Enterprise Products Partners L.P. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 10, 2012. Enterprise is a North American midstream energy partnership operating pipelines, storage, processing, fractionation and related assets. Its six segments include NGL, natural gas, crude oil, offshore, petrochemical/refined products and other investments.
Financial performance and position
Unless noted otherwise, dollar amounts are in millions. Comparisons are with Q1 2011.
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Revenue | $11,252.5 | $10,183.7 | Up 10.5%; higher crude oil sales were the main driver. |
| Operating income | $748.9 | $624.9 | Up 19.8%. |
| Segment gross operating margin (non-GAAP) | $1,052.7 | $875.4 | Up 20.3%; strongest increases were in NGL and onshore natural gas services. |
| Net income | $655.5 | $434.5 | Up 50.9%; includes significant asset-sale gains and an income-tax benefit. |
| Net income attributable to limited partners | $651.3 | $420.7 | Basic earnings per unit: $0.76 vs. $0.52; diluted: $0.73 vs. $0.49. |
| Operating cash flow | $604.9 | $802.7 | Down $197.8, primarily from timing of receipts and payments, partly offset by higher earnings. |
| Capital expenditures | $973.1 | $713.5 | Operating cash flow was below reported capital expenditures. |
| Interest expense | $186.5 | $183.8 | Up $2.7; average debt balances increased. |
Operating income was about 6.7% of revenue, compared with 6.1% in Q1 2011. This simple ratio is not the partnership’s non-GAAP segment-margin measure.
Balance sheet at March 31, 2012: Total assets were $33.9 billion; cash and cash equivalents were $88.3 million, plus $81.8 million of restricted cash. Total current liabilities were $7.7 billion against current assets of $6.1 billion. Debt principal was approximately $14.58 billion; balance-sheet debt included $1.05 billion of current maturities and $13.57 billion of long-term debt. Partners’ equity was $12.28 billion.
Management reported consolidated liquidity of $3.59 billion, defined as unrestricted cash plus available borrowing capacity under EPO’s $3.5 billion revolving credit facility. The partnership was in compliance with debt covenants. EPO’s senior unsecured debt ratings were BBB (S&P), Baa2 (Moody’s) and BBB (Fitch), as of May 1, 2012.
Material changes versus the prior comparable period
- Crude oil sales revenue increased about $1.10 billion, primarily from higher sales volumes and prices; more than 80% of the increase was attributed to higher volumes. Crude oil prices averaged $102.93 per barrel versus $94.10; natural gas averaged $2.72 per MMBtu versus $4.11.
- NGL Pipelines & Services gross operating margin rose $150.5 million to $654.9 million, and Onshore Natural Gas Pipelines & Services rose $47.0 million to $206.2 million. Offshore margin fell $9.2 million and Petrochemical & Refined Products Services fell $14.6 million.
- Operating cash flow declined despite improved earnings. Capital spending for property, plant and equipment, net of construction contributions, rose to $968.1 million from $710.3 million.
- Net income benefited from $53.3 million in gains on Energy Transfer Equity unit sales and a $34.4 million income-tax benefit. The tax benefit primarily reflected a $46.5 million benefit from converting certain subsidiaries to limited liability companies.
- The partnership sold most of its Energy Transfer Equity units in Q1, recognized the investment as available-for-sale after its ownership fell below 3%, and sold its remaining units in April. Proceeds from Q1 sales were approximately $975.9 million.
Outlook, management commentary, risks and unusual items
- Management estimated 2012 consolidated capital spending at approximately $4.0 billion: $3.7 billion for growth projects and $0.3 billion for sustaining capital. It cited operating cash flow, debt and equity issuance, and potential divestitures as possible funding sources. No specific full-year revenue or earnings guidance is provided in the filing.
- Q1 growth spending was $910 million, including approximately $449 million for Eagle Ford Shale projects. At March 31, purchase commitments for capital projects were approximately $958.2 million.
- Planned and developing projects include the Front Range NGL pipeline, Seaway crude oil pipeline reversal and expansion, two additional Mont Belvieu fractionators, the ATEX Express ethane pipeline, and the SEKCO crude oil pipeline. Their timing, capacity and economics depend on construction, shipper commitments and other factors described in the filing.
- Pipeline integrity costs were $31.9 million in Q1 ($19.0 million expensed and $12.9 million capitalized); the partnership expected a further $85.0 million for the remainder of 2012.
- In February, EPO issued $750 million of 4.85% senior notes due 2042, partly to refinance notes maturing that month. Scheduled principal maturities include $500 million for the remainder of 2012 and $1.2 billion in 2013. Management expected to refinance current maturities before due dates.
- Interest-rate and commodity prices expose results to market risk. Derivatives are used principally for hedging, but mark-to-market earnings on instruments not designated as hedges can be volatile and their impact may be material. The filing also identifies counterparty risk, outages, demand changes and competition as risks.
- Q1 included $5.4 million of non-cash asset impairment charges. Litigation accruals were $16.3 million; management did not expect pending lawsuits to have a material financial impact. Other disputed claims were not accrued, with management assessing a material impact as remote. The filing reports no material off-balance-sheet arrangements.
Important facts for investors to verify
- How much of the increase in earnings and per-unit results is attributable to recurring operations versus the $53.3 million asset-sale gain and $34.4 million tax benefit.
- Whether operating cash flow, financing capacity and capital-market access can support the approximately $4.0 billion 2012 capital program and planned distributions.
- Progress, committed shipper capacity, costs and expected in-service dates for major pipeline and fractionation projects.
- Near-term refinancing needs, revolving-credit availability, debt covenants and the effect of interest rates and hedging settlements.
- Whether lower offshore throughput, expiring demand fees, facility maintenance and pipeline-integrity spending affect future segment margins.
- The filing states that quarterly results are not necessarily indicative of full-year 2012 results; review the 2011 Form 10-K risk factors and subsequent filings for developments.