Enterprise Products Partners L.P. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; fourth-quarter data are unaudited. The partnership provides diversified midstream services across natural gas, NGLs, crude oil, petrochemicals and refined products.
Financial performance and position
- Revenue: $47.95 billion, up 0.5% from $47.73 billion in 2013. Sales of commodities make revenue sensitive to market prices and can move substantially without a comparable change in operating profit.
- Profit: Operating income was $3.78 billion, up 8.9%; net income was $2.83 billion, up 8.7%; net income attributable to limited partners was $2.79 billion, up 7.3%. Basic and diluted earnings were $1.51 and $1.47 per unit, respectively, compared with $1.45 and $1.41.
- Margins: Operating income was about 7.9% of revenue and net income about 5.9%. Management’s non-GAAP gross operating margin rose 9.7% to $5.29 billion. It includes certain deferred shipper make-up-right revenue; $84.6 million was included in 2014 segment gross operating margin but excluded from GAAP operating income.
- Cash flow: Operating cash flow was $4.16 billion, up 7.7%. Investing used $5.80 billion, including $2.42 billion of net cash for the first step of the Oiltanking acquisition. Financing provided $1.65 billion. Distributable cash flow, a non-GAAP measure, was $4.08 billion; distributions paid with respect to the period were $2.71 billion, for 1.51x coverage.
- Debt and liquidity: Debt principal totaled $21.39 billion, including $18.95 billion of senior notes, $1.53 billion of junior subordinated notes and $906.5 million of commercial paper. Cash was $74.4 million; management reported $4.17 billion of liquidity, including $4.09 billion of available revolver capacity. The filing identifies $2.21 billion of debt maturities in 2015, including commercial paper, and expects to refinance current maturities.
- Distributions: Quarterly distributions increased from $0.355 per unit in Q1 to $0.370 in Q4; distributions for the year were $1.45 per unit, up from $1.37 in 2013.
Material changes versus 2013
- Oiltanking was consolidated beginning October 1, 2014 after Enterprise acquired control. Step 1 consideration was approximately $4.4 billion, including cash and Enterprise units; reported total acquisition cost was approximately $5.9 billion after the February 2015 merger. The acquisition added Houston Ship Channel and Beaumont terminals and approximately 26 million barrels of storage capacity. The February merger issued 36.8 million additional Enterprise units and made Oiltanking wholly owned.
- Gross operating margin increased in all five reported segments. The largest increase was NGL Pipelines & Services, up $363 million to $2.88 billion, supported by new pipeline capacity and higher fractionation volumes. Onshore crude oil margin rose $20 million to $763 million, while crude oil marketing margins were pressured by narrowing regional price spreads.
- Operating cash flow increased $297 million. Debt principal rose from $17.36 billion to $21.39 billion, while total assets increased from $40.14 billion to $47.10 billion, reflecting growth spending and the acquisition.
- Fourth-quarter revenue declined to $10.19 billion from $13.10 billion in Q4 2013; Q4 operating income was $921 million versus $916 million. Q4 2014 included Oiltanking, consolidated for the quarter.
Outlook, risks and unusual items
- Outlook and spending: Management expected 2015 capital spending of approximately $3.9 billion, including $380 million of sustaining capital, and expected about $2.6 billion of growth projects to enter service during 2015. It cited long-term fee-based and volume commitments on many projects, while cautioning that lower oil and NGL prices could slow drilling, reduce future volumes and pressure margins. These are expectations, not guaranteed results.
- Market exposure: WTI fell sharply in Q4 2014; management noted uncertainty over how sustained lower prices would affect producers, throughput, commodity-linked processing contracts and marketing spreads. Ethane oversupply and ethane rejection could also constrain NGL volumes.
- Legal and regulatory matters: A Texas court entered a $535.8 million judgment for ETP in July 2014, including damages, disgorgement and prejudgment interest. Enterprise disputed the judgment and intended to appeal; it recorded no provision because management considered payment not probable. In February 2015, the FTC requested information about the Oiltanking acquisition; the outcome was not predictable.
- Insurance and operations: Enterprise self-insured offshore Gulf of Mexico assets against windstorm damage for the June 2014–June 2015 policy period, while affiliated producers provided some coverage for two key platforms. The filing also cites environmental, pipeline integrity, hurricane, counterparty, interest-rate and refinancing risks.
- Other items: 2014 operating income included $95 million of insurance recovery gains related to the 2011 Mont Belvieu storage fire. Pipeline integrity costs were $99 million in 2014; management expected approximately $128 million in 2015. Oiltanking represented 13% of year-end assets but less than 1% of 2014 revenue. Management’s control assessment excluded Oiltanking while integration of its controls was underway; management and the auditor reported effective controls for the assessed scope.
Important facts for investors to verify
- Follow the ETP judgment and appeal, including any change to the estimated exposure or accrual.
- Track Oiltanking integration, FTC review, acquisition-related liabilities and the effect of issued units on per-unit cash generation.
- Compare 2015 project spending and commissioning with the $3.9 billion spending outlook and assess whether committed volumes and fees support expected returns.
- Monitor debt refinancing, commercial paper dependence, liquidity and distribution coverage as capital needs and lower commodity prices evolve.
- Reconcile distributable cash flow and segment gross operating margin to GAAP cash flow and operating income, including deferred shipper make-up-right revenue and insurance gains.