Enterprise Products Partners L.P. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. EPD is a publicly traded master limited partnership providing midstream natural gas, NGL, crude oil, petrochemical and refined-products services through four segments. Its network includes approximately 50,000 pipeline miles.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $32.79 billion | $36.53 billion | Down 10.3% |
| Operating income | $6.08 billion | $5.41 billion | Up 12.4% |
| Net income | $4.69 billion | $4.24 billion | Up 10.6% |
| Net income attributable to limited partners | $4.59 billion | $4.17 billion | Up 10.0% |
| Diluted earnings per unit | $2.09 | $1.91 | Up 9.4% |
| Cash flow from operating activities | $6.52 billion | $6.13 billion | Up $394 million |
| Distributable cash flow (non-GAAP) | $6.62 billion | $5.99 billion | Up 10.6% |
| Distribution coverage ratio | 1.70x | 1.59x | Improved |
Revenue fell primarily because of lower commodity prices and marketing sales prices; cost of sales also declined. Operating income and net income rose as midstream service earnings and equity income improved. The filing does not present a single consolidated gross-margin percentage; segment gross operating margin is a non-GAAP measure.
Fourth quarter: Revenue was $8.01 billion versus $9.18 billion in Q4 2018; operating income was $1.42 billion versus $1.64 billion; net income was $1.13 billion versus $1.31 billion; diluted earnings per unit were $0.50 versus $0.59.
Segment gross operating margin (non-GAAP): Total was $8.27 billion, up from $7.33 billion. NGL Pipelines & Services contributed $4.07 billion (up from $3.83 billion); Crude Oil Pipelines & Services $2.09 billion (up from $1.51 billion); Natural Gas Pipelines & Services $1.06 billion (up from $0.89 billion); and Petrochemical & Refined Products Services $1.07 billion (up from $1.06 billion).
Cash, debt and capital
- Year-end unrestricted cash was $334.7 million; total stated liquidity was $4.85 billion, including $4.52 billion of available revolver capacity.
- Debt principal outstanding was $27.88 billion, including $2.65 billion of junior subordinated notes. The balance sheet reported debt of $27.63 billion including current maturities. Total debt principal increased from $26.42 billion in 2018.
- Cash used in investing activities was $4.58 billion, including $4.53 billion of capital expenditures. Cash used in financing activities was $1.95 billion.
- Year-end total assets were $61.73 billion and total equity was $25.83 billion. Cash distributions for 2019 were $1.765 per unit; the Q4 rate was $0.445 per unit.
Material changes and notable items
- Marketing revenue declined, while midstream revenue increased by $121.5 million. Crude oil and NGL pipeline throughput and export activity were among the contributors to stronger segment earnings.
- Major projects placed in service included the Shin Oak NGL pipeline, Midland-to-ECHO 2 crude pipeline, Mentone and Bulldog gas-processing plants, iBDH facility and expanded LPG loading capacity at EHT. EPD reported $5.4 billion of major growth projects placed in service during 2019.
- EPD recorded $132.7 million of asset impairment and related charges, including a $76.4 million write-off of its Centennial Pipeline investment and charges associated with planned asset shutdowns.
- Interest expense increased to $1.24 billion from $1.10 billion. A $94.9 million noncash mark-to-market loss on forward-starting interest-rate swaps was a significant item; the swaps were subsequently designated as cash-flow hedges.
- EPD received $440.7 million when Altus acquired a 33% interest in the subsidiary owning Shin Oak. The partnership repurchased $81.1 million of units under its $2.0 billion buyback authorization during 2019.
Outlook, risks and contingencies
- Management expected 2020 total capital investments of $3.4–$4.4 billion, including $3.0–$4.0 billion of growth capital and approximately $400 million of sustaining capital. It anticipated $2.0–$3.0 billion of growth investment in 2021.
- Management planned to recommend quarterly distribution increases of $0.0025 per unit during 2020, implying $1.805 per unit for the year, 2.3% above 2019. Payments remain subject to Board approval. Management also intended to use about 2% of operating cash flow for unit repurchases in 2020.
- The filing describes a positive long-term view of U.S. production and export demand, but notes uncertainty from commodity-price volatility, producer spending, competition, customer credit, regulation, weather, environmental obligations and project costs. It also flags the emerging coronavirus as a potential drag on global demand and reported a roughly 22% WTI price decline from the start of 2020 through February 10.
- The Texas Supreme Court affirmed the appellate decision rejecting Energy Transfer’s claims on January 31, 2020; EPD had recorded no liability. EPD’s claims against the former PDH 1 general contractor remained in litigation. A Louisiana EPA notice could result in a monetary sanction, which EPD did not expect to be material.
- After year-end, M&B exercised the Liquidity Option. EPD expected to settle in March 2020 by issuing 54.8 million units in exchange for the same number of units held by OTA, which would be reclassified as treasury units; the filing expected no net increase in units outstanding. EPO also issued $3.0 billion of senior notes in January 2020, partly to refinance maturities.
Investor verification priorities
- Confirm project schedules, customer commitments, cost-to-complete and utilization for the announced growth-capital program.
- Review debt maturities, leverage and refinancing needs alongside the stated liquidity and distribution plans; the filing cites a target debt-to-normalized-adjusted-EBITDA ratio of approximately 3.5x but does not state the year-end ratio here.
- Assess how much earnings and cash generation depend on fee-based services versus commodity-sensitive processing and marketing, including the effects of lower prices and volumes.
- Verify settlement accounting and tax consequences of the exercised Liquidity Option and the impact of the January 2020 debt issuance.
- Review the assumptions behind the Centennial impairment, remaining legal matters, and potential pipeline-safety and environmental compliance costs.