Enterprise Products Partners L.P. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; filed November 9, 2012. Amounts are in U.S. dollars. The unaudited partnership operates an integrated North American midstream energy network across five segments: NGL, onshore natural gas, onshore crude oil, offshore, and petrochemical and refined products services.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $10,468.7 million | $11,327.1 million | $31,511.0 million | $32,727.3 million |
| Operating income | $788.5 million | $681.1 million | $2,286.5 million | $1,949.9 million |
| Net income attributable to limited partners | $586.8 million | $471.4 million | $1,804.4 million | $1,325.8 million |
| Diluted earnings per unit | $0.66 | $0.55 | $2.03 | $1.55 |
| Segment gross operating margin | $1,139.6 million | $972.8 million | $3,225.3 million | $2,770.7 million |
- Cash flow: Nine-month operating cash flow was $1,615.8 million, down from $2,228.2 million. Capital expenditures were $2,716.1 million; operating cash flow was therefore below capital expenditures. Investing activities used $1,895.0 million, while financing activities provided $273.9 million. Working-capital changes reduced operating cash flow by $910.2 million, versus a $61.6 million source in 2011.
- Margins and segments: Total segment gross operating margin, a company-defined non-GAAP measure, rose year over year. Q3 gains included NGL Pipelines & Services ($615.8 million versus $547.6 million), onshore natural gas ($183.5 million versus $156.0 million), and onshore crude oil ($117.6 million versus $67.4 million). Offshore margin declined to $40.6 million from $53.9 million. Management attributes much of the improvement to growth in volumes and operating assets; margin should not be treated as a substitute for GAAP operating income.
- Liquidity and debt: Management reported $3.43 billion of liquidity at September 30, including unrestricted cash and available capacity under EPO’s $3.5 billion revolving credit facility. Cash and cash equivalents were $14.5 million. Debt principal was $15.92 billion, including $1.2 billion of current maturities; long-term debt on the balance sheet was $14.75 billion. The partnership reported compliance with debt covenants and expected to refinance 2013 maturities.
- Equity and distributions: Common units outstanding rose to 895.6 million from 881.6 million at year-end 2011. The declared Q3 2012 distribution was $0.6500 per common unit, payable November 8, 2012.
Changes versus the prior comparable period
- Revenue fell 7.6% in Q3 and 3.7% for the nine-month period, while operating income and limited-partner income increased in both comparisons. Lower NGL, natural gas, and petrochemical prices reduced reported product sales and associated costs; higher crude oil volumes partly offset the revenue decline.
- Average Q3 NGL and natural gas prices were each 33% below the prior-year quarter, while crude oil prices were 3% higher. Management noted that lower commodity prices can reduce revenue without necessarily reducing gross operating margin because related product costs may also fall.
- Nine-month operating cash flow declined despite higher earnings, primarily reflecting the timing of receipts and payments and working-capital movements. Capital spending remained substantial.
- Debt increased from $14.48 billion in principal at December 31, 2011 to $15.92 billion at September 30, 2012. The partnership issued $2.5 billion of senior notes during the first nine months and common units through an underwritten offering, an at-the-market program, and unit plans.
Outlook, management commentary, risks, and unusual items
- Management estimated 2012 capital spending of approximately $4.3 billion: $4.0 billion for growth and $0.3 billion for sustaining projects. Nine-month spending, including investments in unconsolidated affiliates and other investing activity, was $3.08 billion. The filing says actual spending may change with market access, weather, supplier costs, economic conditions, or management decisions.
- Growth projects included crude oil and NGL pipeline expansions, processing and fractionation capacity, and the ATEX ethane pipeline. The filing describes expected in-service dates and project capacities, but these are forward-looking plans, not assurances of completion or results.
- Unusual items included a $68.8 million gain from liquidating the Energy Transfer Equity investment, $30.0 million of insurance recoveries recognized as gains year to date, a $24.0 million marine-transportation legal settlement gain, and a $20.0 million vendor-settlement gain in Rocky Mountains gas processing. Nine-month non-cash asset impairment charges were $57.6 million, including $29.2 million for planned abandonment of Texas Intrastate System pipeline segments.
- Commodity prices, demand and throughput, project execution and funding, counterparty performance, and regulatory or pipeline-integrity requirements may affect results. The partnership uses derivatives, but certain non-hedge-accounted positions can cause earnings volatility.
- Management elected to self-insure Gulf of Mexico offshore assets against windstorm damage for the current policy period because of insurance costs and deductibles. The filing warns that an uninsured or underinsured loss could adversely affect results, cash flows, and distributions. Litigation accruals were $11.5 million; management did not expect currently pending litigation to have a material effect, while noting outcomes are uncertain.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during Q3.
Important facts for investors to verify
- Whether operating cash flow and available borrowing capacity can support the planned capital program, distributions, and refinancing needs—particularly the $1.2 billion of 2013 maturities.
- Whether the reported increase in segment gross operating margin is sustained after excluding unusual gains and considering segment-specific declines, including offshore operations.
- Progress, committed volumes, costs, and schedules for major growth projects, and the extent to which expected returns depend on producer activity and market demand.
- The effects of unit issuance and future financing on per-unit results, and the sustainability of the $0.6500 quarterly distribution.
- Potential exposure from offshore windstorm self-insurance, litigation and other claims, pipeline integrity costs, and commodity derivative mark-to-market volatility.