Enterprise Products Partners L.P. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed March 1, 2011. The filing also reports fourth-quarter 2010 results. Enterprise is a North American midstream energy partnership spanning natural gas, NGLs, crude oil, refined products and petrochemicals.
Financial performance
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $33.74 billion | $25.51 billion | +32.3% |
| Operating income | $2.15 billion | $1.85 billion | +15.8% |
| Net income | $1.38 billion | $1.14 billion | +21.3% |
| Net income attributable to partners | $320.8 million | $204.1 million | +57.2% |
| Diluted earnings per unit | $1.15 | $0.99 | +$0.16 |
| Segment gross operating margin* | $3.25 billion | $2.88 billion | +12.9% |
| Operating cash flow | $2.30 billion | $2.41 billion | −4.6% |
*Non-GAAP measure defined by the partnership; it is not a substitute for GAAP operating income.
Revenue growth reflected higher commodity prices and sales volumes, particularly in crude oil, NGLs and other petroleum products. Marketing sales increased both revenue and cost of sales, so revenue growth should not be read as equivalent margin growth. Average 2010 prices included WTI crude at $79.53/barrel, Henry Hub gas at $4.39/MMBtu and Mont Belvieu ethane at $0.60/gallon.
Fourth quarter: Revenue was $9.58 billion, operating income $505.4 million, net income $289.3 million and income attributable to partners $159.8 million. Diluted earnings per unit were $0.33. The declared fourth-quarter distribution was $0.590 per common unit.
Margins and segments: 2010 gross operating margin rose in NGL Pipelines & Services ($1.73 billion versus $1.63 billion), Onshore Natural Gas Pipelines & Services ($527.2 million versus $501.5 million), Offshore Pipelines & Services ($297.8 million versus $180.5 million) and Petrochemical & Refined Products Services ($584.5 million versus $364.7 million). Onshore Crude Oil Pipelines & Services declined to $113.7 million from $164.4 million, mainly on weaker crude marketing margins; Other Investments recorded a $2.8 million loss versus $41.1 million income, principally reflecting lower Energy Transfer Equity earnings.
Liquidity, debt and capital spending
- At year-end, consolidated debt principal was $13.53 billion, including $12.0 billion of senior debt and $1.53 billion of junior subordinated debt. About 11% was variable-rate or converted to variable-rate exposure through swaps.
- Year-end unrestricted cash was $65.5 million and available borrowing capacity under revolving credit facilities was approximately $1.79 billion. Management reported approximately $2.9 billion of consolidated liquidity after adjusting for the January 2011 note issuance and February repayment of $450 million of maturing notes.
- Current maturities of debt were $282.3 million, relating to Duncan Energy Partners’ term loan. Principal maturities included $1.65 billion in 2012 and $1.71 billion in 2013. The $1.75 billion EPO revolving credit facility matures in November 2012.
- Cash used in investing activities was $3.25 billion, including $2.04 billion of capital expenditures and $1.31 billion for business combinations. Financing activities provided $961.1 million. Operating cash flow was below total investing outlays.
- 2010 capital spending was $3.32 billion, including $1.77 billion for growth projects and $235.9 million for sustaining projects. Year-end capital expenditure commitments were $795.7 million.
- Management estimated 2011 capital spending of approximately $3.7 billion: $3.4 billion for growth projects and acquisitions and $260 million for sustaining expenditures. Management expected liquidity, operating cash flow and capital-market access to meet 2011 needs and expected to maintain investment-grade ratings and comply with covenants.
Material changes, outlook and unusual items
- Holdings merger: Completed November 22, 2010. Enterprise issued approximately 208.8 million common units for Holdings units and cancelled 21.6 million Enterprise units held by Holdings. The transaction cancelled the general partner’s 2% economic interest and incentive distribution rights. It was accounted for as an equity transaction; historical results before closing are presented as Holdings’ results for accounting purposes. Accordingly, year-to-year comparisons and unit-count comparisons require care.
- Growth investments: The May 2010 purchase of State Line and Fairplay gas gathering systems cost approximately $1.2 billion. Eagle Ford projects were estimated at $2.7 billion for 2010–2012; the Haynesville Extension budget was approximately $1.56 billion, with Duncan Energy Partners funding 66%. The Haynesville pipeline was expected to enter service in September 2011; Eagle Ford projects were expected to be completed around mid-2012.
- 2011 business outlook: Management expected strong NGL demand and shale-related production to support utilization and further investment. It forecast lower Gulf of Mexico volumes in 2011 following reduced drilling and regulatory uncertainty; Independence Hub and Trail volumes were estimated at 450–500 BBtu/day versus 576 BBtu/day in 2010. No consolidated earnings or distribution guidance was provided.
- Distribution: The partnership said it expected to continue comparable distributions, while stating payment was not guaranteed. The quarterly rate rose from $0.5675 in first-quarter 2010 to $0.5900 in fourth-quarter 2010. An affiliate’s distribution waiver applied to designated units under a declining schedule through 2015.
- Post-year-end Mont Belvieu fire: A February 8, 2011 fire at the West Storage facility caused one fatality. The partnership was reconfiguring storage to restore receipt and delivery capability. It could not estimate additional losses beyond the $5 million property-damage deductible; the cause remained under investigation.
- Other notable items: 2010 results included $56.6 million of net gains on disposition of certain offshore assets related to insurance proceeds; $8.4 million of non-cash asset impairments; and $24.5 million of Holdings-merger costs plus $20.2 million associated with Employee Partnership liquidations in G&A. 2009 included $135.3 million of TOPS-related charges and $28.7 million of river-terminal deficiency expenses. 2010 operating cash flow was affected by working-capital timing.
- Key risks and contingencies: Significant leverage and refinancing needs; variable interest rates; commodity-price, basis and counterparty exposure; dependence on volumes and customer demand; execution, cost and timing risks for major projects; Gulf hurricanes and offshore drilling restrictions after Deepwater Horizon; environmental, climate, hydraulic-fracturing and pipeline-safety regulation; and possible constraints on distributions under debt agreements. The filing reports no litigation management believed reasonably likely to have a significant adverse financial effect, but describes pending merger-related litigation and regulatory proceedings.
Most important facts for investors to verify
- Review the Holdings-merger accounting and confirm the effect of the pro forma historical presentation, unit issuance and distribution waiver on per-unit comparisons.
- Reconcile reported revenue growth with gross operating margin, marketing cost of sales, working-capital changes and operating cash flow.
- Check current debt balances, maturities, covenant headroom, variable-rate exposure and refinancing assumptions, including subsequent debt issuance and repayment.
- Track Eagle Ford and Haynesville budgets, committed producer volumes, project schedules and whether new assets generate expected cash flows.
- Assess the Mont Belvieu fire’s operational, safety, insurance and financial consequences as further information becomes available.
- Verify distribution coverage and the impact of capital spending, debt service, working capital and any future Duncan Energy Partners transaction.