Enterprise Products Partners L.P. — 2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013; fourth-quarter figures are also provided. Enterprise is a publicly traded midstream energy partnership operating through EPO across five segments: NGL, onshore natural gas, onshore crude oil, offshore, and petrochemical and refined products. Its network includes approximately 51,000 miles of pipelines. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $47,727.0 | $42,583.1 | +12.1% |
| Operating income | $3,467.3 | $3,109.2 | +11.5% |
| Net income | $2,607.1 | $2,428.0 | +7.4% |
| Net income attributable to limited partners | $2,596.9 | $2,419.9 | +7.3% |
| Basic / diluted earnings per unit | $2.90 / $2.82 | $2.81 / $2.71 | — |
| Operating cash flow | $3,865.5 | $2,890.9 | +$974.6 |
| Cash used in investing activities | $4,257.5 | $3,018.8 | +$1,238.7 used |
| Capital spending | $4,477.3 | $4,251.1 | +5.3% |
| Cash distributions paid to limited partners | $2,400.3 | $2,178.6 | +10.2% |
Revenue growth largely reflected higher crude oil and NGL marketing volumes and increased midstream service revenue; commodity sales and related cost of sales can move together, so revenue growth alone does not indicate equivalent growth in profitability. Segment gross operating margin, a non-GAAP measure, increased to $4,818.1 million from $4,387.0 million. Operating income was approximately 7.3% of revenue in both years.
Fourth quarter: Revenue was $13,101.3 million, operating income $915.5 million, net income $705.7 million, and net income attributable to limited partners $698.9 million. Basic and diluted earnings per unit were $0.77 and $0.75, respectively. In Q4 2012, the corresponding values were $11,072.1 million, $822.7 million, $617.4 million, $615.5 million, $0.70 and $0.68.
Liquidity and debt: Year-end consolidated liquidity was approximately $4.1 billion, defined as unrestricted cash plus available borrowing capacity under $4.5 billion of bank facilities; unrestricted cash was $56.9 million. Principal debt outstanding was approximately $17.36 billion, including $15.35 billion of senior debt, $1.53 billion of junior subordinated debt and $475 million of commercial paper. Total liabilities were $24.70 billion. The partnership reported compliance with debt covenants. Approximately $150 million, or 1%, of consolidated long-term debt was variable-rate or converted to variable-rate at year-end.
Distributions: The quarterly distribution rose from $0.67 per unit for Q1 2013 to $0.70 for Q4 2013. The partnership said it expected distributions to be funded primarily from operating cash flow, but cautioned that payment is not guaranteed.
Material changes and operating developments
- Onshore crude oil segment gross operating margin rose to $742.7 million from $387.7 million, supported by higher pipeline throughput and crude oil marketing results. Net crude oil pipeline throughput increased to 1,175 MBPD from 828 MBPD.
- NGL segment gross operating margin increased to $2,514.4 million from $2,468.5 million. Higher pipeline and fractionation volumes helped, while natural gas processing and related NGL marketing margin fell to $1,165.4 million from $1,443.0 million amid lower NGL prices, higher natural gas prices and ethane rejection.
- Onshore natural gas segment gross operating margin was $789.0 million versus $775.5 million; throughput declined to 12,936 BBtus per day from 13,634 BBtus per day, with growth in the Texas Intrastate System offset by declines in several dry-gas basins.
- Offshore segment gross operating margin fell to $146.1 million from $173.0 million, reflecting lower natural gas volumes and expiration of Independence Hub demand fees. Offshore natural gas pipeline utilization was 17.7%, down from 21.7%.
- Petrochemical and refined products segment gross operating margin increased to $625.9 million from $579.9 million. Stronger octane enhancement and refined products pipeline results offset lower propylene fractionation and marine transportation results.
- Major projects entering service included the seventh and eighth Mont Belvieu NGL fractionators and the Texas Express Pipeline and related gathering systems in 2013. ATEX Express and the Rocky Mountain expansion began operations in January 2014; Front Range began operations in February 2014.
Outlook, risks and unusual items
- 2014 outlook: Management expected continued support for NGL pipelines, storage and fractionation from NGL-rich shale production, and growth in LPG and refined product exports. It forecast $3.9–$4.4 billion of 2014 capital spending, including $350 million of sustaining capital, and cited approximately $5.5 billion of major organic growth projects under construction. Management believed liquidity and capital-market access would be sufficient for planned spending and working capital needs.
- Commodity and volume exposure: Ethane oversupply, price volatility and producer ethane rejection could reduce equity NGL values and pipeline and fractionation volumes. Management also expected possible declines in dry-gas basin and offshore natural gas volumes, while anticipating growth in crude oil and NGL-related activity.
- Debt, financing and dilution: Growth requires substantial capital, and the partnership expects to issue additional debt and equity. It issued 31.2 million common units in 2013 for net proceeds of $1.79 billion. Debt service, capital spending, refinancing needs and future unit issuance may affect financial flexibility and distributions.
- Regulatory and contingency exposure: Seaway’s uncommitted shipper rates remained subject to a FERC proceeding; the FERC’s February 2014 order upheld committed rates, while the outcome for uncommitted rates remained uncertain. The filing reported no material pending legal proceedings other than routine matters, but disclosed environmental compliance matters, including a $1.2 million Texas fine paid in January 2014.
- Insurance and weather: Enterprise elected to self-insure offshore Gulf of Mexico assets against windstorm damage for the June 2013–June 2014 policy period because coverage was considered uneconomic. A 2011 Mont Belvieu storage incident generated $15 million of 2013 insurance proceeds; approximately $95 million of additional claims were expected in Q1 2014.
- Unusual items: 2013 results included a $52.5 million gain on the sale of a Seminole Pipeline segment and $15 million of West Storage insurance gains. Operating impairment charges were $92.6 million, principally for abandoned or impaired assets; a further $4.8 million impairment was recorded against the Neptune equity investment. By comparison, 2012 included $68.8 million of gains from liquidation of the Energy Transfer Equity investment and a $45.3 million federal tax benefit; 2013 included $57.5 million of income tax expense, including $19.6 million related to Texas Margin Tax changes.
Important facts for investors to verify
- Confirm the reported cash flow and capital spending figures against the audited statements, including the distinction between $3.408 billion of consolidated capital expenditures and $4.477 billion of total capital spending, which includes affiliate investments.
- Review debt maturities, refinancing and the effect of the February 2014 note issuance; the filing reported $2.7 billion of senior notes maturing from October 2014 through December 2016.
- Track execution, cost and committed shipper volumes for major projects, including Aegis, Seaway, ECHO and LPG export terminal expansions; assess make-up rights and revenue deferrals on new pipelines.
- Assess sensitivity to ethane rejection, commodity spreads, declining offshore and dry-gas throughput, and the durability of fee-based earnings.
- Verify the collection and accounting treatment of remaining West Storage insurance claims, as well as the impact of self-insuring offshore windstorm risk.
- Consider partnership-specific governance, related-party arrangements and potential dilution: EPCO affiliates owned approximately 36.4% of limited partner interests, and the partnership has broad authority to issue additional securities.