Enterprise Products Partners L.P. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015; filed November 6, 2015. Dollar amounts are in U.S. dollars. Enterprise is a North American midstream energy partnership operating pipelines, storage, processing and terminals across natural gas, NGLs, crude oil, petrochemicals and refined products.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $6.31 billion | $12.33 billion | $20.87 billion | $37.76 billion |
| Operating income | $909 million | $938 million | $2.61 billion | $2.85 billion |
| Net income attributable to limited partners | $649 million | $691 million | $1.84 billion | $2.13 billion |
| Basic earnings per unit | $0.33 | $0.38 | $0.94 | $1.16 |
| Segment gross operating margin (non-GAAP) | $1.34 billion | $1.34 billion | $3.98 billion | $3.93 billion |
Revenue fell sharply primarily because lower commodity prices reduced reported product sales and associated cost of sales. Management said the weighted-average indicative NGL price was $0.45 per gallon in Q3 2015 versus $0.99 a year earlier. Midstream service revenue increased, while aggregate segment gross operating margin was broadly stable in Q3 and modestly higher year to date.
- Cash flow: Nine-month operating cash flow was $2.59 billion, down from $2.70 billion. Investing activities used $2.31 billion; financing activities used $277 million. Capital expenditures were $2.63 billion.
- Distribution: The Q3 declared distribution was $0.385 per unit, up from $0.365 a year earlier. Nine-month distributions paid to limited partners were $2.19 billion. Reported nine-month distributable cash flow was $4.52 billion and coverage was 2.0x; both figures include $1.54 billion of asset-sale and insurance proceeds, mainly the Offshore Business sale.
- Debt and liquidity: Debt principal totaled $22.50 billion at September 30, versus $21.39 billion at year-end 2014. Cash was $80.5 million, with $4.63 billion of available revolving capacity; reported consolidated liquidity was $4.71 billion. The partnership reported compliance with debt covenants and said it expects to refinance current maturities.
- Balance sheet: Total assets were $48.53 billion, compared with $47.20 billion at December 31, 2014. Property, plant and equipment was $31.21 billion; goodwill was $5.75 billion.
Material changes versus the prior comparable period
- Nine-month revenue declined $16.89 billion, largely from lower commodity sales prices and lower crude oil and natural gas sales volumes. Lower purchase prices also reduced cost of sales, so the revenue decline should not be read as an equivalent decline in operating margin.
- Crude Oil Pipelines & Services gross operating margin rose to $255 million for Q3 from $191 million, supported by EFS Midstream, Oiltanking terminal operations and Seaway Pipeline contributions. NGL Pipelines & Services margin eased to $696 million from $712 million, principally due to weaker processing margins.
- Interest expense increased to $244 million for Q3 from $230 million and to $723 million for nine months from $680 million, reflecting higher average debt balances, partly offset by lower interest rates.
- Common units outstanding increased to approximately 2.006 billion from 1.937 billion at year-end, including issuance through the ATM program, DRIP, employee plan and Oiltanking merger consideration.
Outlook, management commentary, risks and unusual items
- Management forecast approximately $1.25 billion of capital spending for the remainder of 2015, including $95 million of sustaining capital, subject to market conditions, financing availability and project changes. It expected approximately $1.8 billion of major projects to enter service during the remainder of 2015.
- Growth projects included LPG export-terminal expansion, the Aegis ethane pipeline, crude oil pipeline and storage expansions, and a propane dehydrogenation facility. Management said it expected sufficient liquidity and capital-market access for foreseeable needs, but anticipated further debt and equity issuance to fund requirements.
- In July, Enterprise acquired EFS Midstream for approximately $2.1 billion, including a deferred $1.0 billion payment due no later than the first anniversary of closing. The business has long-term, fee-based agreements with Pioneer and Reliance; Enterprise also may be required to invest up to $270 million in specified assets if requested.
- Enterprise sold its Offshore Business in July for approximately $1.53 billion cash, recorded a $54.8 million impairment before closing and a $12.6 million sale loss. Management described the business as non-strategic and said proceeds would support redeployment of capital and reduce funding needs.
- Nine-month non-cash impairment charges were $139 million, versus $18 million a year earlier; they included the Offshore sale and asset abandonment or held-for-sale decisions. The prior-year comparison included a $95 million insurance recovery gain.
- An ETP lawsuit judgment of $535.8 million, plus post-judgment interest, was under appeal. Management had not accrued the judgment because it did not consider payment probable. The FTC and Texas Attorney General were also investigating matters related to the Oiltanking acquisition; Enterprise said the outcome could not be predicted.
- The Liquidity Option Agreement liability was $235.5 million at quarter-end, and its fair-value change contributed $15.8 million of expense for the nine-month period. Enterprise revised the agreement’s fair-value estimate during 2015, increasing the prior-year-end estimate by $100.3 million with a corresponding goodwill adjustment.
- Commodity prices, demand for midstream services, execution of major projects, refinancing and access to capital markets are key risks. The filing also highlights potential changes in tax rules for publicly traded partnerships that could affect partnership tax treatment and distributions.
Most important facts for investors to verify
- Whether underlying cash generation and distribution coverage remain strong after excluding the nonrecurring Offshore sale proceeds from reported distributable cash flow.
- Progress on completing and placing growth projects into service, and whether forecast capital spending and returns remain achievable.
- Funding and payment of the deferred EFS Midstream purchase price, and the acquired business’s contribution under its long-term contracts.
- Debt maturities, refinancing plans, borrowing costs and the extent of future equity issuance and unit dilution.
- Developments in the ETP appeal and FTC/Texas investigations, as well as any changes to the Liquidity Option Agreement valuation or partnership tax rules.