Enterprise Products Partners L.P. — Q2 2023 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2023. Enterprise is a North American midstream energy partnership operating natural gas, NGL, crude oil, petrochemical and refined-products infrastructure, including pipelines, processing and fractionation plants, storage and export terminals. Unless otherwise stated, dollar amounts below are in millions.
Financial performance and position
- Q2 results: Revenue was $10,651, down 33.7% from $16,060 a year earlier. Operating income was $1,579 versus $1,764; net income attributable to common unitholders was $1,253 versus $1,411. Earnings per common unit were $0.57 versus $0.64.
- First-half results: Revenue was $23,095 versus $29,068; operating income was $3,313 versus $3,430; and common-unitholder net income was $2,643 versus $2,707. Basic earnings per unit were $1.21 versus $1.23.
- Operating margin: Q2 total gross operating margin, a non-GAAP measure, was $2,181 versus $2,362; first-half gross operating margin was $4,516 versus $4,620. Q2 segment gross operating margin was led by NGL Pipelines & Services at $1,110, followed by Crude Oil at $422, Petrochemical & Refined Products at $383, and Natural Gas at $238.
- Cash flow and distributions: First-half operating cash flow was $3,485, down from $4,264. Capital expenditures were $1,433, including $1,227 of growth capital. Distributable cash flow (DCF), a non-GAAP measure, was $3,673 versus $3,855, with 1.7x distribution coverage versus 1.9x. The declared Q2 distribution was $0.50 per unit, or $2.00 annualized.
- Debt and liquidity: Debt principal totaled $28.9 billion at June 30; average debt maturity was approximately 19.7 years. Cash and cash equivalents were $183, with another $94 restricted. The company reported $4.0 billion of consolidated liquidity, including available revolver capacity. Current liabilities exceeded current assets by approximately $1.0 billion. The company was in compliance with debt covenants.
- Other balance-sheet items: Total assets were $67.7 billion and total equity was $28.0 billion. The Partnership guaranteed substantially all EPO consolidated debt; guaranteed debt, including accrued interest, totaled $29.4 billion.
Material changes versus the prior comparable period
- The revenue decline largely reflected lower commodity prices and lower marketing revenue, with corresponding reductions in cost of sales. Management said Q2 marketing revenue fell about $5.3 billion; midstream-services revenue declined $150 million. Lower reported revenue therefore should not be read alone as an equivalent decline in underlying fee-based activity.
- Q2 gross operating margin fell $181 million. NGL margin was lower, principally reflecting weaker processing and marketing margins; Natural Gas and Crude Oil segment margins increased modestly, while Petrochemical & Refined Products declined.
- First-half operating cash flow decreased $779 million, primarily due to working-capital changes and lower earnings. Investing cash outflow was lower year over year because the prior-year period included the $3.2 billion Navitas Midstream acquisition, partly offset by higher capital expenditures in 2023.
- First-half capital expenditures rose to $1.4 billion from $731 million, reflecting increased spending on Permian processing and gathering, export expansions and other growth projects. First-half common-unit distributions were $2,129 versus $2,026.
Outlook, commentary, risks and unusual items
- Capital outlook: Management estimated 2023 capital investments, net of noncontrolling-interest contributions, at $2.8–$3.2 billion: $2.4–$2.8 billion for growth and approximately $400 million for sustaining capital. Approximately $4.1 billion of growth projects were scheduled for completion by the first half of 2026. Estimates may change with economic conditions, costs, supply-chain issues and management decisions.
- Projects and developments: Acadian Haynesville pipeline expansion was completed in May. PDH 2, Frac XII and the Poseidon processing plant entered service in July 2023. The proposed SPOT offshore crude-oil terminal remained subject to permitting and other requirements; the filing gives no assurance it will be authorized.
- Distribution outlook: The Q2 distribution was declared at $0.50 per unit. Future payments and increases remain subject to management review and Board approval; the filing does not provide formal earnings guidance.
- Key exposures: Results are sensitive to commodity prices, demand, volumes, processing margins, interest rates, customer performance, regulation, inflation and project execution. Management said inflation had not materially affected historical results, but prolonged cost increases could be adverse if they outpace revenue increases. The company uses derivatives and fee-based contracts to manage, not eliminate, commodity exposure.
- Unusual and contingent matters: Six-month gains on commodity derivatives not designated as hedges were $217 million, including $226 million realized gains and $9 million unrealized losses. Litigation contingencies had no recorded accrual at June 30. Several environmental notices and alleged violations were disclosed; the company did not expect related expenditures to be material. Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
- Related-party and governance considerations: EPCO and affiliates owned 32.3% of common units and provide administrative and operating services. The filing cautions related-party terms may not be as favorable as those available from unaffiliated parties.
Important facts for investors to verify
- Whether lower commodity prices and marketing margins continue to pressure segment gross operating margin, and how much performance is supported by fee-based services and throughput.
- Whether operating cash flow and DCF sustain distributions and planned growth spending; review working-capital movements and the non-GAAP DCF reconciliation.
- Execution, timing, cost and customer commitments for the announced growth projects, including the $2.8–$3.2 billion 2023 capital-investment estimate and SPOT permitting.
- Debt refinancing and interest-rate exposure, including the $850 million 2024 maturity, variable-rate borrowings, and the Partnership’s guarantees of EPO debt.
- Developments in environmental and regulatory proceedings, related-party arrangements, and potential obligations associated with the Partnership’s guarantees.