Enterprise Products Partners L.P. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Enterprise is a North American midstream partnership operating pipelines, processing, storage and terminal assets across natural gas, NGLs, crude oil, petrochemicals and refined products. It sold its Offshore Business in July 2015 and began consolidating EFS Midstream in July 2015.
Financial performance and liquidity
- Revenue: $5.005 billion, down 33.0% from $7.473 billion. The decline primarily reflected lower commodity prices and sales volumes; the filing notes that associated cost of sales also fell.
- Profit: Net income was $670.2 million, up 3.0%; income attributable to limited partners was $661.2 million, up 3.9%. Basic earnings per unit were $0.32 versus $0.33; diluted earnings per unit were $0.32 versus $0.32.
- Operating results: Operating income increased to $915.6 million from $896.0 million. Non-GAAP gross operating margin was $1.319 billion, down from $1.334 billion. NGL Pipelines & Services margin rose to $783.7 million; margins declined in crude oil, natural gas, petrochemical/refined products and the prior-year Offshore segment.
- Cash flow: Operating cash flow was $899.7 million, down from $954.0 million. Capital expenditures were $1.007 billion, so they exceeded operating cash flow by about $108 million before other investing items. Cash used in investing was $1.164 billion. Financing provided $405.8 million, including $1.012 billion of net common-unit issuance proceeds.
- Distributions: Distributable cash flow, a non-GAAP measure, was $1.054 billion versus $1.030 billion. Distribution coverage was 1.3x versus 1.4x; cash distributions paid with respect to the period were $825.4 million. The Q1 2016 declared rate was $0.395 per unit, compared with $0.375 a year earlier.
- Balance sheet and debt: Total assets were $49.737 billion and total equity $21.346 billion at March 31. Consolidated debt principal was approximately $22.946 billion; balance-sheet debt was $22.756 billion, including current maturities. Commercial paper was $2.072 billion. The partnership reported compliance with debt covenants.
- Liquidity: Management reported $3.6 billion of consolidated liquidity: $3.43 billion of available revolving-credit capacity and $160.6 million of unrestricted cash. Restricted cash was an additional $136.9 million.
Material changes, outlook and management commentary
- Commodity-linked marketing revenues and cost of sales fell substantially with lower prices and volumes. Q1 average WTI crude oil was $33.45 per barrel versus $48.63; the filing says lower prices do not necessarily reduce margin or cash available for distributions because purchase costs also decline.
- Growth in NGL pipeline, storage and terminal activity helped offset weaker results elsewhere. EFS Midstream contributed $53.3 million of crude-oil-segment gross operating margin in Q1 2016. Seaway recognized $22.2 million of revenue on a 100% basis after a favorable FERC ruling on rates.
- Management said it expected sufficient liquidity and capital-market access for foreseeable needs. It forecast approximately $3.1 billion of capital spending for the remainder of 2016, including the $1.0 billion final EFS Midstream installment and about $215 million of sustaining spending. It expected $2.2 billion of growth projects to enter service during the rest of 2016 and $4.2 billion in 2017–2018.
- Management announced plans to recommend total 2016 distributions of $1.61 per unit, a 5.2% increase over 2015, subject to board approval. The board declared the Q1 rate of $0.395 per unit in April.
- After quarter-end, EPO issued $1.25 billion of senior notes in April 2016. The partnership also sold additional units through its ATM program through April 8; together with Q1 DRIP/EUPP proceeds, the filing reports $1.604 billion of net proceeds for the specified period. These equity issuances increase unit count and can dilute existing holders.
- The South Eddy gas-processing plant and related infrastructure entered service in May 2016; the ethane export facility was expected to begin operations in Q3 2016. The filing cautions that actual results may differ from forward-looking statements and that capital plans may change with market, weather, supplier and financing conditions.
Risks, contingencies and unusual items
- ETP litigation: A Texas trial-court judgment against Enterprise totals $535.8 million, plus post-judgment interest at 5% compounded annually. Enterprise disputes the judgment; oral argument occurred April 20, 2016 and the appeal was submitted. No provision was recorded because management considered payment not probable.
- Regulatory inquiry: The FTC and Texas Attorney General requested information concerning the Oiltanking acquisition and operations. Enterprise said it was cooperating and could not predict the outcome.
- Commodity and financing exposure: Commodity prices, regional production and demand, counterparties’ performance, derivatives, and access to debt and equity markets may affect results and cash flows. Commercial paper and significant planned capital spending make continued financing access important.
- Related parties: EPCO and affiliates owned 33.3% of units and provide operating and administrative services. They invested $200 million through ATM and DRIP transactions in Q1; Enterprise notes related-party agreements may not be as favorable as arrangements with unaffiliated parties.
- EFS obligation: The balance sheet included a $996.5 million accrued liability related to the EFS Midstream acquisition; management expected a $1.0 billion final installment as part of remaining-2016 capital spending.
Most important facts for investors to verify
- Whether projected capital spending, project start-up dates and the EFS final payment are completed on schedule and within budget.
- Whether operating cash flow and distributable cash flow support the planned distribution; note Q1 coverage of 1.3x and capital expenditures exceeding operating cash flow.
- How unit issuance, including subsequent ATM sales, affects per-unit results and distribution obligations.
- Developments in the ETP appeal and the FTC/Texas inquiry, including any change in estimated exposure.
- Debt maturities, commercial-paper refinancing, revolving-credit availability and continued covenant compliance.
- Commodity-price, volume and margin trends, particularly in crude oil marketing and the segments with year-over-year margin declines.