Enterprise Products Partners L.P. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. EPD is a North American midstream energy partnership operating natural gas, NGL, crude oil, petrochemical and refined-products infrastructure through four reportable segments. Financial amounts below are in U.S. dollars; unless noted, millions.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $7,482.5 | $8,543.5; down 12.4% |
| Operating income | $1,507.5 | $1,626.2; down 7.3% |
| Net income attributable to limited partners | $1,350.1 | $1,260.5; up 7.1% |
| Basic and diluted earnings per unit | $0.61 | $0.57 |
| Operating cash flow | $2,012.2 | $1,160.4 |
| Capital expenditures | $1,079.5 | $1,148.9 |
| Distributable cash flow (non-GAAP) | $1,553.6 | $1,628.4 |
| Distribution coverage ratio (non-GAAP) | 1.6x | 1.7x |
- Total segment gross operating margin was $2,057.2, down from $2,128.4. The filing’s non-GAAP total gross operating margin was $2,047.5 versus $2,133.7.
- Net income included $187.2 of non-cash income tax benefits associated with the Liquidity Option settlement and changes in OTA’s deferred tax liability. The benefit materially supported year-over-year earnings growth; it is not a recurring operating result.
- Operating cash flow rose by $851.8, primarily due to the timing of operating receipts and payments. Changes in operating accounts contributed $341.7 in Q1 2020, versus a $559.8 use of cash in Q1 2019. Free cash flow, as defined by the partnership (non-GAAP), was $915.8 versus $2.7.
- At March 31, cash and cash equivalents were $2,025.7, restricted cash was $89.9, and total current assets and current liabilities were $7,719.1 and $6,915.4, respectively.
- Debt principal was $29.90 billion at March 31, up from $27.88 billion at year-end 2019; reported long-term debt was $27,855.9. EPD reported no borrowings under revolving facilities at quarter-end and compliance with debt covenants.
- Q1 distribution declared was $0.4450 per unit, or $1.78 annualized, 1.7% above the year-earlier quarterly rate. Future 2020 distributions are to be assessed quarterly and require Board approval.
Material changes and drivers
- Revenue declined by about $1.06 billion, primarily from lower marketing revenues as commodity prices and crude oil and natural gas sales volumes fell. Lower product purchase costs largely offset the reduced product sales revenues.
- Segment gross operating margin increased in NGL Pipelines & Services ($1,042.0 versus $959.2), Natural Gas Pipelines & Services ($283.8 versus $264.3), and Petrochemical & Refined Products Services ($278.5 versus $242.6). Crude Oil Pipelines & Services declined to $452.9 from $662.3, including lower marketing and non-cash mark-to-market results.
- Interest expense rose to $317.5 from $277.2, mainly reflecting higher average debt outstanding; weighted-average debt principal was $29.39 billion versus $26.76 billion.
- In January, EPO issued $3.0 billion of senior notes due 2030, 2051 and 2060 at fixed rates of 2.80%, 3.70% and 3.95%. Proceeds included funding for 2020 maturities and general purposes.
- In March, EPD settled the Liquidity Option by issuing 54.8 million common units to Skyline and indirectly reacquiring the same number of units held by OTA as treasury units. The transaction resulted in an assumed OTA deferred tax liability and the non-cash tax benefits noted above.
Outlook, risks and contingencies
- Management identified COVID-19 demand destruction and the oil-price dispute between OPEC+ members as material uncertainties. It warned of potential throughput declines in the second half of 2020, particularly if upstream production falls, customers face liquidity stress, or reduced downstream demand persists. Management noted firm ship-or-pay contracts may help mitigate near-term effects, subject to customers’ ability to meet commitments.
- Management reduced its 2020 capital-investment outlook to $2.8–$3.3 billion from $3.4–$4.4 billion, including $2.5–$3.0 billion of growth investment and approximately $300 million of sustaining capital. Sanctioned-project growth spending was expected to be approximately $2.5 billion in 2021 and $1.5 billion in 2022. The filing states these plans may change with market conditions and funding availability.
- Liquidity was $7.0 billion at March 31, comprising $5.0 billion of available revolving capacity and $2.0 billion of unrestricted cash. An additional $1.0 billion 364-day revolver entered in April raised reported liquidity to $8.1 billion at April 30, with $6.0 billion of total facility capacity and $2.1 billion cash on hand. Management said it did not anticipate needing debt-market access before 2021.
- Management said approximately 86% of 2019 business was fee-based and reported that LPG export demand had remained resilient. It also cautioned that sustained market weakness could lead to future asset impairments; no significant non-cash impairment was recorded in Q1.
- Product purchase obligations were estimated at $10.12 billion at March 31, down from $20.57 billion at December 31, 2019, primarily reflecting lower NGL and crude oil prices. The filing describes ordinary-course litigation and a continuing PDH 1 contractor lawsuit; the Texas Supreme Court’s January 2020 ruling in the Energy Transfer matter affirmed Enterprise’s favorable judgment and the case concluded in March.
Most important facts for investors to verify
- Whether reported earnings and cash generation are sustained without the unusual, non-cash OTA tax benefits and favorable working-capital timing.
- Actual throughput, customer credit quality and contract collections as COVID-19 and lower commodity prices affect producers and end-market demand.
- Quarterly Board decisions on distributions, distribution coverage, and the pace of unit repurchases amid revised capital spending.
- Debt maturities, refinancing plans, facility availability and covenant compliance; the filing lists $1.0 billion of principal maturities for the remainder of 2020 and $1.325 billion for 2021.
- Progress, costs and timing for sanctioned growth projects, and whether weaker markets lead to further capital-plan changes or asset impairments.