Enterprise Products Partners L.P. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; balance-sheet amounts are as of September 30, 2016. Dollar amounts are in millions unless noted. Enterprise is a North American midstream energy partnership, with operations spanning pipelines, processing, storage, terminals and marketing. Its common units trade as EPD.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $5,920.4 | $6,307.9 | $16,543.5 | $20,872.9 |
| Operating income | $905.0 | $909.4 | $2,657.5 | $2,605.7 |
| Net income attributable to limited partners | $634.6 | $649.3 | $1,854.3 | $1,836.4 |
| Diluted earnings per unit | $0.30 | $0.32 | $0.89 | $0.92 |
| Total gross operating margin (non-GAAP) | $1,312.0 | $1,348.6 | $3,890.5 | $3,984.7 |
| Distributable cash flow (non-GAAP) | $978.4 | $2,501.3 | $3,071.7 | $4,518.5 |
- Cash flow: Nine-month net cash from operations was $2,659.0, versus $2,591.2 in 2015. Investing activities used $3,695.7; financing activities provided $1,074.8. Capital expenditures were $2,443.9, and cash distributions paid to limited partners were $2,448.3.
- Distributions: The declared quarterly distribution rose to $0.405 per unit for Q3 2016 from $0.385 a year earlier. Nine-month distribution coverage was 1.22x; the quarter’s was 1.14x. These coverage figures use the partnership’s non-GAAP distributable cash flow measure.
- Debt and liquidity: Debt principal totaled $24.16 billion, including $2.04 billion of commercial paper. Unrestricted cash was $57.1; restricted cash was $277.3. Management reported $3.52 billion of consolidated liquidity, including $3.46 billion of available revolving-credit capacity. The partnership was in compliance with debt financial covenants.
- Balance sheet: Total assets were $51.26 billion and equity was $22.04 billion. Inventories were $1.76 billion, up from $1.04 billion at year-end 2015; management attributed the increase mainly to marketing positions using storage to capture contango.
Material changes versus prior periods
- Revenue declined 6% in Q3 and 21% for the nine-month period. Management attributed the year-to-date decrease largely to lower crude oil and natural gas marketing sales volumes and prices; related cost of sales also fell substantially.
- Q3 limited-partner income and diluted earnings per unit were lower year over year, while nine-month limited-partner income increased modestly and diluted earnings per unit declined. Q3 operating income was nearly flat; nine-month operating income increased.
- Gross operating margin declined in both comparisons. NGL Pipelines & Services strengthened year to date, but was offset by weaker crude oil, natural gas, and petrochemical/refined-products results. Lower crude-oil volumes and marketing margins, reduced producer activity in some basins, and weaker octane-enhancement margins were cited.
- Year-to-date distributable cash flow fell sharply from 2015, which included $1.53 billion of proceeds from the Offshore Business sale in the comparative period. The Q3 comparison is similarly affected by prior-year asset-sale proceeds included in the DCF calculation; DCF is not GAAP operating cash flow.
- Debt principal increased from $22.74 billion at December 31, 2015. The partnership issued $1.25 billion of senior notes and $2.17 billion of net proceeds from common-unit issuance during the first nine months. Common units outstanding rose to approximately 2.103 billion at September 30.
Outlook, commentary, risks and unusual items
- Management said it expected sufficient operating cash flow, liquidity and capital-market access to meet foreseeable capital and working-capital needs, while noting that it expected to issue additional debt and equity securities. No earnings or cash-flow guidance was provided.
- Management expected 2016 organic growth capital expenditures of about $2.8 billion and sustaining capital expenditures of about $250 million. Approximately $5.2 billion of growth projects were scheduled for completion in 2017–2018. The PDH facility was expected to begin commercial operations in Q2 2017; a planned Delaware Basin processing plant was expected in Q2 2018.
- Recent developments included commercial service at the Morgan’s Point ethane export terminal, start-up of the Waha and South Eddy processing plants, and new propylene export capability. The partnership also announced a second Delaware Basin processing facility backed by long-term producer commitments.
- The Pascagoula gas-processing facility remained out of service after a June fire; management expected a Q4 2016 return to service. The filing reported a $7.1 million non-cash asset loss and $7.1 million of Q3 fire-response expense. Insurance recovery remained under evaluation; property-damage coverage has a $55 million deductible and business-interruption coverage has stated thresholds.
- A Dallas County judgment in the ETP dispute totaled $535.8 million before post-judgment interest. The appeal had been argued and submitted; management did not accrue a provision because it believed payment was not probable. The FTC and Texas Attorney General investigations concerning the Oiltanking acquisition were closed.
- Enterprise sued its former PDH contractor after terminating it for cause; the case had not been set for trial. A New Mexico environmental notice of violation concerning air emissions could result in sanctions above $0.1 million. Litigation accruals were $5.6 million; management did not expect pending litigation, individually or in aggregate, to materially affect the financial statements.
- Other notable items include a $273.1 million Level 3 liability for the Oiltanking-related Liquidity Option Agreement, with valuation dependent on significant unobservable assumptions, and a $28.0 million nine-month non-cash expense from its accretion and remeasurement.
- Commodity-price, interest-rate, counterparty, producer-activity, project-execution and capital-market risks remain relevant. Restricted cash rose substantially with derivative margin requirements. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether operating cash flow and distributable cash flow can support the rising distribution and large growth-capital program; review DCF definitions and the prior-year asset-sale effect.
- Debt maturities, commercial-paper funding, available revolver capacity and the extent of future equity issuance and dilution.
- Execution, timing, cost and contracted returns of the PDH, Delaware Basin and other major projects, including the expected Pascagoula restart.
- Developments in the ETP appeal, PDH contractor litigation, environmental matters and the Liquidity Option valuation assumptions.
- Segment trends in crude-oil transportation and marketing, natural-gas volumes, NGL export activity and octane-enhancement margins.