Enterprise Products Partners L.P. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011; filed November 9, 2011. Enterprise is a North American midstream energy partnership providing pipeline, processing, storage, fractionation and terminal services. Its network included approximately 50,000 miles of pipelines.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $11.33 billion | $8.07 billion | $32.73 billion | $24.16 billion |
| Operating income | $681.1 million | $543.2 million | $1.95 billion | $1.64 billion |
| Net income | $479.5 million | $347.6 million | $1.36 billion | $1.09 billion |
| Net income attributable to partners | $471.4 million | $37.0 million | $1.33 billion | $161.0 million |
| Basic / diluted earnings per unit | $0.57 / $0.55 | $0.18 / $0.18 | $1.62 / $1.55 | $0.77 / $0.77 |
| Segment gross operating margin (non-GAAP) | $972.8 million | $808.9 million | $2.77 billion | $2.42 billion |
- Revenue and margin drivers: Revenue growth reflected higher commodity prices and sales volumes, especially for crude oil and NGLs, as well as new assets and stronger Eagle Ford-related activity. Higher commodity prices also increased marketing and processing costs. Gross operating margin rose, led by NGL and onshore crude oil businesses; offshore and petrochemical/refined-products margins declined.
- Cash flow: Nine-month operating cash flow was $2.23 billion, up from $1.44 billion. Investing used $2.34 billion, including $2.79 billion of capital expenditures before construction contributions; financing provided $74 million. Cash and equivalents were $29.1 million at quarter-end.
- Capital spending: Nine-month property, plant and equipment spending, net of construction contributions, was $2.78 billion. Management estimated approximately $1.2 billion of additional 2011 capital spending, including $1.1 billion for growth and $60 million for sustaining projects.
- Debt and liquidity: Principal debt was approximately $15.05 billion at September 30, including $1.0 billion of scheduled 2012 maturities. Long-term debt on the balance sheet was $14.11 billion, in addition to $1.0 billion current maturities. Reported liquidity was $2.81 billion, including unrestricted cash and available capacity under the new $3.5 billion revolving facility maturing in 2016. The partnership reported compliance with debt covenants.
- Distributions: Declared per-unit distributions rose from $0.5975 for Q1 to $0.6050 for Q2 and $0.6125 for Q3 2011. Nine-month cash distributions to partners were $1.46 billion.
Material changes versus the prior comparable period
- Q3 revenue increased approximately 40% year over year, while operating income increased about 25%. Nine-month revenue increased approximately 35% and operating income about 19%.
- Comparisons of partner-attributable income are significantly affected by the November 2010 Holdings Merger and the resulting change in presentation of noncontrolling interests. The sharp rise in partner-attributable income is therefore not directly comparable to 2010; the filing also presents adjusted earnings per unit and explains the accounting change.
- The September 2011 Duncan Energy Partners merger made that partnership a wholly owned subsidiary; Enterprise issued 24.3 million common units as consideration.
- Debt rose from $13.53 billion of principal at year-end 2010 to $15.05 billion at September 30, 2011. Enterprise issued $2.75 billion of senior notes during 2011 and replaced its $1.75 billion revolver with a $3.5 billion facility.
- Capital investment accelerated, particularly for the Haynesville Extension and Eagle Ford projects. The Haynesville Extension began full commercial operations on November 1, 2011, after the reporting date.
Outlook, commentary, risks and unusual items
- Management said it expected adequate liquidity and capital resources for recurring operating and investing needs and expected to fund distributions primarily with operating cash flow. No specific earnings or distribution guidance was provided.
- After quarter-end, Enterprise agreed to sell its Mississippi Crystal gas-storage interests for $550 million cash, subject to regulatory approvals and expected to close in Q4 2011. It also announced or advanced major growth projects, including Eagle Ford infrastructure, the Texas Express NGL pipeline, a proposed Cushing-to-Gulf Coast crude pipeline, and an Appalachian-to-Gulf Coast ethane pipeline.
- The February 2011 Mont Belvieu West Storage release and fire left storage wells partly inoperative. Repairs were expected in stages through early 2012; estimated total capital cost was approximately $200 million, with $52.1 million of property-damage insurance claims outstanding at September 30.
- Commodity and interest-rate derivatives introduce valuation and earnings volatility. A sharp decline in forward LIBOR drove the fair value of forward-starting interest-rate swaps to a $263.7 million liability at quarter-end; management noted that settlement gains or losses would be amortized over the hedged debt period. Management cautioned that unhedged mark-to-market volatility could materially affect earnings.
- Other risks include offshore throughput weakness following the drilling moratorium and continuing permit constraints; reduced refined-products pipeline demand and higher maintenance/integrity costs; potential climate-related regulation and compliance costs that the partnership could not estimate; and insurance limits, litigation and environmental matters. Recorded litigation accruals were $12.9 million.
- Natural gas purchase commitments tied to the Haynesville Extension were estimated at $3.42 billion using September 30 prices; actual payments may vary with future prices. The partnership also disclosed contingent Centennial guarantees, including a potential $52.1 million debt-guarantee payment upon default.
Important facts for investors to verify
- Whether the Crystal sale closed on schedule, the realized proceeds, and the use of those proceeds.
- Whether growth projects meet expected schedules and budgets, and how their financing affects debt, liquidity and future distributions.
- Cash generation after capital spending and distributions, including the effect of working-capital changes and commodity-price-driven marketing revenues and costs.
- The comparability of 2010 and 2011 partner earnings after the Holdings Merger, Duncan merger and related noncontrolling-interest presentation changes.
- Recovery and repair progress for the West Storage incident, including insurance collections and any remaining operational or financial effects.
- Exposure to debt maturities, variable rates, derivative collateral requirements, environmental regulation, and outstanding litigation or guarantees.