Enterprise Products Partners L.P. — Q3 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2017. Enterprise is a North American midstream energy partnership operating about 50,000 miles of pipelines, storage and terminal assets, across NGL, crude oil, natural gas, and petrochemical and refined-products businesses. Its common units trade as EPD. Unless noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $6,886.9 | $5,920.4 | $20,814.9 | $16,543.5 |
| Operating income | $879.2 | $905.0 | $2,849.5 | $2,657.5 |
| Net income attributable to limited partners | $610.9 | $634.6 | $2,025.3 | $1,854.3 |
| Basic and diluted earnings per unit | $0.28 | $0.30 | $0.94 | $0.89 |
| Non-GAAP gross operating margin | $1,313.3 | $1,312.0 | $4,160.3 | $3,890.5 |
| Cash flow from operating activities | $485.0 | $813.8 | $2,819.9 | $2,659.0 |
Revenue, profit and margins. Q3 revenue grew about 16%, but limited-partner net income fell about 4% and earnings per unit declined from $0.30 to $0.28. Management attributed much of the revenue increase to higher commodity selling prices, with related purchase costs also higher; lower crude-oil marketing margins and unfavorable mark-to-market results weighed on Q3 gross operating margin. Nine-month revenue rose about 26%, limited-partner net income about 9%, and gross operating margin about 7%. Gross operating margin is a company-defined non-GAAP measure, not a GAAP profit measure.
For Q3, NGL Pipelines & Services gross operating margin increased to $770.9 from $703.5; Crude Oil Pipelines & Services declined to $190.4 from $254.0; Natural Gas Pipelines & Services declined to $170.7 from $178.5; and Petrochemical & Refined Products Services was $172.4 versus $171.6.
Cash flow, debt and liquidity
- Nine-month operating cash flow increased to $2.82 billion from $2.66 billion. Nine-month capital expenditures were $2.15 billion; cash used in investing activities was $2.02 billion. Q3 operating cash flow was lower year over year, with the filing’s reconciliation showing a substantial contribution from changes in operating accounts.
- At September 30, principal debt was $24.93 billion, compared with $23.90 billion at December 31, 2016. Balance-sheet current maturities were $3.01 billion and long-term debt was $21.71 billion. Commercial paper outstanding was $1.91 billion.
- Cash and cash equivalents were $32.9 million; restricted cash was $66.8 million. Management reported $3.62 billion of consolidated liquidity, including $3.59 billion of available revolving-credit capacity. No borrowings were outstanding under the new revolving facilities at filing.
- In August, EPO issued $1.7 billion of junior subordinated notes: $700 million at a 4.875% fixed rate through August 2022 and $1.0 billion at 5.25% through August 2027, each due in 2077. Proceeds supported commercial-paper repayment and repayment of $800 million of senior notes due September 2017. New credit facilities include a $4.0 billion facility due 2022 and a $1.5 billion 364-day facility due 2018.
- Nine-month common-unit issuance generated $877.2 million in net proceeds. Cash distributions paid to limited partners were $2.66 billion. The reported distribution coverage ratio was 1.17x for Q3 and 1.20x for the nine-month period; both are non-GAAP measures.
Changes versus prior comparable periods
- Q3 total revenue increased $966.5 million, driven principally by higher marketing prices and expanded midstream activity, while total operating costs and expenses increased $1.01 billion, mainly from higher commodity purchase costs.
- Nine-month operating income rose $192.0 million, supported by higher equity earnings from unconsolidated affiliates and growth in NGL-related operations. Higher depreciation and operating costs partly offset these gains.
- Nine-month capital spending was lower than in 2016, which included the $1.0 billion final EFS Midstream acquisition payment. 2017 investing included the $191.4 million Azure acquisition.
- Outstanding common units increased to approximately 2.153 billion from 2.118 billion at year-end 2016, reflecting issuance through the ATM, DRIP and employee plan, among other items.
Outlook, commentary, risks and unusual items
- Distributions: The Board declared $0.4225 per unit for Q3 2017. Management said it expected to recommend quarterly increases of $0.0025 per unit through Q4 2018, reaching $0.4350 per unit; future payments remain subject to Board approval and financial review. Management said the moderated growth plan is intended to improve coverage, retain cash for investment and support self-funding the equity portion of growth capital by 2019.
- Capital program: Management forecast 2017 growth capital spending of $2.9–$3.1 billion, including Azure, and sustaining capital spending of about $240 million. It reported approximately $9.1 billion of growth projects scheduled for completion by 2020. These forecasts depend on operating cash flow, financing access and project execution.
- Projects and operations: The PDH facility was in final commissioning, with initial production expected in Q4 2017; Hurricane Harvey delayed commissioning about four weeks. Planned projects include Orla II, Shin Oak, a ninth Mont Belvieu fractionator, and an isobutane dehydrogenation unit. Several projects depend on customer commitments, approvals and completion schedules.
- Hurricane Harvey: Management estimated a $34.6 million reduction in Q3 gross operating margin, including lower volumes, lost opportunities and recovery costs. It did not expect insurance reimbursement because of deductibles.
- Legal matters: A Texas appeals court reversed the adverse ETP judgment and ruled for Enterprise; ETP’s rehearing request was denied, but ETP indicated it intended to seek Texas Supreme Court review. Enterprise recorded no provision, stating damages were not probable. Separately, Enterprise is pursuing claims against its former PDH contractor; the filing gives no clear estimate of recovery.
- Other unusual items and risks: The Level 3 Liquidity Option Agreement liability was $302.6 million and generated $33.0 million of non-cash expense in the first nine months. Its valuation depends on significant unobservable assumptions. Derivative fair values and commodity prices can fluctuate; exchange rule changes affected balance-sheet presentation of certain derivatives. Management cited commodity-price, demand, customer-credit, weather, regulatory and capital-market risks.
- Accounting changes: ASC 606 adoption was planned for January 1, 2018; management expected less than a 5% increase in reported revenue, with no significant gross-margin change. Lease accounting changes were expected to affect balance-sheet presentation upon planned 2019 adoption.
Important facts for investors to verify
- Whether forecast project spending, construction milestones and expected commissioning dates were achieved, and whether committed customer volumes support the new capacity.
- How distribution coverage and retained cash develop relative to the announced distribution-increase plan and management’s 2019 self-funding objective.
- Debt refinancing needs, commercial-paper exposure, interest costs and continued access to revolving facilities and capital markets.
- The final outcome of ETP’s indicated appeal, the PDH contractor litigation, and the provisional Azure environmental-liability allocation.
- The drivers of Q3 operating cash flow and crude-oil segment weakness, including working-capital movements and derivative mark-to-market volatility.
- Actual Hurricane Harvey costs and subsequent effects on volumes, margins and insurance recoveries, as well as the assumptions underlying the Liquidity Option valuation.