Enterprise Products Partners L.P. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited and compared with Q1 2012. Enterprise is a North American midstream energy partnership, operating through EPO across five segments: NGL, onshore natural gas, onshore crude oil, offshore, and petrochemical and refined products services.
Financial performance and position
- Revenue: $11.38 billion, up 1.2% year over year. The filing notes product sales and cost of sales move with commodity prices, so revenue alone may not indicate underlying profitability.
- Profit: Operating income was $957.7 million, up 27.9%; net income was $755.3 million, up 15.2%; net income attributable to limited partners was $753.5 million. Basic and diluted earnings per unit were $0.85 and $0.83, versus $0.76 and $0.73.
- Margins: Management’s non-GAAP segment gross operating margin was $1.23 billion, up 16.9% from $1.05 billion. GAAP operating margin was approximately 8.4% of revenue, versus 6.7% in Q1 2012.
- Cash flow: Operating cash flow was $999.9 million, versus $604.9 million. Capital expenditures were $631.6 million; investments in unconsolidated affiliates were $291.4 million. Cash used in investing was $847.2 million. Distributions paid to limited partners totaled $577.6 million.
- Liquidity: Cash and cash equivalents were $1.28 billion at quarter-end, compared with $16.1 million at year-end 2012; restricted cash was $68.1 million. Management reported total liquidity of $4.78 billion, including available revolving-credit capacity. The high cash balance partly reflected March debt issuance proceeds and was not necessarily a normalized cash level.
- Debt: Principal debt outstanding was $17.53 billion, up from $16.18 billion at year-end. Long-term debt carrying value was $16.39 billion; current maturities were $1.15 billion. The partnership reported compliance with debt covenants.
- Balance sheet: Total assets were $38.10 billion and total equity was $13.99 billion. Current liabilities exceeded current assets by approximately $150 million; working-capital balances include substantial product payables and receivables.
Material changes versus Q1 2012
- Crude oil segment gross operating margin rose to $236.4 million from $39.3 million, supported by higher volumes, new pipeline infrastructure, and increased crude-oil joint-venture earnings.
- Petrochemical and refined products margin increased to $170.9 million from $97.8 million, including improved octane-enhancement facility performance and a $16.6 million benefit from reduced terminal capacity-obligation provisions.
- NGL segment margin declined to $592.5 million from $654.9 million, mainly because lower NGL prices weakened processing and related marketing margins. Onshore natural gas and offshore segment margins also declined.
- Operating cash flow increased $395.0 million, reflecting higher income, timing of operating cash receipts and payments, and higher distributions from affiliates. The filing cautions that timing effects contributed to the increase.
- Interest expense rose $9.4 million, primarily because average debt principal increased to $16.81 billion from $14.50 billion, partly offset by lower average borrowing rates.
- Q1 2012 included $53.3 million of gains from sales of Energy Transfer Equity units and a $34.4 million income-tax benefit, including a $46.5 million benefit related to subsidiary conversions. These items did not recur in Q1 2013.
Outlook, commentary, risks and unusual items
- Capital plans: Management estimated 2013 consolidated capital spending of approximately $4.6 billion: $4.2 billion for growth and $350 million for sustaining capital. It reported $1.42 billion of outstanding capital-project purchase commitments at March 31.
- Growth projects: The Aegis ethane pipeline was expected to enter service in 2014. The LPG export-terminal expansion completed in March increased low-ethane propane loading capacity to approximately 7.5 million barrels per month; a further expansion was under evaluation. A proposed Southeast Texas crude-oil storage and pipeline expansion was expected to be completed in phases, with final completion targeted for Q4 2014.
- Distribution: The declared Q1 2013 distribution was $0.67 per common unit, payable May 7, 2013. Class B units were scheduled to convert into distribution-bearing common units after the Q2 2013 distribution payment.
- Commodity and operating risks: Management cited persistent ethane oversupply, potentially volatile ethane prices, producer ethane rejection, and possible reductions in NGL production and transported volumes. Lower natural-gas prices had led some producers to curtail drilling, affecting certain gathering systems.
- Insurance: The partnership expected to forgo windstorm coverage for Gulf of Mexico offshore assets during the 2013 hurricane season because of cost, while noting some asset-specific coverage from platform producers. It received $8.8 million of insurance proceeds related to a 2011 Mont Belvieu incident and was negotiating over remaining claims estimated at $91.9 million.
- Other unusual items: The sale of a Seminole Pipeline segment and related cavern generated an $86.9 million cash receipt and a $52.5 million gain. Chemical trucking assets were sold for $29.5 million, with a $0.5 million loss. Asset-abandonment impairment charges were $11.0 million.
- Hedges and market exposure: The partnership paid $168.8 million to settle forward-starting interest-rate swaps in connection with its March note issuance; losses are being amortized to interest expense over ten years. Management warned that mark-to-market changes on certain non-designated commodity derivatives can make earnings volatile. It had no hedges for future natural-gas-processing margins at quarter-end.
- Contingencies: Litigation accruals were $4.7 million. Management did not expect pending litigation to have a material impact, but noted that claim outcomes and estimates remain uncertain. Other disputed claims against the partnership totaled $43.3 million; no loss accrual was recorded.
- Formal outlook: The filing provides capital-spending estimates and project plans but no clear earnings or revenue guidance. Management stated it believed liquidity, operating cash flow, and capital-market access would be sufficient for planned spending and working-capital needs.
Important facts for investors to verify
- Whether forecast growth spending, project schedules, and committed customer volumes are achieved, and how those plans are financed.
- How much Q1 earnings and cash-flow growth reflects recurring operations versus asset-sale gains, insurance proceeds, affiliate earnings, and working-capital timing.
- Debt refinancing and liquidity needs, including the $1.15 billion of current maturities reported at March 31 and subsequent repayment activity.
- Progress on the $91.9 million estimated remaining West Storage insurance claims and the extent of offshore windstorm coverage during hurricane season.
- Effects of ethane oversupply, commodity-price movements, producer activity, derivative mark-to-market volatility, and new distribution-bearing units on margins and per-unit results.