Enterprise Products Partners L.P. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Enterprise is a North American midstream energy partnership operating across NGL, crude oil, natural gas, petrochemical and refined-products businesses.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $9.16 billion | $7.48 billion | +22.4% |
| Operating income | $1.69 billion | $1.51 billion | +12.4% |
| Net income | $1.36 billion | $1.38 billion | -0.9% |
| Net income attributable to common unitholders | $1.34 billion | $1.35 billion | -0.7% |
| Basic and diluted earnings per common unit | $0.61 | $0.61 | Unchanged |
| Operating cash flow | $2.02 billion | $2.01 billion | +$10.9 million |
| Capital expenditures | $679.0 million | $1.08 billion | -$400.5 million |
- Margins and segment results: Non-GAAP total gross operating margin was $2.32 billion, up from $2.05 billion. Natural Gas Pipelines & Services rose to $535.2 million from $283.8 million, largely reflecting unusually strong natural-gas marketing margins during February’s winter storms. Crude Oil Pipelines & Services declined to $400.2 million from $452.9 million; NGL Pipelines & Services and Petrochemical & Refined Products Services increased to $1.09 billion and $281.5 million, respectively.
- Revenue drivers: Higher commodity prices drove much of the revenue increase, while associated cost of sales also rose. Marketing revenues increased about $1.67 billion net; management said higher average sales prices contributed $2.1 billion, partly offset by lower sales volumes. Revenue growth therefore did not translate proportionately into profit growth.
- Cash generation and distributions: Distributable cash flow (non-GAAP) was $1.74 billion versus $1.55 billion; distribution coverage was 1.8x versus 1.6x. Free cash flow (non-GAAP) was $1.35 billion versus $915.8 million. Cash distributions paid during the quarter were $981.7 million. A $0.45-per-unit Q1 distribution, or $1.80 annualized, was declared after quarter-end, payable May 12, 2021.
- Liquidity and debt: March 31 unrestricted cash was $229.4 million, restricted cash was $105.0 million, and consolidated liquidity was $5.11 billion, including $4.88 billion of available revolving credit capacity. Debt principal totaled $28.94 billion, down from $30.15 billion at year-end 2020; long-term debt on the balance sheet was $27.15 billion. The average debt maturity was approximately 21 years. EPO remained investment grade and was in compliance with debt covenants.
- Balance-sheet position: Total assets were $64.98 billion. Current assets of $10.58 billion were approximately equal to current liabilities of $10.54 billion. The filing reports $19.34 billion of contractual product-purchase commitments at March 31, up from $14.8 billion at year-end, primarily due to higher crude oil and NGL prices.
Material changes and unusual items
- February winter storms Uri and Viola caused power outages, shutdowns and disruptions, and increased power and natural-gas costs. Natural-gas sales to customers during the storms helped mitigate impacts; storm-related natural-gas marketing gross operating margin increased $265.9 million year over year. The filing also cites lower volumes and operating disruptions.
- Net income was slightly lower despite higher operating income, in part because Q1 2020 included a $179.2 million deferred tax benefit attributable to OTA; Q1 2021 recorded a $10.0 million income tax provision.
- Q1 2021 included $65.5 million of asset impairment charges, primarily a $43.4 million charge related to the San Juan Gathering System assets classified as held for sale. The $40.0 million sale closed effective April 1, 2021.
- EPO repaid $750 million of notes in February and redeemed $575 million of notes in March, partly using commercial paper proceeds. Financing cash flow shifted to a $2.19 billion use from $765.1 million provided in Q1 2020, primarily reflecting debt repayment versus prior-year debt issuance.
- The full $1.08 billion notional portfolio of interest-rate forward-starting swaps was terminated in March. The company reported no interest-rate derivative instruments outstanding at quarter-end and received $75.2 million from monetizing interest-rate derivatives during the quarter.
Outlook, risks and contingencies
- Management said demand for hydrocarbons had begun recovering as vaccination expanded and restrictions eased, while emphasizing that recovery depends on containing COVID-19, vaccine efficacy and distribution, and economic conditions. It described the integrated, diversified and fee-based model, investment-grade ratings, liquidity and spending discipline as sources of resilience.
- Expected 2021 capital investments, net of anticipated noncontrolling-interest contributions, were approximately $2.1 billion: $1.6 billion growth and $440 million sustaining. Sanctioned growth capital was expected to be approximately $800 million in 2022 and $400 million in 2023. The company cited $3.6 billion of growth projects scheduled through 2023.
- The proposed SPOT deepwater crude oil terminal remained subject to governmental approvals; approval was anticipated as early as the second half of 2021, with no assurance of approval or timing. Future distribution increases are to be evaluated quarterly.
- Risks include commodity-price and demand changes, customer credit and contractual performance, weather and operational disruptions, COVID-19 effects, and potential future non-cash impairments if adverse economic impacts persist. The filing notes ongoing PDH litigation against Amec Foster Wheeler and related entities; the company intends to pursue its claims. Accrued litigation contingencies were $0.2 million at quarter-end.
- The Partnership guarantees most EPO debt. The filing states guaranteed debt was $29.15 billion, including accrued interest, at March 31, 2021. The company also disclosed extensive related-party arrangements and that EPCO affiliates held 32.2% of common units.
Important facts for investors to verify
- How much Q1 earnings and cash generation depended on higher commodity prices and the temporary storm-related natural-gas marketing opportunity, versus recurring fee-based activity.
- Whether the declared $0.45 quarterly distribution remains well covered after sustaining capital, working-capital needs, debt service and planned growth spending.
- Debt refinancing and liquidity needs, including commercial paper exposure, the near-term maturity schedule and the parent guarantee of EPO obligations.
- Execution, costs and expected returns for the $3.6 billion project slate, as well as the approval status and assumptions for SPOT.
- Potential effects of storm damage, facility maintenance, customer volumes, COVID-19 developments, commodity-price movements and asset impairments on subsequent results.
- The size and terms of related-party transactions, contingent litigation exposure and the valuation assumptions behind the San Juan asset sale and impairment.