Enterprise Products Partners L.P. — 2013 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Dollar amounts are in millions unless otherwise noted. Enterprise is a North American midstream energy partnership with five reporting segments: NGL, onshore natural gas, onshore crude oil, offshore, and petrochemical and refined products services.
Financial performance
- Third quarter: Revenue was $12,093.3, up 15.5% from $10,468.7 a year earlier. Operating income rose to $819.9 from $788.5; net income was $592.8 versus $587.9, and net income attributable to limited partners was $592.0 versus $586.8. Basic earnings per unit fell to $0.66 from $0.68; diluted earnings per unit fell to $0.64 from $0.66.
- Nine months: Revenue was $34,625.7, up 9.9%; operating income was $2,551.8 versus $2,286.5; net income was $1,901.4 versus $1,810.6; and limited-partner income was $1,898.0 versus $1,804.4. Basic earnings per unit increased to $2.13 from $2.10; diluted earnings per unit increased to $2.07 from $2.03.
- Operating margin measure: Management’s non-GAAP gross operating margin was $1,154.0 in Q3, up from $1,139.6, and $3,527.3 for nine months, up from $3,225.3. It is not a substitute for GAAP operating income.
- Cash flow, nine months: Operating cash flow was $2,366.2, compared with $1,615.8. Investing used $2,937.5, including $2,413.2 of capital expenditures and $768.4 of investments in unconsolidated affiliates. Financing provided $564.8. Cash and cash equivalents ended at $9.6.
- Balance sheet and liquidity: At September 30, total assets were $40,125.0 and total equity was $14,682.2. Principal debt outstanding was $17,532.7, up from $16,179.3 at December 31, 2012; current maturities were $1,049.9. Management reported $3.86 billion of consolidated liquidity, including $9.6 of unrestricted cash, and stated it expected to refinance current maturities. The partnership was in compliance with debt financial covenants.
- Distributions and equity: Quarterly distributions per common unit rose from $0.67 for Q1 to $0.68 for Q2 and $0.69 for Q3. The unit count increased during the period, including through public and at-the-market offerings, DRIP/EUPP issuances, and conversion of Class B units.
Changes versus comparable periods
- Q3 revenue growth primarily reflected higher NGL and crude oil marketing volumes; higher product sales also drove higher cost of sales. Midstream asset-service revenue benefited from recently placed-in-service assets.
- For the nine-month period, crude oil pipeline and joint-venture results improved materially. Onshore crude oil segment gross operating margin rose to $579.6 from $252.7, while NGL segment margin declined to $1,777.0 from $1,836.5, principally due to weaker natural gas processing margins.
- Equity income from unconsolidated affiliates increased to $126.1 from $42.2 for nine months, mainly on improved crude oil pipeline joint-venture earnings. Interest expense rose to $604.4 from $572.8 as average debt balances increased.
- 2012 nine-month results included a $68.8 gain on the sale of Energy Transfer Equity units and a $46.5 tax benefit associated with subsidiary conversions. In 2013, the partnership recorded a $52.5 gain from a pipeline-segment sale and $8.8 of insurance-recovery gains. These items affect period comparisons.
Outlook, risks, and unusual items
- Capital program: Management estimated 2013 consolidated capital spending of approximately $4.5 billion, including $4.2 billion for growth projects and $300–$325 for sustaining capital. The forecast depends on operating cash flow and access to debt and equity markets and could change.
- Projects and operations: Texas Express Pipeline and related gathering systems began commercial operations November 1, 2013. The eighth Mont Belvieu fractionator was expected in service in Q4 2013. Announced projects include LPG export capacity, crude oil pipeline and storage expansions, refined-products exports, and the Aegis ethane pipeline.
- Commodity and market risks: Management described ethane oversupply and potential producer ethane rejection as risks to NGL production value and pipeline/fractionation volumes. Commodity prices, spreads, supply and demand, and non-hedge-accounted derivative mark-to-market changes can affect results; the filing says such earnings variability cannot be predicted.
- Insurance and contingencies: The partnership elected not to purchase windstorm coverage for its Gulf of Mexico offshore assets for the 2013 hurricane season, citing cost; certain producers provide coverage for two key platforms. It was negotiating for an estimated $91.9 of remaining West Storage insurance claims. Litigation accruals were $5.7; management did not expect pending litigation to have a material effect, while acknowledging outcomes are uncertain.
- Other developments: A November 8, 2013 public offering generated $553.4 of net proceeds. Texas Margin Tax legislative changes contributed $19.6 of 2013 nine-month tax expense. The filing provided no earnings or per-unit guidance. Management said liquidity and capital-market access were expected to support capital spending and working-capital needs.
Important facts for investors to verify
- Whether new projects reach service on schedule and deliver expected utilization, fees, and returns, and whether the $4.5 billion 2013 capital-spending estimate is achieved.
- Debt refinancing needs, liquidity availability, and the effect of continued debt and unit issuance on leverage and per-unit results.
- How much of operating-cash-flow growth reflects durable earnings versus working-capital timing; working-capital changes reduced nine-month operating cash flow by $513.9.
- Progress and recoverability of the remaining West Storage insurance claims, and the exposure created by self-insuring offshore assets against windstorm damage.
- Commodity-market developments, including ethane supply-demand conditions, and the performance and accounting volatility of commodity and interest-rate hedges.