired the State Line and Fairplay natural gas gathering systems for approximately $1.2 billion. The assets generated $75.0 of revenue and $8.1 of net income during the five months owned. Purchase accounting included $895.0 of customer-relationship intangibles.
- Reported Q3 results included a $56.6 insurance-related gain from disposing of damaged offshore assets. The nine-month results also included $26.4 of other property-damage insurance gains. These items boosted reported operating results and are not necessarily recurring.
- Q3 costs included approximately $22.9 related to liquidation of employee partnerships and $5.8 of proposed Holdings merger expenses. Q3 2009 included $66.9 of TOPS settlement expense; nine-month 2009 included $135.3 of TOPS-related charges. These items affect period comparability.
- Management estimated that the offshore drilling moratorium reduced Q3 2010 offshore segment gross operating margin by $10–$15. The suspension was lifted in October, but management said the timing of a recovery in Gulf of Mexico production remained uncertain.
- The proposed merger with Enterprise GP Holdings would exchange 1.5 EPD common units per Holdings unit; Enterprise expected to issue about 208.8 million units, cancel 21.6 million EPD units held by Holdings, and eliminate the general partner’s 2% economic interest and incentive distribution rights. The merger was subject to approval and other conditions and faced unitholder lawsuits seeking to block it.
Outlook, risks and contingencies
- No specific earnings or distribution guidance is provided. Management forecast approximately $870 million of consolidated capital spending for the remainder of 2010, including $800 million for growth projects and acquisitions and $70 million for sustaining capital. The forecast depends on available funding and could change.
- The Haynesville Extension project was estimated to cost $1.56 billion, including capitalized interest; Duncan Energy Partners was expected to fund 66%. In October, it entered new credit facilities with $1.25 billion of capacity. Enterprise also described Eagle Ford pipeline, processing and fractionation projects expected to be completed in 2012, and a crude oil pipeline expected in Q4 2011.
- Key operating and regulatory risks include commodity-price and demand changes, reduced customer drilling or production, hydraulic-fracturing regulation, evolving offshore permitting and safety rules after Deepwater Horizon, and potential additional cash collateral or costs under derivatives regulation. The filing warns these could reduce throughput, raise costs, constrain hedging or affect liquidity and distributions.
- Four lawsuits related to the proposed Holdings merger sought injunctive relief; the company said it could not predict their outcome. Management reported no other litigation it believed reasonably likely to have a significant adverse effect. Other disclosed exposures include environmental matters, contractual claims, and guarantees associated with Centennial; the filing does not indicate that these were expected to have a material adverse effect.
Important facts for investors to verify
- How much of earnings and cash generation is attributable to durable fee-based activity versus commodity marketing, commodity prices, and nonrecurring insurance proceeds or other unusual items.
- Whether operating cash flow can fund distributions and the substantial growth-capital program without sustained increases in debt or equity issuance.
- Debt maturities, revolving-credit availability, subsidiary borrowing needs, and the effect of project spending on leverage and distribution capacity.
- The completion, unit issuance and dilution implications of the proposed Holdings merger, including litigation and any distribution-waiver terms.
- Whether Gulf of Mexico production and offshore throughput recover, and how new offshore rules, shale regulation, commodity markets and customer activity affect volumes and project returns.