Business context and reporting period
Enterprise Products Partners L.P. (NYSE: EPD) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. The partnership operates an integrated North American midstream network spanning natural gas, NGLs, crude oil, petrochemicals, refined products, storage, terminals and marine transportation.
Unless noted otherwise, dollar amounts below are in millions. Comparisons are with the corresponding 2020 period.
Financial and operating performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $9,450.1 | $5,751.0 | $18,605.4 | $13,233.5 |
| Operating income | $1,492.6 | $1,436.9 | $3,187.1 | $2,944.4 |
| Net income attributable to common unitholders | $1,112.3 | $1,034.7 | $2,452.7 | $2,384.8 |
| Basic and diluted earnings per common unit | $0.50 | $0.47 | $1.11 | $1.08 |
| Gross operating margin (non-GAAP) | $2,061.4 | $1,998.4 | $4,384.7 | $4,045.9 |
| Net cash from operating activities | $1,993.9 | $1,181.6 | $4,017.0 | $3,193.8 |
| Distributable cash flow (non-GAAP) | $1,598.5 | $1,577.3 | $3,335.8 | $3,130.9 |
| Distribution coverage ratio | 1.6x | 1.6x | 1.7x | 1.6x |
Revenue growth substantially reflected higher commodity prices and marketing activity, with associated cost of sales also rising. Gross operating margin is a management-defined non-GAAP measure and is not directly equivalent to GAAP operating income.
- Margins and segments: Q2 gross operating margin rose about 3%, while revenue rose about 64%. Q2 segment margin improved in NGL Pipelines & Services ($1,097.6 vs. $968.1) and Petrochemical & Refined Products Services ($326.3 vs. $191.5), but declined in Crude Oil Pipelines & Services ($418.9 vs. $634.4). Natural Gas Pipelines & Services was $202.0 vs. $208.9.
- Cash generation and investment: First-half operating cash flow increased $823.2 year over year. Capital expenditures were $1,301.2, including $1,050.1 of growth and $251.1 of sustaining investment. First-half free cash flow, as defined by the partnership, was $2,735.0.
- Liquidity: At June 30, cash and cash equivalents were $404.5, restricted cash was $206.5, and management reported $5.4 billion of consolidated liquidity, including $5.0 billion of available revolving-credit capacity. Current assets were $10,311.2 and current liabilities $10,528.6.
- Debt: Consolidated debt principal was $28.82 billion, down from $30.15 billion at December 31, 2020, following repayment of $750 million of notes in February and redemption of $575 million in March. Long-term debt was $27,148.6 and current maturities $1,398.9. The partnership reported compliance with debt covenants; EPO’s long-term senior unsecured debt had investment-grade ratings.
- Distribution: The board declared a Q2 distribution of $0.45 per common unit ($1.80 annualized), payable August 12, 2021. Total declared payments, including phantom-unit distribution equivalents, were $991.4.
Material changes, outlook and risks
- First-half revenue increased $5.37 billion, primarily from higher marketing revenues as commodity prices recovered; higher prices generally raised both sales revenue and cost of sales. First-half total gross operating margin increased about 8% and common-unit earnings about 3%.
- The February 2021 Texas winter storms produced unusual earnings effects. Q2 NGL fractionation results included $58.0 from power-supply optimization and $40.5 of Load Resources Demand Response Program payments. First-half natural-gas marketing margin benefited from storm-related sales; storm-related power and gas costs, operational disruptions and hedge losses were partly mitigated by those sales and program receipts.
- First-half asset impairment charges were $83.4, including $44.3 related to the sale of San Juan Gathering System assets. A separate $11.3 non-cash charge related to a warehouse fire. The filing warns that prolonged adverse COVID-19 impacts could lead to further non-cash impairment charges.
- Management said the diversified, largely fee-based business model, liquidity, investment-grade ratings and disciplined capital spending support the business. It cited recovering global hydrocarbon demand and restrained supply, while emphasizing uncertainty from COVID-19 and variants, including Delta. These are management views and third-party forecasts, not guaranteed outcomes.
- Management expected 2021 capital investment for sanctioned projects, net of expected noncontrolling-interest contributions, of about $2.2 billion ($1.7 billion growth and $440 million sustaining). Planned growth investment was about $800 million in 2022 and $400 million in 2023. Approximately $3.1 billion of growth projects were scheduled for completion by year-end 2023, including PDH 2 in Q2 2023. These estimates may change; the proposed SPOT offshore crude terminal remained subject to government approvals and was excluded from the forecast.
- EPO expected to renew its 364-day revolving credit agreement and extend the multi-year facility maturity during Q3 2021. Management said future distribution increases would be reviewed quarterly; the filing provided no earnings or distribution-growth guidance.
- Risks include commodity-price and demand changes, customer credit and contract performance, weather and operational disruption, COVID-19, derivative valuation and margin requirements, litigation and environmental/regulatory matters. A long-running PDH 1 contractor lawsuit remained pending; the filing does not provide a clear estimate of potential recovery or exposure. Product purchase commitments were $20.95 billion, up from $14.8 billion at year-end, primarily reflecting higher crude and NGL prices.
Important facts for investors to verify
- How much of reported revenue and cash generation reflects commodity-price-driven marketing activity versus recurring fee-based services, and whether segment trends persist.
- The sustainability of first-half cash flow and distribution coverage, including working-capital effects, storm-related benefits and the filing’s $99.7 million of trade receivables not expected to be collected in the normal billing cycle.
- Debt maturities, refinancing progress, revolver renewals/extensions and the distinction between reported liquidity and unrestricted cash.
- Execution, funding and expected returns for the capital program, including project timing, sustaining needs and SPOT approvals.
- Potential future impairment, litigation, commodity-hedge and margin-collateral exposure, and material related-party arrangements; EPCO and affiliates owned 32.1% of common units.