01—Abstract
Summary
Summary of the 10-K filed March 10, 2004. Cited figures are marked; the original filing is the authoritative source.
Enterprise Products Partners L.P.
(NYSE: EPD) reported 2003 revenues of $5.35 billiona, up roughly 49% from $3.58 billion in 2002, and net income of $104.5 million, up from $95.5 million. Total segment gross operating margin rose to $410.4 million from $332.3 million, driven mainly by the full-year contribution of the Mid-America and Seminole pipelines acquired in July 2002. Partially offsetting this were a $22.5 million share of an impairment at the MTBE facility (BEF), lower NGL volumes due to weak ethylene demand and low NGL extraction rates, and a loss in equity earnings.
Distributions were raised to $0.3725b per unit per quarter. Diluted EPS fell to $0.41 from $0.48 in 2002, and the company carried about $2.1 billion of debt at year end. The dominant investor issue is the pending merger with GulfTerra Energy Partners (NYSE: GTM).
Step One, a $425 millionc purchase of a 50% interest in GulfTerra's general partner, has already closed. Steps Two and Three would give Enterprise full ownership of GulfTerra and roughly 103 million new units, with total consideration estimated near $3.9 billion. Completion depends on unitholder and HSR antitrust approvals, and management expects closing in the second half of 2004.
Leverage would rise substantially, goodwill of about $2 billiond is expected, and rating agencies have placed Enterprise's ratings under review. Investors should weigh the strategic scale gained against integration, leverage, and execution risks, along with the overhang from Shell's 41 million units, which Shell intends to sell over time.
The core business remains fee-based and midstream-oriented, but earnings remain exposed to NGL and natural gas price spreads, petrochemical demand, and MTBE regulation, which could reduce BEF's earnings. The MTBE exposure is also a risk because the insurance carrier indicated that MTBE-related claims may be excluded at the April 2004 policy renewal.
02—Key points
Key Highlights
- Revenue rose 49% to $5.35 billion and segment gross operating margin rose 23% to $410.4 million, led by the Pipelines segment, which grew to $282.9 million from $214.9 million.
- Net income grew modestly to $104.5 million, but diluted EPS fell to $0.41 from $0.48, reflecting a larger unit count and the $22.5 million BEF impairment.
- Quarterly distributions increased to $0.3725 per unit in Q3 and Q4 2003, up from $0.3450 in 2002, and the merger agreement commits to at least $0.395 per unit after closing.
- Pending GulfTerra merger, with about $3.9 billion total consideration, roughly 103 million new units issued, and expected closing in 2H 2004, subject to unitholder and HSR approvals.
- Debt was about $2.1 billion at year end, with a $225 million interim term loan and the merger expected to significantly increase consolidated leverage.
- Processing segment gross margin recovered to $30.3 million from a $17.6 million loss in 2002, which included $51.3 million of hedging losses, though equity NGL production fell to 56 MBPD from 73 MBPD.
- MTBE exposure: BEF recorded a $67.5 million impairment, and the insurer may exclude MTBE claims upon the April 2004 policy renewal, while several states have banned MTBE.
03—Questions
Frequently Asked Questions
What drove the increase in revenue and profitability in 2003?
Most of the growth came from acquisitions, especially the Mid-America and Seminole pipelines bought in July 2002, which contributed a full year of earnings in 2003. Pipelines gross margin rose to $282.9 million from $214.9 million. Higher commodity prices also lifted revenues and costs, with natural gas averaging $5.38 per MMBtu versus $3.22 in 2002. Partly offsetting this were lower NGL volumes and a $22.5 million share of the BEF impairment.
What are the main terms and risks of the GulfTerra merger?
The merger has three steps. Step One, the $425 million purchase of a 50% interest in GulfTerra's general partner, is complete. Step Two would give Enterprise 100% ownership of GulfTerra, with each GulfTerra common unit exchanged for 1.81 Enterprise units. Step Three is the $150 million acquisition of South Texas midstream assets from El Paso. Risks include regulatory divestitures of up to $150 million or more, integration challenges, roughly $2.1 billion of combined debt before the merger, change-of-control repurchase obligations on GulfTerra's notes, and the possibility that goodwill of about $2 billion could be impaired.
Is the distribution safe, and how might the merger affect it?
The company has increased distributions steadily, to $0.3725 per unit per quarter for late 2003. It states that it expects to continue paying comparable distributions, but payments are not guaranteed and depend on cash flow after reserves and debt service. Management has committed to raise the distribution to at least $0.395 per unit after the merger closes. Higher leverage and restrictions in GulfTerra's indentures could limit distributions from subsidiaries.
How exposed is the company to commodity prices and MTBE regulation?
Most processing volumes are now under fee-based or percent-of-liquids contracts, which reduces direct exposure. However, the Shell margin-band arrangement and keepwhole contracts still expose the company to the spread between natural gas and NGL prices. BEF's MTBE facility is directly exposed to state and federal bans. California, New York, and Connecticut banned MTBE effective January 1, 2004, and at least sixteen other states have enacted bans. The company is converting the facility to iso-octane at a cost of about $30 million.
What does Shell's ownership mean for investors?
Shell owned 41 million common units, about 19.1% of outstanding units as of February 20, 2004, and has publicly stated it intends to reduce its holdings over several years. Under a registration rights agreement, the company must register these units for resale. Sales could depress the unit price, and Shell remains the company's largest customer, representing 5.5% of 2003 revenues.
04—Continue