01—Abstract
Summary
Summary of the 10-K filed March 1, 2019. Cited figures are marked; the original filing is the authoritative source.
Enterprise Products Partners L.P.
(NYSE: EPD) reported record 2018 results, with net income attributable to limited partners of $4.17 billiona ($1.91 per unit) versus $2.80 billion ($1.30 per unit) in 2017, and total revenues of $36.53 billion (up from $29.24 billion). Operating income rose 38% to $5.41 billion, driven by strong NGL Pipelines & Services and Petrochemical & Refined Products Services segments. Total non-GAAP gross operating margin reached $7.33 billion, up about 29%, led by the PDH facility, the Orla gas plant, and expanded Permian Basin crude and NGL infrastructure.
Distributable cash flow was $5.99 billionb, giving a 1.6x distribution coverage ratio on $1.725 per unit of 2018 distributions, up from 1.2x in 2017, which supports the company's decision to retain cash for growth. The balance sheet and capital plans are the main areas of investor focus. Total debt principal was $26.4 billion at year-end, and EPO's credit ratings were investment grade (BBB+/Baa1/BBB+).
Management expects 2019 capital investments of $3.5 to $3.9 billionc, with $6.7 billion of growth projects scheduled through 2020, including Shin Oak NGL Pipeline, Mentone and a new Mont Belvieu fractionator. The partnership also authorized a $2.0 billion multi-year unit buyback in January 2019 and plans a $0.0025 per unit quarterly distribution increase for 2019.
Key risks include commodity price and basis volatility, with an unrealized mark-to-market loss of $44.6 milliond tied to Midland-to-ECHO 1 basis hedges, and an unresolved $535.8 million judgment in the Energy Transfer litigation, which the company believes is not probable of payment. Other risks include regulatory changes at FERC for oil pipeline indexed rates, the cost of growth capital, and exposure to interest rate increases given $26.15 billion of fixed-rate debt.
02—Key points
Key Highlights
- Record 2018 revenue of $36.5 billion (up 25% year over year) and operating income of $5.41 billion (up 38%), with net income attributable to limited partners of $4.17 billion ($1.91 per unit, versus $1.30 in 2017).
- Total non-GAAP gross operating margin rose to $7.33 billion from $5.68 billion, led by NGL Pipelines & Services ($3.83 billion) and the Petrochemical & Refined Products segment, which more than doubled its margin to $1.06 billion after the PDH facility entered service.
- Distributable cash flow was $5.99 billion, giving a 1.6x distribution coverage ratio, and free cash flow turned positive at $2.0 billion, compared with $1.3 billion in 2017.
- Growth capital investment totaled $3.9 billion in 2018. The company expects $3.5 to $3.9 billion of 2019 capital spending and has $6.7 billion of growth projects scheduled through 2020.
- Shareholder returns expanded: a $2.0 billion multi-year unit buyback was authorized in January 2019, and the 2019 distribution is planned at $1.765 per unit, 2.3% above 2018.
- Credit profile remains investment grade (BBB+ S&P, Baa1 Moody's, BBB+ Fitch) despite $26.4 billion of total debt, with $6.34 billion of liquidity at year-end.
- Material legal exposure remains: the Energy Transfer judgment of $535.8 million was reversed on appeal, but ETP's petition is pending before the Texas Supreme Court, and no provision has been recorded.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Enterprise Products Partners L.P. kept $0.11.
- Revenue$36.53B100.0%
- Cost of revenue−$26.79B73.3%
- Gross profit$9.74B26.7%
- Operating costs−$4.34B11.9%
- Operating income$5.41B14.8%
- Interest, other & tax−$1.24B3.4%
- Net income$4.17B11.4%
Where FY2018 revenue went
$36.53B- Cost of revenue: $26.79B, 73% of revenue
- Net income: $4.17B, 11% of revenue
- Operating costs: $4.34B, 12% of revenue
- Interest, other & tax: $1.24B, 3.4% of revenue
Kept 11% as net incomeNet income $4.17B · 11%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed March 1, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $36.53B$29.24B | +24.9% |
| Cost of Revenue | $26.79B$21.49B | +24.7% |
| Gross Profit | $9.74B$7.75B | +25.7% |
| Operating Expenses | $31.61B$25.74B | +22.8% |
| Operating Income | $5.41B$3.93B | +37.7% |
| Interest Expense | $1.10B$984.60M | +11.4% |
| Net Income | $4.17B$2.80B | +49.1% |
| Shares Outstanding (Diluted) | 2.19B2.15B | +1.5% |
05—Questions
Frequently Asked Questions
What drove the large increase in 2018 earnings?
Higher gross operating margin across segments drove the increase. The PDH facility began full operations in April 2018 and contributed $104.4 million. Midland-to-ECHO 1 crude pipeline earnings rose to $304.7 million from $25.3 million, and NGL pipelines, fractionation and storage added about $227 million. Revenue growth was largely driven by higher commodity sales prices, which also raised cost of sales, so margin growth is the better measure of underlying performance.
Is the distribution safe, and how much cushion does it have?
Coverage is solid. DCF of $5.99 billion covered total 2018 distributions to limited partners of $3.78 billion by about 1.6x, and 2018 retained cash was $2.2 billion. The partnership has a stated plan to increase the quarterly distribution by $0.0025 per unit in each quarter of 2019. Distributions are subject to board approval, and any reduction in commodity prices, volumes or capital needs could change coverage.
What are the main risks to the Permian and Midland-to-ECHO growth story?
The Midland-to-ECHO 1 hedges carried a $44.6 million non-cash mark-to-market loss in 2018 because the Midland-Houston basis widened to $8.48 per barrel, versus a locked-in $2.76. These hedges reverse as physical volumes flow, but further basis widening would create more temporary losses. Pipeline additions such as Midland-to-ECHO 2 and Shin Oak depend on continued Permian drilling and on the timing of takeaway capacity industry-wide.
How exposed is EPD to interest rates and refinancing?
Most debt is fixed rate: $26.15 billion carrying value of fixed-rate debt versus commercial paper and revolver borrowings that were nil at year-end. Senior maturities are $1.5 billion in 2019 and $1.5 billion in 2020. Interest expense rose to $1.10 billion from $0.98 billion because of higher average debt principal. The filing notes the Federal Reserve raised rates four times in 2018 and signaled further increases in 2019, which would raise the cost of refinancing and new borrowings.
What is the status of the Energy Transfer litigation and what is the potential exposure?
A Texas appeals court reversed the original $535.8 million trial judgment in July 2017 and ruled that ETP take nothing on its claims. ETP petitioned the Supreme Court of Texas, which requested merits briefing in June 2018. Management believes payment of damages is not probable and has recorded no provision. An adverse ruling would represent a material one-time charge against earnings, so this matter should be monitored.
06—Continue