ENTERPRISE PRODUCTS PARTNERS L.P. quarterly report, Q3 FY2021

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Enterprise Products Partners L.P. (EPD) — Q3 2021 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2021. EPD is a North American midstream energy partnership operating natural gas, NGL, crude oil, petrochemical and refined-products infrastructure, with four reported business segments. Dollar amounts below are in millions unless stated otherwise.

Financial performance

  • Third quarter: Revenue was $10,831.3 versus $6,922.0 in Q3 2020; operating income was $1,513.1 versus $1,382.5; net income attributable to common unitholders was $1,153.0 versus $1,052.6. Basic and diluted earnings were $0.52 per unit, up from $0.48.
  • Nine months: Revenue was $29,436.7 versus $20,155.5; operating income was $4,700.2 versus $4,326.9; net income attributable to common unitholders was $3,605.7 versus $3,437.4. Earnings were $1.64 per unit versus $1.56.
  • Operating margin: Non-GAAP total gross operating margin was $2,090.2 in Q3 versus $1,993.4 a year earlier, and $6,474.9 for nine months versus $6,039.3. The measure is management-defined and is not directly comparable to GAAP operating income.
  • Segment trends: Q3 gross operating margin increased in Natural Gas Pipelines & Services ($223.3 versus $208.4) and Petrochemical & Refined Products Services ($411.3 versus $315.0), while NGL Pipelines & Services was nearly flat ($1,022.9 versus $1,028.1) and Crude Oil Pipelines & Services declined ($422.9 versus $481.8). For nine months, crude oil segment margin fell to $1,242.0 from $1,569.1; the other three segments improved.
  • Cash flow: Nine-month operating cash flow was $6,387.3 versus $4,291.6. Capital expenditures were $1,805.7 versus $2,671.6. Company-defined free cash flow was $4,573.7 versus $1,650.8, while distributable cash flow (DCF) was $4,949.0 versus $4,777.9. DCF distribution coverage was 1.7x for the nine months (1.6x in Q3), compared with 1.6x and 1.7x, respectively, in 2020.
  • Margins and revenue quality: Much of the revenue increase reflected higher commodity prices and marketing activity, with associated cost of sales also rising. Management cautions that higher product-sales revenue does not necessarily increase gross margin or cash available for distribution.

Balance sheet, debt and distributions

  • At September 30, 2021, cash and cash equivalents were $2,213.5, restricted cash was $144.6, and total assets were $67,319.9. Current liabilities were $11,870.7.
  • Consolidated debt principal was $29,821.4, down from $30,146.4 at year-end 2020; reported current maturities were $1,399.3 and long-term debt was $28,132.8. Average debt maturity was approximately 20.9 years. EPD reported compliance with debt covenants.
  • Management reported $6.7 billion of consolidated liquidity: $2.2 billion of unrestricted cash and $4.5 billion of available revolving-credit capacity. New September 2021 facilities included a $1.5 billion 364-day revolver and a $3.0 billion five-year revolver; neither had borrowings outstanding at quarter-end.
  • EPO issued $1.0 billion of 3.30% senior notes due 2053. Proceeds were designated for general purposes, including growth investments and potential repayment of 2022 maturities. The Partnership guarantees substantially all EPO debt, other than specified TEPPCO obligations.
  • The Board declared a Q3 distribution of $0.45 per common unit, or $1.80 annualized, payable November 12, 2021. Management said future distribution increases would be evaluated quarterly. Nine-month cash distributions paid to common unitholders were $2,948.5.

Changes, outlook and notable items

  • Revenue growth was driven primarily by higher marketing sales prices and volumes; midstream-services revenue also increased. Higher commodity purchase costs offset much of the marketing revenue increase.
  • Nine-month results benefited from unusually strong natural-gas marketing margins during February 2021 winter storms, including sales to customers facing power and gas shortages. The storms also caused operating disruption and higher costs. Hurricane Ida reduced estimated Q3 gross operating margin by approximately $30 million; most affected assets had returned to normal operations, but third-party disruptions remained.
  • The Partnership recorded $112.7 of asset impairment charges for the first nine months, including $44.3 related to the sale of part of the San Juan Gathering System. Management warned that prolonged adverse COVID-19 impacts could prompt further non-cash impairments.
  • The 2020 comparable period included a $158.0 deferred tax benefit attributable to OTA; the 2021 nine-month period instead recorded a $57.3 income-tax provision. This makes year-over-year net-income comparisons less directly indicative of operating trends.
  • Management forecast 2021 capital investments, net of expected noncontrolling-interest contributions, of approximately $2.2 billion, including $1.7 billion of growth capital and $440 million of sustaining capital. It estimated 2022 sanctioned-project growth capital at about $800 million, with a possible $1.0–$1.5 billion range including projects under development. Approximately $2.9 billion of growth projects were scheduled to enter service by the end of 2023, including PDH 2, then expected in Q2 2023.
  • The proposed Sea Port Oil Terminal remained subject to government approvals; management anticipated a decision as early as mid-2022 but gave no assurance of approval or timing. EPD and Chevron also began a study of potential carbon capture, transport and storage opportunities.
  • Key risks include commodity-price and demand volatility, customer and counterparty performance, COVID-19 and severe-weather impacts, potential asset impairments, project execution and approval risks, and environmental or regulatory matters. EPD disclosed a pending PDH 1 contractor lawsuit and a Colorado regulatory penalty demand that could exceed $0.3 million but was not expected to be material. It reported no material off-balance-sheet arrangements and effective disclosure controls.

Important facts for investors to verify

  • Whether cash generation and distribution coverage remain resilient after separating recurring fee-based performance from commodity marketing gains, storm-related benefits and working-capital movements.
  • Execution, cost and timing of planned growth projects and capital spending, including PDH 2 and the status of Sea Port Oil Terminal approvals.
  • Debt refinancing and repayment plans for the $1.4 billion of 2022 maturities, liquidity availability, covenant compliance and the Partnership’s guarantees of EPO debt.
  • Commodity hedge exposures and expected earnings effects: the filing expected $283.6 of commodity-hedge losses to be reclassified into earnings over the next 12 months.
  • Potential effects of COVID-19, weather events, customer disruptions, the PDH 1 litigation, the Colorado penalty matter and related-party arrangements on results and cash flows.