Enterprise Products Partners L.P. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Enterprise is a large North American midstream energy partnership operating natural gas, NGL, crude oil, petrochemical and refined-products infrastructure across four reporting segments.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $7.320 billion | $5.005 billion |
| Operating income | $1.032 billion | $915.6 million |
| Net income | $771.0 million | $670.2 million |
| Net income attributable to limited partners | $760.7 million | $661.2 million |
| Basic and diluted earnings per unit | $0.36 | $0.32 |
| Operating cash flow | $875.6 million | $899.7 million |
| Capital expenditures | $446.0 million | $1.007 billion |
| Cash distributions paid to limited partners | $869.0 million | $788.3 million |
| Unrestricted cash at period-end | $62.4 million | $63.1 million at Dec. 31, 2016 |
| Consolidated principal debt | $23.625 billion | $23.902 billion at Dec. 31, 2016 |
- Non-GAAP total gross operating margin was $1.469 billion, versus $1.324 billion. Segment margin increased in NGL Pipelines & Services ($856.0 million vs. $783.7 million), Crude Oil Pipelines & Services ($264.6 million vs. $202.3 million) and Petrochemical & Refined Products Services ($181.8 million vs. $154.8 million); Natural Gas Pipelines & Services declined ($170.9 million vs. $177.7 million).
- Revenue rose about 46%, primarily from higher commodity sales prices and volumes. Management noted that higher product sales prices generally also increase purchase costs and may not increase gross margin or cash available for distribution. Operating margin was affected by the larger commodity-marketing revenue and cost base.
- Operating cash flow decreased $24.1 million, principally due to timing of operating receipts and payments and lower distributions from unconsolidated affiliates, partly offset by higher income.
- At March 31, current assets were $5.642 billion and current liabilities $7.048 billion. Total liquidity was reported at $4.06 billion, including $4.0 billion of available revolving-credit capacity and $62.4 million of unrestricted cash. Restricted cash was $44.7 million, down from $354.5 million at year-end, primarily following settlement of contango-related derivatives.
Material changes and operating developments
- Q1 2017 revenue increased $2.315 billion year over year; operating income rose $116.0 million and limited-partner net income rose $99.5 million. Interest expense increased $8.7 million.
- Higher commodity prices and volumes lifted marketing revenues and related cost of sales. Management cited an increase in the weighted-average indicative NGL price to $0.66 per gallon from $0.40.
- Crude oil segment margin benefited from marketing and blending results, including a $33.0 million year-over-year improvement in blending mark-to-market results. Natural gas segment weakness reflected lower activity and volumes in certain systems, partly offset by stronger Permian Basin gathering.
- The partnership spent $460.1 million on capital spending, including $379.6 million for growth projects, $50.8 million for sustaining projects, $13.7 million invested in affiliates and a $16.0 million Azure acquisition deposit. Property, plant and equipment net increased to $33.556 billion from $33.293 billion.
- The Azure acquisition closed in April 2017 for $189 million. Assets include more than 960 miles of gas gathering pipelines, three processing facilities and two NGL pipelines.
Outlook, risks and unusual items
- Management expects 2017 growth capital spending of $2.7–$3.0 billion, including the Azure acquisition, and approximately $250 million of sustaining capital expenditures. It cited access to operating cash flow and capital markets as funding sources and said spending timing and amounts may change with market conditions and other factors.
- Approximately $8.4 billion of growth projects were scheduled for completion by 2020. The PDH facility was expected to begin commercial operations in Q3 2017; the ninth Mont Belvieu NGL fractionator was expected by mid-2018. Announced post-quarter plans included the Shin Oak NGL pipeline, expected in service in Q2 2019, and ethylene infrastructure projects.
- Enterprise declared a Q1 2017 distribution of $0.415 per common unit, up from $0.395 for Q1 2016; payment was scheduled for May 8, 2017. Distributable cash flow, a non-GAAP measure, was $1.129 billion, with reported distribution coverage of 1.3x and $235.8 million retained for the period.
- Debt maturities included $2.300 billion for the remainder of 2017 and $1.100 billion in 2018. The partnership reported compliance with debt covenants and investment-grade ratings. It expects to issue additional equity and debt securities; Q1 issuance generated $448.8 million net proceeds and increased common units outstanding.
- The ETP litigation stems from a cancelled pipeline project. A 2014 judgment totaled $535.8 million plus post-judgment interest; the appeal was pending, and management said payment was not probable, so no provision was recorded. Enterprise also sued its former PDH contractor, seeking damages; the filing provides no clear estimate of recovery or exposure.
- Other notable items included $11.2 million of asset impairment and related charges, mostly a write-down of spare parts; $5.5 million of non-cash expense from changes in the estimated value of the Liquidity Option Agreement; and a new CME margin-accounting rule that changed derivative balance-sheet presentation.
- Market and execution risks include commodity-price and volume volatility, customer credit and contract performance, capital-market access, project costs and timing, and potential litigation outcomes. Management said Q1 results are not necessarily indicative of full-year 2017 results. It planned ASC 606 adoption in 2018 and ASC 842 lease-standard adoption in 2019; implementation work was ongoing.
Important facts for investors to verify
- Whether operating cash flow and distributable cash flow support distributions and the planned growth-capital program, particularly as capital spending rises.
- Funding needs, unit dilution, and refinancing plans for near-term maturities, especially the $2.3 billion due during the remainder of 2017.
- Project completion, commissioning, customer commitments and returns for the PDH facility, Azure acquisition and major announced expansions.
- Developments in the ETP appeal and PDH contractor litigation, including any change in probability, potential loss or recovery estimates.
- How much reported growth reflects durable fee-based activity versus commodity prices, marketing volumes, and mark-to-market or contango results.