Enterprise Products Partners L.P. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial statement amounts are unaudited and, unless noted, in millions of dollars. Enterprise is a North American midstream energy partnership operating pipelines, storage, processing, fractionation and related services across five active reportable segments.
Financial performance and condition
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $9,789.8 | $11,216.5 | $21,042.3 | $21,400.2 |
| Operating income | $749.1 | $643.9 | $1,498.0 | $1,268.8 |
| Net income attributable to limited partners | $566.3 | $433.7 | $1,217.6 | $854.4 |
| Diluted earnings per unit | $0.64 | $0.51 | $1.37 | $1.00 |
| Segment gross operating margin (non-GAAP) | $1,033.0 | $922.5 | $2,085.7 | $1,797.9 |
| Operating cash flow | Not separately presented for the quarter | $1,338.3 | $1,754.5 |
Segment gross operating margin, a management-defined non-GAAP measure, was approximately 10.6% of revenue in Q2 2012 versus 8.2% a year earlier; for the first six months, approximately 9.9% versus 8.4%. GAAP operating margin was approximately 7.7% in Q2 versus 5.7%.
- Cash and liquidity: Cash and cash equivalents were $14.5 at June 30, down from $19.8 at year-end 2011. Management reported consolidated liquidity of $3.09 billion, including available revolving-credit capacity.
- Debt: Principal debt outstanding was approximately $15.01 billion; balance-sheet current maturities were $1.70 billion and long-term debt was $13.35 billion. Total liabilities were $21.19 billion. The partnership reported compliance with debt covenants.
- Capital spending: Cash capital expenditures were $1,813.1 in the first half. The partnership estimated 2012 capital spending of approximately $4.1 billion, including $3.8 billion of growth projects and $330 of sustaining expenditures.
- Distributions: The declared quarterly common-unit distribution rose from $0.6275 for Q1 to $0.6350 for Q2; the Q2 distribution was payable August 8, 2012.
Changes versus the prior comparable period
- Q2 revenue fell 12.7%, primarily because lower commodity prices reduced marketing sales and related cost of sales. First-half revenue declined 1.7%; lower NGL, natural gas and petrochemical marketing revenue was partly offset by higher crude-oil sales volumes.
- Despite lower revenue, Q2 operating income rose 16.3%, limited-partner net income rose 30.6%, and diluted earnings per unit rose from $0.51 to $0.64. First-half limited-partner net income increased 42.5%.
- First-half gross operating margin increased $287.8, led by NGL, onshore natural gas and onshore crude-oil operations. Offshore margin declined $24.3 year over year, chiefly as Independence Hub demand-fee revenue expired and throughput weakened.
- Operating cash flow decreased $416.2 year over year, mainly due to the timing of receipts and payments, despite higher earnings. Investing cash use declined largely because of proceeds from the sale of Energy Transfer Equity units; financing cash use increased.
Outlook, commentary, risks and unusual items
- Management cited lower 2012 commodity prices and weaker natural-gas processing margins, but noted ethane prices had strengthened after petrochemical plant turnarounds ended. The partnership said it expected some processing-margin improvement; no full-year earnings or distribution guidance was provided.
- Growth projects included Eagle Ford crude-oil and gas infrastructure, the ATEX ethane pipeline, additional Mont Belvieu fractionators, Front Range NGL pipeline and a planned propane dehydrogenation facility. Stated expected in-service dates ranged from 2012 to 2015 and are subject to project execution and market conditions.
- In August 2012, EPO agreed to issue $650 million of 1.25% notes due 2015 and $1.1 billion of 4.45% notes due 2043, and established a $2.0 billion commercial-paper program backed by its revolving facility. As of the filing, no commercial paper had been issued. These are subsequent events, not June 30 balances.
- Unusual items affecting results included $68.8 of gains from the 2012 liquidation of the Energy Transfer Equity investment, a $46.5 tax benefit from subsidiary conversions (contributing to a $25.9 first-half net tax benefit), $27.7 of insurance-recovery gain, and $14.5 of noncash asset impairments.
- Risk exposures include commodity-price and interest-rate movements, execution and funding of substantial capital projects, working-capital variability, litigation and operating disruptions. The partnership elected to self-insure Gulf of Mexico offshore assets against windstorm damage for the current policy period; certain producers provide stated windstorm coverage of about $350 per key Independence Hub and Marco Polo asset.
- Litigation accruals were $16.2. Management said it did not believe pending litigation would materially affect the financial statements; other claims against the partnership totaled about $42.1, with management considering material loss remote. Related-party arrangements may be less favorable than arm’s-length terms.
Important facts for investors to verify
- Whether cash generation, working-capital needs and refinancing support the planned $4.1 billion 2012 capital program and distributions.
- Progress, committed volumes, costs and start-up schedules for major growth projects, and whether projected fee-based returns are achieved.
- How much reported earnings growth reflects recurring operations versus the ETE sale gains, tax benefit and insurance recovery.
- Commodity-price, ethane-recovery and operating-volume trends, plus the effect of expiring offshore demand fees and windstorm self-insurance.
- Debt maturities, revolver availability, subsequent note issuance and commercial-paper usage; confirm that post-quarter events are distinguished from June 30 reported balances.