Business context and reporting period
Enterprise Products Partners L.P. (NYSE: EPD) filed this unaudited Form 10-Q for the quarter ended March 31, 2010. The partnership operates North American midstream energy assets across natural gas, NGLs, crude oil, refined products and petrochemicals, through five reportable segments.
Comparisons with Q1 2009 require care: following the October 2009 TEPPCO merger, prior-period results were recast to include TEPPCO and related businesses on a common-control basis. Segment structure also changed.
Financial performance and position
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenue | $8,544.5 million | $4,886.9 million |
| Operating income | $551.0 million | $482.8 million |
| Net income | $393.8 million | $315.5 million |
| Net income attributable to EPD | $377.8 million | $225.3 million |
| Diluted earnings per unit | $0.50 | $0.41 |
| Operating cash flow | $686.9 million | $372.0 million |
| Capital expenditures | $347.8 million gross; $344.2 million net of construction contributions | $513.9 million gross |
Reported revenue rose 75%, primarily from higher commodity prices and marketing volumes; operating costs rose by a similar amount. Operating income increased 14%. Net income attributable to EPD increased 68%, but the comparison also reflects the absence of the $78.3 million attributable to former TEPPCO owners in Q1 2009. Diluted earnings per unit rose 22%. Operating margin, calculated as operating income divided by revenue, was approximately 6.4% versus 9.9%.
Total segment gross operating margin, a non-GAAP measure, was $795.4 million, up from $714.1 million. It increased in NGL Pipelines & Services ($437.3 million versus $350.9 million), Offshore Pipelines & Services ($81.1 million versus $61.3 million) and Petrochemical & Refined Products Services ($120.0 million versus $89.5 million). It declined in Onshore Natural Gas Pipelines & Services ($130.3 million versus $161.9 million) and Onshore Crude Oil Pipelines & Services ($26.7 million versus $50.5 million).
Operating cash flow increased $314.9 million year over year, reflecting improved profitability and timing of working-capital receipts and payments. Investing used $370.5 million; financing used $236.6 million, including $595.0 million of debt repayments and $407.3 million of partner distributions, partly offset by unit issuance proceeds. Cash and cash equivalents were $134.9 million at quarter-end, with another $101.7 million restricted.
At March 31, consolidated debt principal was approximately $11.05 billion, down from $11.30 billion at year-end 2009. Consolidated liquidity was approximately $1.99 billion, including about $1.86 billion of available revolving credit. The partnership reported compliance with financial covenants. Current maturities include a $175 million Duncan Energy Partners facility; scheduled debt maturities also include $500 million in the remainder of 2010 and $907.3 million in 2011. EPD and EPO do not guarantee Duncan Energy Partners’ borrowings.
The declared Q1 2010 distribution was $0.5675 per common unit, payable May 6, 2010. The partnership issued 10.925 million common units in January for net proceeds of $343.3 million.
Material changes, outlook and risks
- Drivers and operating trends: Average crude oil prices rose 82% year over year and indicative NGL prices rose 86%; higher prices and marketing volumes drove much of the revenue increase. NGL transportation and fractionation volumes increased. Onshore natural gas marketing margins weakened, while onshore crude oil marketing margins and volumes declined. Offshore crude oil volumes improved, partly reflecting recovery from prior hurricane-related disruptions and new Shenzi service.
- Investment plans: Management estimated approximately $2.66 billion of consolidated capital spending for the remainder of 2010, comprising $2.43 billion for growth projects and acquisitions and $230 million for sustaining capital. Pipeline integrity costs were expected to be approximately $87.3 million for the remainder of 2010. These forecasts are subject to market, project, weather and funding conditions.
- Subsequent acquisition and financing: In April, EPD issued 13.8 million units at $35.55 per unit, receiving approximately $475.5 million net proceeds as reported in MD&A. On May 4, it acquired two Haynesville-area gas gathering and treating systems for approximately $1.2 billion, funded with offering proceeds and revolver borrowings. Purchase-price allocation was not complete at filing.
- Management and governance: Dan L. Duncan died on March 29, 2010. Voting control transferred to three trustees, and the filing identifies his death as a loss of a key senior-management team member; management said it could not yet predict the effect on the business.
- Risks and contingencies: The filing highlights potential effects of proposed hydraulic-fracturing rules, greenhouse-gas regulation and a possible Gulf of Mexico drilling moratorium on customer production and volumes through EPD systems. Centennial guarantees include an estimated $58.9 million debt-guarantee exposure and a cash-call commitment of up to $50 million; recorded fair-value liabilities were $8.2 million and $3.6 million, respectively. Other disputed claims totaled approximately $56.3 million; management considered a material adverse outcome remote. The filing reported no litigation it believed reasonably likely to have a significant adverse financial effect.
- Unusual items: Offshore segment gross operating margin included $8.7 million of insurance proceeds. A $1.5 million non-cash impairment was recorded. A Q1 2009 tax charge of $6.6 million related to taxable gains from an asset sale did not recur. A change to the estimated amortization life of Val Verde customer-relationship intangibles was not material to Q1 earnings.
- Market and credit exposure: Derivatives are used principally to hedge commodity and interest-rate exposures. A downgrade could trigger collateral requirements, including amounts associated with Centennial guarantees and derivatives. At March 31, EPD reported investment-grade ratings; S&P revised its outlook to positive in April.
Important facts for investors to verify
- Assess how much of revenue and earnings growth reflects commodity prices and marketing activity versus durable fee-based throughput and new assets.
- Review segment margin trends, especially weaker onshore natural gas and crude oil results, Trinity River Lateral delays, and offshore production and maintenance trends.
- Evaluate funding and leverage after the approximately $1.2 billion Momentum acquisition, including revolver use, upcoming maturities and unit issuance dilution.
- Confirm the expected timing, costs, capacity utilization and producer commitments for the acquired gathering systems and other growth projects.
- Monitor the effects of Dan Duncan’s death and the control transition, as well as regulatory developments affecting hydraulic fracturing and Gulf of Mexico drilling.
- Reconcile cash generation with distributions and planned capital spending, and review derivative exposures, collateral triggers, guarantees and outstanding claims.