01—Abstract
Summary
Summary of the 10-K filed February 27, 2006. Cited figures are marked; the original filing is the authoritative source.
Enterprise Products Partners L.P.
(NYSE: EPD) reported record results for fiscal 2005, driven by the September 2004 GulfTerra Merger, which roughly doubled its asset base. Revenues rose to $12.26 billiona from $8.32 billion, operating income reached $663.0 million from $423.0 million, and net income climbed to $419.5 million ($0.91 per unit) from $268.3 million. Total segment gross operating margin grew 73% to $1.14 billion, led by the Onshore Natural Gas Pipelines and NGL Pipelines & Services segments.
Growth came with higher leverage: consolidated debt reached about $4.8 billion, with interest expense up to $230.5 millionb, and the company has a sizable 2006 growth program. Management is pursuing a major capital build-out. It estimates 2006 consolidated capital spending of about $1.8 billion, including roughly $1.7 billion for growth projects and acquisitions, with major projects including Independence Hub, the Piceance and Wyoming gas processing projects, and the Hobbs NGL fractionator.
The filing also describes 2005 disruption from Hurricanes Katrina and Rita, which reduced segment margin by an estimated $48 millionc, with insurance recoveries expected in 2006 and 2007. Distributions per unit rose to $1.698 for 2005 from $1.540, and the quarterly rate reached $0.4375 in early 2006. Investors should weigh the strong earnings momentum and distribution growth against elevated debt, dependence on successful execution of large projects, and governance considerations.
Affiliates of EPCO, controlled by Dan L. Duncan, own about 36.9%d of common units and manage the partnership through its general partner, and conflicts of interest and related-party transactions are significant features of the structure.
02—Key points
Key Highlights
- Revenues increased 47% to $12.26 billion in 2005, and net income rose 56% to $419.5 million, or $0.91 per unit, largely due to acquisitions from the GulfTerra Merger.
- Total segment gross operating margin increased 73% to $1.14 billion, with the Onshore Natural Gas Pipelines segment rising from $91.0 million to $353.1 million and NGL Pipelines & Services rising from $374.2 million to $579.7 million.
- Distributions per common unit increased to $1.698 in 2005 from $1.540 in 2004, and the quarterly rate rose to $0.4375 for the fourth quarter of 2005.
- Record 2005 growth capital spending of $743.8 million, plus $326.6 million in acquisitions, including the $145.5 million purchase of Ferrellgas NGL storage and propane terminals.
- Consolidated debt of about $4.8 billion at year-end 2005, with interest expense up to $230.5 million and a stated investment-grade rating for the operating partnership's debt (Baa3/BBB-/BB), with S&P at BB.
- 2006 consolidated capital spending forecast of approximately $1.8 billion, mostly growth projects including Independence Hub, Piceance Basin processing, and Wyoming gas processing expansions.
- Hurricanes Katrina and Rita reduced 2005 gross operating margin by an estimated $48 million, with additional insurance recoveries expected in 2006 and 2007.
03—Questions
Frequently Asked Questions
What drove the large increase in EPD's 2005 results?
The main driver was the September 2004 GulfTerra Merger, which added natural gas pipelines, offshore platforms, and South Texas midstream assets. Those assets were included for a full year in 2005, and higher NGL and energy commodity prices also contributed. Revenues from the NGL marketing business and acquired businesses added about $3.9 billion in revenue.
How much debt does Enterprise Products carry, and is it a risk to distributions?
Total principal debt was about $4.87 billion at December 31, 2005, of which roughly $3.3 billion was fixed-rate and $1.5 billion variable after swaps. The filing states that a significant portion of cash flow may be dedicated to debt service, and that a credit downgrade could raise borrowing costs. Investors should watch leverage as the company funds its large 2006 capital program.
Is the distribution sustainable, and how fast is it growing?
The company paid $1.698 per unit for 2005, up about 10% from $1.540 in 2004, and the most recent quarterly payment was $0.4375. The filing says it expects to continue comparable distributions but does not guarantee them. Distributions depend on cash flow, which can be affected by commodity prices, hurricanes, and the timing of growth projects.
Who controls Enterprise Products, and what are the governance implications?
Affiliates of EPCO, controlled by Chairman Dan L. Duncan, own about 36.9% of the common units. The general partner, Enterprise Products GP, is owned by Enterprise GP Holdings, and EPCO provides all management and personnel under an administrative services agreement. The filing discloses significant conflicts of interest, limited fiduciary duties of the general partner, and the difficulty unitholders face in removing it.
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