Enterprise Products Partners L.P. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; compared with the corresponding 2019 periods. Dollar amounts below are in millions unless noted. Enterprise is a North American midstream energy partnership operating across NGL, crude oil, natural gas, petrochemical and refined-products businesses.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $6,922 | $7,964 | $20,156 | $24,784 |
| Operating income | $1,383 | $1,474 | $4,327 | $4,661 |
| Net income | $1,084 | $1,045 | $3,520 | $3,562 |
| Net income attributable to common unitholders | $1,053 | $1,019 | $3,437 | $3,494 |
| Basic and diluted earnings per common unit | $0.48 | $0.46 | $1.56 | $1.59 |
| Gross operating margin, non-GAAP | $1,993 | $2,036 | $6,039 | $6,250 |
Q3 operating margin was approximately 20.0% of revenue, compared with 18.5% a year earlier; the filing does not present this as a reported margin measure. Lower product prices reduced marketing revenue and associated costs, while operating income and gross operating margin declined modestly. Q3 net income benefited in part from a $19 million income tax benefit, versus a $15 million tax provision in Q3 2019. The nine-month 2020 tax benefit was $139 million, including $158 million of net deferred tax benefit attributable to OTA.
Cash flow and distributions: For the first nine months, operating cash flow was $4,292, down from $4,826; capital expenditures were $2,672, down from $3,302; and cash used in investing activities was $2,564. Distributable cash flow (DCF, non-GAAP) was $4,778 versus $4,990, with 1.6x distribution coverage versus 1.7x. Q3 DCF was $1,647 versus $1,640, with 1.7x coverage in both periods. Free cash flow (non-GAAP) for the nine months was $1,651 versus $1,975. The declared Q3 distribution was $0.445 per common unit, or $1.78 annualized.
Balance sheet and liquidity: At September 30, cash and cash equivalents were $1,032; total cash including restricted cash was $1,131. Total current assets were $8,793 and current liabilities $7,847. Debt principal was $30.15 billion, up from $27.88 billion at December 31, 2019; long-term debt on the balance sheet was $28.54 billion. Management reported $6.03 billion of consolidated liquidity, including $5.0 billion of available revolving-credit capacity and $1.03 billion of unrestricted cash. EPO was in compliance with debt financial covenants. Its senior unsecured debt ratings were investment grade.
Material changes versus prior periods
- Q3 revenue fell about 13% year over year, primarily from lower crude oil, natural gas and NGL marketing prices and volumes. Petrochemical and refined-products sales rose, partly offsetting declines elsewhere.
- Nine-month revenue fell about 19%, largely reflecting lower marketing revenue. Operating costs also fell substantially, mainly because of lower commodity purchase costs.
- Segment gross operating margin rose year over year in NGL Pipelines & Services in Q3, but fell in crude oil, natural gas and petrochemical/refined-products segments. New NGL fractionation capacity contributed to NGL segment growth; weaker crude oil volumes and affiliate earnings weighed on crude oil results.
- Operating cash flow declined by $535 million year over year. Management attributed the decrease mainly to higher working capital employed in marketing, lower earnings and lower cash distributions from unconsolidated affiliates.
- Debt principal increased by approximately $2.27 billion from year-end. EPO issued $4.25 billion of senior notes during the first nine months and repaid $1.5 billion of senior notes.
Outlook, commentary and key risks
- Management said COVID-19, depressed hydrocarbon demand, lower commodity prices and producer activity reductions created continued uncertainty and could further reduce volumes, cash flows and asset values. It noted that recovery depended on disease containment and the development of approved vaccines or effective therapeutics.
- Management forecast 2020 capital investments, net of joint-venture contributions, of approximately $3.2 billion: $2.9 billion growth and $300 million sustaining. Sanctioned growth capital was expected to be approximately $1.6 billion in 2021 and $800 million in 2022. These are forecasts, not guarantees, and may change.
- The proposed SPOT deepwater crude oil terminal remained subject to government approvals; the Partnership did not expect approvals in 2020. The Midland-to-ECHO 4 pipeline was cancelled, reducing planned 2020–2022 growth investment by about $800 million and causing a $42 million Q3 impairment. Total non-cash impairment charges were $77 million for Q3 and $90 million for nine months; additional impairment was possible if adverse conditions persisted.
- The Partnership reported $3.9 billion of growth projects scheduled for completion by the end of 2023, including PDH 2, then expected to begin service in Q2 2023. The Midland-to-ECHO segment of the Midland-to-Webster pipeline entered service in October 2020, after quarter-end.
- The Q3 distribution was maintained, but management said future increases would be evaluated quarterly in light of economic conditions, financial condition, results and cash flows, and would require Board approval.
- Material unusual items included the March settlement of the Liquidity Option and related OTA tax accounting, and the September issuance of Series A cumulative convertible preferred units. The preferred units carry a 7.25% cumulative annual distribution, rank senior to common units and may be convertible or redeemable under specified terms.
- Risks also include commodity and interest-rate exposure, customer credit and counterparty risk, potential future asset impairments, and litigation or regulatory matters. A proposed Texas environmental order could result in sanctions above $0.1 million, which the Partnership did not expect to be material. The filing reports no material off-balance-sheet arrangements.
Investor verification priorities
- Reconcile reported net income and distribution coverage with the $158 million nine-month OTA deferred-tax benefit and other non-cash items.
- Assess whether operating cash flow and DCF can sustain distributions and planned investment, particularly given working-capital needs and the 1.6x nine-month DCF coverage ratio.
- Review debt maturities, refinancing plans and liquidity availability; $1.325 billion of principal was scheduled for 2021.
- Track COVID-19 effects on customer volumes, commodity markets, customer credit quality and the potential for further impairments.
- Confirm execution, timing and returns of sanctioned capital projects, including PDH 2, and the terms and cash implications of the preferred units.