Enterprise Products Partners L.P. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited results are compared with 2010. The filing was signed August 9, 2011.
Business context
Enterprise is a North American midstream energy partnership operating pipelines, storage, processing and terminal assets serving natural gas, NGL, crude oil, refined products and petrochemical markets. It reported six segments. The partnership had approximately 50,200 miles of pipelines, 190 million barrels of liquids storage capacity and 27 Bcf of natural gas storage capacity.
Key financial results
Amounts are in millions of dollars except per-unit data and where otherwise stated.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $11,216.5 | $7,543.4 | $21,400.2 | $16,087.9 |
| Operating income | $643.9 | $539.7 | $1,268.8 | $1,098.6 |
| Net income | $448.5 | $354.4 | $883.0 | $746.8 |
| Net income attributable to partners | $433.7 | $54.1 | $854.4 | $124.0 |
| Diluted earnings per unit | $0.51 | $0.26 | $1.00 | $0.59 |
| Segment gross operating margin (non-GAAP) | $922.5 | $809.0 | $1,797.9 | $1,615.0 |
Q2 revenue rose 49% and operating income 19% year over year; first-half revenue rose 33% and operating income 15%. Revenue growth substantially reflected higher commodity prices and sales volumes, with associated costs also increasing. Q2 operating margin was approximately 5.7% of revenue, versus 7.2% a year earlier; revenue includes substantial pass-through commodity sales and related costs. Segment gross operating margin is management’s non-GAAP performance measure, not a substitute for GAAP operating income.
Partner-attributable income and per-unit comparisons require caution: the 2010 periods reflect the pre-November 2010 Holdings structure, including substantial income attributed to Enterprise unitholders as noncontrolling interests. The Holdings merger changed presentation and ownership attribution; the filing retroactively adjusted historical unit counts for its exchange ratio.
Cash flow, debt and liquidity
- First-half operating cash flow was $1,754.5, up from $920.4 in 2010. Investing used $1,492.2; financing used $218.7. Cash and cash equivalents ended June at $109.1.
- Property and equipment capital expenditures were $1,716.2 in the first half; reported capital spending, net of construction contributions and including other categories, was $1,725.2. Operating cash flow only modestly exceeded property and equipment capex.
- At June 30, total debt principal was $14.29 billion, versus $13.53 billion at year-end 2010. Current maturities were $782.3; long-term debt carrying value was $13,544.7. EPO had no borrowings under its $1.75 billion revolving facility.
- Management reported $2.24 billion of liquidity, defined as unrestricted cash plus available borrowing capacity, including $382.5 million available under Duncan Energy Partners’ revolver. Restricted cash of $116.2 million is held in connection with commodity derivative activity.
- In January, EPO issued $1.5 billion of senior notes: $750 million at 3.20% due 2016 and $750 million at 5.95% due 2041. Proceeds partly repaid $450 million of notes that matured in February.
- Quarterly distributions declared were $0.5975 per common unit for Q1 and $0.6050 for Q2. The Q2 distribution was scheduled for payment August 10, 2011.
Material changes and management commentary
- Q2 segment gross operating margin increased to $922.5 from $809.0. Growth in NGL, onshore natural gas and onshore crude oil businesses was partly offset by lower offshore and petrochemical/refined-products margins.
- Crude oil, NGL and petrochemical/refined-product prices were materially higher year over year, supporting reported sales growth but also increasing purchase and processing costs. Management cited improved marketing margins and higher volumes in several onshore businesses.
- Offshore margin declined amid lower throughput, production declines at existing wells and the effects of the 2010 drilling moratorium and continued permitting constraints. Petrochemical/refined-products margin also declined, including weaker propylene activity and lower refined-products pipeline volumes.
- First-half capital spending was directed principally to Eagle Ford and Haynesville expansion projects. Management estimated approximately $2.23 billion of consolidated capital spending for the remainder of 2011, including $2.1 billion for growth and $130 million for sustaining capital; estimates may change with project, market and funding conditions.
- Announced projects included a sixth Mont Belvieu NGL fractionator, an Eagle Ford crude-oil pipeline extension and a Houston Ship Channel export-terminal expansion. A proposed Cushing-to-Houston crude-oil pipeline with ETP remained contingent on satisfactory shipper commitments.
Outlook, risks and contingencies
- Duncan Energy Partners: A proposed merger would exchange each DEP common unit for 1.01 Enterprise common units, subject to approvals and other conditions. A special unitholder meeting was scheduled for September 7, 2011. DEP’s leverage ratio was 5.04x against a 5.00x covenant limit; lenders waived the covenant for the June and September quarters. DEP expected the ratio to remain above the limit in September and fall below it by year-end after the Haynesville Extension entered commercial service, then expected in Q4.
- Mont Belvieu incident: A February NGL release and fire left West Storage and associated wells partially inoperative. Repairs were expected in stages through early 2012. Estimated total incident cost was approximately $150 million; the $5 million deductible was expensed in Q1. Estimated property-damage insurance claims outstanding were $44.8 million at June 30, including $37.3 million related to the fire.
- Other exposures: Management highlighted commodity-price and interest-rate exposure, derivative mark-to-market earnings volatility, operating and pipeline-integrity risks, offshore production/permitting uncertainty, and possible regulatory costs from greenhouse-gas requirements. It cautioned that insurance may not cover all losses or reimburse them promptly.
- Legal and contingent matters: Management said it did not expect pending litigation to have a material financial-statement impact; litigation accruals were $8.5 million. Claims against the partnership were approximately $100.9 million and claims by it approximately $109.2 million; outcomes were not reasonably estimable, and management considered a material impact remote. Two pipeline-release matters were under discussion with the DOJ; the company did not expect material impact. Centennial guarantees included an estimated $53.2 million payment exposure upon debt default and a cash-call commitment of up to $50 million for a catastrophic event.
Management stated that it believed liquidity and capital resources were adequate for expected recurring operating and investing activities. EPO’s senior debt ratings were investment grade; Moody’s and Fitch had revised their outlooks to positive. A downgrade could trigger collateral requirements.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects durable throughput, fees and margins versus commodity prices, marketing activity and changes in consolidated ownership presentation.
- Actual capital spending, project timing and financing needs compared with the $2.23 billion remainder-of-2011 estimate; also the cash-flow impact of distributions and working-capital movements.
- Progress on West Storage repairs, total incident costs and insurance recoveries, including whether any uncovered costs or operating restrictions increase.
- DEP’s covenant position and the proposed merger’s approval, completion conditions, exchange dilution and expected debt refinancing.
- Offshore volumes and permitting, pipeline integrity costs and the status or potential financial effects of litigation, environmental matters and guarantees.