01—Abstract
Summary
Summary of the 10-K filed March 22, 2001. Cited figures are marked; the original filing is the authoritative source.
Enterprise Products Partners L.P.
(NYSE: EPD) reported a strong fiscal 2000 in its 10-K filed March 22, 2001. Revenues from consolidated operations rose to $3.05 billiona (total revenues $3.07 billion, up 128%), operating income increased 84% to $243.7 million, and net income reached $220.5 million, or $2.64 per diluted unit, versus $1.64 in 1999. The growth was driven mainly by the August 1999 TNGL acquisition from Shell, the July 1999 Mont Belvieu fractionator acquisition, and a sharp improvement in NGL prices.
Processing margin jumped from $28.5 million to $122.2 millionb, and EBITDA rose to $267.0 million from $147.1 million. Cash flow from operations reached $360.7 million, comfortably covering $139.6 million in distributions to partners. Management raised the quarterly distribution three times in 2000, to $0.55 per unit for early 2001.
The filing also highlights risks. Natural gas prices spiked to about $10c/MMBtu in January 2001, which forced some processing plants into rejection mode and pressured first-quarter 2001 processing margins. Long-term debt rose to $404 million at year-end, and the company then issued $450 million of 7.50% senior notes in January 2001 to fund the Acadian and El Paso pipeline acquisitions.
Those acquisitions, along with a 1.0 Bcfd Acadian system and about 737 miles of Gulf of Mexico pipelines, mark a strategic entry into natural gas gathering and transmission. Regulatory exposure is also notable: Mont Belvieu faces a proposed 90%d NOx reduction mandate in the Houston-Galveston area, and the MTBE business at BEF faces potential California and federal bans. Investors should also note that EPCO, the affiliated sponsor, controls the general partner and significant units, and that Shell holds about 20.5% of the company and is both a major customer and supplier.
Overall, the filing describes a partnership that grew its fee-based and merchant NGL footprint substantially through acquisitions, financed largely with debt and units, with cash distributions well covered by operating cash flow. Key watch items for investors are commodity price sensitivity, the Mont Belvieu air-permit litigation, MTBE regulation, and the dependence on Shell and EPCO relationships.
02—Key points
Key Highlights
- Net income rose to $220.5 million ($2.64 diluted EPU) in 2000, up from $120.3 million ($1.64) in 1999, roughly 83% growth.
- Revenues from consolidated operations reached $3.05 billion, up about 129% year over year, driven largely by the TNGL and Mont Belvieu acquisitions.
- Processing segment gross operating margin increased to $122.2 million from $28.5 million, benefiting from stronger NGL pricing and higher equity NGL production of 72 MBPD.
- Operating cash flow of $360.7 million covered $139.6 million in distributions to partners, and the quarterly distribution was raised to $0.55 per unit.
- Acquired Acadian Gas ($226 million) and Gulf of Mexico pipeline interests from El Paso (about $113 million), adding roughly 737 miles of gathering and transmission assets and a new natural gas business line.
- Long-term debt increased to $404 million at year-end 2000, and a $450 million 7.50% senior note offering in January 2001 added further leverage to finance the 2001 acquisitions.
- Risk factors include record natural gas costs in early 2001, a proposed 90% NOx reduction rule for Mont Belvieu under litigation, and potential MTBE bans affecting the BEF joint venture.
03—Questions
Frequently Asked Questions
What drove the large increase in Enterprise Products' 2000 earnings?
Most of the increase came from a full year of the TNGL assets acquired from Shell in August 1999 (versus five months in 1999), the July 1999 increase in the Mont Belvieu fractionator stake, and higher NGL prices. Operating income rose 84% to $243.7 million, and the Processing segment's margin rose more than fourfold to $122.2 million.
Is the distribution safe, and how has it changed?
The quarterly distribution rose from $0.45 in 1999 to $0.50 in early 2000, $0.525 in mid-2000, and $0.55 for the quarter paid in February 2001. Total 2000 distributions were $2.10 per unit. The filing says payment is not guaranteed, but management expects comparable distributions to continue. Operating cash flow of $360.7 million and net income of $220.5 million both comfortably cover the $139.6 million paid to partners.
What are the biggest risks to near-term results?
The main risks are commodity price volatility and the effect of high natural gas costs on plant economics. Natural gas hit about $10/MMBtu in January 2001, causing some plants to operate in rejection mode and cutting first-quarter 2001 processing volumes. Other risks include the Houston-Galveston NOx rule (which could force costly redesign of Mont Belvieu facilities), potential MTBE bans that could hurt the BEF joint venture, and the FERC grandfathering uncertainty on certain pipelines.
How is the company's ownership and governance structure relevant to investors?
The company is externally managed. It has no employees; EPCO, a private company controlled by Dan Duncan, performs all management functions under the EPCO Agreement. EPCO controls the general partner and owns about 71.7% of the common units and 100% of the subordinated units. Shell owns about 20.5% of the company and is both a major customer and supplier. The filing states these related-party arrangements are not arm's-length, so investors should weigh the potential for conflicts of interest.
How will the 2001 acquisitions change the business?
The Acadian Gas acquisition for $226 million and the El Paso pipeline purchases (Stingray, West Cameron, Sailfish, Moray, and related interests, about $113 million combined) move the company into natural gas gathering, transmission, and storage. Management says the assets complement the NGL business and add fee-based cash flows. Financing came from the $450 million senior note offering, and the company also filed a $500 million shelf registration in February 2001 to fund future acquisitions.
04—Continue