Enterprise Products Partners L.P. — 2009 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009. Unaudited results are compared with the corresponding 2008 periods. The partnership operates midstream energy infrastructure through EPO across NGL, onshore natural gas, offshore and petrochemical businesses. The TEPPCO merger closed after quarter-end, on October 26, 2009, and was not included in reported September results.
Financial performance and position
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $4,596.1 million | $6,297.9 million | $11,527.1 million | $18,322.1 million |
| Operating income | $364.5 million | $319.1 million | $1,065.0 million | $1,060.1 million |
| Net income | $229.9 million | $211.0 million | $667.3 million | $755.3 million |
| Net income attributable to EPD | $212.9 million | $203.1 million | $624.8 million | $726.0 million |
| Basic and diluted earnings per unit | $0.36 | $0.38 | $1.09 | $1.41 |
| Segment gross operating margin | $560.9 million | $478.9 million | $1,618.8 million | $1,535.5 million |
- Cash flow: Nine-month operating cash flow was $615.4 million, down from $973.0 million. Investing used $771.4 million, including $851.1 million of capital expenditures before construction contributions and other investing inflows; financing provided $194.8 million. Cash and cash equivalents were $73.8 million at September 30, versus $35.4 million at year-end 2008.
- Liquidity and debt: September 30 unrestricted cash was $73.8 million; restricted cash was another $102.8 million. Management reported approximately $1.09 billion of available borrowing capacity under EPO’s revolving facility and consolidated liquidity of about $1.31 billion. Consolidated debt principal was $9.145 billion (long-term debt carrying value $9.198 billion). The partnership reported compliance with debt covenants.
- Balance sheet: Total assets were $19.36 billion and total equity $7.30 billion at September 30, 2009. Inventories rose to $1.15 billion from $362.8 million at year-end, reflecting increased physical purchases and forward-sale commitments.
- Distributions: A quarterly cash distribution of $0.5525 per unit for Q3 was paid November 5, 2009.
Changes and drivers versus prior periods
- Q3 revenue fell 27% year over year, and nine-month revenue fell 37%, primarily because lower commodity prices reduced marketing sales values. Management noted that lower prices also reduced associated cost of sales, limiting the impact on operating income. Q3 average Henry Hub natural gas price was $3.39/MMBtu versus $10.25; the NGL indicative price averaged $0.88/gallon versus $1.68.
- Q3 operating income increased $45.4 million, while net income attributable to EPD increased $9.8 million. Higher segment gross operating margin and affiliate earnings helped, but increased interest expense partly offset the improvement. Nine-month net income attributable to EPD declined $101.2 million; interest expense rose $84.2 million and affiliate income was lower.
- Q3 segment gross operating margin increased in NGL Pipelines & Services ($392.0 million versus $336.1 million), Offshore Pipelines & Services ($56.3 million versus $17.5 million) and Petrochemical Services ($50.3 million versus $37.2 million); Onshore Natural Gas Pipelines & Services declined ($62.3 million versus $88.1 million). The offshore comparison was affected by prior-year hurricane repair costs and current-year TOPS settlement expense.
- Operating cash flow was pressured by working capital: increased inventory and trade receivables contributed to a $590.0 million cash outflow from changes in operating accounts, partly offset by higher accrued product payables.
Outlook, material events and risks
- Capital spending: After giving effect to the TEPPCO merger, management estimated Q4 2009 capital spending of approximately $700 million: $630 million for growth projects and acquisitions and $70 million for sustaining expenditures. Forecasts may change with financing availability, market conditions, weather, supplier costs and management decisions.
- Growth plans: Announced projects included a 75 MBPD Mont Belvieu fractionator expected to enter service in Q1 2011, and a proposed Haynesville Extension with initial capacity of 1.4 Bcf/d, targeted for service in September 2011 subject to long-term commitments and project funding. The filing did not provide quantified earnings guidance.
- TEPPCO merger: The October 26 transaction issued 126.9 million common units and 4.52 million Class B units. Class B units do not receive regular quarterly distributions for the first 16 quarters after closing, then convert into common units. Pro forma nine-month 2009 basic EPU was $0.88 versus reported $1.09; the merger’s pro forma information is illustrative, not a forecast.
- Unusual charges: Q3 included $33.5 million of expense for the TOPS litigation settlement. Nine-month affiliate earnings included a $34.2 million noncash loss from forfeiting the TOPS investment; together, TOPS-related charges were reported as $67.7 million for the first nine months. Q3 also included $19.2 million of Hurricane Ike business-interruption proceeds.
- Contingencies and risks: Merger-related TEPPCO litigation settlement remained subject to Delaware Court approval. The company reported no litigation it believed likely to have a significant adverse financial effect. Risks discussed include commodity and interest-rate exposure, hurricane damage, increased windstorm deductibles and reduced offshore business-interruption coverage, potential greenhouse-gas regulation costs, and customer credit exposure. LyondellBasell’s bankruptcy-related claims were settled in October 2009 with no gain or loss recorded.
- Funding and dilution: EPD issued 35.7 million common units during the first nine months, raising $877.7 million in net proceeds, and issued $500 million of Senior Notes P. In October, EPO issued $1.1 billion of notes, used in part to refinance $500 million of notes that matured that month. Additional equity issuance and borrowing are among the stated funding sources for growth plans.
Important facts for investors to verify
- Review post-merger debt, unit count, distribution obligations and the effect of the merger on per-unit results; distinguish reported Q3 figures from pro forma and subsequent-event information.
- Assess whether operating cash flow can support distributions, debt service and the announced capital program, particularly given the working-capital buildup and remaining capital commitments.
- Track segment gross operating margin and volumes, including the durability of growth in NGL and offshore activity and the weaker onshore segment.
- Check the final court outcome for the TEPPCO litigation settlement and the financial consequences, if any, of remaining TOPS-related matters.
- Evaluate exposure to commodity-price movements, insurance deductibles and coverage changes, and the company’s ability to refinance and fund projects while maintaining investment-grade credit ratings.