Enterprise Products Partners L.P. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; compared with the three months ended March 31, 2014. Enterprise is a North American midstream energy partnership spanning natural gas, NGLs, crude oil, petrochemicals and refined products. It reports five operating segments and conducts substantially all business through EPO.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $7.47 billion | $12.91 billion; down about 42% |
| Operating income | $896.0 million | $1.03 billion |
| Net income | $650.6 million | $806.7 million |
| Net income attributable to limited partners | $636.1 million | $798.8 million |
| Basic / diluted earnings per unit | $0.33 / $0.32 | $0.44 / $0.43 |
| Segment gross operating margin (non-GAAP) | $1.334 billion | $1.330 billion |
| Operating cash flow | $954.0 million | $1.404 billion |
| Capital expenditures, net of construction contributions | $793.2 million | $695.4 million |
| Distributable cash flow (non-GAAP) | $1.030 billion | $1.087 billion |
| Distribution coverage ratio (non-GAAP) | 1.4x | 1.7x |
Management attributed the sharp revenue decline primarily to lower commodity sales prices, with related cost of sales also falling. Average WTI crude oil was $48.63/bbl versus $98.68; Henry Hub natural gas was $2.99/MMBtu versus $4.95; and the stated weighted-average NGL price was $0.54/gallon versus $1.13. Management reported that lower prices did not necessarily reduce gross operating margin or distributable cash flow because underlying commodity purchase costs also declined.
Segment gross operating margin was broadly steady: NGL Pipelines & Services $695.2 million (down from $780.0 million); Onshore Natural Gas $204.5 million (down from $220.4 million); Onshore Crude Oil $214.0 million (up from $159.7 million); Offshore $46.1 million (up from $39.3 million); and Petrochemical & Refined Products $174.6 million (up from $130.4 million). The filing presents gross operating margin as a non-GAAP measure.
Cash and cash equivalents were $81.1 million at quarter-end, with $28.2 million of restricted cash. Reported consolidated liquidity was $3.69 billion, including $3.61 billion of available revolving-credit capacity. Consolidated debt principal was $21.62 billion, versus $21.39 billion at year-end 2014; long-term debt carrying value was $20.19 billion. The partnership reported compliance with debt covenants.
The declared Q1 distribution was $0.375 per unit, up from $0.355 for Q1 2014. Cash distributions paid to limited partners during the quarter were $703.8 million. Common units outstanding rose to 1.989 billion at March 31, from 1.937 billion at December 31, partly reflecting the Oiltanking transaction and equity issuance.
Material changes and notable items
- Q1 2014 operating income included a $95.0 million insurance recovery gain related to the 2011 Mont Belvieu West Storage incident; there was no comparable recovery in Q1 2015.
- Q1 2015 included $33.3 million of noncash impairments, primarily from abandonment of Texas natural gas and crude oil pipeline segments, versus $8.8 million a year earlier.
- Enterprise completed the second step of its Oiltanking acquisition in February 2015, issuing 36.8 million common units to former public unitholders. Total consideration for Oiltanking was approximately $5.9 billion. The transaction also shifted about $1.4 billion from noncontrolling interests to partners’ equity.
- Operating cash flow declined $450.1 million year over year, which management attributed mainly to timing of operating cash receipts and payments and lower partnership income; higher distributions from unconsolidated affiliates partly offset the decline.
- Interest expense increased $18.2 million year over year, principally reflecting higher average debt balances. Equity income from unconsolidated affiliates increased $32.7 million.
Outlook, risks and contingencies
- No earnings guidance: The filing provides no specific earnings or revenue forecast and cautions that first-quarter results are not necessarily indicative of full-year results.
- Management expected approximately $2.5 billion of growth projects to enter service during the rest of 2015 and forecast approximately $3.3 billion of remaining-2015 capital spending, including $320 million of sustaining capital. It expected sufficient liquidity and access to capital markets, while noting that spending plans could change with market conditions, costs, weather or new opportunities.
- Projects cited include further Houston Ship Channel LPG export-terminal expansion, expected by year-end 2015; the Rancho II crude oil pipeline, expected in July 2015; and an ethane export facility and propane dehydrogenation facility, each expected to begin operations in 2016. A newly announced Midland-to-Houston pipeline was expected to start in Q2 2017, subject to its development plans.
- On May 7, 2015, after quarter-end, EPO issued $2.5 billion of senior notes. Proceeds were intended to repay commercial paper and the $400 million notes due June 2015, and for general purposes.
- Commodity prices, customer demand, competition, interest rates, project execution and access to capital are key risks. The partnership uses commodity derivatives to manage exposures; it reported no interest-rate hedging derivatives outstanding at March 31.
- Enterprise appealed a $535.8 million judgment in the ETP matter and had not accrued a provision because management considered payment not probable. The judgment also accrues post-judgment interest at 5% annually, compounded annually.
- The FTC and Texas Attorney General requested information regarding the Oiltanking acquisition and Enterprise’s operations. Enterprise said it was cooperating and could not predict the outcome.
- Management reported effective disclosure controls. Oiltanking’s internal-control integration evaluation was ongoing and expected to be completed in Q4 2015.
Investor verification priorities
- Review the drivers and sustainability of distributable cash flow and the reduction in coverage to 1.4x; reconcile this non-GAAP measure with GAAP operating cash flow.
- Check debt refinancing, post-quarter note proceeds, commercial-paper balances and the ability to fund planned capital spending while maintaining liquidity and distributions.
- Assess commodity-price sensitivity, hedge positions and whether resilient segment margins persist despite lower prices and changing volumes.
- Monitor Oiltanking-related regulatory inquiries, acquisition integration and related-party governance; EPCO affiliates held approximately 34.6% of limited partner interests at quarter-end.
- Follow the ETP appeal and assess potential exposure, including accrued interest, as the case proceeds.
- Confirm delivery, costs and expected returns for major growth projects, and track unit issuance and dilution from the acquisition and equity programs.