Business context and reporting period
Enterprise Products Partners L.P. (NYSE: EPD) filed its audited Form 10-K for the fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter earnings report. EPD is a diversified North American midstream partnership operating natural gas, NGL, crude oil, petrochemical and refined-products infrastructure through four business segments.
Financial and operating highlights
| Metric | 2023 | 2022 |
|---|---|---|
| Revenue | $49.715 billion | $58.186 billion |
| Operating income | $6.929 billion | $6.907 billion |
| Net income | $5.657 billion | $5.615 billion |
| Net income attributable to common unitholders | $5.529 billion | $5.487 billion |
| Diluted earnings per common unit | $2.52 | $2.50 |
| Operating cash flow | $7.569 billion | $8.039 billion |
| Gross operating margin, non-GAAP | $9.395 billion | $9.309 billion |
| Distributable cash flow (DCF), non-GAAP | $7.601 billion | $7.751 billion |
| DCF distribution coverage | 1.73x | 1.85x |
Revenue fell about 14.6%, while operating income, net income and common-unit earnings rose modestly. Operating income was about 13.9% of revenue, compared with 11.9% in 2022; this ratio is affected by the large commodity-product sales and purchase amounts in reported revenue. The filing does not present a single company-wide operating margin as a primary performance measure.
Cash used in investing activities was $3.197 billion, including $3.266 billion of capital expenditures; cash used in financing was $4.258 billion. Sustaining capital expenditures were $413 million for the DCF calculation. The DCF coverage ratio declined despite slightly higher earnings, and retained DCF was $3.208 billion versus $3.569 billion in 2022.
At year-end, total assets were $70.982 billion, cash and cash equivalents were $180 million, and current liabilities exceeded current assets ($13.131 billion versus $12.248 billion). Consolidated debt principal was $29.021 billion: $26.725 billion of senior debt, $2.296 billion of junior subordinated debt and $450 million of commercial paper. Management reported $3.9 billion of consolidated liquidity, including $3.75 billion of available revolving-credit capacity. Approximately 96.4% of debt was fixed-rate, with a 4.6% weighted-average cost and approximately 19 years’ weighted-average maturity. EPO had investment-grade ratings of A-/A3/A- from S&P, Moody’s and Fitch.
Material changes versus the prior year
- The $8.471 billion revenue decrease mainly reflected lower average selling prices for NGLs, natural gas, petrochemicals and refined products; lower prices reduced both sales revenue and associated purchase costs. Marketing revenues for those products fell by a combined $9.4 billion, partly offset by higher crude-oil sales revenue.
- Operating cash flow decreased $470 million, principally because of a $501 million adverse year-over-year change in operating accounts, including working-capital effects from marketing activities and commodity-price and margin-deposit movements.
- Gross operating margin was nearly flat overall. NGL Pipelines & Services declined to $4.898 billion from $5.142 billion, chiefly on lower processing margins; Crude Oil rose to $1.707 billion from $1.655 billion; Natural Gas rose to $1.077 billion from $1.042 billion; and Petrochemical & Refined Products rose to $1.694 billion from $1.517 billion.
- Operating cash capital expenditures rose to $3.266 billion from $1.964 billion, largely reflecting higher Permian gathering and processing, export-terminal and Texas Western Products System investment. The prior-year comparison also included $3.204 billion for the Midland Basin acquisition.
- Quarterly common distributions increased during 2023, from $0.49 to $0.515 per unit. EPD repurchased 7.24 million units for $188 million under its buyback program.
Outlook, commentary, risks and unusual items
- Management forecast 2024 capital investments of approximately $3.8 billion to $4.3 billion, including $3.25 billion to $3.75 billion of growth investment and $550 million of sustaining capital. The forecast excludes SPOT. About $6.8 billion of growth projects were scheduled for completion by the end of the first half of 2026.
- Management described crude-oil fundamentals as constructive but was less optimistic about near-term natural-gas fundamentals, citing high domestic production, limited LNG export capacity before expected additions in 2025, and weak prices. It also flagged global petrochemical oversupply, including capacity growth in China. These views and third-party forecasts are forward-looking and uncertain.
- Major projects include the Bahia NGL Pipeline, expected in service in the first half of 2025; additional Permian gas-processing trains and Frac 14, generally expected in 2025; the Texas Western Products System, expected to enter service in phases during 2024; and the Neches River ethane/propane export facility, planned for 2025–2026.
- SPOT, the proposed offshore crude-oil export terminal, remained subject to a federal license and long-term customer contracts; the partnership gave no assurance that or when it would proceed. The FERC liquids-pipeline indexing methodology was under appellate challenge, creating potential rate uncertainty.
- Principal risks include commodity-price and volume exposure, customer credit and counterparty risk, leverage and refinancing costs, construction delays or overruns, pipeline integrity and environmental obligations, severe weather, cybersecurity, and regulatory or climate-related changes. A decline in producer activity or hydrocarbon demand could reduce volumes and cash flows.
- Vitol and its affiliates accounted for 15.8% of 2023 consolidated revenue, compared with 10.2% in 2022. EPD reported no litigation accruals at year-end and said it did not expect the identified environmental penalty matters to be material to the consolidated financial statements. The company reported $32 million of asset impairment charges in 2023 and no goodwill impairment.
- Subsequent events included a January 2024 $2.0 billion senior-note issuance at fixed rates of 4.60% and 4.85%; the February 2024 purchase of remaining interests in Whitethorn and EF78 for $375 million; and a proposed $25 million Panola interest purchase, subject to other members’ purchase rights. The fourth-quarter 2023 distribution of $0.515 per unit was paid in February 2024.
- The partnership is not subject to federal income tax while it meets the qualifying-income test; unitholders generally bear tax on allocated income. The filing highlights partnership-structure, related-party, governance and unitholder tax risks. EPCO and affiliates owned approximately 32.4% of common units, and EPD reimbursed EPCO and affiliates $1.353 billion in operating costs and expenses in 2023.
Most important facts for investors to verify
- Whether operating cash flow and DCF stabilize or improve, and whether distribution coverage remains adequate as distributions and capital spending rise.
- Actual project costs, in-service dates, customer commitments and utilization for the Permian, export, and Texas Western projects; separately, the licensing and commercial status of SPOT.
- Debt maturities, refinancing and commercial-paper usage after the January 2024 note issue and February 2024 transactions, alongside available liquidity and leverage targets.
- How much of future earnings depends on fee-based contracts versus commodity-sensitive processing and marketing margins, including the effect of natural-gas and NGL prices.
- Customer concentration, particularly Vitol’s 15.8% revenue share, and the credit quality and performance of counterparties and minimum-volume commitments.
- Potential changes to regulated pipeline rates, environmental and methane requirements, and the financial impact of any material litigation, incident or impairment.