01—Abstract
Summary
Summary of the 10-K filed February 29, 2008. Cited figures are marked; the original filing is the authoritative source.
Enterprise Products Partners L.P.
(EPD) reported a 2007 fiscal year marked by heavy growth spending and record revenue, but flat-to-lower net income. Consolidated revenues rose 21% to $16.95 billiona, driven mainly by higher NGL and natural gas marketing volumes and commodity prices, while net income fell to $533.7 million from $601.2 million, partly due to higher interest expense ($311.8 million, up $73.7 million) and the start-up delays at the Meeker and Pioneer gas processing plants. Total segment gross operating margin, the company's preferred non-GAAP profitability measure, grew 9.5% to $1.49 billion, with Offshore Pipelines (up 66%, led by the Independence Hub platform) and NGL Pipelines & Services (up 8%) contributing most of the gain.
The balance sheet is being stretched by the capital program. Total consolidated debt reached about $6.9 billionb, up from $5.3 billion, and the company carries investment-grade ratings (Baa3/BBB-/BBB-), with ratings-linked covenant and acceleration provisions noted. Operating cash flow improved sharply to $1.59 billion from $1.18 billion, but 2007 capital spending of $2.5 billion and 2008 planned spending of roughly $1.7 billion mean the company will continue to rely on debt and equity markets.
Distributions per unit rose to $1.9475c for 2007, with the quarterly rate at $0.50 in the fourth quarter, though distribution coverage is tighter given the capital needs. The filing also highlights several risk areas for unitholders: commodity price exposure in the gas processing contracts, the affiliate and related-party structure with EPCO (which controls the general partner and owns about 34% of the units), an ammonia pipeline criminal and civil matter, a TEPPCO unitholder lawsuit, and the upcoming Pioneer cryogenic plant start-up and 2008 growth projects that are expected to drive future cash flow.
02—Key points
Key Highlights
- Revenues rose 21% to $16.95 billion in 2007 (from $13.99 billion), mainly from higher marketing volumes and energy commodity prices.
- Net income declined to $533.7 million from $601.2 million, reflecting higher interest expense ($311.8 million) and plant start-up delays at Meeker and Pioneer.
- Total segment gross operating margin grew 9.5% to $1.49 billion; Offshore Pipelines rose 66% to $171.6 million, driven by the Independence Hub platform.
- Consolidated debt increased to about $6.9 billion from $5.3 billion, with about $5.0 billion fixed-rate and $1.9 billion variable after swaps.
- Operating cash flow rose to $1.59 billion from $1.18 billion, while 2007 capital spending reached $2.5 billion and 2008 is projected at about $1.7 billion.
- Distributions per unit were $1.9475 for 2007, with the quarterly rate increasing to $0.50 in early 2008; EPCO and affiliates control about 34% of the units and the general partner.
- Major 2008 growth catalysts include the Pioneer cryogenic plant (in service February 2008), Meeker II, the Sherman Extension in the Barnett Shale, and the Petal storage cavern.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 29, 2008Financial Statements
FY2007 against FY2006
| Line item | FY2007FY2006 | Change |
|---|---|---|
| Revenue | $26.71B$23.61B | +13.1% |
| Operating Expenses | $25.53B$22.52B | +13.4% |
| Operating Income | $1.20B$1.12B | +6.6% |
| Interest Expense | -$413.00M-$324.20M | −27.4% |
| Net Income | $533.60M$601.10M | −11.2% |
| EPS (Basic) | $0.48— | — |
| EPS (Diluted) | $0.48— | — |
05—Questions
Frequently Asked Questions
Is the distribution safe given the heavy capital spending program?
The company has consistently raised its quarterly distribution (from $0.4450 in early 2006 to $0.5000 by early 2008) and says it expects to fund distributions primarily from operating cash flow, which rose to $1.59 billion in 2007. However, the filing explicitly notes that distributions are not guaranteed, and that growing debt and the $1.7 billion 2008 capital budget could limit future increases if cash flow or capital market access weakens.
How exposed is the business to commodity prices?
Most of the company's fee-based pipeline and platform revenues are not commodity-sensitive, but certain natural gas processing, gathering, and NGL marketing contracts (percent-of-liquids, keepwhole, and margin-band) expose it to natural gas and NGL price swings. The company uses commodity financial instruments to hedge part of this exposure; its commodity hedge portfolio was a $19.3 million liability at year-end 2007, and a 10% price move would change that position materially.
What drove the drop in net income despite higher revenues and margins?
Interest expense rose $73.7 million due to new junior subordinated notes and senior notes issued in 2006 and 2007 and higher average debt ($6.26 billion vs. $4.93 billion). Operating income was nearly flat (up $22.9 million), and start-up costs and hedging losses at the Meeker and Pioneer plants weighed on results. Minority interest also increased as a result of the Duncan Energy Partners IPO and third-party ownership in Independence Hub.
Are there material legal or regulatory risks disclosed?
The filing discloses a DOJ criminal investigation into ammonia pipeline releases in Kansas, resolved in September 2007 with a $1.0 million fine by a subsidiary, plus a possible civil claim by the DOJ's environmental division with statutory exposure up to $17.4 million, which the company says Magellan has agreed to indemnify. It also describes a TEPPCO unitholder lawsuit tied to the Jonah joint venture and Pioneer plant purchase, which management believes is without merit. Management does not expect these matters to have a material adverse effect.
How concentrated is the business and the ownership structure?
Revenue concentration is modest: Dow Chemical was the largest customer at 6.9% of 2007 revenues. Ownership is more concentrated, as Dan L. Duncan's EPCO group controls the general partner and owns about 34% of the common units, and the general partner's interest and parts of EPCO's stake are pledged as collateral under affiliate credit facilities. Unitholders have limited voting rights, and the company has no employees, relying on EPCO under an administrative services agreement.
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