Enterprise Products Partners L.P. — 2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2012; quarterly figures below identify the fourth quarter. Enterprise is a publicly traded midstream energy partnership operating through EPO, with businesses spanning NGLs, natural gas, crude oil, petrochemicals, refined products and marine transportation. Its five reportable segments are NGL Pipelines & Services, Onshore Natural Gas, Onshore Crude Oil, Offshore, and Petrochemical & Refined Products Services.
Key financial metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $42.58 billion | $44.31 billion |
| Operating income | $3.11 billion | $2.86 billion |
| Net income | $2.43 billion | $2.09 billion |
| Net income attributable to limited partners | $2.42 billion | $2.05 billion |
| Basic / diluted earnings per unit | $2.81 / $2.71 | $2.48 / $2.38 |
| Segment gross operating margin (non-GAAP) | $4.39 billion | $3.87 billion |
| Net cash provided by operating activities | $2.89 billion | $3.33 billion |
| Cash used in investing activities | $3.02 billion | $2.78 billion |
| Consolidated debt principal at year-end | $16.18 billion | $14.48 billion |
At December 31, 2012, total assets were $35.93 billion, equity was $13.30 billion, and cash and cash equivalents were $16.1 million. Management reported consolidated liquidity of $3.17 billion, defined as unrestricted cash plus available capacity under EPO’s $3.5 billion revolving credit facility. The current portion of debt was $1.55 billion. The partnership declared distributions of $2.57 per common unit for 2012, including $0.66 for the fourth quarter.
Fourth quarter: Revenue was $11.07 billion, operating income $822.7 million, net income $617.4 million, and net income attributable to limited partners $615.5 million. Basic and diluted earnings per unit were $0.70 and $0.68, respectively. In fourth-quarter 2011, revenue was $11.59 billion, operating income $909.2 million, net income $725.8 million, and basic/diluted earnings per unit $0.85/$0.82.
Material changes versus prior comparable period
- Annual revenue fell 3.9%, mainly because lower commodity prices reduced NGL, natural gas and petrochemical/refined-product marketing sales. The associated cost of sales also declined, while operating income and net income increased.
- Segment gross operating margin increased about 13%. NGL margin rose to $2.47 billion; onshore natural gas to $775.5 million; and onshore crude oil to $387.7 million. Offshore margin declined to $173.0 million, while petrochemical and refined-products margin increased to $579.9 million.
- Operating cash flow declined $439.6 million, reflecting increased cash tied up in inventory and timing of operating receipts and payments, despite higher partnership income.
- Debt principal increased approximately $1.70 billion year over year. Capital spending for property, plant and equipment was $3.62 billion; total capital spending, including investments in unconsolidated affiliates, was $4.25 billion.
- Annual distributions per unit increased from $2.44 to $2.57. Common units outstanding also increased, including through public offerings, the at-the-market program and reinvestment plans.
Outlook, commentary, risks and unusual items
- Management estimated 2013 capital spending of approximately $4.4 billion, including $4.0 billion for growth projects and $350 million for sustaining expenditures, and stated that expected liquidity, operating cash flow and capital-market access should be sufficient to fund planned needs. The filing identifies approximately $7.2 billion of major organic growth projects under construction.
- Key projects included the ATEX ethane pipeline (expected to start in Q1 2014), Seaway expansion (expected in Q1 2014), additional Mont Belvieu fractionation capacity, Eagle Ford infrastructure, and a propane dehydrogenation facility expected to start in Q3 2015. These timelines and estimates are forward-looking and subject to execution, permitting, cost and market risks.
- Management expected ethane oversupply and possible ethane rejection to persist in the near term, potentially reducing equity NGL production and volumes handled. It forecast 2013 declines of 5%–12% in volumes on the Jonah, Piceance and San Juan gathering systems, and lower Independence Hub gas volumes. Offshore crude volumes were expected to recover; management cited Q4 2012 offshore crude throughput as the highest since Q1 2010.
- Unusual or nonrecurring items included a $68.8 million gain from liquidating the Energy Transfer Equity investment; $63.4 million of non-cash impairment charges; a $24.0 million marine-transportation legal-settlement gain; and $30.0 million of 2012 insurance-recovery gains related to the Mont Belvieu West Storage incident. The related insurance claim remained under negotiation, with total recovery projected by the partnership at up to $150 million.
- Risks highlighted include commodity-price and volume exposure, customer and counterparty credit risk, substantial debt and refinancing needs, dependence on access to capital for growth, cost and schedule overruns, regulatory and rate-case outcomes, pipeline integrity and environmental liabilities, Gulf Coast storms, and reduced offshore drilling activity. Offshore windstorm coverage was not purchased for the 2012 hurricane season.
- The partnership reported no material pending legal proceedings other than routine litigation, and management considered the disclosed environmental sanctions immaterial. Deloitte & Touche issued an unqualified audit opinion; management and the auditor also reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether operating cash flow and available liquidity can support the planned growth program, debt maturities and distributions; operating cash flow was below total 2012 capital spending.
- Project spending, customer commitments, completion dates and expected returns for major projects, particularly ATEX, Seaway, Eagle Ford and Mont Belvieu expansions.
- Actual effects of ethane oversupply, ethane rejection, lower natural gas prices and forecast gathering-volume declines on segment margins and throughput.
- Debt refinancing and capital-market access: the filing listed $1.55 billion of 2013 principal maturities at year-end and approximately $3.1 billion of senior notes maturing from April 2013 through 2015. It also reported a February 2013 equity offering with net proceeds of $486.6 million and retirement of $550 million of notes.
- Resolution and proceeds of the West Storage insurance claim, and whether further gains or costs arise; also monitor impairment, litigation and regulatory proceedings affecting pipeline rates.
- Distribution coverage and unit dilution, including scheduled conversion of 4.52 million Class B units and the declining affiliate distribution waiver through 2015.