Enterprise Products Partners L.P. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 9, 2018. Enterprise is a North American midstream energy partnership operating across NGL, crude oil, natural gas, petrochemical and refined-products businesses.
Financial performance
Dollar amounts are in millions except per-unit data. Comparisons are with Q1 2017 unless noted.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $9,298.5 | $7,320.4 |
| Operating income | $1,138.5 | $1,031.6 |
| Net income | $911.5 | $771.0 |
| Net income attributable to limited partners | $900.7 | $760.7 |
| Basic and diluted earnings per unit | $0.41 | $0.36 |
| Operating cash flow | $1,233.6 | $875.6 |
| Capital expenditures | $946.5 | $430.4 |
| Non-GAAP distributable cash flow | $1,390.6 | $1,128.6 |
| Distribution coverage ratio | 1.5x | 1.3x |
- Revenue rose 27%, primarily from higher crude oil marketing volumes and prices. Marketing revenue growth was largely offset by higher product costs; revenue growth should not be read as equivalent growth in underlying profitability.
- Operating income increased 10% and net income attributable to limited partners increased 18%. Operating margin was approximately 12.2%, compared with 14.1% in Q1 2017, reflecting the larger share of lower-margin product sales in revenue.
- Management’s non-GAAP total gross operating margin increased to $1,586.2 from $1,469.1. By segment, gross operating margin increased in NGL Pipelines & Services ($884.9), Natural Gas Pipelines & Services ($197.9) and Petrochemical & Refined Products Services ($271.9), but declined in Crude Oil Pipelines & Services ($220.0).
- Cash used in investing activities was $1,119.1, principally reflecting capital spending and the Delaware Processing acquisition. Operating cash flow less capital expenditures was $287.1, versus $445.2 in Q1 2017.
- At March 31, cash and cash equivalents were $102.1 and restricted cash was $113.5. Current assets were $6,791.0 and current liabilities were $8,839.6. Management reported $5.02 billion of consolidated liquidity, including $4.92 billion of available revolving-credit capacity.
- Debt principal totaled $25.62 billion, up from $24.78 billion at year-end 2017. The balance sheet reported $2,376.8 of current maturities and $23,016.4 of long-term debt. The partnership was in compliance with debt covenants.
Material changes and notable items
- Crude oil marketing revenue increased by approximately $1.72 billion, primarily from higher sales volumes and prices. Corresponding crude oil cost of sales rose approximately $1.76 billion.
- Q1 results included a non-cash $37.0 gain from remeasuring the previously held Delaware Processing interest when Enterprise acquired the remaining 50% for $153.6 in cash and consolidated the business.
- Enterprise adopted ASC 606 revenue recognition on January 1, 2018. It reported no material difference in the amount or timing of revenue overall, and no opening equity adjustment. Adoption increased Q1 revenue by $117.0 and operating costs by $113.8, with a $3.2 net income impact, principally from recognition of equity NGLs and construction contributions.
- Non-designated derivatives generated $155.0 of losses in Q1; total unrealized mark-to-market losses across derivative types were $140.5. The Midland-to-Houston crude oil basis hedges accounted for $114.0 of segment mark-to-market losses. These losses are described as temporary and expected to reverse as related physical transactions occur, but can affect reported earnings and liquidity in the interim.
- In February, EPO issued $2.7 billion of notes and redeemed $682.7 million of 7.034% junior subordinated notes. Management estimated annual interest savings of approximately $11.3 million from the redemption and replacement financing.
Outlook, risks and contingencies
- Management expected 2018 growth capital spending of approximately $3.2–$3.4 billion, including the Delaware Processing acquisition, and sustaining capital spending of approximately $315 million. About $5.3 billion of growth projects were scheduled for completion by the end of 2019. Spending forecasts depend on operating cash flow and access to debt, equity or other funding and may change.
- Management expected to recommend quarterly distributions of $0.4300, $0.4325 and $0.4350 for Q2, Q3 and Q4 2018, respectively; payment remained subject to Board approval. The Q1 2018 distribution was $0.4275 per unit, versus $0.4150 for Q1 2017.
- After quarter-end, management reported the crude oil basis-hedge liability had increased to $481.3 million by May 3, 2018, and estimated an approximately $309.6 million non-cash Q2 loss for instruments settling after June 30 under the stated assumptions. Restricted cash and other margin postings also rose; the filing noted additional cash could be required as commodity prices and margin requirements change.
- Material legal matters include the ETP dispute, for which the Texas Court of Appeals reversed the trial judgment and ETP petitioned the Texas Supreme Court; management did not consider payment probable and had recorded no provision. Enterprise also described ongoing litigation with its former PDH contractor. Management stated pending litigation was not expected to materially affect the financial statements, while noting outcomes remain uncertain.
- Enterprise reported no material off-balance-sheet arrangements and no material changes to internal control over financial reporting. Management said disclosure controls were effective.
Important facts for investors to verify
- Whether operating cash flow and distributable cash flow continue to support the distribution as growth spending ramps up; review the non-GAAP definitions and reconciliations.
- Debt maturities, borrowing availability and financing needs against the $3.2–$3.4 billion 2018 growth-spending forecast.
- The subsequent performance of crude oil basis spreads, related derivative margin requirements and the timing of reversals against physical transactions.
- Final purchase-accounting allocations for Delaware Processing, which were provisional at filing and expected to be resolved by the end of Q2 2018.
- Execution, shipper commitments, costs and timing for major announced projects, as well as the status and potential outcomes of the ETP and PDH contractor litigation.