Enterprise Products Partners L.P. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; filing dated March 1, 2010. The filing includes fourth-quarter results and compares 2009 with 2008. Amounts below are in U.S. dollars; financial statements are in millions unless stated otherwise.
Business context
Enterprise Products Partners is a North American midstream energy partnership operating natural gas, NGL, crude oil, refined-products and petrochemical pipelines, processing, storage and marine transportation assets. It reports five segments: NGL Pipelines & Services; Onshore Natural Gas Pipelines & Services; Onshore Crude Oil Pipelines & Services; Offshore Pipelines & Services; and Petrochemical & Refined Products Services.
The TEPPCO merger closed October 26, 2009. Because the entities were under common control, the merger was accounted for at historical cost and prior periods were retrospectively recast. The transaction materially expanded the business and changed unit counts; reported comparisons should be read in that context.
Key financial results
| Metric | FY 2009 | FY 2008 | Change |
|---|---|---|---|
| Revenue | $25,510.9 | $35,469.6 | Down $9,958.7 (28.1%) |
| Operating income | $1,824.0 | $1,748.4 | Up $75.6 (4.3%) |
| Net income | $1,155.1 | $1,188.9 | Down $33.8 (2.8%) |
| Net income attributable to EPD | $1,030.9 | $954.0 | Up $76.9 (8.1%) |
| Basic and diluted earnings per unit | $1.73 | $1.84 | Down $0.11 |
| Segment gross operating margin | $2,839.8 | $2,609.0 | Up $230.8 (8.8%) |
| Operating cash flow | $2,377.2 | $1,567.1 | Up $810.1 (51.7%) |
| Cash used in investing | $1,546.9 | $3,246.9 | Down $1,700.0 |
| Cash from (used in) financing | $(837.1) | $1,690.7 | Down $2,527.8 |
| Distributions per common unit | $2.1950 | $2.0750 | Up 5.8% |
Revenue fell mainly because lower commodity prices reduced reported sales in marketing activities; 2009 average NGL, natural gas and crude oil prices were down 39%, 56% and 38%, respectively. Operating income nevertheless increased. Operating margin was approximately 7.2% of revenue, versus 4.9% in 2008; this ratio is affected by the large volume of pass-through commodity sales. Net income attributable to EPD rose partly because less income was allocated to noncontrolling interests after the TEPPCO merger.
Segment gross operating margin increased in NGL Pipelines & Services ($1,628.7, up $303.7) and Onshore Crude Oil Pipelines & Services ($164.4, up $32.2). It declined in Onshore Natural Gas Pipelines & Services ($501.5, down $88.4), Offshore Pipelines & Services ($180.5, down $6.5) and Petrochemical & Refined Products Services ($364.7, down $10.2).
Fourth quarter: Revenue was $8,400.3, operating income $611.6, net income $439.3, net income attributable to EPD $406.1 and earnings per unit $0.60. In Q4 2008, the corresponding figures were $5,925.5, $423.1, $274.8, $228.0 and $0.43. The declared Q4 2009 distribution was $0.56 per common unit, paid February 4, 2010.
Debt, liquidity and capital
At December 31, 2009, consolidated debt principal was approximately $11.30 billion: $9.76 billion senior debt and $1.53 billion junior subordinated notes. About $1.34 billion, or 11.8% of consolidated debt, was variable-rate or fixed-rate debt converted to variable rates through swaps. Reported long-term debt was $11.35 billion including non-principal accounting amounts.
Cash and cash equivalents were $54.7 million, restricted cash $63.6 million and available credit under revolving facilities approximately $1.66 billion, for reported consolidated liquidity of about $1.72 billion. Current assets of $4.25 billion were below current liabilities of $4.54 billion; working capital was approximately negative $289 million. Management said it expected sufficient liquidity and capital-market access to meet 2010 needs and believed investment-grade ratings and covenant compliance would be maintained.
Operating cash flow exceeded 2009 net capital spending, but cash flow benefited from timing of working-capital accounts and weather-related insurance proceeds. Capital spending was $1.69 billion, including $1.37 billion for growth projects and $192.6 million for sustaining projects. Management estimated 2010 capital expenditures of approximately $1.75 billion ($1.5 billion growth and $250 million sustaining). Debt principal of $554 million was due in 2010; approximately $3.2 billion of senior notes were scheduled to mature from 2010 through 2013.
Material changes, outlook and risks
- TEPPCO merger: EPD issued 126.9 million common units and 4.52 million Class B units. The Class B units receive no regular distributions for the first 16 post-merger quarters, then convert into common units. The merger’s retrospective accounting and increased unit count affect comparisons and per-unit analysis.
- Unusual expenses: The exit from the Texas Offshore Port System (TOPS) and related settlement generated $135.3 million of 2009 charges: $68.4 million noncash and $66.9 million cash settlement expense. The company also recorded $33.5 million of noncash impairment charges and accrued $28.7 million for expected pipeline deficiency fees.
- Other unusual items: 2009 included $87.6 million of weather-related property-damage and business-interruption insurance proceeds. The filing reports $37.6 million of estimated storm-related property-damage claims outstanding that management expected to collect in 2010.
- Growth plans: Management expected 2010 natural gas transportation volumes on the Texas Intrastate System to increase up to 10%, while volumes on the Jonah, Piceance and San Juan systems could range from 5% growth to 5% decline. It expected no significant improvement in refined-products demand in its Midwest service region. The Haynesville Extension, with planned capacity up to 2.1 Bcf/d, was expected in service in Q3 2011; the Mont Belvieu fractionator expansion was expected in Q1 2011.
- Risks: Results and cash flows remain exposed to commodity-price and volume changes, customer and hedge-counterparty credit risk, competition, debt maturities and refinancing costs, project execution and construction-cost risk, and weather disruptions—particularly Gulf Coast hurricanes. Environmental and pipeline-safety regulation, potential greenhouse-gas requirements, FERC rate proceedings and marine spill/Jones Act exposure are also identified risks.
- Distributions and governance: Management expected comparable future distributions but stated they were not guaranteed. The partnership depends on EPCO for employees and services, has significant related-party dealings, and has limited unitholder voting rights. The filing says no pending or threatened litigation was believed reasonably likely to have a significant adverse financial effect; this is not a guarantee of outcomes.
Most important facts for investors to verify
- Reconcile the TEPPCO merger’s retrospective presentation, noncontrolling-interest allocations and unit dilution when assessing trends and per-unit performance.
- Review the composition and sustainability of 2009 operating cash flow, including working-capital swings, insurance proceeds and the year-end buildup in inventory and accrued product payables.
- Confirm refinancing of 2010 maturities and progress against the 2010 capital-spending plan, liquidity expectations and debt covenants.
- Track actual returns from growth projects and whether forecast producer volumes, utilization and customer commitments materialize.
- Assess the remaining effects of TOPS, pipeline deficiency fees, storm claims, impairments, rate cases and environmental or other contingencies.
- Evaluate distribution coverage and the impact of additional equity issuance, Class B conversion and partnership incentive distributions.