ENTERPRISE PRODUCTS PARTNERS L.P. quarterly report, Q2 FY2015

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Enterprise Products Partners L.P. — Q2 2015 Form 10-Q

Reporting period: Three and six months ended June 30, 2015; filed August 7, 2015. Dollar amounts are in millions unless stated otherwise. Enterprise is a North American midstream energy partnership operating pipelines, storage, processing and terminal assets. Comparisons below are with the corresponding 2014 periods.

Financial performance and liquidity

  • Q2 revenue: $7,092.5, down 43% from $12,520.8. Six-month revenue was $14,565.0, down 43% from $25,430.7. Management attributed most of the decline to lower commodity sales prices, partly offset by higher volumes; lower prices also reduced associated cost of sales.
  • Profit: Q2 operating income was $800.3 versus $884.3; net income attributable to limited partners was $551.0 versus $637.7; diluted earnings per unit were $0.28 versus $0.34. For six months, operating income was $1,696.3 versus $1,917.0, limited-partner net income was $1,187.1 versus $1,436.5, and diluted earnings per unit were $0.60 versus $0.76.
  • Margins and segment results: Management’s non-GAAP gross operating margin increased to $1,303.2 in Q2 from $1,263.2, and to $2,637.6 for six months from $2,593.0. Calculated GAAP operating margin was approximately 11.3% in Q2 versus 7.1% in Q2 2014; the substantial revenue decline reflects commodity-price and sales-mix effects. Q2 gross operating margin gains in crude oil and petrochemical/refined products were partly offset by declines in NGL and natural gas operations.
  • Cash flow and distributions: Six-month operating cash flow was $1,901.6, up from $1,871.9. Investing used $1,789.3, including $1,638.0 of capital expenditures; financing provided $364.4. Distributable cash flow, a non-GAAP measure, was $2,017.2 versus $2,040.8, with a 1.4x distribution coverage ratio versus 1.6x. Q2 coverage was 1.3x versus 1.5x. The declared distribution was $0.380 per unit for Q2, up from $0.360.
  • Debt and liquidity: Principal debt was $22,332.7 at June 30, compared with $21,389.2 at year-end; long-term debt on the balance sheet was $20,892.9. Cash and equivalents were $551.1, with $46.1 restricted. Management reported $5.55 billion of consolidated liquidity, including $5.0 billion of available revolver capacity. The partnership was in compliance with debt covenants and expected to refinance near-term maturities.
  • Balance sheet: Total assets were $48,159.4 and total equity $20,363.2. Current assets of $7,178.8 included $1,710.7 of offshore-business assets held for sale; current liabilities were $6,466.1.

Material changes and notable items

  • Enterprise completed the second step of its Oiltanking acquisition in February, issuing 36.8 million common units; total consideration for Oiltanking was approximately $5.9 billion. This increased the unit count and contributed to higher marine-terminal results.
  • In May, EPO issued $2.5 billion of senior notes, with maturities from 2018 to 2046, principally to repay commercial paper and maturing notes and for general purposes. Six-month common-unit issuance generated $944.1 of net cash proceeds, including $760.0 net from the at-the-market program.
  • After quarter-end, Enterprise completed the sale of its Offshore Gulf of Mexico business to Genesis on July 24 for approximately $1.53 billion cash. It recorded a $54.8 non-cash impairment in Q2 before the sale; the segment represented 3.4% of first-half consolidated gross operating margin.
  • After quarter-end, Enterprise acquired EFS Midstream for $2.15 billion: $1.15 billion was paid July 8, with $1.0 billion due no later than the first anniversary of closing. The acquisition includes long-term, fee-based acreage dedications and minimum volumes for the first seven years of the gathering agreement.
  • Six-month non-cash impairment charges rose to $112.3 from $12.5, primarily due to the offshore held-for-sale write-down and abandonment of Texas pipeline assets. A $39.5 increase in Q2 accretion expense reflected revised abandonment-cost estimates for the Matagorda system.

Outlook, risks and contingencies

  • Management expected approximately $2.3 billion of capital spending in the remainder of 2015, including $200 million of sustaining expenditures, and approximately $2.4 billion of major projects to enter service. The outlook depended on operating cash flow and access to debt, equity or divestiture proceeds; management reserved the ability to change timing and spending.
  • Projects included expansion of the Houston Ship Channel LPG export terminal, crude-oil pipelines and terminals, and a Mont Belvieu propane dehydrogenation plant. The filing also described planned projects and expected service dates extending through 2017 and 2020; these are forward-looking and subject to execution and market risks.
  • Management cited commodity-price, demand, competition, operating, capital-market and regulatory risks. WTI averaged $57.94 per barrel in Q2 2015 versus $102.99 a year earlier; Henry Hub gas averaged $2.65/MMBtu versus $4.68. The company hedged certain commodity and interest-rate exposures but noted that hedges may not fully offset exposure.
  • An ETP lawsuit resulted in a $535.8 judgment, including damages, disgorgement and prejudgment interest, plus post-judgment interest. Enterprise appealed and recorded no provision because management did not consider payment probable. The filing states that management did not expect pending litigation, individually or in aggregate, to have a material financial-statement impact; outcomes remain uncertain.
  • The FTC and Texas Attorney General requested information concerning the Oiltanking acquisition and operations. Enterprise was cooperating and could not predict the investigations’ outcome.
  • The $223.7 fair-value liability for the Oiltanking-related Liquidity Option Agreement included $11.5 of non-cash accretion expense in first-half results. Its initial valuation remained provisional, with finalization expected in Q3 2015.
  • Texas tax-law changes produced a $16.3 Q2 benefit, contributing to the reported income-tax benefit. The filing also identifies proposed federal tax regulations that could affect the qualifying-income rules for publicly traded partnerships, potentially affecting partnership tax status or unitholder distributions.
  • Management reported effective disclosure controls. Integration-related internal-control evaluation for Oiltanking remained in progress, with completion expected in Q4 2015; acquired businesses may be excluded from the internal-control assessment for one year.

Investor facts to verify

  • Whether post-quarter sale proceeds and EFS Midstream funding changed debt, liquidity, capital spending needs or planned equity issuance.
  • Whether operating cash flow and distributable cash flow sustain the distribution, given lower year-over-year coverage and significant growth spending.
  • Progress, costs and expected returns for major projects, particularly LPG exports, crude-oil infrastructure and the PDH plant.
  • Developments in the ETP appeal, FTC and Texas investigations, and final valuation of the Liquidity Option Agreement.
  • Effects of commodity-price movements, Texas tax changes and any final federal qualifying-income regulations on earnings, partnership status and distributions.