Enterprise Products Partners L.P. (EPD) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Dollar amounts are in millions unless otherwise stated. EPD is a North American midstream energy partnership operating pipelines, processing, storage, terminal, marketing and related businesses.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $16,060 | $9,450 | $29,068 | $18,605 |
| Operating income | $1,764 | $1,492 | $3,430 | $3,187 |
| Net income attributable to common unitholders | $1,411 | $1,112 | $2,707 | $2,453 |
| Basic and diluted earnings per common unit | $0.64 | $0.50 | $1.23 | $1.11 |
| Non-GAAP distributable cash flow (DCF) | $2,018 | $1,599 | $3,855 | $3,336 |
| DCF distribution coverage | 1.9x | 1.6x | 1.9x | 1.7x |
Q2 revenue rose 70%, primarily from higher marketing sales prices and volumes; management attributed $4.3 billion of the increase to prices and $2.1 billion to volumes. Cost of sales also increased substantially, reflecting higher commodity purchase prices and volumes. The filing cautions that higher product revenue does not necessarily mean higher margin or distributable cash. Total gross operating margin, a non-GAAP measure, was $2,362 in Q2 versus $2,062 a year earlier.
Q2 gross operating margin grew in NGL Pipelines & Services ($1,327 versus $1,098), Natural Gas Pipelines & Services ($229 versus $202) and Petrochemical & Refined Products Services ($421 versus $326); Crude Oil Pipelines & Services declined ($407 versus $419). For the six-month period, Natural Gas Pipelines & Services margin fell to $449 from $737, primarily because the prior-year period benefited from exceptional natural gas marketing conditions during the February 2021 winter storms.
Cash flow, liquidity and debt
- Six-month operating cash flow was $4,264, up from $4,017. Investing activities used $3,868, including $3,204 for Navitas Midstream; capital expenditures were $731. Financing activities used $2,964, including $2,026 of distributions to common unitholders.
- Cash and cash equivalents were $231 at June 30, 2022, versus $2,820 at year-end; restricted cash was $166. Cash, cash equivalents and restricted cash totaled $397, down from $2,965.
- Management reported consolidated liquidity of $4.1 billion: $3.9 billion of available revolving-credit capacity and $231 million of unrestricted cash.
- Consolidated debt principal was $29.1 billion, including $640 million of commercial paper; the average debt maturity was approximately 20.8 years. EPD was in compliance with debt financial covenants. EPO’s long-term senior unsecured ratings were BBB+ (S&P), Baa1 (Moody’s) and BBB+ (Fitch), as of August 9, 2022.
- Current liabilities exceeded current assets by approximately $2.0 billion, with accrued product payables a significant component. EPO expected to renew its 364-day revolving credit agreement, due in September 2022. It also called for redemption of $350 million of Junior Subordinated Notes D, scheduled for August 31, 2022.
Changes, outlook and key developments
- In February, EPD acquired Navitas Midstream for approximately $3.2 billion net cash consideration, adding roughly 1,750 miles of pipelines and more than 1.0 Bcf/d of processing capacity. The purchase-price allocation remained provisional; the acquired business’s contribution to reported revenue and net income was not material in the period.
- Management expected 2022 capital investments, excluding business combinations and net of noncontrolling-interest contributions, of approximately $2.0 billion: $1.6 billion growth and $350 million sustaining. Approximately $5.5 billion of growth projects were scheduled for completion by the end of 2025. These are expectations, not guarantees.
- In August, EPD announced three additional Permian projects expected to be completed in the first half of 2024. Other announced projects include processing, pipeline, fractionation and export expansions. A potential Gulf Coast CO2 transportation and sequestration project remained at the letter-of-intent and commercialization-exploration stage.
- The Board declared a Q2 distribution of $0.475 per common unit, or $1.90 annualized, payable August 12, 2022. Future distributions and increases remain subject to management evaluation and Board approval.
- Management said inflation and related cost pressures had not materially affected historical results, citing contractual escalators, customer pass-throughs and other mitigants, but warned prolonged inflation could hurt results if costs rise faster than revenue. Risks also include commodity-price and volume exposure, construction delays and cost overruns, aging-asset maintenance, supply-chain and labor constraints, and cyberattacks. The filing notes that insurance may not fully cover cybersecurity losses.
- The PDH 1 contractor litigation proceeded to trial; closing arguments were completed July 22, 2022. EPD reported no litigation contingency accrual at June 30. It also disclosed environmental enforcement matters for which monetary sanctions could exceed $0.3 million individually, though it did not expect them to be material.
Most important facts for investors to verify
- How much of earnings and revenue growth reflects durable midstream activity versus commodity prices, marketing volumes and derivative effects.
- Whether operating cash flow and DCF can sustain distributions while funding the announced capital program, debt service and working-capital needs.
- Execution, timing, total cost and expected returns of the Navitas integration and planned growth projects, including exposure to inflation and supply-chain constraints.
- Debt and liquidity developments, including renewal of the 364-day facility, commercial-paper usage and the subsequent $350 million note redemption.
- Updates on the PDH 1 litigation, environmental proceedings, and the provisional Navitas purchase-price allocation.