Enterprise Products Partners L.P. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017; the filing was signed February 28, 2018. This is an annual report, not a standalone fourth-quarter filing. Amounts below are U.S. dollars; financial figures are generally in millions unless stated otherwise.
Business context
Enterprise is a publicly traded midstream energy partnership operating across natural gas, NGLs, crude oil, petrochemicals and refined products. Its integrated network includes approximately 50,000 miles of pipelines, 260 million barrels of liquid storage capacity and 14 Bcf of natural gas storage. It reports four segments: NGL Pipelines & Services, Crude Oil Pipelines & Services, Natural Gas Pipelines & Services, and Petrochemical & Refined Products Services. Substantially all operations are conducted through EPO; the partnership has no direct employees and relies primarily on EPCO personnel under an administrative services agreement.
Financial results and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $29,241.5 | $23,022.3 | +27.0% |
| Operating income | $3,928.9 | $3,580.7 | +9.7% |
| Net income | $2,855.6 | $2,553.0 | +11.9% |
| Net income attributable to limited partners | $2,799.3 | $2,513.1 | +11.4% |
| Basic and diluted earnings per unit | $1.30 | $1.20 | +8.3% |
| Net cash from operating activities | $4,666.3 | $4,066.8 | +14.7% |
| Cash used in investing activities | $3,286.1 | $4,005.8 | Lower use of $719.7 |
| Cash from (used in) financing activities | $(1,727.5) | $321.7 | Declined $2,049.2 |
| Non-GAAP distributable cash flow | $4,502.3 | $4,102.8 | +9.7% |
| Distribution coverage ratio | 1.24x | 1.21x | Improved |
Operating income was approximately 13.4% of revenue in 2017, compared with 15.6% in 2016; net income was approximately 9.8% versus 11.1%. The revenue growth largely reflected higher commodity selling prices and volumes, with associated cost of sales also rising. Management’s non-GAAP total gross operating margin increased to $5,680.4 from $5,247.8, up 8.2%.
Segment gross operating margin rose in NGL Pipelines & Services ($3,258.3 versus $2,990.6), Crude Oil Pipelines & Services ($987.2 versus $854.6), and Petrochemical & Refined Products Services ($714.6 versus $650.6); it declined in Natural Gas Pipelines & Services ($714.5 versus $734.9). These are segment measures; total gross operating margin is non-GAAP.
Cash capital spending for property, plant and equipment was $3,101.8, including $2,868.8 of growth projects and $233.0 of sustaining projects. Cash distributions paid to limited partners were $3,569.9; distributable cash flow retained was $867.1. The fourth-quarter 2017 distribution was $0.425 per unit, paid February 7, 2018.
At year-end, total assets were $54,418.1, total liabilities $31,645.7 and partners’ equity $22,547.2. Principal debt outstanding was $24,780.1, including $19,850.0 of senior notes, $3,174.4 of junior subordinated notes and $1,755.7 of commercial paper. Balance-sheet debt, including current maturities and carrying-value adjustments, was $24,568.7. Cash and cash equivalents were $5.1; restricted cash was $65.2. Reported consolidated liquidity was $3.75 billion, comprising $3.74 billion of available revolving-credit capacity and $5.1 million of unrestricted cash.
Fourth-quarter snapshot and material changes
For fourth-quarter 2017, revenue was $8,426.6, operating income $1,079.4, net income $797.3, net income attributable to limited partners $774.0, and earnings per unit $0.36. In fourth-quarter 2016, the corresponding figures were $6,478.8, $923.2, $669.7, $658.8 and $0.31.
- Year-over-year revenue growth reflected higher marketing sales prices and volumes, especially for NGLs and petrochemical/refined products; marketing purchase costs rose as well. Midstream-service revenue increased by a net $94.7.
- Operating income increased $348.2. Equity earnings from unconsolidated affiliates increased $64.0, primarily from crude oil pipeline joint ventures. Interest expense was broadly flat at $984.6 versus $982.6.
- Operating cash flow increased $599.5, reflecting higher earnings, timing of operating receipts and payments, and greater cash distributions from affiliates. Cash used in investing fell mainly because 2016 included the $1.0 billion final EFS Midstream acquisition payment.
- Cash distributions per unit for 2017 totaled $1.6825, up from $1.6100 in 2016. Common units outstanding increased to approximately 2.161 billion from 2.118 billion.
- Hurricane Harvey reduced estimated 2017 gross operating margin by $46 million, including about $30 million of lower volumes and lost opportunities and $16 million of repair and recovery costs. The partnership did not expect insurance reimbursement due to deductibles.
Outlook, management commentary and notable items
- Management expected 2018 capital spending of approximately $3.3 billion, including $315 million of sustaining capital. It expected sufficient liquidity and access to capital for foreseeable needs, while noting capital-market conditions, project costs and market conditions could change plans.
- Management expected to recommend quarterly distributions of $0.4275, $0.4300, $0.4325 and $0.4350 for the four 2018 quarters, respectively. These increases were subject to Board approval. Management said the moderated growth rate was intended to strengthen coverage and support becoming self-funding for the equity portion of capital spending by 2019.
- Major growth plans included the Orla gas-processing trains, the 250 MBPD initial-capacity Shin Oak NGL pipeline, an 85 MBPD Mont Belvieu fractionator, and the iBDH facility. The filing also described ethylene storage and export projects, including a planned 50/50 export-terminal joint venture. These projects carried construction, permitting, cost, timing and utilization risks.
- In February 2018, EPO issued $2.7 billion of notes and planned to redeem $682.7 million of 7.034% junior subordinated notes. Management estimated annual interest savings of approximately $11.3 million from the redemption and replacement financing.
- Management’s commercial outlook assumed increasing U.S. production and export demand, particularly from the Permian and other shale regions. It cited industry expectations of WTI prices around $50–$60 per barrel through 2020 and natural gas prices around $3.00 per MMBtu; these are market expectations, not company earnings guidance.
- Key risks include commodity-price and volume exposure, customer credit and concentration, competition and overcapacity, substantial debt and refinancing needs, capital access, construction execution, pipeline integrity, environmental and safety regulation, severe weather, cyber incidents, and potential limits on distributions. Vitol represented 11.2% of 2017 revenue.
- The ETP litigation judgment of $535.8 million was reversed by a Texas appeals court; ETP petitioned the Texas Supreme Court for review. The partnership recorded no provision because management did not consider payment probable. Separately, Enterprise sued the former PDH contractor; the filing does not provide a clear quantified recovery amount.
- Other unusual items included $49.8 million of non-cash asset impairment and related charges, and $64.3 million of non-cash expense from changes in the estimated fair value of the Liquidity Option Agreement, partly reflecting the 2017 tax law changes. The filing reported an unqualified audit opinion and effective internal control over financial reporting.
Important facts for investors to verify
- Confirm the sustainability of 2017 cash generation and distribution coverage, including the effects of working-capital timing, retained cash and continued high capital spending.
- Review debt maturities, commercial-paper refinancing, revolving-credit availability and the terms and use of the February 2018 note proceeds.
- Track distribution recommendations against Board approvals and actual distributable cash flow; the 2018 distribution schedule was not guaranteed.
- Assess execution, cost, schedule and customer commitments for major projects, and whether forecast production and export demand materialize.
- Monitor outcomes of the ETP appeal and PDH contractor litigation, environmental matters, and exposure to Harvey-like events not reimbursed by insurance.
- Evaluate commodity, customer and counterparty exposure, including Vitol’s revenue share and the company’s hedging and fee-based contract mix.