Business context and reporting period
Enterprise Products Partners L.P. (NYSE: EPD) is a U.S.-focused midstream energy partnership providing gathering, processing, transportation, storage, fractionation and export services for natural gas, NGLs, crude oil, petrochemicals and refined products. This Form 10-K covers the year ended December 31, 2016; quarterly figures below include the fourth quarter. The partnership reported about 49,300 pipeline miles and 260 million barrels of hydrocarbon storage capacity. Its Gulf of Mexico Offshore Business was sold in July 2015, affecting period comparisons.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $23.02 billion | $27.03 billion |
| Operating income | $3.58 billion | $3.54 billion |
| Net income | $2.55 billion | $2.56 billion |
| Net income attributable to limited partners | $2.51 billion | $2.52 billion |
| Diluted earnings per unit | $1.20 | $1.26 |
| Operating cash flow | $4.07 billion | $4.00 billion |
| Distributable cash flow (non-GAAP) | $4.10 billion | $5.61 billion |
| Distribution coverage (non-GAAP) | 1.21x | 1.85x |
Fourth-quarter 2016 revenue was $6.48 billion, operating income $923.2 million, net income $669.7 million and diluted earnings per unit $0.31. The 2016 quarterly distribution rose to $0.41 per unit in the fourth quarter; distributions for the year totaled $1.61 per unit.
- Operating income was about 15.6% of revenue in 2016; net income was about 11.1% of revenue.
- Cash used in investing activities was $4.34 billion; capital spending was $4.12 billion, including the $1.0 billion final EFS Midstream acquisition payment. Financing activities provided $321.7 million.
- At year-end, total assets were $52.19 billion and total equity $22.27 billion. Debt principal was $23.90 billion, including $1.78 billion of commercial paper and $1.47 billion of junior subordinated notes. Year-end unrestricted cash was $63.1 million.
- Available liquidity was $3.78 billion, comprising $3.72 billion in revolving-credit availability and $63.1 million of cash. Investment-grade ratings were BBB+ from S&P and Baa1 from Moody’s.
Material changes versus the prior comparable period
- Revenue fell $4.01 billion, principally because crude oil marketing revenue declined $3.93 billion, reflecting lower sales volumes and prices. Since related commodity purchase costs also fell, the revenue decrease did not translate directly into a comparable margin decline.
- Operating income increased $40.5 million, while net income attributable to limited partners decreased slightly. Interest expense rose $20.8 million to $982.6 million, primarily reflecting higher average debt outstanding.
- Non-GAAP gross operating margin decreased to $5.25 billion from $5.34 billion. NGL Pipelines & Services improved to $2.99 billion, while Crude Oil Pipelines & Services declined to $854.6 million; Natural Gas Pipelines & Services and Petrochemical & Refined Products Services also declined.
- Operating cash flow increased $64.4 million. Distributable cash flow fell substantially from 2015, which included $1.61 billion of asset-sale and insurance proceeds in its calculation, largely related to the Offshore Business sale.
- Units outstanding increased from about 2.013 billion to 2.118 billion. EPD issued 104.2 million units through its ATM, distribution reinvestment and employee purchase plans, generating $2.54 billion net proceeds.
- Commodity-price weakness continued, though crude and natural gas prices recovered late in 2016. The Offshore sale, completed EFS acquisition, new facilities and project start-ups also affect comparability.
Outlook, commentary, risks and unusual items
- Management forecast 2017 capital spending of $2.3–$2.7 billion, including about $250 million of sustaining capital, and said it expected sufficient liquidity and market access for foreseeable funding needs. It planned to refinance $800 million of senior notes due September 2017; $1.1 billion is due in 2018.
- Management expected the new Morgan’s Point ethane export terminal to become profitable in 2017 as customer commitments ramped up. The PDH facility was expected to enter commercial operations around mid-2017; the Orla gas plant was expected to start in the second quarter of 2018. These are forward-looking expectations, not guarantees.
- Management cited recovering producer activity and growing export and petrochemical demand as potential supports for volumes. It also noted excess midstream capacity in the Eagle Ford and Haynesville while production recovers. Industry forecasts cited by management—not company guidance—put WTI at $50–$60 per barrel through 2020; management expected natural gas prices to stabilize near $3/MMBtu.
- Key risks include commodity-price and volume exposure, customer credit and contract performance, competition, leverage and refinancing needs, project cost or schedule overruns, pipeline safety and environmental compliance, severe weather, and changes in regulated pipeline rates. New or proposed pipeline rules and FERC rate proceedings could add costs or affect revenues.
- At December 31, 2016, inventory was $1.77 billion, up from $1.04 billion, partly due to storage-related contango positions. Management expected to unwind about $1.1 billion of positions during first-quarter 2017, reducing working-capital needs and related debt. Restricted cash increased to $354.5 million, mainly from commodity-derivative margin requirements.
- 2016 included $52.8 million of asset impairment and related charges in operating costs and expenses, including planned asset abandonments and costs associated with a Pascagoula plant fire. The facility returned to service in December; related repair and response costs were incurred, and an insurance claim remained under evaluation.
- Enterprise is appealing a $535.8 million judgment in the ETP matter, plus post-judgment interest. Management considered payment not probable and recorded no provision. The appeal was pending. The partnership also sued its former PDH contractor after terminating it for cause; the filing does not provide a clear value for claimed damages.
- The general partner’s limited fiduciary duties, EPCO service and cost-sharing arrangements, and affiliated ownership are structural considerations. EPCO affiliates held about 32% of limited partner interests. The filing also discloses reportable Iran-related activity involving an Oiltanking joint venture affiliate; the partnership stated the affiliate reported no sanctionable conduct.
Important facts for investors to verify
- Whether operating cash flow and distribution coverage remain adequate after growth and sustaining capital spending; review the partnership’s non-GAAP distributable cash flow reconciliation.
- Progress on refinancing 2017–2018 maturities, commercial-paper balances, liquidity availability and leverage, including the impact of planned capital investment.
- Actual performance and contract-volume ramp-up at Morgan’s Point, PDH, Orla and other major projects, including any schedule, cost or customer-commitment changes.
- Resolution and potential financial exposure from the ETP appeal and PDH contractor litigation, and the status of insurance recovery for the Pascagoula fire.
- Effects of producer activity, commodity prices, customer credit quality and FERC or pipeline-safety regulation on throughput, margins and cash generation.
- Ongoing unit issuance and dilution, including use of the ATM program and distribution reinvestment plan.