Enterprise Products Partners L.P. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Amounts are in U.S. dollars; financial statement amounts are in millions except per-unit data. Enterprise is a North American midstream energy partnership operating pipelines, storage and processing assets across five segments. The 2009 comparative figures were recast for the October 2009 TEPPCO merger.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $7,543.4 | $5,434.3 | $16,087.9 | $10,321.2 |
| Operating income | $548.0 | $373.3 | $1,099.0 | $856.1 |
| Net income | $373.3 | $212.5 | $767.1 | $528.0 |
| Net income attributable to EPD | $357.2 | $186.6 | $735.0 | $411.9 |
| Basic earnings per unit | $0.46 | $0.32 | $0.97 | $0.73 |
| Segment gross operating margin (non-GAAP) | $814.7 | $622.1 | $1,610.1 | $1,336.2 |
| Interest expense | $168.6 | $158.5 | $317.2 | $311.0 |
Quarterly revenue rose 38.8% and income attributable to the partnership rose 91.4%; first-half revenue rose 55.9% and attributable income rose 78.4%. Management attributed most revenue growth to higher commodity prices and marketing volumes; associated cost of sales also increased substantially. Derived operating margin was approximately 7.3% in Q2 2010 versus 6.9% in Q2 2009, while attributable net margin was approximately 4.7% versus 3.4%.
Q2 segment gross operating margin increased in NGL Pipelines & Services ($441.0 million versus $363.8 million), Offshore Pipelines & Services ($82.8 million versus a loss of $1.1 million) and Petrochemical & Refined Products Services ($158.1 million versus $96.1 million). It declined in Onshore Natural Gas Pipelines & Services ($106.9 million versus $121.2 million) and Onshore Crude Oil Pipelines & Services ($25.9 million versus $42.1 million). Offshore comparison includes the prior-year $68.4 million TOPS forfeiture charge; 2010 results include insurance-related gains.
Cash flow, balance sheet and capital
- Cash flow, six months: Operating cash flow was $900.3 million, compared with $635.0 million a year earlier. Investing used $1,891.8 million, including $1,220.2 million for acquisitions; financing provided $1,431.2 million. Capital expenditures were $746.8 million, partly offset by $8.7 million in construction contributions.
- Liquidity at June 30: Cash and cash equivalents were $494.5 million; available revolving-credit capacity was approximately $1.83 billion; reported consolidated liquidity was approximately $2.32 billion. Current assets were $4,905.6 million and current liabilities $4,667.4 million.
- Debt: Consolidated debt principal was $12,627.5 million, up from $11,297.0 million at year-end 2009. The filing reports $12,416.5 million long-term debt plus $255.0 million current maturities on the balance sheet. EPO issued $2.0 billion of senior notes in May and used proceeds partly to refinance maturing notes and reduce revolver borrowings. The partnership reported compliance with debt covenants.
- Equity and distributions: Two underwritten offerings and other unit issuances generated $990.1 million net proceeds and 29.6 million common units during the first half. Quarterly distribution per common unit increased to $0.575 for Q2 2010 from $0.5675 for Q1. Cash distributions paid to partners in the first half were $830.9 million.
- Growth spending: First-half total capital spending was $1,968.5 million, including acquisitions. Management estimated approximately $1.1 billion of capital spending for the remainder of 2010, including $1.0 billion for growth projects and acquisitions and $130 million for sustaining capital.
Material changes, outlook and risks
- Acquisition: In May, the partnership acquired the State Line and Fairplay natural gas gathering systems for approximately $1.2 billion. The systems contributed $26.2 million in revenue and $2.5 million in net income during the two months owned. Funding included equity proceeds and revolver borrowings.
- Expansion plans: The partnership announced Eagle Ford-related pipeline, processing and fractionation projects expected to be completed in early 2012; a crude oil pipeline expansion was expected in Q4 2011. The Port Arthur refined-products storage facility began commercial operations in June.
- Near-term unusual items: Management expected an approximately $70 million gain in Q3 2010 from offshore insurance recoveries. The filing also expected approximately $24 million of Q3 expense from liquidation of employee partnerships, about $18 million of it non-cash.
- Operating pressures: Natural gas marketing results were affected by lower basis differentials, mark-to-market losses and costs from construction delays on the Trinity River Lateral; the line began operations in July. Crude oil marketing margins weakened amid competition and higher transportation costs. Offshore production declines and uncertainty around the deepwater drilling moratorium affected volumes.
- Key risks: The Gulf of Mexico drilling suspension and potential additional regulation could reduce or delay producer activity and supply volumes. Proposed hydraulic-fracturing regulation and greenhouse-gas requirements could raise costs. New derivatives rules could require collateral and increase working-capital needs. Windstorm exposure remains material; offshore windstorm business-interruption coverage was not in place.
- Contingencies and governance: The filing disclosed environmental and other legal matters, but management did not expect a significant adverse effect from the described proceedings. Centennial-related guarantees included a possible $57.7 million debt-guarantee payment and up to $50 million under a catastrophic-event cash-call arrangement. Dan L. Duncan died in March 2010; voting control transferred to trustees, and the filing identified uncertainty about the effect of his loss.
- Outlook caveat: Management said results for the first half are not necessarily indicative of full-year results. Its capital-spending estimate depends on operating cash flow, access to debt and equity markets, project timing and other factors.
Investor verification priorities
- Assess how much reported revenue and earnings growth reflects commodity prices, marketing volumes, acquired assets and the nonrecurring 2009 TOPS charge.
- Verify acquisition performance and the expected contribution and funding needs of State Line and Fairplay, alongside the announced Eagle Ford projects and remaining 2010 capital plan.
- Track debt maturities, refinancing capacity, credit ratings and the effect of additional borrowing and equity issuance on leverage and per-unit results.
- Confirm realization and timing of the expected Q3 insurance gain and employee-partnership liquidation expense.
- Monitor offshore drilling restrictions, producer volumes, insurance coverage and potential collateral requirements under derivatives regulation.