01—Abstract
Summary
Summary of the 10-K filed March 1, 2000. Cited figures are marked; the original filing is the authoritative source.
Enterprise Products Partners L.P.
(NYSE: EPD) reported a transformative 1999 for its NGL midstream business, driven by the August 1, 1999 acquisition of Tejas Natural Gas Liquids (TNGL) from Shell's affiliate Tejas Energy (now Coral Energy). Revenues rose 78.4% to $1,346.5 milliona from $754.6 million, operating income more than doubled from $50.5 million to $132.4 million, and net income increased to $120.3 million from $10.1 million in 1998 (which included a $27.2 million extraordinary debt charge). Basic earnings per unit were $1.79 and diluted were $1.64.
Operating cash flow improved sharply to $168.8 millionb from a $20.3 million outflow, and the company raised its quarterly distribution to $0.50 per unit, an 11.1% increase over the $0.45 minimum quarterly distribution. Total assets nearly doubled to $1.49 billion, and long-term debt rose to $295 million. The key strategic driver is the 20-year Shell Processing Agreement, which gives the Company exclusive rights to process Shell's Gulf of Mexico natural gas production, including deepwater developments.
This is expected to materially grow NGL volumes, and processing margins jumped to $36.8 millionc in 1999 from a loss of $0.7 million in 1998. The Company is also expanding through new projects, including the Neptune gas plant, a Baton Rouge propylene concentrator, and the planned 263-mile Lou-Tex NGL pipeline, plus the acquisition of the Lou-Tex Propylene Pipeline for about $100 million and a pending offer for the remaining 88.5% of Dixie Pipeline for about $204.4 million. Investors should weigh several risks.
Earnings are increasingly tied to NGL prices and natural gas processing spreads, and the Mont Belvieu fractionator ran at only 75%d utilization in 1999. The MTBE facility faces potential regulatory phase-outs, particularly in California and at the federal level. Shell and its affiliates now hold roughly 17.6% of the units and the General Partner, and the 14.5 million Special Units, plus up to 6 million contingent units, will convert into common units over 2000 through 2003, which could dilute existing holders.
The Company has no employees and relies on EPCO under the EPCO Agreement, with the administrative fee rising to $1.55 million per month in 2000. Debt is largely variable-rate bank borrowings, with plans to issue up to $350 million in senior unsecured notes under an $800 million shelf registration, and the company received investment-grade ratings (BBB from S&P, Baa3 from Moody's) in January 2000.
02—Key points
Key Highlights
- Revenues increased 78.4% to $1,346.5 million in 1999 from $754.6 million in 1998, driven primarily by the TNGL acquisition effective August 1, 1999.
- Operating income rose to $132.4 million from $50.5 million, and net income increased to $120.3 million from $10.1 million (1998 included a $27.2 million extraordinary charge).
- Processing segment gross operating margin swung to $36.8 million from a $0.7 million loss, supported by the 20-year Shell Processing Agreement for Gulf of Mexico natural gas.
- Operating cash flow was $168.8 million, compared with a $20.3 million outflow in 1998, and the quarterly distribution was increased 11.1% to $0.50 per unit.
- Total assets grew to $1.49 billion from $741 million, and long-term debt increased to $295 million to fund the TNGL acquisition ($166 million cash) and the Mont Belvieu fractionator stake.
- Growth pipeline includes the Lou-Tex NGL pipeline (about $82.5 million, expected Q3 2000), the Neptune gas plant, and the Lou-Tex Propylene acquisition (about $100 million); a bid for the remaining 88.5% of Dixie Pipeline (about $204.4 million) is pending.
- Key risks include MTBE regulatory bans (California phase-out, federal legislation), lower Mont Belvieu fractionation utilization (75%), and future dilution from the 14.5 million Special Units converting into common units through 2002.
03—Questions
Frequently Asked Questions
What drove the large increase in Enterprise's 1999 financial results?
The main driver was the acquisition of Tejas Natural Gas Liquids (TNGL) from Shell's affiliate, effective August 1, 1999. TNGL added natural gas processing, NGL fractionation, and pipeline assets, and contributed about $48.4 million of gross operating margin in the five months after closing. Stronger NGL product prices in 1999 also contributed, along with the July 1999 purchase of an additional 25% of the Mont Belvieu fractionator.
How does the Shell Processing Agreement affect the company's long-term outlook?
The 20-year agreement gives Enterprise the exclusive right to process substantially all of Shell's current and future Gulf of Mexico natural gas production on a keepwhole basis, including deepwater developments. Management expects this to significantly increase NGL volumes and processing margins. Shell's production and performance thresholds also determine whether up to 6 million contingent units are issued to Shell in 2000 and 2001.
Is the distribution to unitholders secure, and how does it compare with the minimum quarterly distribution?
The company paid the $0.45 minimum quarterly distribution from its 1998 IPO through Q4 1999 and raised it to $0.50 per unit in January 2000. The company states that distributions are not guaranteed and depend on sufficient Operating Surplus. In 1999 it paid $1.85 per common unit in declared distributions, with coverage supported by operating cash flow of $168.8 million.
What are the main risks investors should consider?
Key risks include fluctuations in NGL and natural gas prices, competition for fractionation volumes at Mont Belvieu (utilization fell to 75% in 1999), and regulatory pressure on MTBE, which could hurt the BEF joint venture and require a costly conversion to alkylate production. Other risks include potential dilution from the conversion of Special Units, reliance on EPCO for all management and staff, a $800 million shelf registration, and FERC challenges to pipeline rates under the Lakehead ruling.
04—Continue