Business context and reporting period
Enterprise Products Partners L.P. (NYSE: EPD) is a North American midstream energy partnership operating pipelines, processing and fractionation facilities, storage and export terminals, and related marketing businesses. This unaudited Form 10-Q covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Dollar figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparator |
|---|---|---|
| Revenue | $13,008 | $9,155 |
| Operating income | $1,666 | $1,695 |
| Net income | $1,331 | $1,363 |
| Net income attributable to common unitholders | $1,296 | $1,341 |
| Basic and diluted earnings per common unit | $0.59 | $0.61 |
| Operating cash flow | $2,145 | $2,023 |
| Distributable cash flow (non-GAAP) | $1,837 | $1,737 |
| Distribution coverage ratio | 1.8x | 1.8x |
Revenue grew 42%, largely reflecting higher commodity prices and marketing activity; operating income declined 2% and common-unit earnings declined 3%. Calculated operating margin was approximately 12.8% versus 18.5%, and net margin approximately 10.2% versus 14.9%. These revenue-based margins were affected by higher product sales prices and corresponding purchase costs. Total gross operating margin, a non-GAAP measure, was $2,258 versus $2,323, down about 3%.
Segment gross operating margin: NGL Pipelines & Services $1,225 (up from $1,086); Crude Oil Pipelines & Services $415 (up from $400); Natural Gas Pipelines & Services $220 (down from $535); Petrochemical & Refined Products Services $404 (up from $282). The natural gas segment’s decline primarily reflected the absence of unusually strong natural gas marketing results during the February 2021 winter storms.
Operating costs and expenses were $11,397 versus $7,553, primarily because cost of sales rose with commodity prices and sales activity. Equity income from unconsolidated affiliates fell to $117 from $149. Interest expense declined to $319 from $323. The filing reports no company-defined GAAP operating or net margin; the percentages above are calculated from reported figures.
Cash flow, debt and liquidity
- Operating cash flow increased to $2,145 from $2,023. Capital expenditures were $349, and the Navitas Midstream acquisition used $3,204 net cash; cash used in investing activities totaled $3,532.
- Cash distributions paid to common unitholders were $1,012 in the quarter. Q1 DCF of $1,837 exceeded distributions paid with respect to the period, including distribution equivalent rights, of $1,023; reported retained DCF was $814.
- At March 31, cash and cash equivalents were $231, restricted cash $222, and total current assets $12,978 versus current liabilities of $15,374. Current debt maturities were $2,629.
- Consolidated debt principal was $29,801, including $1,380 of commercial paper; long-term debt carrying value was $26,889. EPO repaid $1,400 of senior notes in February, partly using commercial paper proceeds. Average debt maturity was approximately 20.7 years; the Partnership guaranteed substantially all EPO debt. The Partnership reported compliance with debt covenants.
- Management reported $3.9 billion of liquidity at quarter-end, including a $500 million delayed-draw facility. That facility automatically terminated April 30, 2022 because EPO did not borrow under it; management also cited $3.1 billion of revolving-credit availability and $231 million of unrestricted cash. Thus, the reported quarter-end liquidity figure includes a facility that later expired.
Material changes, outlook and risks
- Navitas acquisition: An affiliate acquired Navitas Midstream on February 17 for $3.231 billion in cash. Its Midland Basin system includes about 1,750 miles of pipelines and more than 1.0 Bcf/d of processing capacity. The preliminary purchase-price allocation included $989 million of contract-based intangibles and $159 million of goodwill; acquired-business results were not material to the quarter.
- Distribution: On April 7, the Board declared $0.465 per common unit for Q1, or $1.86 annualized, payable May 12. Future distributions and increases remain subject to management review and Board approval.
- Capital plans: Management forecast approximately $1.9 billion of 2022 capital investments, comprising $1.5 billion growth and $350 million sustaining capital. It cited approximately $4.6 billion of growth projects expected to be completed by 2025, including processing, pipeline, fractionation and export-terminal expansions. The Sea Port Oil Terminal remains subject to approvals; the company anticipated a decision in the second half of 2022 but gave no assurance of approval or timing.
- Other developments: In April, Enterprise and Oxy Low Carbon Ventures signed a letter of intent to explore a Gulf Coast CO2 transportation and sequestration project. Management also announced seven projects at an April investor meeting, with expected completion dates from 2023 to 2025.
- Operating and market risks: Management said inflation, supply-chain disruption, labor shortages and higher commodity costs were not materially affecting historical results in the periods presented, but prolonged cost increases could hurt results if not passed through or offset. Risks include commodity-price and demand volatility, customer credit and contract performance, construction delays and cost overruns, maintenance needs, regulation, environmental matters, and cyberattacks. Commodity derivatives are used to manage exposures; hedge values and earnings can fluctuate.
- Legal and unusual items: The PDH 1 contractor lawsuit went to trial in April 2022; the filing reported no litigation accrual at March 31. Certain EPA and Colorado environmental matters could result in penalties, which the Partnership did not expect to be material. Q1 included $14 million of asset impairment charges, versus $66 million in Q1 2021. The Navitas purchase-price allocation remained provisional.
- Management stated that liquidity, operating cash flow and capital-market access should be sufficient for reasonably foreseeable needs. Forward-looking statements are subject to risks and are not guarantees; the company undertook no general obligation to update them.
Most important facts for investors to verify
- Whether Navitas delivers expected operating contribution and integration benefits; its Q1 contribution was reported as not material.
- Liquidity after the $500 million delayed-draw facility expired, and the company’s commercial-paper and refinancing needs, including the $1.38 billion of commercial paper shown at quarter-end.
- Execution, costs and timing of the approximately $1.9 billion 2022 capital program and the longer-term projects, including required approvals for SPOT.
- Distribution sustainability: reported DCF coverage was 1.8x, but DCF is a non-GAAP measure and distributions remain subject to Board approval.
- Exposure to commodity-price changes, inflation, supply constraints, counterparty risks, litigation and environmental, construction and cybersecurity events.