Business context and reporting period
Enterprise Products Partners L.P. (NYSE: EPD) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. It is a North American midstream energy partnership operating pipelines, processing and storage facilities, terminals, and related marketing businesses. Its five reported segments include NGL, crude oil, natural gas, and petrochemical/refined-products services; the Offshore business was sold in July 2015.
Financial results and liquidity
Amounts are in millions of dollars except per-unit data. Comparative periods are the three or six months ended June 30, 2015.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $5,617.8 | $7,092.5 | $10,623.1 | $14,565.0 |
| Operating income | $836.9 | $800.3 | $1,752.5 | $1,696.3 |
| Net income | $570.0 | $556.6 | $1,240.2 | $1,207.2 |
| Net income attributable to limited partners | $558.5 | $551.0 | $1,219.7 | $1,187.1 |
| Diluted earnings per unit | $0.27 | $0.28 | $0.59 | $0.60 |
| Total gross operating margin (non-GAAP) | $1,254.2 | $1,312.3 | $2,578.5 | $2,636.1 |
| Operating cash flow | Not separately stated | Not separately stated | $1,845.2 | $1,901.6 |
- Revenue and earnings: Q2 revenue fell about 21% and first-half revenue about 27%. Net income attributable to limited partners increased about 1% in Q2 and 3% for the first half, while diluted earnings per unit declined as the weighted-average unit count grew.
- Margins and segment performance: Non-GAAP gross operating margin decreased about 4% in Q2 and 2% for the first half. NGL Pipelines & Services grew, led by pipeline, storage and terminal activity; crude oil, natural gas and petrochemical/refined-products segments declined overall. GAAP operating income rose year over year, partly reflecting substantially lower impairment charges than in 2015.
- Cash flow and investment: First-half operating cash flow was $1,845.2, down $56.4. Capital expenditures were $1,880.4; investing activities used $2,238.6, including a $356.7 increase in restricted cash. Financing activities provided $487.9. Cash and cash equivalents were $113.5 at June 30, versus $19.0 at year-end 2015; restricted cash was a separate $372.6.
- Debt and liquidity: Principal debt was approximately $23.0 billion at June 30, up from $22.74 billion at year-end. Long-term debt on the balance sheet was $21,922.1; current maturities were $875.4. Management reported $4.74 billion of consolidated liquidity, including $4.62 billion of available revolving-credit capacity, and said debt covenants were met. In April, EPO issued $1.25 billion of senior notes.
- Distributions and coverage: The declared quarterly distribution increased from $0.380 per unit for Q2 2015 to $0.400 for Q2 2016. First-half distributable cash flow (non-GAAP) was $2,093.3, with reported coverage of 1.3x, versus $2,017.2 and 1.4x in 2015.
Material changes versus the prior comparable period
- Lower crude oil marketing revenue was the main driver of the revenue decline; management attributed the Q2 decrease largely to lower crude oil sales volumes and prices. Associated cost of sales also fell, limiting the effect on earnings.
- First-half NGL pipeline transportation volumes rose to 2,973 MBPD from 2,553 MBPD, and NGL marine terminal volumes rose to 453 MBPD from 279 MBPD. The EFS Midstream acquisition contributed $130.9 million of midstream-services revenue during the first half.
- Crude oil pipeline and terminal activity was weaker in several areas, including reduced Eagle Ford producer drilling and lower Seaway transportation and terminal volumes. The FERC’s favorable Seaway rate-case decision contributed to first-quarter 2016 results.
- Cash distributions paid to limited partners increased to $1,610.5 from $1,437.3 in the first half. The number of common units outstanding also increased, including 79.0 million units issued through the ATM, DRIP and EUPP, generating $1,888.3 of net proceeds.
Outlook, commentary, risks and unusual items
- Distribution outlook: Management said it planned to recommend total 2016 distributions of $1.61 per unit, a 5.2% increase from 2015, subject to Board approval. The first- and second-quarter 2016 rates were declared at $0.395 and $0.400 per unit, respectively.
- Capital plan and projects: Management forecast 2016 organic growth capital expenditures of approximately $2.8 billion and sustaining capital expenditures of approximately $275 million. It expected about $1.4 billion of projects to enter service in the second half of 2016 and approximately $5.2 billion of growth projects to be completed in 2017–2018. These plans depend on operating cash flow and continued access to debt and equity markets. The South Eddy gas plant began service in May; a new 300 MMcf/d Delaware Basin plant was planned for service in Q2 2018.
- Acquisition payment: The $1.0 billion final EFS Midstream installment was paid July 11, 2016, using cash and short-term commercial paper borrowings.
- Pascagoula fire: A June 27 fire left the recently acquired natural gas processing facility out of service. The partnership recorded an estimated $7.1 million asset loss and expected service to resume in Q4 2016, subject to completion of the safety investigation. The $55 million property-damage deductible may limit insurance recovery; a claim was still under evaluation.
- Contingencies and unusual valuation: The ETP litigation judgment totaled $535.8 million plus post-judgment interest; the partnership appealed, recorded no provision because management did not consider payment probable, and the appeal remained under consideration. An FTC and Texas Attorney General inquiry concerning the Oiltanking acquisition was ongoing; the filing said its outcome could not be predicted. A Level 3 Liquidity Option Agreement liability was valued at $266.2 million, with a $23.3 million Q2 non-cash expense driven by valuation assumptions.
- Market and funding risks: Commodity prices, volumes, producer activity, counterparty performance, derivative valuation and collateral requirements can affect results and cash needs. Restricted cash rose sharply with variation-margin requirements. Management cautioned that forward-looking statements are subject to risks and that actual results may differ.
- Related parties: EPCO and its affiliates owned approximately 32.8% of units and provide operating and administrative services. The filing notes related-party terms may not be as favorable as those obtainable from unaffiliated parties. It also disclosed that 118 million affiliate-held units were pledged under affiliate credit facilities.
Most important facts for investors to verify
- Whether operating cash flow and distributable cash flow can support the distribution and planned capital program, given first-half coverage of 1.3x and substantial equity issuance.
- Actual funding and balance-sheet impact of the July EFS payment, ongoing commercial-paper usage, and upcoming debt maturities.
- Progress and costs for major growth projects, including the 2016 start-ups, the PDH facility and the Delaware Basin expansion.
- Pascagoula repair timing, final loss assessment and any insurance recovery.
- Developments in the ETP appeal and FTC/state inquiry, plus future changes in the Liquidity Option valuation.
- Performance of NGL and crude oil segments, commodity-related working-capital swings, and derivative margin requirements.