Enterprise Products Partners L.P. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; year-over-year comparisons are against Q1 2018. Dollar amounts are in millions unless stated otherwise. Enterprise is a North American midstream energy partnership operating across NGL, crude oil, natural gas, and petrochemical and refined-products businesses.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $8,543.5 | $9,298.5 |
| Operating income | $1,626.2 | $1,138.5 |
| Net income attributable to limited partners | $1,260.5 | $900.7 |
| Basic and diluted earnings per unit | $0.57 | $0.41 |
| Operating cash flow | $1,160.4 | $1,233.6 |
| Capital expenditures | $1,148.9 | $946.5 |
| Cash distributions paid to limited partners | $950.4 | $918.5 |
| Cash and restricted cash at quarter-end | $107.5 | $410.1 at Dec. 31, 2018 |
| Debt principal | $27,115.6 | $26,420.6 at Dec. 31, 2018 |
- Operating margin was approximately 19.0% of revenue, compared with 12.2% in Q1 2018; net income attributable to limited partners was approximately 14.8% of revenue, compared with 9.7%.
- Management’s non-GAAP distributable cash flow (DCF) was $1,628.4, up from $1,385.5. Distribution coverage was 1.7x versus 1.5x, and reported DCF retained was $664.9 versus $452.0.
- Free cash flow, as defined by the partnership’s non-GAAP measure, was $2.7 versus $99.2. This reflects substantial investment spending; the measure deducts investing cash flows from operating cash flow and includes noncontrolling-interest contributions and distributions.
- At March 31, current assets were $6,628.6 and current liabilities $8,592.7. The partnership reported $4.70 billion of consolidated liquidity, including $4.60 billion of available revolver capacity and $99.3 of unrestricted cash. It was in compliance with debt covenants.
Material changes versus Q1 2018
- Revenue decreased $755.0, primarily from lower marketing revenue, including a $1.01 billion decline in crude oil marketing revenue mainly due to lower sales volumes. Lower commodity sales revenue generally coincided with lower cost of sales.
- Operating costs and expenses fell $1.20 billion, largely because crude oil marketing cost of sales declined $1.34 billion. Operating income rose $487.7 despite lower revenue.
- Segment gross operating margin increased to $2,128.4 from $1,574.7. Crude Oil Pipelines & Services increased to $662.3 from $220.0; NGL Pipelines & Services rose to $959.2 from $884.9; Natural Gas Pipelines & Services rose to $264.3 from $197.9; Petrochemical & Refined Products Services declined to $242.6 from $271.9.
- Crude oil segment improvement included a swing in non-cash mark-to-market results. Across gross operating margin, non-cash mark-to-market impact was a $96.3 gain in Q1 2019 versus a $136.8 loss in Q1 2018.
- Operating cash flow declined $73.2, chiefly due to timing of operating receipts and payments. Capital expenditures increased $202.4; financing cash flow shifted from a $30.8 inflow to a $288.5 outflow.
Outlook, management commentary, risks and unusual items
- Management expected 2019 capital investments of approximately $3.8–$4.2 billion, including $3.4–$3.8 billion of growth capital and $350 million of sustaining capital. Approximately $5.0 billion of growth projects were scheduled for completion by mid-2020.
- Management indicated an intended 2019 distribution rate of $1.7650 per unit, 2.3% above 2018, subject to Board approval and evaluation of financial condition and cash flows. The Board declared a Q1 distribution of $0.4375 per unit, payable May 13, 2019.
- Shin Oak NGL Pipeline entered limited service in February, with ultimate capacity of up to 550 MBPD expected in Q4 2019. Midland-to-ECHO 2 reached full service in April, adding approximately 200 MBPD of crude transportation capacity.
- The Houston Ship Channel fire and fog-related restrictions reduced estimated Q1 gross operating margin by approximately $40 million; management expected substantially all of the delayed margin to be recognized in Q2.
- A $57.8 non-cash expense from the Liquidity Option Agreement reduced Q1 2019 earnings, compared with $7.5 in Q1 2018. Its recorded liability was $447.8; the option may be exercised during a 90-day period beginning February 1, 2020, potentially requiring the partnership to acquire OTA and assume related tax obligations.
- Long-term purchase obligations for NGLs totaled an estimated $13.5 billion at quarter-end, up from $10.8 billion at year-end; new commitments added $3.2 billion before expirations. Long-term debt maturities include $2.195 billion for the remainder of 2019, including $1.395 billion of commercial paper.
- Litigation includes the Energy Transfer matter pending before the Texas Supreme Court; the partnership recorded no provision because management considers payment not probable. Enterprise is also pursuing claims against the former PDH project contractor. The filing notes that insurance may not fully cover future legal losses.
- Commodity prices, marketing volumes and margins, derivative valuations, project execution and access to capital can affect results. Management cautions that quarterly results are not necessarily indicative of full-year results. The filing reports no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether earnings and segment margin growth persist after considering the $96.3 mark-to-market gain and other non-cash or timing-related items.
- Progress, costs, customer commitments and expected start-up timing for the announced growth projects, alongside the $3.8–$4.2 billion 2019 capital-investment plan.
- Cash generation, distribution coverage and funding needs as capital spending, distributions and debt maturities evolve; assess reported DCF separately from GAAP operating cash flow and free cash flow.
- Debt refinancing and liquidity, including commercial paper exposure, covenant compliance and management’s targeted debt-to-normalized-adjusted-EBITDA ratio of around 3.5x.
- Potential costs and valuation changes for the Liquidity Option Agreement, and developments in the Energy Transfer and PDH litigation matters.
- Whether the estimated Q2 recovery of Houston Ship Channel-related delayed margin occurs as expected.