Enterprise Products Partners L.P. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 1, 2019. The filing also reports fourth-quarter results. Enterprise is a diversified U.S. midstream energy partnership operating pipelines, processing and fractionation facilities, storage, terminals, and marine transportation assets.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $36.53 billion | $29.24 billion |
| Operating income | $5.41 billion | $3.93 billion |
| Net income attributable to limited partners | $4.17 billion | $2.80 billion |
| Basic and diluted earnings per unit | $1.91 | $1.30 |
| Net cash from operating activities | $6.13 billion | $4.67 billion |
| Cash used in investing activities | $4.28 billion | $3.29 billion |
| Distributable cash flow (non-GAAP) | $5.99 billion | $4.50 billion |
| Distribution coverage ratio | 1.6x | 1.2x |
Revenue increased 25% and operating income increased 38%. Approximate operating and net margins were 14.8% and 11.6%, respectively, based on reported revenue and income. Fourth-quarter 2018 revenue was $9.18 billion, operating income $1.64 billion, net income $1.31 billion, and earnings per unit $0.59; fourth-quarter 2017 figures were $8.43 billion, $1.08 billion, $797.3 million, and $0.36, respectively.
Revenue growth was led by marketing activity and higher commodity selling prices; management noted that higher marketing revenue generally comes with higher product purchase costs and does not necessarily increase margin. Midstream service revenue also grew. Adoption of ASC 606 added $632.7 million to 2018 revenue, including $621.7 million of non-cash consideration for equity NGLs, with a corresponding $621.7 million cost of sales; the filing says the change did not significantly affect gross operating margin.
Segments and material changes
- Non-GAAP gross operating margin rose to $7.33 billion from $5.68 billion. Segment results were: NGL Pipelines & Services $3.83 billion (up from $3.26 billion); Crude Oil Pipelines & Services $1.51 billion (up from $987.2 million); Natural Gas Pipelines & Services $891.2 million (up from $714.5 million); and Petrochemical & Refined Products Services $1.06 billion (up from $714.6 million).
- Growth reflected higher throughput and fees, new assets, and improved marketing results. Notable additions included the PDH facility, two Orla gas-processing trains, and a new Mont Belvieu fractionator. PDH operations contributed $104.4 million of segment gross operating margin.
- Operating cash flow increased 31% year over year. Growth capital spending was $3.90 billion; sustaining capital spending was $320.9 million. Free cash flow, a non-GAAP measure defined by the partnership, was $2.00 billion versus $1.33 billion.
- Capital investment was funded in part through $5.7 billion of debt issuance. The partnership also acquired the remaining 50% of Delaware Processing for $150.6 million and sold the Red River System for $134.9 million, recognizing a $20.6 million gain.
Debt, liquidity and distributions
At year-end, consolidated debt principal was $26.42 billion, comprising $23.75 billion of senior notes and $2.67 billion of junior subordinated notes. Balance-sheet debt, including current maturities and net of other adjustments, was $26.18 billion. Debt principal increased from $24.78 billion a year earlier. Cash and cash equivalents were $344.8 million; restricted cash was $65.3 million. Reported consolidated liquidity was $6.34 billion, including $6.0 billion of available revolving-credit capacity. The partnership reported compliance with debt covenants; long-term senior debt ratings were investment grade.
Cash distributions declared for 2018 totaled $1.725 per unit, up from $1.6825 in 2017. The fourth-quarter distribution was $0.435 per unit, payable in February 2019. Management planned to recommend quarterly increases of $0.0025 per unit during 2019, implying $1.765 per unit for the year, subject to Board approval. A new $2.0 billion multi-year unit repurchase program was authorized in January 2019; execution is discretionary and conditioned on financial flexibility, investment opportunities, unit valuation, and leverage objectives.
Outlook, risks and unusual items
- Management forecast 2019 capital investment of approximately $3.5 billion to $3.9 billion, including $3.1 billion to $3.5 billion of growth capital and $350 million of sustaining capital. This forecast depends on funding availability and may change.
- Management anticipated continued producer investment and demand for Gulf Coast infrastructure, exports, petrochemical feedstocks, and NGL services. Projects under construction included Shin Oak, Orla III, Mentone, fractionation expansions, LPG export capacity, and an ethylene export terminal. Project schedules and expected demand are forward-looking and not assured.
- Management identified commodity-price and volume volatility, producer activity and basin depletion, competition and potential excess infrastructure capacity, customer credit risk, construction delays or cost overruns, higher interest rates, and regulatory, environmental, weather and cybersecurity risks. Pipeline integrity spending was $122.0 million in 2018; approximately $126 million was expected in 2019.
- The Energy Transfer litigation remained pending before the Texas Supreme Court after an appellate court reversed the trial judgment; no provision was recorded because management considered payment of damages not probable. Enterprise also had an ongoing lawsuit against the former PDH contractor. A Texas environmental enforcement matter could result in sanctions exceeding $0.1 million; management did not expect a material financial-statement impact.
- Other notable items included $56.1 million of non-cash expense from changes in the estimated value of the Liquidity Option Agreement and $39.4 million of non-cash gain from the Delaware Processing step acquisition. Non-cash asset impairment and related charges were $50.5 million.
Important facts for investors to verify
- Reconcile reported growth in revenue and earnings with commodity marketing prices, costs, volumes, and the ASC 606 presentation change.
- Review debt maturities, interest expense, available borrowing capacity, and whether leverage remains consistent with the stated target near 3.5x debt-to-normalized EBITDA.
- Track delivery, utilization, customer commitments, and costs for major growth projects, alongside the stated 2019 capital-investment forecast.
- Confirm distribution growth and buyback execution against cash generation, coverage, capital needs, and Board approvals.
- Monitor the Energy Transfer and PDH litigation, environmental matters, and other disclosed contingencies for changes in status or estimated exposure.