ENTERPRISE PRODUCTS PARTNERS L.P. quarterly report, Q3 FY2018

Enterprise Products Partners L.P. — Q3 2018 Form 10-Q

Reporting period: Three and nine months ended September 30, 2018; filed November 8, 2018. Amounts are U.S. dollars. Enterprise is a North American midstream partnership operating across NGL, crude oil, natural gas, petrochemical and refined-products businesses.

Financial performance and liquidity

Metric	Q3 2018	Q3 2017	Nine months 2018	Nine months 2017
Revenue	$9.586B	$6.887B	$27.352B	$20.815B
Operating income	$1.643B	$879.2M	$3.768B	$2.850B
Net income attributable to limited partners	$1.313B	$610.9M	$2.888B	$2.025B
Basic and diluted earnings per unit	$0.60	$0.28	$1.32	$0.94
Non-GAAP total gross operating margin	$2.123B	$1.313B	$5.188B	$4.160B
Cash from operating activities	$1.578B	$485.0M	$4.275B	$2.820B

Q3 revenue rose 39%; operating income rose 87%; limited-partner net income more than doubled. Nine-month revenue increased 31%, operating income 32%, and limited-partner net income 43% year over year.
Q3 gross operating margin increased across all four segments, led by NGL Pipelines & Services ($1.063B versus $770.9M) and Crude Oil Pipelines & Services ($594.2M versus $190.4M). The crude segment’s Q3 result included a $186.7M non-cash mark-to-market gain on Midland-to-ECHO-related hedges; its nine-month result included a $237.3M mark-to-market loss.
Q3 interest expense was $279.5M, up from $243.9M. Nine-month interest expense was $806.2M, up from $739.0M, reflecting higher average debt balances.
At September 30, total principal debt was $26.13B, including $2.71B of commercial paper; current maturities were $3.41B. Unrestricted cash was $30.2M and restricted cash $248.9M. Management reported $3.32B of consolidated liquidity, including $3.29B of available revolving-credit capacity. The partnership reported compliance with debt covenants.
Nine-month capital expenditures were $3.00B, including $2.78B for growth and $221.5M for sustaining projects. Cash used in investing was $3.18B. Common-unit distributions paid in the first nine months totaled $2.78B.
Non-GAAP distributable cash flow was $1.581B for Q3 and $4.402B year to date; reported distribution coverage was 1.7x and 1.6x, respectively. These measures are not GAAP measures.

Material changes and significant items

Revenue growth primarily reflected increased marketing activity, higher commodity prices and volumes, and stronger midstream service activity. Higher sales prices generally also increased cost of sales; management cautioned that higher marketing revenue does not necessarily mean higher margin or distributable cash flow.
ASC 606 was adopted January 1, 2018. Reported revenue included $215.8M in Q3 and $491.4M year to date from non-cash equity NGL consideration, with matching costs recognized when those products were sold. The filing says gross operating margin is not expected to change significantly from this presentation. Prior-year figures were not recast.
Growth projects placed in service included the PDH facility, the first Orla processing train and the ninth Mont Belvieu NGL fractionator. The PDH facility experienced a planned-maintenance outage in September and resumed service in October.
In March, Enterprise acquired the remaining 50% of Delaware Processing for $150.6M cash and recognized a $39.4M non-cash step-acquisition gain. In June, Western Gas acquired a 20% interest in the Midland-to-ECHO pipeline for $189.6M.
In October, EPO issued $3.0B of senior notes at fixed rates of 3.50%, 4.15% and 4.80%, with maturities in 2022, 2028 and 2049. Proceeds were used for temporary commercial-paper repayment and general purposes, including growth spending. Enterprise also completed the Red River System sale for approximately $135M; the assets had a September 30 carrying value of $109.6M.
Restricted cash supports commodity derivatives and related physical activity. Derivatives not designated as hedges generated a $542.2M nine-month loss in earnings; the filing identifies $288.2M as realized and reports $259.7M of aggregate unrealized mark-to-market losses across derivative instruments.

Outlook, risks and contingencies

Management expected 2018 growth capital spending of approximately $4.2B, including the Delaware Processing acquisition, and sustaining capital spending of approximately $315M. Approximately $6.0B of growth projects were scheduled for completion by mid-2020. Management stated it expected adequate liquidity and capital-market access, while noting spending plans could change.
Management expected to recommend a Q4 2018 distribution of $0.4350 per unit; distributions remain subject to board approval. The Q3 declared rate was $0.4325 per unit.
Management expected NGL basis differentials and overall commodity prices to be lower in Q4 2018. Commodity price and basis-spread volatility, hedging outcomes, margin requirements, customer performance, project execution and access to capital are material risks. Additional cash may be required for derivative margin; the filing reports $211.7M in cash and $100M in standby letters of credit posted through October 15.
New crude-oil purchase commitments increased estimated obligations by about $1.2B over five years and $1.8B overall. Management reported no material off-balance-sheet arrangements.
The Texas Supreme Court was considering the ETP pipeline dispute after an appeals court reversed the prior judgment against Enterprise. No provision was recorded because management did not consider payment probable. Enterprise also continues to pursue claims in litigation concerning the PDH facility contractor; the filing does not provide a clear estimate of potential recovery or exposure.
The Liquidity Option Agreement liability was $368.8M at September 30. M&B may exercise a put option in 2020 that could require Enterprise to acquire OTA and assume associated tax obligations; valuation depends on significant unobservable assumptions.

Most important facts for investors to verify

How much of earnings and reported growth reflects durable fee-based volumes versus commodity marketing, price changes and non-cash derivative marks?
Whether projected capital spending, project start-up schedules and customer demand support expected returns and liquidity needs.
Debt refinancing needs and commercial-paper exposure, including the effect of post-quarter note issuance on net debt and interest costs.
Distribution coverage using the partnership’s non-GAAP definition and cash actually retained after growth spending.
Potential cash, tax or earnings effects from the ETP litigation, PDH contractor litigation and the 2020 Liquidity Option.
The effect of ASC 606 presentation changes when comparing 2018 revenue with prior periods.