Enterprise Products Partners L.P. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; comparisons are with the same periods in 2019. EPD is a North American midstream energy partnership operating across NGL, crude oil, natural gas, petrochemical and refined-products businesses.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $5.75 billion | $8.28 billion | $13.23 billion | $16.82 billion |
| Operating income | $1.44 billion | $1.56 billion | $2.94 billion | $3.19 billion |
| Net income attributable to limited partners | $1.03 billion | $1.21 billion | $2.38 billion | $2.48 billion |
| Basic and diluted earnings per unit | $0.47 | $0.55 | $1.08 | $1.12 |
| Net cash from operating activities | $1.18 billion | $2.02 billion | $3.19 billion | $3.18 billion |
| Distributable cash flow (non-GAAP) | $1.58 billion | $1.72 billion | $3.13 billion | $3.35 billion |
- Q2 revenue fell about 31%, principally from lower commodity prices and reduced marketing volumes. Operating income declined about 8% and earnings per unit about 15%.
- Lower product sales prices also reduced cost of sales, so the sharp revenue decline did not translate proportionally into lower operating income. Management reported approximately 86% of 2019 gross operating margin was fee-based, much of it supported by take-or-pay arrangements.
- Non-GAAP total gross operating margin was $2.00 billion in Q2, down from $2.08 billion; for the first half it was $4.05 billion versus $4.21 billion. Segment results varied: NGL margin was resilient, crude oil margin increased in Q2 partly on storage/contango opportunities, while natural gas and petrochemical/refined-products margins weakened.
- First-half operating cash flow was essentially flat year over year, despite lower earnings, partly due to timing of operating receipts and payments. Q2 operating cash flow was lower year over year. Capital expenditures were $1.98 billion in the first half, versus $2.26 billion.
- DCF coverage was 1.6x in both Q2 and the first half, compared with 1.8x and 1.7x, respectively, in 2019. First-half DCF retained by the partnership was $1.17 billion, down from $1.42 billion.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $1.30 billion; total cash including restricted cash was $1.44 billion. Consolidated liquidity was $7.3 billion: $6.0 billion of available revolving-credit capacity and $1.3 billion of unrestricted cash.
- Consolidated debt principal was $29.90 billion, up from $27.88 billion at December 31, 2019; long-term debt on the balance sheet was $27.29 billion. Average debt maturity was approximately 19.9 years. The partnership reported compliance with debt covenants.
- Current assets were $7.12 billion and current liabilities $7.48 billion. Current debt maturities were $2.33 billion, including $1.0 billion of notes due in September 2020; management said January 2020 note proceeds were intended to fund that maturity.
- In January, EPO issued $3.0 billion of senior notes. In August, after quarter-end, it issued a further $1.25 billion, with proceeds intended for general purposes and repayment of all or part of $750 million due in February 2021.
Outlook, risks and notable items
- Management lowered its 2020 total capital-investment forecast to $2.8–$3.3 billion, including $2.5–$3.0 billion of growth spending and about $300 million of sustaining capital, from the prior $3.4–$4.4 billion forecast. Planned growth spending was approximately $2.3 billion for 2021 and $1.0 billion for 2022. The forecast excludes the proposed SPOT offshore crude terminal; management did not expect governmental approval in 2020.
- Management described the outlook as challenging but said the partnership had a solid balance sheet, ample liquidity and good distribution coverage. It warned that reduced drilling, refinery activity and transportation-fuel demand could continue to reduce asset throughput in the second half of 2020. The duration and pace of economic reopening remained uncertain.
- COVID-19, the oil-market supply dispute and lower commodity prices were identified as material risks to demand, volumes, customers, counterparties, liquidity and asset values. EPD was monitoring assets and investments for impairment; no significant impairment charges were recorded in the first half, though future charges remained possible.
- The Q2 distribution was declared at $0.445 per unit ($1.78 annualized), a 1.1% increase over Q2 2019. Management said future 2020 distributions would be evaluated quarterly and remain subject to Board approval.
- The March settlement of the Liquidity Option involved issuing 54.8 million units to acquire OTA and reacquiring an equal number of units as treasury units. It increased reported common-unit equity by about $1.3 billion and resulted in an assumed deferred tax liability. The settlement and subsequent unit-price changes generated a net $136.7 million deferred tax benefit in first-half earnings; the second quarter included $50.5 million of related tax expense.
- First-half derivatives and commodity-market movements affected reported results: non-cash mark-to-market gains contributed to gross operating margin, and accumulated other comprehensive loss was $147.1 million at quarter-end. A PDH 1 construction dispute with AFW remained in litigation; the filing does not quantify a potential recovery.
Important facts for investors to verify
- Whether actual 2020 throughput, fee-based earnings and customer credit quality held up as pandemic effects and producer curtailments evolved.
- Whether cash generation and DCF continued to support distributions, capital spending and debt service, given lower coverage and management’s quarterly distribution reviews.
- Execution of the revised capital plan, project completion schedules, and the expected returns and customer commitments for growth projects.
- Debt refinancing and liquidity developments, including the September 2020 revolving-credit renewal and upcoming maturities; also monitor the effect of the August note issuance.
- Potential earnings volatility from OTA’s unit-price-linked deferred tax liability, commodity derivatives and mark-to-market accounting, as well as any future impairment charges or litigation outcomes.