Enterprise Products Partners L.P. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are to the corresponding 2016 periods. Amounts are in U.S. dollars unless stated otherwise. Enterprise is a North American midstream energy partnership operating four segments: NGL, crude oil, natural gas, and petrochemical and refined products services.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $6,607.6 million | $5,617.8 million | $13,928.0 million | $10,623.1 million |
| Operating income | $938.7 million | $836.9 million | $1,970.3 million | $1,752.5 million |
| Net income attributable to limited partners | $653.7 million | $558.5 million | $1,414.4 million | $1,219.7 million |
| Basic and diluted earnings per unit | $0.30 | $0.27 | $0.66 | $0.59 |
| Segment gross operating margin (non-GAAP) | $1,379.4 million | $1,249.4 million | $2,852.7 million | $2,567.9 million |
Revenue growth reflected higher commodity prices and, in several product lines, higher sales volumes. Management cautioned that higher marketing revenue and cost of sales can rise together and do not necessarily increase gross margin or cash available for distribution. Segment gross operating margin increased across all four segments in Q2; crude oil was a notable contributor, including improved marketing mark-to-market results.
- Cash flow: Six-month operating cash flow was $2,334.9 million, up from $1,845.2 million. Investing activities used $979.5 million, versus $2,238.6 million in 2016; financing activities used $1,389.9 million, compared with $487.9 million provided in 2016.
- Capital spending: Six-month capital spending was $1,328.6 million, including $1,003.6 million for growth projects, $109.5 million for sustaining projects, $24.1 million invested in affiliates, and $191.4 million for the Azure acquisition.
- Debt and liquidity: Consolidated debt principal was $23.58 billion at June 30, down from $23.90 billion at year-end 2016. Balance-sheet current maturities were $3.35 billion; long-term debt was $20.03 billion. Management reported $4.07 billion of consolidated liquidity, comprising $4.04 billion of available revolving-credit capacity and $28.6 million of unrestricted cash. The partnership was in compliance with debt covenants.
- Distributions: The Q2 declared distribution was $0.420 per unit, versus $0.400 a year earlier. Six-month distributable cash flow, a non-GAAP measure, was $2.18 billion; distribution coverage was 1.2x, compared with 1.3x in the 2016 first half. The partnership retained $381.2 million for the six-month period.
Material changes versus the prior comparable period
- Q2 revenue rose $989.8 million and operating income rose $101.8 million year over year. For the first half, revenue increased about $3.3 billion and operating income increased $217.8 million.
- Higher commodity prices drove much of the revenue increase, with corresponding higher purchase costs. Six-month NGL and crude oil marketing revenue growth was partly offset by lower volumes.
- Crude Oil Pipelines & Services gross operating margin increased $59.3 million in Q2 and $121.6 million for the first half, supported by higher transportation volumes and more favorable non-cash mark-to-market results.
- Operating cash flow improved by $489.7 million for the first half, partly due to timing of operating receipts and payments. Capital spending was lower than in 2016 as several large projects approached completion or had entered service.
- Common-unit issuance generated $757.2 million net proceeds in the first half, versus $1.89 billion in the comparable 2016 period; the unit count increased during the period.
Outlook, management commentary, risks and unusual items
- Management expected full-year 2017 growth capital investment of $2.8–$3.0 billion, including the Azure acquisition, and approximately $250 million of sustaining capital expenditures. It cited access to operating cash flow and capital markets as sources of funding and said timing or spending could change with market conditions and other factors.
- Management reported approximately $9.0 billion of growth projects scheduled for completion by 2020. Projects included the Orla II processing expansion, expected in Q3 2018; a ninth Mont Belvieu NGL fractionator, expected by mid-2018; the Shin Oak NGL pipeline, expected in Q2 2019; and an isobutane dehydrogenation facility, expected in Q4 2019. These plans depend on execution and, where applicable, customer commitments.
- A proposed 50/50 ethylene export-terminal venture with Navigator was at the letter-of-intent stage and remained subject to definitive agreements, board approvals, and sufficient long-term customer commitments.
- In July 2017, the Dallas Court of Appeals reversed the trial judgment in the ETP matter and ruled for Enterprise on ETP’s claims. The company recorded no provision for the case, stating payment was not probable. Enterprise’s separate PDH contractor lawsuit against Amec Foster Wheeler remained pending.
- The Azure acquisition closed in April for $191.4 million. Its preliminary allocation included an estimated $2.2 million of environmental liabilities still under review; the acquired business’s Q2 contribution was not material.
- The Liquidity Option Agreement liability was $293.7 million at June 30. Its valuation uses significant unobservable assumptions, and Q2 included $18.6 million of non-cash expense from accretion and valuation changes.
- Other risks include commodity-price and volume changes, customer credit and take-or-pay performance, project completion and funding needs, litigation and environmental matters, and reliance on related-party service arrangements. Management said market-risk exposure had not changed materially from the 2016 Form 10-K.
- Management planned to adopt revenue-recognition guidance on January 1, 2018 and lease guidance on January 1, 2019. It anticipated no material revenue-recognition impact for most businesses but was still evaluating certain natural-gas-processing arrangements; it expected the lease standard to significantly change lease presentation and disclosures.
Most important facts for investors to verify
- Whether operating cash flow and distributable cash flow continue to cover distributions as capital investment proceeds; review the partnership’s non-GAAP definitions and reconciliations.
- How the $2.8–$3.0 billion growth-capital forecast, approximately $250 million sustaining-capital plan, and project milestones evolve, including customer commitments and funding requirements.
- The refinancing or repayment plan for near-term obligations, including $1.455 billion of commercial paper and $800 million of senior notes scheduled for the remainder of 2017, and the expected renewal of the $1.5 billion 364-day credit agreement.
- Commodity-price and volume effects beneath reported revenue growth, and the extent to which marketing mark-to-market gains are non-cash or temporary.
- Developments in the PDH litigation, Azure environmental-liability allocation, and valuation assumptions for the Liquidity Option Agreement.
- Unit issuance, dilution, related-party arrangements, and any subsequent changes to the declared distribution or capital-market access.