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, 2018. It is a North American midstream energy partnership operating natural gas, NGL, crude oil, petrochemical and refined-products infrastructure through four business segments. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $8,467.5; prior year $6,607.6 | $17,766.0; prior year $13,928.0 |
| Operating income | $986.4; prior year $938.7 | $2,124.9; prior year $1,970.3 |
| Net income attributable to limited partners | $673.8; prior year $653.7 | $1,574.5; prior year $1,414.4 |
| Basic and diluted earnings per unit | $0.31; prior year $0.30 | $0.72; prior year $0.66 |
| Total gross operating margin, non-GAAP | $1,478.1; prior year $1,377.9 | $3,064.3; prior year $2,847.0 |
| Net cash provided by operating activities | Quarterly value not separately stated here | $2,697.8; prior year $2,334.9 |
- For the first half, capital expenditures were $1,921.1, including $1,780.7 of growth and $140.4 of sustaining spending. Investing activities used $2,089.6; financing activities used $337.0.
- At June 30, cash and cash equivalents were $57.9 and restricted cash was $283.6. Management reported $3.59 billion of consolidated liquidity: $3.53 billion of available revolver capacity and $57.9 million of unrestricted cash.
- Consolidated debt principal was $25.91 billion, up from $24.78 billion at December 31, 2017; balance-sheet current maturities were $2,668.7 and long-term debt was $23,020.2. The partnership was in compliance with debt covenants.
- First-half distributable cash flow, a non-GAAP measure, was $2,821.4 versus $2,180.5; distribution coverage was 1.5x versus 1.2x. The quarterly distribution declared for Q2 was $0.4300 per unit.
Material changes versus the prior comparable period
- Second-quarter revenue increased about 28% year over year, while limited-partner net income rose about 3%. First-half revenue increased about 28%, and limited-partner net income rose about 11%. Revenue growth was driven largely by higher marketing sales volumes and commodity prices; higher product costs also increased with prices and volumes.
- Second-quarter non-GAAP gross operating margin increased about 7%. NGL Pipelines & Services and Petrochemical & Refined Products Services improved, while the crude-oil segment fell sharply, principally because of non-cash mark-to-market losses on Midland-to-ECHO-related crude basis hedges.
- First-half operating cash flow rose $362.9 million year over year, but capital spending increased substantially; cash used in investing activities rose $791.0 million.
- Interest expense increased $28.8 million in Q2 and $31.6 million for the first half, primarily due to higher average debt balances. The average debt principal balance was $25.97 billion in Q2 versus $23.6 billion a year earlier.
Outlook, management commentary, risks and unusual items
- Management said it expected sufficient liquidity, operating cash flow and capital-market access for foreseeable capital expenditures and working-capital needs. It forecast 2018 growth capital spending of approximately $3.8–$4.0 billion, including the Delaware Processing acquisition, and sustaining capital of approximately $315 million.
- Management expected to recommend quarterly distributions of $0.4325 for Q3 2018 and $0.4350 for Q4 2018; payment remains subject to Board approval and financial conditions.
- Growth initiatives included the Shin Oak NGL pipeline, expansions of Front Range and Texas Express, Orla processing trains, an ethylene export terminal and a planned butane-isomerization expansion. A proposed offshore Texas crude export terminal remained in planning and depended on permits and customer demand.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method, with no opening equity adjustment. It added first-half reported revenue of $280.4 million and operating costs of $275.6 million, principally reflecting equity NGL volumes; management said gross operating margin was not expected to change significantly. Prior-year periods were not restated.
- Crude-oil derivatives produced $462.5 million of aggregate unrealized mark-to-market losses in the first half, primarily from widening Midland-area price differentials. The partnership cautioned that further spread widening could cause additional temporary losses. Restricted cash for derivative margin was $283.6 million at quarter-end and had risen to $316.0 million by July 16; additional margin postings may be required.
- The Midland-to-ECHO business reported a $276.0 million first-half gross operating margin loss, including $423.9 million of non-cash mark-to-market losses. Management stated the hedges lock in an average $2.62-per-barrel positive margin on covered anticipated flows; actual physical transactions and hedge settlements occur over time.
- In February EPO issued $2.7 billion of notes and in March redeemed $682.7 million of 7.034% junior subordinated notes; management estimated annual interest savings of about $11.3 million. In July, EPO notified the trustee of its planned redemption of $521.1 million of Junior Subordinated Notes A, expected to be funded short term with commercial paper or revolver borrowings. EPO also expected to renew its $1.5 billion 364-day credit facility in Q3.
- The Delaware Processing step acquisition generated a non-cash $39.4 million remeasurement gain in the first half. The ETP dispute remained pending before the Texas Supreme Court after an appellate court reversed the trial judgment; management had recorded no provision because it did not consider payment probable. A separate PDH-contractor lawsuit remained ongoing.
- Other disclosed exposures include about $1.7 billion of new crude-oil purchase commitments overall, an estimated $350.3 million liability for the Oiltanking Liquidity Option, and related-party relationships: EPCO affiliates owned approximately 32% of units and provide operating and administrative services. Management stated pending litigation was not expected to have a material aggregate impact; a New Mexico air-permit matter could result in sanctions above $0.1 million but was not expected to be material.
Most important facts an investor should verify
- How much of earnings and reported gross margin reflects underlying fee-based operations versus marketing activity and non-cash derivative valuation changes; track hedge settlements, physical margins and required collateral.
- Whether projected growth projects, spending and start-up schedules are met, and whether funding needs lead to additional debt or unit issuance.
- Distribution sustainability: reconcile non-GAAP distributable cash flow and reported coverage to operating cash flow, capital requirements and actual distributions.
- Debt refinancing and liquidity developments, including the September 2018 credit-facility renewal, the planned Notes A redemption and commercial-paper usage.
- Developments in the ETP and PDH litigation, the Liquidity Option valuation, crude purchase commitments and material related-party transactions.