Enterprise Products Partners L.P. — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. Unaudited results; amounts in U.S. dollars. Enterprise is a North American midstream energy partnership with NGL, onshore natural gas, offshore pipeline and petrochemical segments.
Key financial results
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Revenue | $3,507.9 million | $6,339.7 million | $6,931.0 million | $12,024.2 million |
| Operating income | $328.3 million | $374.3 million | $700.5 million | $741.0 million |
| Net income | $200.1 million | $272.3 million | $437.4 million | $544.3 million |
| Net income attributable to Enterprise | $186.6 million | $263.3 million | $411.9 million | $522.9 million |
| Basic and diluted earnings per unit | $0.32 | $0.52 | $0.73 | $1.03 |
| Segment gross operating margin | $509.2 million | $534.4 million | $1,057.9 million | $1,056.6 million |
| Operating cash flow | Not separately stated | Not separately stated | $437.7 million | $696.7 million |
Revenue and operating costs both dropped sharply as energy commodity prices fell; management said this largely reflected lower sales and purchase prices rather than a comparable change in underlying activity. Q2 indicative NGL prices fell 55% year over year and Henry Hub gas prices fell 68%. First-half segment gross operating margin was essentially flat, while Q2 margin declined about 5%.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $65.0 million, with an additional $184.4 million in restricted cash. Current assets were $2.87 billion and current liabilities $2.81 billion.
- Total debt obligations were $9.41 billion principal and $9.22 billion reported as long-term debt; $181.4 million was classified as current maturities. Debt principal increased from $9.05 billion at year-end 2008.
- Available borrowing capacity under EPO’s multi-year revolving facility was approximately $872.6 million; total consolidated liquidity was approximately $1.08 billion. The partnership reported compliance with debt covenants.
- June issuance of $500 million of 4.60% senior notes due August 2012 funded repayment of an April term loan, temporarily reduced revolving borrowings and supported general partnership purposes. Senior notes were investment grade: Moody’s Baa3, S&P BBB-, and Fitch BBB-.
- First-half capital expenditures were $640.0 million gross, with $10.3 million of construction contributions; cash used in investing activities was $642.2 million. Partners received $566.4 million in distributions during the first half. A $0.545 per-unit Q2 distribution was scheduled for payment August 7, 2009.
Material changes and operating performance
- Q2 revenue fell $2.83 billion year over year and first-half revenue fell $5.09 billion, primarily reflecting lower commodity prices. Operating income declined $46.0 million in Q2 and $40.5 million in the first half.
- Enterprise-attributable net income declined $76.7 million in Q2 and $111.0 million in the first half. Higher interest expense—up $30.4 million in Q2 and $58.9 million in the first half—was attributed to higher average debt and lower capitalized interest.
- NGL Pipelines & Services gross operating margin increased to $354.0 million in Q2 and $696.8 million in the first half. Onshore Natural Gas margin fell to $74.3 million and $190.3 million, respectively; Petrochemical Services margin fell to $47.8 million and $76.4 million.
- Offshore Pipelines & Services margin was $33.1 million in Q2 and $94.4 million in the first half. Results included a $34.2 million non-cash loss after Enterprise exited the Texas Offshore Port System (TOPS) partnership. The company said the exit reduced estimated capital expenditure commitments by $68 million.
- First-half operating cash flow decreased $259.0 million year over year, with working-capital movements and increased inventory investment important factors. Inventory rose to $965.8 million from $362.8 million at year-end, including $527.0 million dedicated to forward sales; management expected the NGL inventory cash investment to be recovered within 12 months.
- Common units outstanding increased to 457.3 million at June 30 from 439.4 million at year-end, following public, distribution-reinvestment and employee-plan issuances. The January underwritten offering generated $230.2 million net proceeds including the general partner contribution.
Outlook, developments and risks
- Management estimated approximately $475 million of capital spending for the second half of 2009: $365 million for growth projects and acquisitions and $110 million for sustaining capital. It also forecast approximately $64.4 million of pipeline integrity costs for the remainder of 2009.
- The Sherman Extension added 1.1 Bcf/d of capacity but had operated at limited service because of integrity issues on the connecting Gulf Crossing pipeline. After that pipeline began ramping up August 1, the extension was billing demand charges at 95% of contracted volume (about $5 million monthly) and flowing approximately 650 MMcf/d.
- A merger agreement with TEPPCO was announced June 28. The proposed exchange was 1.24 Enterprise common units per TEPPCO unit, subject to unitholder and regulatory approvals; completion was expected in Q4 2009. On August 5, the parties entered a litigation settlement agreement, subject to Delaware Court approval. A related unsecured revolving loan commitment to TEPPCO was capped at $100 million.
- The TOPS exit is contested by Oiltanking, which alleges wrongful dissociation and potential continuing funding obligations. Enterprise said it would defend the claims and had recorded no reserve; substantial payments could adversely affect results and liquidity.
- Hurricanes Gustav and Ike were estimated to have reduced gross operating margin by $12 million in Q2 and $33 million in the first half. Weather insurance terms tightened: offshore windstorm deductibles increased to $75 million per storm, offshore business-interruption coverage was eliminated, and overall offshore named-windstorm coverage fell to $100 million aggregate from $175 million. Management expected an initial $25 million of business-interruption proceeds in Q3, not yet recognized as income.
- Additional matters include possible federal civil penalties of up to $17.4 million in aggregate relating to historical ammonia releases (Magellan agreed to indemnify EPO), environmental and other litigation, and potential costs from greenhouse-gas regulation. The partnership disclosed no litigation it believed reasonably likely to have a significant adverse effect, apart from identified uncertainties such as TOPS.
- Management reported that the August 4 scheduled Independence Hub maintenance and a fire at a High Island Offshore System platform were not expected, based on information then available, to materially affect consolidated results; damage from the fire was still being assessed.
Important facts for investors to verify
- Whether the TEPPCO merger received required unitholder, regulatory and court approvals, and the eventual financing and ownership effects.
- Outcome and potential financial exposure of the TOPS litigation, including whether any reserve or further capital obligation is recorded.
- Conversion of the elevated forward-sales inventory balance into cash and the resulting working-capital and operating-cash-flow trend.
- Actual Sherman Extension throughput and demand-charge collections, and the effect of offshore maintenance, hurricane recovery and the High Island platform fire.
- Debt refinancing needs, distribution coverage and the effect of higher insurance costs, reduced coverage and other contingencies.