Enterprise Products Partners L.P. — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2019, with comparisons to the same 2018 periods. Enterprise is a North American midstream energy partnership operating across NGL, crude oil, natural gas, petrochemical and refined-products businesses. Its network includes approximately 50,000 miles of pipelines and substantial storage and terminal assets.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $7.964 billion | $9.586 billion | $24.784 billion | $27.352 billion |
| Operating income | $1.474 billion | $1.643 billion | $4.661 billion | $3.768 billion |
| Net income attributable to limited partners | $1.019 billion | $1.313 billion | $3.494 billion | $2.888 billion |
| Basic and diluted earnings per unit | $0.46 | $0.60 | $1.59 | $1.32 |
| Total segment gross operating margin | $2.051 billion | $2.124 billion | $6.266 billion | $5.160 billion |
| Operating cash flow | $1.643 billion | $1.578 billion | $4.826 billion | $4.275 billion |
All dollar amounts are U.S. dollars. Segment gross operating margin is a non-GAAP measure; the filing reconciles it to operating income. GAAP net margins were not reported as a headline measure.
- Cash flow and investment: Nine-month capital expenditures were $3.302 billion, including $3.072 billion for growth projects and $230 million for sustaining projects. Cash used in investing activities was $3.373 billion.
- Distributions and coverage: Nine-month distributable cash flow (DCF, non-GAAP) was $4.990 billion versus $4.372 billion. Distribution coverage was 1.72x versus 1.55x. The Q3 distribution declared was $0.4425 per unit, up from $0.4325 a year earlier.
- Liquidity: At September 30, consolidated liquidity was $6.21 billion: $5.0 billion of available revolving-credit capacity and $1.21 billion of unrestricted cash. The partnership reported compliance with debt financial covenants.
- Debt: Debt principal totaled $28.20 billion at September 30, up from $26.42 billion at year-end 2018. Balance-sheet current maturities were $2.30 billion and long-term debt was $25.64 billion. The company repaid $800 million of notes at maturity in October 2019.
Material changes versus comparable periods
- Q3 revenue fell $1.62 billion, chiefly because lower commodity prices reduced marketing revenues; lower product sales prices were partly offset by higher volumes. Q3 net income attributable to limited partners declined $294 million, and earnings per unit fell from $0.60 to $0.46.
- Nine-month revenue decreased $2.57 billion, principally from lower marketing revenues and prices. Despite that, operating income rose $893 million and limited-partner net income rose $607 million. Higher crude-oil pipeline gross operating margin, including a favorable swing in Midland-to-ECHO 1 non-cash mark-to-market results, contributed materially to the improvement.
- Nine-month segment gross operating margin increased to $6.266 billion from $5.160 billion. Crude Oil Pipelines & Services increased to $1.672 billion from $867 million; Natural Gas Pipelines & Services increased to $825 million from $628 million. Q3 segment gross operating margin was lower year over year, principally reflecting the prior-year Midland-to-ECHO 1 mark-to-market gain.
- Interest expense increased to $950 million for nine months from $806 million, reflecting higher average debt balances and a $94.9 million non-cash loss at inception on forward-starting interest-rate swaps. A $123.1 million non-cash expense from the Liquidity Option Agreement also weighed on nine-month earnings, versus $34.9 million in 2018.
- Cash from operations increased $551 million for nine months. Capital expenditures rose $298 million, while cash distributions to limited partners increased to $2.871 billion from $2.783 billion.
Outlook, commentary, risks and unusual items
- Capital plans: Management estimated 2019 capital investments at approximately $4.3 billion net of expected noncontrolling-interest contributions, based on $4.5 billion of growth capital, $350 million of sustaining capital and $600 million of contributions. Expected 2020 growth capital investments were $3.0–$4.0 billion. Approximately $9.1 billion of growth projects were scheduled for completion by the end of 2023.
- Projects: Announced developments included a second propane dehydrogenation plant, expected to begin service in the first half of 2023; expansions of crude-oil, NGL and natural-gas pipelines; and Gulf Coast export-terminal expansions. Several projects depend on long-term customer commitments, permits, construction schedules and access to funding.
- Management liquidity view: Management believed cash flow, liquidity and capital-market access would be sufficient for foreseeable capital expenditures and working-capital needs. It cautioned that capital plans may change with market conditions, supplier costs, weather, funding availability or new opportunities.
- Commodity and operating exposure: Commodity-price and supply-demand changes affect marketing revenues and costs, processing margins, volumes and customer demand. Management said lower product prices can reduce both revenue and corresponding cost of sales, so revenue changes do not necessarily translate proportionately into margin or distributable cash.
- Significant commitments and contingencies: Estimated long-term NGL purchase obligations were $12.7 billion, up from $10.8 billion at year-end 2018. The Liquidity Option Agreement gives M&B a 90-day option beginning February 1, 2020 to sell OTA to Enterprise; the liability was $513.1 million at quarter-end. A major Energy Transfer lawsuit remained pending before the Texas Supreme Court; no provision was recorded because management did not consider payment probable. The filing also describes PDH project litigation and an EPA notice of violation; management did not expect the latter’s potential sanctions to be material.
- Unusual accounting items: The $94.9 million swap mark-to-market loss and Liquidity Option revaluation expense were non-cash. Nine-month asset impairment charges were $51.3 million, mainly related to assets retired after operations ceased. The company adopted lease accounting standard ASC 842 in 2019; recognized right-of-use assets and lease liabilities were not material relative to total assets and liabilities.
Most important facts for investors to verify
- Whether the improvement in nine-month operating income and DCF is sustained by underlying volumes and fee-based activity, rather than commodity-marketing and mark-to-market movements.
- Progress, customer commitments, permits, cost estimates and in-service timing for the substantial growth-capital program, and the resulting effect on debt and liquidity.
- Debt maturities and refinancing needs, the maintenance of investment-grade ratings and covenant compliance, and management’s targeted leverage of approximately 3.5x debt to normalized adjusted EBITDA.
- Distribution growth and coverage, including the balance between distributions, retained cash, unit repurchases and capital spending.
- Developments in the Texas Supreme Court Energy Transfer case, the OTA Liquidity Option exercise window and valuation, and other litigation or regulatory matters.