ITEM 1A. RISK FACTORS.
An investment in our common units or debt securities involves certain risks. If any of the following key risks were to occur, it could have a material adverse effect on our financial position, results of operations and cash flows, as well as our ability to maintain or increase distribution levels. In any such circumstance and others described below, the trading price of our securities could decline and you could lose part or all of your investment.
Risks Relating to Our Business
Changes in demand for and prices and production of hydrocarbon products could have a material adverse effect
on our financial position, results of operations and cash flows.
We operate predominantly in the midstream energy industry, which includes gathering, transporting, processing, fractionating and storing natural gas, NGLs, crude oil, petrochemical and refined products. As such, changes in the prices of hydrocarbon products and in the relative price levels among hydrocarbon products could have a material adverse effect on our financial position, results of operations and cash flows. Changes in prices may impact demand for hydrocarbon products, which in turn may impact production, demand and the volumes of products for which we provide services. In addition, decreases in demand may be caused by other factors, including prevailing economic conditions, reduced demand by consumers for the end products made with hydrocarbon products, increased competition, adverse weather conditions, public health emergencies, and government regulations affecting prices and production levels. We may also incur credit and price risk to the extent customers do not fulfill their obligations to us in connection with our marketing of natural gas, NGLs, propylene, refined products and/or crude oil and long-term take-or-pay agreements.
Crude oil and natural gas prices have been volatile in recent years. For example, crude oil prices (based on WTI as measured by the NYMEX) ranged from a high of $76.41 per barrel to a low of $42.53 per barrel in the three year period ending December 31, 2019. WTI prices in 2020 have ranged from a high of $63.27 per barrel to a low of $49.57 per barrel through February 10, 2020. Likewise, natural gas prices (based on Henry Hub as measured by the NYMEX) ranged from a high of $4.84 per MMBtu to a low of $2.07 per MMBtu over the same three-year period. Henry Hub natural gas prices in 2020 have ranged from a high of $2.20 per MMBtu to a low of $1.77 per MMBtu through February 10, 2020.
Generally, prices of hydrocarbon products are subject to fluctuations in response to changes in supply, demand, market uncertainty and a variety of other uncontrollable factors, such as: (i) the level of domestic production and consumer product demand; (ii) the availability of imported crude oil and natural gas and actions taken by foreign crude oil and natural gas producing nations; (iii) the availability of transportation systems with adequate capacity; (iv) the availability of competitive fuels; (v) fluctuating and seasonal demand for crude oil, natural gas, NGLs and other hydrocarbon products, including demand for NGL products by the petrochemical, refining and heating industries; (vi) the impact of conservation efforts; (vii) governmental regulation and taxation of production; (viii) reduced demand for hydrocarbons attributable to public health emergencies and (ix) prevailing economic conditions.
We are exposed to natural gas and NGL commodity price risks under certain of our natural gas processing and gathering and NGL fractionation contracts that provide for fees to be calculated based on a regional natural gas or NGL price index, or to be paid in-kind by taking title to natural gas or NGLs. A decrease in natural gas and NGL prices can result in lower margins from these contracts, which could have a material adverse effect on our financial position, results of operations and cash flows. Volatility in the prices of natural gas and NGLs can lead to ethane rejection, which results in a reduction in volumes available for transportation, fractionation, storage and marketing. Volatility in these commodity prices may also have an impact on many of our customers, which in turn could have a negative impact on their ability to fulfill their obligations to us.
The crude oil, natural gas and NGLs currently transported, gathered or processed at our facilities originate primarily from existing domestic resource basins, which naturally deplete over time. To offset this natural decline, our facilities need access to production from newly discovered properties. Many economic and business factors beyond our control can adversely affect the decision by producers to explore for and develop new reserves. These factors could include relatively low crude oil and natural gas prices, cost and availability of equipment and labor, regulatory changes, capital budget limitations, the lack of available capital or the probability of success in finding hydrocarbons. A decrease in exploration and development activities in the regions where our facilities and other energy logistic assets are located could result in a decrease in volumes handled by our assets, which could have a material adverse effect on our financial position, results of operations and cash flows.
For a discussion regarding our current fundamentals outlook for 2020, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations - General Outlook for 2020” included under Part II, Item 7 of this annual report.
We face competition from third parties in our midstream energy businesses.
Even if crude oil and natural gas reserves exist in the areas served by our assets, we may not be chosen by producers in these areas to gather, transport, process, fractionate, store or otherwise handle the hydrocarbons extracted. We compete with other companies, including producers of crude oil and natural gas, for any such production on the basis of many factors, including but not limited to geographic proximity to the production, costs of connection, available capacity, rates and access to markets.
Our NGL, refined products and marine transportation businesses may compete with other pipelines and marine transportation companies in the areas they serve. We also compete with railroads and third party trucking operations in certain of the areas we serve. Competitive pressures may adversely affect our tariff rates or volumes shipped. Also, substantial new construction of inland marine vessels could create an oversupply and intensify competition for our marine transportation business.
The crude oil gathering and marketing business can be characterized by intense competition for supplies of crude oil at the wellhead. A decline in domestic crude oil production could intensify this competition among gatherers and marketers. Our crude oil transportation business competes with common carriers and proprietary pipelines owned and operated by major oil companies, large independent pipeline companies, financial institutions with commodity trading platforms and other companies in the areas where such pipeline systems deliver crude oil.
In our natural gas gathering business, we encounter competition in obtaining contracts to gather natural gas supplies, particularly new supplies. Competition in natural gas gathering is based in large part on reputation, efficiency, system reliability, gathering system capacity and pricing arrangements. Our key competitors in the natural gas gathering business include independent gas gatherers and major integrated energy companies. Alternate gathering facilities are available to producers we serve, and those producers may also elect to construct proprietary gas gathering systems.
Both we and our competitors make significant investments in new energy infrastructure to meet anticipated market demand. The success of our projects depends on utilization of our assets. Demand for our new projects may change during construction, and our competitors may make additional investments or redeploy assets that compete with our projects and existing assets. If either our investments or construction by competitors in the markets we serve result in excess capacity, our facilities and assets could be underutilized, which could cause us to reduce rates for our services. A reduction in rates may result in lower returns on our investments and, as a result, lower the value of our assets.
A significant increase in competition in the midstream energy industry, including construction of new assets or redeployment of existing assets by our competitors, could have a material adverse effect on our financial position, results of operations and cash flows.
Our debt level may limit our future financial and operating flexibility.
As of December 31, 2019, we had $24.75 billion in principal amount of consolidated senior long-term debt outstanding and $2.65 billion in principal amount of junior subordinated debt outstanding. The amount of our future debt could have significant effects on our operations, including, among other things:
• a substantial portion of our cash flow could be dedicated to the payment of principal and interest on our future debt and may not be available for other purposes, including the payment of distributions on our common units and for capital investments;
• credit rating agencies may take a negative view of our consolidated debt level;
• covenants contained in our existing and future credit and debt agreements will require us to continue to meet financial tests that may adversely affect our flexibility in planning for and reacting to changes in our business, including possible acquisition opportunities;
• our ability to obtain additional financing, if necessary, for working capital, capital investments, acquisitions or other purposes may be impaired or such financing may not be available on favorable terms;
• we may be at a competitive disadvantage relative to similar companies that have less debt; and
• we may be more vulnerable to adverse economic and industry conditions as a result of our significant debt level.
Our public debt indentures currently do not limit the amount of future indebtedness that we can incur, assume or guarantee. Although our credit agreements restrict our ability to incur additional debt above certain levels, any debt we may incur in compliance with these restrictions may still be substantial. For information regarding our long-term debt, see Note 7 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Our credit agreements and each of the indentures related to our public debt instruments include traditional financial covenants and other restrictions. For example, we are prohibited from making distributions to our partners if such distributions would cause an event of default or otherwise violate a covenant under our credit agreements. A breach of any of these restrictions by us could permit our lenders or noteholders, as applicable, to declare all amounts outstanding under these debt agreements to be immediately due and payable and, in the case of our credit agreements, terminate all commitments to extend further credit.
Our ability to access capital markets to raise capital on favorable terms could be affected by our debt level, when such debt matures, and by prevailing market conditions. Moreover, if the rating agencies were to downgrade our credit ratings, we could experience an increase in our borrowing costs, difficulty assessing capital markets and/or a reduction in the market price of our securities. Such a development could adversely affect our ability to obtain financing for working capital, capital investments or acquisitions, or to refinance existing indebtedness. If we are unable to access the capital markets on favorable terms in the future, we might be forced to seek extensions for some of our short-term debt obligations or to refinance some of our debt obligations through bank credit, as opposed to long-term public debt securities or equity securities. The price and terms upon which we might receive such extensions or additional bank credit, if at all, could be more onerous than those contained in existing debt agreements. Any such arrangements could, in turn, increase the risk that our leverage may adversely affect our future financial and operating flexibility and thereby impact our ability to pay cash distributions at expected levels.
We may not be able to fully execute our growth strategy if we encounter illiquid capital markets or increased competition for investment opportunities.
Our growth strategy contemplates the development and acquisition of a wide range of midstream and other energy infrastructure assets while maintaining a strong balance sheet. This strategy includes constructing and acquiring additional assets and businesses that enhance our ability to compete effectively and to diversify our asset portfolio, thereby providing us with more stable cash flows. We consider and pursue potential joint ventures, standalone projects and other transactions that we believe may present opportunities to expand our business, increase our market position and realize operational synergies.
We will require substantial new capital to finance the future development and acquisition of assets and businesses. For example, our capital investments for 2019 reflected $4.66 billion of cash payments for capital projects and other investments. Based on information currently available, we expect our total capital investments for 2020 to approximate $3.4 billion to $4.4 billion, which includes approximately $400 million for sustaining capital expenditures. Any limitations on our access to capital may impair our ability to execute this growth strategy. If our cost of debt or equity capital becomes too expensive, our ability to develop or acquire accretive assets will be limited. We also may not be able to raise the necessary funds on satisfactory terms, if at all.
Any sustained tightening of the credit markets may have a material adverse effect on us by, among other things, decreasing our ability to finance growth capital projects or business acquisitions on favorable terms and by the imposition of increasingly restrictive borrowing covenants. In addition, the distribution yields of any new equity we may issue may be higher than historical levels, making additional equity issuances more expensive. Accordingly, increased costs of equity and debt will make returns on capital expenditures with proceeds from such capital less accretive on a per unit basis.
We also may compete with third parties in the acquisition of energy infrastructure assets that complement our existing asset base. Increased competition for a limited pool of assets could result in our losing to other bidders more often than in the past or acquiring assets at less attractive prices. Either occurrence could limit our ability to fully execute our growth strategy. Our inability to execute our growth strategy may materially adversely affect our ability to maintain or pay higher cash distributions in the future.
Our actual construction, development and acquisition costs could materially exceed forecasted amounts.
We have announced and are engaged in multiple significant construction projects involving existing and new assets for which we have expended or will expend significant capital. These projects entail significant logistical, technological and staffing challenges. We may not be able to complete our projects at the costs we estimated at the time of each project’s initiation or that we currently estimate. Similarly, force majeure events such as hurricanes along the U.S. Gulf Coast may cause delays, shortages of skilled labor and additional expenses for these construction and development projects.
If capital investments materially exceed expected amounts, then our future cash flows could be reduced, which, in turn, could reduce the amount of cash we expect to have available for distribution. In addition, a material increase in project costs could result in decreased overall profitability of the newly constructed asset once it is placed into service.
Our construction of new assets is subject to operational, regulatory, environmental, political, legal and economic risks, which may result in delays, increased costs or decreased cash flows.
One of the ways we intend to grow our business is through the construction of new midstream energy infrastructure assets. The construction of new assets involves numerous operational, regulatory, environmental, political, legal and economic risks beyond our control and may require the expenditure of significant amounts of capital. These potential risks include, among other things, the following:
• we may be unable to complete construction projects on schedule or at the budgeted cost due to the unavailability of required construction personnel or materials, accidents, weather conditions or an inability to obtain necessary permits;
• we will not receive any material increase in operating cash flows until the project is completed, even though we may have expended considerable funds during the construction phase, which may be prolonged;
• we may construct facilities to capture anticipated future production growth in a region in which such growth does not materialize;
• since we are not engaged in the exploration for and development of crude oil or natural gas reserves, we may not have access to third party estimates of reserves in an area prior to our constructing facilities in the area. As a result, we may construct facilities in an area where the reserves are materially lower than we anticipate;
• in those situations where we do rely on third party reserve estimates in making a decision to construct assets, these estimates may prove inaccurate;
• the completion or success of our construction project may depend on the completion of a third party construction project (e.g., a downstream crude oil refinery expansion or construction of a new petrochemical facility) that we do not control and that may be subject to numerous of its own potential risks, delays and complexities; and
• we may be unable to obtain rights-of-way to construct additional pipelines or the cost to do so may be uneconomical.
A materialization of any of these risks could adversely affect our ability to achieve growth in the level of our cash flows or realize benefits from expansion opportunities or construction projects, which could impact the level of cash distributions we pay to partners.
Several of our assets have been in service for many years and require significant expenditures to maintain them. As a result, our maintenance or repair costs may increase in the future.
Our pipelines, terminals and storage assets are generally long-lived assets, and many of them have been in service for many years. The age and condition of our assets could result in increased maintenance or repair expenditures in the future. Any significant increase in these expenditures could adversely affect our results of operations, financial position or cash flows, as well as our ability to make cash distributions to our unitholders.
The inability to continue to access lands owned by third parties could adversely affect our operations and have a material adverse effect on our financial position, results of operations and cash flows.
Our ability to operate our pipeline systems on certain lands owned by third parties will depend on our maintaining existing rights-of-way and obtaining new rights-of-way on those lands. We are parties to rights-of-way agreements, permits and licenses authorizing land use with numerous parties, including private land owners, governmental entities, Native American tribes, rail carriers, public utilities and others. Our ability to secure extensions of existing agreements, permits and licenses is essential to our continuing business operations, and securing additional rights-of-way will be critical to our ability to pursue expansion projects. We cannot provide any assurance that we will be able to maintain access to all existing rights-of-way upon the expiration of the current grants, that all of the rights-of-way will be obtained in a timely fashion or that we will acquire new rights-of-way as needed.
In particular, various federal agencies within the U.S. Department of the Interior, particularly the Bureau of Indian Affairs, Bureau of Land Management, and the Office of Natural Resources Revenue, along with each Native American tribe, promulgate and enforce regulations pertaining to natural gas and oil operations on Native American tribal lands. These regulations and approval requirements relate to such matters as drilling and production requirements and environmental standards. In addition, each Native American tribe is a sovereign nation having the right to enforce laws and regulations and to grant approvals independent from federal, state and local statutes and regulations. These tribal laws and regulations include various taxes, fees, requirements to employ Native American tribal members and other conditions that apply to operators and contractors conducting operations on Native American tribal lands. One or more of these factors may increase our cost of doing business on Native American tribal lands and impact the viability of, or prevent or delay our ability to conduct our operations on such lands.
Furthermore, whether we have the power of eminent domain for our pipelines varies from state to state, depending upon the type of pipeline, the laws of the particular state and the ownership of the land to which we seek access. When we exercise eminent domain rights or negotiate private agreements, we must compensate landowners for the use of their property and, in eminent domain actions, such compensation may be determined by a court. The inability to exercise the power of eminent domain could negatively affect our business if we were to lose the right to use or occupy the property on which our pipelines are located.
We may face opposition to the operation of our pipelines and facilities from various groups.
We may face opposition to the operation of our pipelines and facilities from environmental groups, landowners, tribal groups, local groups and other advocates. Such opposition could take many forms, including organized protests, attempts to block or sabotage our operations, intervention in regulatory or administrative proceedings involving our assets, or lawsuits or other actions designed to prevent, disrupt or delay the operation of our assets and business. For example, repairing our pipelines often involves securing consent from individual landowners to access their property; one or more landowners may resist our efforts to make needed repairs, which could lead to an interruption in the operation of the affected pipeline or facility for a period of time that is significantly longer than would have otherwise been the case. In addition, acts of sabotage or eco-terrorism could cause significant damage or injury to people, property or the environment or lead to extended interruptions of our operations. Any such event that interrupts the revenues generated by our operations, or which causes us to make significant expenditures not covered by insurance, could reduce our cash available for paying distributions to our partners and, accordingly, adversely affect our financial condition and the market price of our securities.
Our growth strategy may adversely affect our results of operations if we do not successfully integrate and manage the businesses that we acquire or if we substantially increase our indebtedness and contingent liabilities to make acquisitions.
Our growth strategy includes making accretive acquisitions. From time to time, we evaluate and acquire additional assets and businesses that we believe complement our existing operations. We may be unable to successfully integrate and manage the businesses we acquire in the future. We may incur substantial expenses or encounter delays or other problems in connection with our growth strategy that could have a material adverse effect on our financial position, results of operations and cash flows. Moreover, acquisitions and business expansions involve numerous risks, such as:
• difficulties in the assimilation of the operations, technologies, services and products of the acquired assets or businesses;
• establishing the internal controls and procedures we are required to maintain under the Sarbanes-Oxley Act of 2002;
• managing relationships with new joint venture partners with whom we have not previously partnered;
• experiencing unforeseen operational interruptions or the loss of key employees, customers or suppliers;
• inefficiencies and complexities that can arise because of unfamiliarity with new assets and the businesses associated with them, including with their markets; and
• diversion of the attention of management and other personnel from day-to-day business to the development or acquisition of new businesses and other business opportunities.
If consummated, any acquisition or investment would also likely result in the incurrence of indebtedness and contingent liabilities and an increase in interest expense and depreciation, amortization and accretion expenses. As a result, our capitalization and results of operations may change significantly following a material acquisition. A substantial increase in our indebtedness and contingent liabilities could have a material adverse effect on our financial position, results of operations and cash flows. In addition, any anticipated benefits of a material acquisition, such as expected cost savings or other synergies, may not be fully realized, if at all.
Acquisitions that appear to increase our operating cash flows may nevertheless reduce our operating cash flows on a per unit basis.
Even if we make acquisitions that we believe will increase our operating cash flows, these acquisitions may ultimately result in a reduction of operating cash flow on a per unit basis, such as if our assumptions regarding a newly acquired asset or business did not materialize or unforeseen risks occurred. As a result, an acquisition initially deemed accretive based on information available at the time could turn out not to be. Examples of risks that could cause an acquisition to ultimately not be accretive include our inability to achieve anticipated operating and financial projections or to integrate an acquired business successfully, the assumption of unknown liabilities for which we become liable, and the loss of key employees or key customers. If we consummate any future acquisitions, our capitalization and results of operations may change significantly, and our unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will in making such decisions. As a result of the risks noted above, we may not realize the full benefits we expect from a material acquisition, which could have a material adverse effect on our financial position, results of operations and cash flows.
A natural disaster, catastrophe, terrorist attack or other event could result in severe personal injury, property damage and environmental damage, which could curtail our operations and have a material adverse effect on our financial position, results of operations and cash flows.
Some of our operations involve risks of personal injury, property damage and environmental damage, which could curtail our operations and otherwise materially adversely affect our cash flow. For example, natural gas facilities operate at high pressures, sometimes in excess of 1,100 pounds per square inch. In addition, our marine transportation business is subject to additional risks, including the possibility of marine accidents and spill events. From time to time, our octane enhancement facility may produce MTBE for export, which could expose us to additional risks from spill events. Virtually all of our operations are exposed to potential natural disasters, including hurricanes, tornadoes, storms, floods and/or earthquakes. The location of our assets and our customers’ assets in the U.S. Gulf Coast region makes them particularly vulnerable to hurricane or tropical storm risk. In addition, terrorists may target our physical facilities and computer hackers may attack our electronic systems.
If one or more facilities or electronic systems that we own or that deliver products to us or that supply our facilities are damaged by severe weather or any other disaster, accident, catastrophe, terrorist attack or other event, our operations could be significantly interrupted. These interruptions could involve significant damage to people, property or the environment, and repairs could take from a week or less for a minor incident to six months or more for a major interruption. Additionally, some of the storage contracts that we are a party to obligate us to indemnify our customers for any damage or injury occurring during the period in which the customers’ product is in our possession. Any event that interrupts the revenues generated by our operations, or which causes us to make significant expenditures not covered by insurance, could reduce our cash available for paying distributions and, accordingly, adversely affect the market price of our common units.
We believe that EPCO maintains adequate insurance coverage on our behalf; however, insurance will not cover all types of interruptions that might occur, will not cover amounts up to applicable deductibles and will not cover all risks associated with the nature and extent of our operations. As a result of market conditions, premiums and deductibles for certain types of insurance (e.g., general liability policies) can increase substantially, and in some instances, such insurance may become unavailable or available only for reduced amounts of coverage.
In the future, circumstances may arise whereby EPCO may not be able to renew existing insurance policies on our behalf or procure other desirable insurance on commercially reasonable terms, if at all. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position, results of operations and cash flows. In addition, the proceeds of any such insurance may not be paid in a timely manner and may be insufficient if such an event were to occur.
A cyber-attack on our information technology (“IT”) systems could affect our business and assets, and have a material adverse effect on our financial position, results of operations and cash flows.
We rely on our IT systems to conduct our business, as well as systems of third-party vendors. These systems include information used to operate our assets, as well as cloud-based services. These systems are subject to possible security breaches and cyber-attacks.
Cyber-attacks are becoming more sophisticated, and U.S. government warnings have indicated that infrastructure assets, including pipelines, may be specifically targeted by certain groups. These attacks include, without limitation, malicious software, ransomware, attempts to gain unauthorized access to data, and other electronic security breaches. These attacks may be perpetrated by state-sponsored groups, “hacktivists”, criminal organizations or private individuals (including employee malfeasance). These cybersecurity risks include cyber-attacks on both us and third parties who provide material services to us. In addition to disrupting operations, cyber security breaches could also affect our ability to operate or control our facilities, render data or systems unusable, or result in the theft of sensitive, confidential or customer information. These events could also damage our reputation, and result in losses from remedial actions, loss of business or potential liability to third parties.
We do not carry insurance specifically for cybersecurity events; however, certain of our insurance policies may allow for coverage of associated damages resulting from such events. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position, results of operations and cash flows. In addition, the proceeds of any such insurance may not be paid in a timely manner and may be insufficient if such an event were to occur.
Failure of our critical IT systems could have an adverse impact on our business, financial condition, results of operations and cash flows, as well as our ability to pay cash distributions.
We rely on IT systems to operate our assets and manage our businesses. We depend on these systems to process, transmit and store electronic information, including financial records and personally identifiable information such as employee, customer, investor and payroll data, and to manage or support a variety of business processes, including our supply chain, pipeline and storage operations, gathering and processing operations, financial transactions, banking and numerous other processes and transactions. Some of these IT systems are proprietary and custom designed for our business, while others are based upon or reside on commercially available technologies.
Failures of these IT systems, whether due to power failures, a cybersecurity event or other reason, could result in a breach of critical operational or financial controls and lead to a disruption of our operations, commercial activities or financial processes. Such failures could adversely affect our results of operations, financial position or cash flow, as well as our ability to pay cash distributions in a timely manner. State and federal cybersecurity legislation could also impose new requirements, which could increase our cost of doing business.
Our business requires extensive credit risk management that may not be adequate to protect against customer nonpayment.
We may incur credit risk to the extent customers do not fulfill their obligations to us in connection with our marketing of natural gas, NGLs, crude oil, petrochemicals and refined products and long-term contracts with minimum volume commitments or fixed demand charges. Risks of nonpayment and nonperformance by customers are a major consideration in our businesses, and our credit procedures and policies may not be adequate to sufficiently eliminate customer credit risk. Further, adverse economic conditions in our industry may increase the risk of nonpayment and nonperformance by customers, particularly customers that have sub-investment grade credit ratings or small-scale companies. We manage our exposure to credit risk through credit analysis, credit approvals, credit limits and monitoring procedures, and for certain transactions may utilize letters of credit, prepayments, net out agreements and guarantees. However, these procedures and policies do not fully eliminate customer credit risk.
The primary markets for our services are the Gulf Coast, Southwest, Rocky Mountains, Northeast and Midwest regions of the U.S. We have a concentration of trade receivable balances due from domestic and international major integrated oil and gas companies, independent oil and gas companies and other pipelines and wholesalers operating in these markets. These concentrations of market areas may affect our overall credit risk in that the customers may be similarly affected by changes in economic, regulatory or other factors.
See Note 2 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report for information regarding our allowance for doubtful accounts.
The use of derivative financial instruments could result in material financial losses by us.
Historically, we have sought to limit a portion of the adverse effects resulting from changes in energy commodity prices and interest rates by using derivative instruments. Derivative instruments typically include futures, forward contracts, swaps, options and other instruments with similar characteristics. Substantially all of our derivatives are used for non-trading activities.
To the extent that we hedge our commodity price and interest rate exposures, we will forego the benefits we would otherwise experience if commodity prices or interest rates were to change in our favor. In addition, hedging activities can result in losses that might be material to our financial condition, results of operations and cash flows. Such losses could occur under various circumstances, including those situations where a counterparty does not perform its obligations under a hedge arrangement, the hedge is not effective in mitigating the underlying risk, or our risk management policies and procedures are not followed. Adverse economic conditions (e.g., a significant decline in energy commodity prices that negatively impact the cash flows of oil and gas producers) increase the risk of nonpayment or performance by our hedging counterparties.
See Part II, Item 7A of this annual report and Note 14 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report for a discussion of our derivative instruments and related hedging activities.
Our risk management policies cannot eliminate all commodity price risks. In addition, any noncompliance with our risk management policies could result in significant financial losses.
When engaged in marketing activities, it is our policy to maintain physical commodity positions that are substantially balanced with respect to price risks between purchases, on the one hand, and sales or future delivery obligations, on the other hand. Through these transactions, we seek to earn a margin for the commodity purchased by selling the commodity for physical delivery to third party users, such as producers, wholesalers, local distributors, independent refiners, marketing companies or major integrated oil and gas companies. These policies and practices cannot, however, eliminate all price risks. For example, any event that disrupts our anticipated physical supply could expose us to risk of loss resulting from price changes if we are required to obtain alternative supplies to cover our sales transactions. We are also exposed to basis risks when a commodity is purchased against one pricing index and sold against a different index. Moreover, we are exposed to some risks that are not hedged, including price risks on product we own, such as pipeline linefill, which must be maintained in order to facilitate transportation of the commodity in our pipelines. In addition, our marketing operations involve the risk of non-compliance with our risk management policies. We cannot assure you that our processes and procedures will detect and prevent all violations of our risk management policies, particularly if deception or other intentional misconduct is involved. If we were to incur a material loss related to commodity price risks, including non-compliance with our risk management policies, it could have a material adverse effect on our financial position, results of operations and cash flows.
Our variable-rate debt, including those fixed-rate debt obligations that may be converted to variable-rate through the use of interest rate swaps, make us vulnerable to increases in interest rates, which could have a material adverse effect on our financial position, results of operation and cash flows.
At December 31, 2019, we had $27.15 billion in principal amount of consolidated fixed-rate debt outstanding, including current maturities thereof. Due to the short term nature of commercial paper notes, we view the interest rates charged in connection with these instruments as variable.
The Board of Governors of the Federal Reserve System raised benchmark interest rates three times during 2017, four times during 2018, and again in early 2019 before lowering rates three times by the end of 2019. Should interest rates increase significantly, the amount of cash required to service our debt (including any future refinancing of our fixed-rate debt instruments) would increase. Additionally, from time to time, we may enter into interest rate swap arrangements, which could increase our exposure to variable interest rates. As a result, significant increases in interest rates could have a material adverse effect on our financial position, results of operations and cash flows.
An increase in interest rates may also cause a corresponding decline in demand for equity securities in general, and in particular, for yield-based equity securities such as our common units. A reduction in demand for our common units may cause their trading price to decline.
Amounts borrowed under our 364-Day and Multi-Year Revolving Credit Agreements may bear interest, at our election, based on a London Interbank Offered Rate (“LIBOR”). In addition, our junior subordinated notes and interest rate swap agreements may also reflect LIBOR-based terms. In July 2017, the Financial Conduct Authority in the U.K. announced a desire to phase out LIBOR as a benchmark by the end of 2021. Financial industry working groups are developing replacement rates and methodologies to transition existing agreements that depend on LIBOR as a reference rate.
We currently do not expect the transition from LIBOR to have a material impact on us. However, if clear market standards and transition methodologies have not developed by the time LIBOR becomes unavailable, we may have difficulty reaching agreements on acceptable replacement rates. If we are unable to negotiate replacement rates on favorable terms, it could have an adverse effect on our results of operations and cash flows.
Our pipeline integrity program as well as compliance with pipeline safety laws and regulations may impose significant costs and liabilities on us.
If we were to incur material costs in connection with our pipeline integrity program or pipeline safety laws and regulations, those costs could have a material adverse effect on our financial condition, results of operations and cash flows.
The DOT requires pipeline operators to develop integrity management programs to comprehensively evaluate their pipelines, and take measures to protect pipeline segments located in HCAs. The majority of the costs to comply with this integrity management rule are associated with pipeline integrity testing and any repairs found to be necessary as a result of such testing. Changes such as advances in pipeline inspection tools, identification of additional threats to a pipeline’s integrity and changes to the amount of pipe determined to be located in HCAs can have a significant impact on the costs to perform integrity testing and repairs. We will continue our pipeline integrity testing programs to assess and maintain the integrity of our pipelines. The results of these tests could cause us to incur significant and unanticipated capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of our pipelines.
In total, our pipeline integrity costs for the years ended December 31, 2019, 2018 and 2017 were $110.6 million, $122.0 million and $91.1 million, respectively. Of these annual totals, we charged $56.4 million, $71.8 million and $52.3 million to operating costs and expenses during the years ended December 31, 2019, 2018 and 2017, respectively. The remaining annual pipeline integrity costs were capitalized and treated as sustaining capital projects. We expect the cost of our pipeline integrity program, regardless of whether such costs are capitalized or expensed, to approximate $122 million for 2020.
For additional information regarding the pipeline safety regulations, the Pipeline Safety Act and the SAFE PIPES Act, see “Regulatory Matters - Environmental, Safety and Conservation - Pipeline Safety” included under Part I, Items 1 and 2 of this annual report.
Environmental, health and safety costs and liabilities, and changing environmental, health and safety regulation, could have a material adverse effect on our financial position, results of operations and cash flows.
Our operations are subject to various environmental, health and safety requirements and potential liabilities under extensive federal, state and local laws and regulations. Further, we cannot ensure that existing environmental, health and safety regulations will not be revised or that new regulations will not be adopted or become applicable to us. Governmental authorities have the power to enforce compliance with applicable regulations and permits and to subject violators to civil and criminal penalties, including substantial fines, injunctions or both. Certain environmental laws, including CERCLA and analogous state laws and regulations, may impose strict, joint and several liability for costs required to clean-up and restore sites where hazardous substances or hydrocarbons have been disposed or otherwise released. Moreover, third parties, including neighboring landowners, may also have the right to pursue legal actions to enforce compliance or to recover for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons or other waste products into the environment. Failure to comply with these requirements may expose us to fines, penalties and/or interruptions in our operations that could have a material adverse effect on our financial position, results of operations and cash flows.
In addition, future environmental, health and safety law developments, such as stricter laws, regulations, permits or enforcement policies, could significantly increase some costs of our operations. Areas of potential future environmental, health and safety law developments include the following items.
Greenhouse Gases/Climate Change
Responding to reports regarding climate change matters, the U.S. Congress from time to time has considered legislation to reduce emissions of greenhouse gases. In addition, certain states, including states in which our facilities or operations are located, have, individually or in regional cooperation, taken or proposed measures to reduce emissions of greenhouse gases. Various policies and approaches, including establishing a cap on emissions, requiring efficiency measures, or providing incentives for pollution reduction, use of renewable energy sources, or use of replacement fuels with lower carbon content are under discussion and have and may continue to result in additional actions involving greenhouse gases.
The adoption and implementation of any federal, state or local regulations imposing reporting obligations on, or limiting emissions of greenhouse gases from, our equipment and operations could require us to incur significant costs to reduce emissions of greenhouse gases associated with our operations or could adversely affect demand for the crude oil, natural gas or other hydrocarbon products that we transport, store or otherwise handle in connection with our midstream services. The potential increase in our operating costs could include costs to operate and maintain our facilities, install new emission controls on our facilities, acquire allowances to authorize greenhouse gas emissions (whether emitted by our operations or associated with fuel that we supply into the markets), pay taxes related to greenhouse gas emissions, and administer and manage a greenhouse gas emissions program. We may not be able to recover such increased costs through customer prices or rates, which may limit our access to, or otherwise cause us to reduce our participation in, certain market activities. In addition, changes in regulatory policies that result in a reduction in the demand for hydrocarbon products that are deemed to contribute to greenhouse gases, or restrictions on their use, may reduce volumes available to us for processing, transportation, marketing and storage. These developments could have a material adverse effect on our financial position, results of operations and cash flows.
In addition, numerous countries around the world have adopted or are considering adopting laws or regulations to reduce greenhouse gas emissions. It is not possible to know how quickly renewable energy technologies may advance, but if significant additional legislation and regulation were enacted, the increased use of renewable energy could ultimately reduce future demand for hydrocarbons. These developments could have a material adverse effect on our financial position, results of operations and cash flows.
Hydraulic Fracturing
Substantially all of our producer customers employ hydraulic fracturing techniques to stimulate natural gas and crude oil production from unconventional geological formations (including shale formations), which entails the injection of pressurized fracturing fluids (consisting of water, sand and certain chemicals) into a well bore. The U.S. federal government, and some states and localities, have adopted, and others are considering adopting, regulations or ordinances that could restrict hydraulic fracturing in certain circumstances, or that would impose higher taxes, fees or royalties on natural gas production. Increased regulation and attention given to the hydraulic fracturing process could lead to greater opposition to crude oil and natural gas drilling activities using hydraulic fracturing techniques, including increased litigation. Additional legislation or regulation could also lead to operational delays and/or increased operating costs in the production of crude oil and natural gas (including natural gas produced from shale plays like the Permian, Eagle Ford, Haynesville, Barnett, Marcellus and Utica Shales) incurred by our customers or could make it more difficult to perform hydraulic fracturing. If these legislative and regulatory initiatives cause a material decrease in the drilling of new wells and related servicing activities, it may affect the volume of hydrocarbon projects available to our midstream businesses and have a material adverse effect on our financial position, results of operations and cash flows.
See “Regulatory Matters” under Part I, Items 1 and 2 of this annual report for more information and specific disclosures relating to environmental, health and safety laws and regulations, and costs and liabilities.
Federal, state or local regulatory measures could have a material adverse effect on our financial position, results of operations and cash flows.
The FERC regulates our interstate liquids pipelines under the ICA. State regulatory agencies regulate our intrastate natural gas and NGL pipelines, intrastate storage facilities and gathering lines.
Our intrastate NGL and natural gas pipelines are subject to regulation in many states, including Colorado, Kansas, Louisiana, New Mexico, Texas and Wyoming. To the extent our intrastate natural gas pipelines engage in interstate transportation, they are also subject to regulation by the FERC pursuant to Section 311 of the NGPA. We also have natural gas underground storage facilities in Louisiana and Texas. Although state regulation is typically less comprehensive in scope than regulation by the FERC, our services are typically required to be provided on a nondiscriminatory basis and are also subject to challenge by protest and complaint.
Although our natural gas gathering systems are generally exempt from FERC regulation under the NGA, our natural gas gathering operations could be adversely affected should they become subject to federal regulation of rates and services, or, if the states in which we operate adopt policies imposing more onerous regulation on gas gathering operations. Additional rules and legislation pertaining to these matters are considered and adopted from time to time at both state and federal levels. We cannot predict what effect, if any, such regulatory changes and legislation might have on our operations, but we could be required to incur additional capital expenditures.
For a general overview of federal, state and local regulation applicable to our assets, see “Regulatory Matters” included within Part I, Items 1 and 2 of this annual report. This regulatory oversight can affect certain aspects of our business and the market for our products and could have a material adverse effect on our financial position, results of operations and cash flows.
The rates of our regulated assets are subject to review and possible adjustment by federal and state regulators, which could adversely affect our revenues.
The FERC, pursuant to the ICA (as amended), the Energy Policy Act and rules and orders promulgated thereunder, regulates the tariff rates and terms and conditions of service for our interstate common carrier liquids pipeline operations. To be lawful under the ICA, interstate tariff rates, terms and conditions of service must be just and reasonable and not unduly discriminatory, and must be on file with the FERC. In addition, pipelines may not confer any undue preference upon any shipper. Shippers may protest (and the FERC may investigate) the lawfulness of new or changed tariff rates. The FERC can suspend those tariff rates for up to seven months. It can also require refunds of amounts collected pursuant to rates that are ultimately found to be unlawful and prescribe new rates prospectively. The FERC and interested parties can also challenge tariff rates that have become final and effective. The FERC can also order new rates to take effect prospectively and order reparations for past rates that exceed the just and reasonable level up to two years prior to the date of a complaint. Due to the complexity of rate making, the lawfulness of any rate is never assured. A successful challenge of our rates could adversely affect our revenues.
The FERC uses prescribed rate methodologies for approving regulated tariff rate changes for interstate liquids pipelines. The FERC’s indexing methodology currently allows a pipeline to increase its rates by a percentage linked to the PPI. For the five-year period ending June 30, 2021, the index is measured by the year-over-year change in the Bureau of Labor’s producer price index for finished goods, plus 1.23%. However, in any year in which the index is negative, a pipeline must file to lower its rates if its rates would be above the indexed rate ceiling. As an alternative to this indexing methodology, we may also choose to support our rates based on a cost-of-service methodology, or by obtaining advance approval to charge “market-based rates,” or by charging “settlement rates” agreed to by all affected shippers. These methodologies may limit our ability to set rates based on our actual costs or may delay the use of rates reflecting increased costs.
In October 2016, the FERC issued an Advanced Notice of Proposed Rulemaking (the “ANOPR”) that sought comments regarding potential modifications to its policies for evaluating changes in oil pipeline indexed rates and the associated reporting requirements. The FERC observed that some pipelines continue to obtain additional index rate increases despite reporting on Form No. 6 that their revenues exceed their costs. The FERC is considering whether to propose a new policy that would deny proposed index increases if a pipeline’s Form No. 6 reflects (i) revenues that exceed the total cost-of-service by 15% for the two preceding years or (ii) the proposed increase in the rate index exceeds the percentage change in the pipeline’s annual costs by 5%. The ANOPR remains pending. If adopted, changes in the FERC’s methodology for approving rates, or challenges to our application of that methodology, could adversely affect us. Adverse decisions by the FERC in approving our regulated rates could adversely affect our financial position, results of operations and cash flows.
The intrastate liquids pipeline transportation services we provide are subject to various state laws and regulations that apply to the rates we charge and the terms and conditions of the services we offer. Although state regulation typically is less onerous than FERC regulation, the rates we charge and the provision of our services may be subject to challenge.
The adoption and implementation of new statutory and regulatory requirements for derivative transactions could have an adverse impact on our ability to hedge risks associated with our business and increase the working capital requirements to conduct these activities.
The Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010 (the “Dodd-Frank Act”) provides for statutory and regulatory requirements for swaps and other derivative transactions, including financial and certain physical oil and gas hedging transactions. Under the Dodd-Frank Act, the CFTC has adopted regulations requiring registration of swap dealers and major swap participants, mandatory clearing of swaps, election of the end-user exception for any uncleared swaps by certain qualified companies, recordkeeping and reporting requirements, business conduct standards and position limits among other requirements. Several of these requirements, including position limits rules, allow the CFTC to impose controls that could have an adverse impact on our ability to hedge risks associated with our business and could increase our working capital requirements to conduct these activities.
Based on an assessment of final rules promulgated by the CFTC, we have determined that we are not a swap dealer, major swap participant or a financial entity, and therefore have determined that we currently qualify as an end-user. In addition, the vast majority of our derivative transactions are currently transacted through a Derivatives Clearing Organization, and we believe our use of the end-user exception will likely not be necessary on a routine basis. We will also seek to retain our status as an end-user by taking reasonable measures necessary to avoid becoming a swap dealer, major swap participant or financial entity, and other measures to preserve our ability to elect the end-user exception should it become necessary. However, derivative transactions that are not clearable, and transactions that are clearable but for which we choose to elect the end-user exception, are subject to recordkeeping and reporting requirements and potentially additional credit support arrangements including cash margin or collateral. Posting of additional cash margin or collateral could affect our liquidity and reduce our ability to use cash for capital investments or other company purposes.
In September 2012, the U.S. District Court for the District of Columbia vacated and remanded the position limits rules adopted by the CFTC based on a necessity finding. In December 2013, the CFTC responded by proposing amended rules in an effort to better conform to the Dodd-Frank Act and in December 2016, the CFTC further refined and re-proposed rules on position limits. Under the re-proposed rules, the CFTC would place volumetric limitations on certain positions in 25 core physical commodity futures contracts and their economically equivalent futures, options and swaps. While we believe that the majority of our hedging transactions would meet one or more of the enumerated categories for Bona Fide Hedges, the rules could have an adverse impact on our ability to hedge certain risks associated with our business and could potentially affect our profitability. The comment period on the re-proposed rules closed on February 28, 2017, and the proposal remains pending.
Over time, the Executive Branch, the U.S. Congress and the CFTC itself will express interest in amending some of the statutory and regulatory provisions impacting financial markets and institutions and in reevaluating some of the existing regulations and regulatory proposals. In addition, the make-up of the CFTC, and its Chairman, changes periodically, often year-to-year, since the term for one CFTC seat expires each year. Those personnel changes can also impact the regulatory agenda. It is not clear what, if any, changes in the law may gain sufficient support to be enacted or what, if any, changes in the existing regulations might move forward and be adopted, or how any such changes would impact our hedging activity.
Our standalone operating cash flow is derived primarily from cash distributions we receive from EPO.
On a standalone basis, EPD is a holding company with no business operations and conducts all of its business through its wholly owned subsidiary, EPO. As a result, we depend upon the earnings and cash flows of EPO and its subsidiaries and unconsolidated affiliates, and the distribution of their cash flows to us in order to meet our obligations and to allow us to make cash distributions to our limited partners.
The amount of cash EPO and its subsidiaries and unconsolidated affiliates can distribute to us depends primarily on cash flows generated from their operations. These operating cash flows fluctuate based on, among other things, the: (i) volume of hydrocarbon products transported on their gathering and transmission pipelines; (ii) throughput volumes in their processing and treating operations; (iii) fees charged and the margins realized for their various storage, terminaling, processing and transportation services; (iv) price of natural gas, crude oil, NGLs and other products; (v) relationships among natural gas, crude oil, NGL and other product prices, including differentials between regional markets; (vi) fluctuations in their working capital needs; (vii) level of their operating costs; (viii) prevailing economic conditions; and (ix) level of competition encountered by their businesses. In addition, the actual amount of cash EPO and its subsidiaries and unconsolidated affiliates will have available for distribution will depend on factors such as: (i) the level of sustaining capital expenditures incurred; (ii) their cash outlays for expansion (or growth) capital projects and acquisitions; and (iii) their debt service requirements and restrictions included in the provisions of existing and future indebtedness, organizational documents, applicable state business organization laws and other applicable laws and regulations. Due to these factors, we may not have sufficient available cash each quarter to continue paying distributions at our current levels.
Risks Relating to Our Partnership Structure
We may issue additional securities without the approval of our common unitholders.
At any time, we may issue an unlimited number of limited partner interests of any type (to parties other than our affiliates) without the approval of our unitholders. Our partnership agreement does not give our common unitholders the right to approve the issuance of equity securities, including equity securities ranking senior to our common units. The issuance of additional common units or other equity securities of equal or senior rank will have the following effects: (i) the ownership interest of a unitholder immediately prior to the issuance will decrease; (ii) the amount of cash available for distribution on each common unit may decrease; (iii) the ratio of taxable income to distributions may increase; (iv) the relative voting strength of each previously outstanding common unit may be diminished; and (v) the market price of our common units may decline.
We may not have sufficient operating cash flows to pay cash distributions at the current level following establishment of cash reserves and payments of fees and expenses.
Because cash distributions on our common units are dependent on the amount of cash we generate, distributions may fluctuate based on our performance and capital needs. We cannot guarantee that we will continue to pay distributions at the current level each quarter. The actual amount of cash that is available to be distributed each quarter will depend upon numerous factors, some of which are beyond our control and the control of our general partner. These factors include, but are not limited to: (i) the volume of the products that we handle and the prices we receive for our services; (ii) the level of our operating costs; (iii) the level of competition in our business; (iv) prevailing economic conditions, including the price of and demand for crude oil, natural gas, NGLs and other products we transport, store and market; (v) the level of capital investments we make; (vi) the amount and cost of capital we can raise compared to the amount of our capital investments and debt service requirements; (vii) restrictions contained in our debt agreements; (viii) fluctuations in our working capital needs; (ix) weather volatility; (x) cash outlays for acquisitions, if any; and (xi) the amount, if any, of cash reserves required by our general partner in its sole discretion.
Furthermore, the amount of cash that we have available for distribution is not solely a function of profitability, which will be affected by non-cash items such as depreciation, amortization and provisions for asset impairments. Our cash flows are also impacted by borrowings under credit agreements and similar arrangements. As a result, we may be able to make cash distributions during periods when we record losses and may not be able to make cash distributions during periods when we record net income. An inability on our part to pay cash distributions to partners could have a material adverse effect on our financial position, results of operations and cash flows.
Our general partner and its affiliates have limited fiduciary responsibilities to, and conflicts of interest with respect to, our partnership, which may permit it to favor its own interests to your detriment.
The directors and officers of our general partner and its affiliates have duties to manage our general partner in a manner that is beneficial to its members. At the same time, our general partner has duties to manage our partnership in a manner that is beneficial to us. Therefore, our general partner’s duties to us may conflict with the duties of its officers and directors to its members. Such conflicts may include, among others, the following:
• neither our partnership agreement nor any other agreement requires our general partner or EPCO to pursue a business strategy that favors us;
• decisions of our general partner regarding the amount and timing of asset purchases and sales, cash expenditures, borrowings, issuances of additional units, and the establishment of additional reserves in any quarter may affect the level of cash available to pay quarterly distributions to our unitholders;
• under our partnership agreement, our general partner determines which costs incurred by it and its affiliates are reimbursable by us;
• our general partner is allowed to resolve any conflicts of interest involving us and our general partner and its affiliates, and may take into account the interests of parties other than us, such as EPCO, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders;
• any resolution of a conflict of interest by our general partner not made in bad faith and that is fair and reasonable to us is binding on the partners and is not a breach of our partnership agreement;
• affiliates of our general partner may compete with us in certain circumstances;
• our general partner has limited its liability and reduced its fiduciary duties and has also restricted the remedies available to our unitholders for actions that might, without the limitations, constitute breaches of fiduciary duty. As a result of purchasing our units, you are deemed to consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable law;
• we do not have any employees and we rely solely on employees of EPCO and its affiliates;
• in some instances, our general partner may cause us to borrow funds in order to permit the payment of distributions;
• our general partner may cause us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf;
• our general partner intends to limit its liability regarding our contractual and other obligations and, in some circumstances, may be entitled to be indemnified by us;
• our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates; and
• our general partner decides whether to retain separate counsel, accountants or others to perform services for us.
We have significant business relationships with entities controlled by EPCO and Dan Duncan LLC. For information regarding these relationships and related party transactions with EPCO and its affiliates, see Note 15 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report. Additional information regarding our relationship with EPCO and its affiliates can also be found under Part III, Item 13 of this annual report.
The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.
We currently list our common units on the NYSE under the symbol “EPD.” Because we are a publicly traded limited partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s Board or to establish a compensation committee or a nominating and corporate governance committee. Additionally, any future issuance of additional common units or other securities, including to affiliates, will not be subject to the NYSE’s shareholder approval rules that apply to a corporation. Accordingly, unitholders do not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. See Part III, Item 10 of this annual report for additional information.
Unitholders have limited voting rights and are not entitled to elect our general partner or its directors. In addition, even if unitholders are dissatisfied, they cannot easily remove our general partner.
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders did not elect our general partner or its directors and will have no right to elect our general partner or its directors on an annual or other continuing basis. The owners of our general partner choose the directors of our general partner.
Furthermore, if unitholders are dissatisfied with the performance of our general partner, they currently have no practical ability to remove our general partner or its officers or directors. Our general partner may not be removed except upon the vote of the holders of at least 60% of our outstanding units voting together as a single class. Since affiliates of our general partner currently own approximately 32% of our outstanding common units, the removal of Enterprise GP as our general partner is highly unlikely without the consent of both our general partner and its affiliates. As a result of this provision, the trading price of our common units may be lower than other forms of equity ownership because of the absence of a takeover premium in the trading price.
Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.
Unitholders’ voting rights are further restricted by a provision in our partnership agreement stating that any units held by a person that owns 20% or more of any class of our common units then outstanding, other than our general partner and its affiliates, cannot be voted on any matter. In addition, our partnership agreement contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting our unitholders’ ability to influence our management. As a result of this provision, the trading price of our common units may be lower than other forms of equity ownership because of the absence of a takeover premium in the trading price.
Our general partner has a limited call right that may require common unitholders to sell their common units at an undesirable time or price.
If at any time our general partner and its affiliates own 85% or more of the common units then outstanding, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the remaining common units held by unaffiliated persons at a price not less than the then current market price. As a result, common unitholders may be required to sell their common units at an undesirable time or price and may therefore not receive any return on their investment. Unitholders may also incur a tax liability upon the sale of their common units.
Our common unitholders may not have limited liability if a court finds that limited partner actions constitute control of our business.
Under Delaware law, common unitholders could be held liable for our obligations to the same extent as a general partner if a court determined that the right of limited partners to remove our general partner or to take other action under our partnership agreement constituted participation in the “control” of our business. Under Delaware law, our general partner generally has unlimited liability for our obligations, such as our debts and environmental liabilities, except for those of our contractual obligations that are expressly made without recourse to our general partner.
The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the states in which we do business. You could have unlimited liability for our obligations if a court or government agency determined that (i) we were conducting business in a state, but had not complied with that particular state’s partnership statute; or (ii) your right to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constituted “control” of our business.
Unitholders may have a liability to repay distributions.
Under certain circumstances, our unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Liabilities to partners on account of their partnership interests and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted. Delaware law provides that for a period of three years from the date of an impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. A purchaser of common units who becomes a limited partner is liable for the obligations of the transferring limited partner to make contributions to the partnership that are known to such purchaser of common units at the time it became a limited partner, and for unknown obligations if the liabilities could be determined from our partnership agreement.
Our general partner’s interest in us and the control of our general partner may be transferred to a third party without unitholder consent.
Our general partner, in accordance with our partnership agreement, may transfer its general partner interest without the consent of unitholders. In addition, our general partner may transfer its general partner interest to a third party in a merger or consolidation or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of the sole member of our general partner, currently Dan Duncan LLC, to transfer its equity interests in our general partner to a third party. The new equity owner of our general partner would then be in a position to replace the Board and officers of our general partner with their own choices and to influence the decisions taken by the Board and officers of our general partner.
We do not have the same flexibility as other types of organizations to accumulate cash and issue equity to protect against illiquidity in the future.
Unlike a corporation, our partnership agreement requires us to make quarterly distributions to our unitholders of all available cash, after taking into account reserves for commitments and contingencies, including capital and operating costs and debt service requirements. The value of our common units and other limited partner interests may decrease in correlation with any reduction in our cash distributions per unit. Accordingly, if we experience a liquidity problem in the future, we may not be able to issue more equity to recapitalize.
Tax Risks to Common Unitholders
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes or if we were otherwise subject to a material amount of entity-level taxation, then cash available for distribution to our unitholders would be reduced.
The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes. Despite the fact that we are organized as a limited partnership under Delaware law, we will be treated as a corporation for federal income tax purposes unless we satisfy a “qualifying income” requirement. Based on our current operations, we believe we satisfy the qualifying income requirement. Failing to meet the qualifying income requirement or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service (“IRS”) with respect to our classification as a partnership for federal income tax purposes.
If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate and we would also likely pay additional state and local income taxes at varying rates. Distributions to our unitholders would generally be taxed again as corporate dividends, and no income, gains, losses or deductions would flow through to our unitholders. Because a tax would be imposed upon us as a corporation, the cash available for distribution to our unitholders would be reduced. Thus, treatment of us as a corporation could result in a reduction in the anticipated cash-flow and after-tax return to our unitholders, which would cause a reduction in the value of our common units.
At the state level, several states have been evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise, capital, and other forms of business taxes, as well as subjecting nonresident partners to taxation through the imposition of withholding obligations and composite, combined, group, block, or similar filing obligations on nonresident partners receiving a distributive share of state “sourced” income. We currently own property or do business in a substantial number of states. Imposition on us of any of these taxes in jurisdictions in which we own assets or conduct business or an increase in the existing tax rates could substantially reduce the cash available for distribution to our unitholders.
From 2013 through 2017, several publicly traded partnerships merged into their corporate general partner sponsors. In 2018 and continuing into 2019, the combination of a number of additional factors, including the passage of the Tax Cuts and Jobs Act (the “Tax Act”) of 2017 (which lowered the federal corporate tax rate from 35% to 21% and generally provides for the expensing of certain capital investments and acquisitions), the FERC issuing its Revised Policy Statement on the Treatment of Income Taxes in March 2018, and, generally, continued lower demand and related liquidity for midstream energy companies (including those structured as publicly traded partnerships), led to additional publicly traded partnerships to either (i) merge into their corporate general partner sponsors, (ii) merge into their general partner structured as a partnership and then elect for the combined entity to be taxed as a corporation, or (iii) voluntarily elect to be taxed as a corporation. These conversions have materially reduced the number of publicly traded partnerships and the total market capitalization and the depth of capital available for the publicly traded partnership sector.
While we currently believe that our classification as a partnership for federal income tax purposes continues to provide a net benefit for our unitholders, should we continue to see (i) additional publicly traded partnerships elect to be taxed as corporations, which could result in a further decrease in the total market capitalization of the publicly traded partnership sector, (ii) lower demand for equity capital in the publicly traded partnership sector, (iii) the absence of a historic premium in the market valuation of publicly traded partnerships compared to midstream energy companies taxed as corporations (or if we see any discount in the valuation of our partnership compared to such companies), or (iv) a combination thereof that results in a material difference in our cost of capital or limits our access to capital, the board of directors of our general partner may determine it is in our unitholders’ best interest to change our classification as a partnership for federal income tax purposes. Should the general partner recommend that we change our tax classification, such change would be subject to the approval of our common unitholders.
The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units, may be modified by administrative, legislative or judicial interpretation. For example, from time to time, members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships or an investment in our common units.
In addition, the Tax Act enacted in 2017, made significant changes to the federal income tax rules applicable to both individuals and entities, including changes to the effective tax rate on an individual or other non-corporate unitholder’s allocable share of certain income from a publicly traded partnership. The Tax Act is complex and the Treasury Department and IRS continue to release regulations relating to and interpretive guidance of the legislation contained in the Tax Act. Thus, unitholders should consult their tax advisor regarding the Tax Act and its effect on an investment in our common units.
Any changes to federal income tax laws and interpretations thereof (including administrative guidance relating to the Tax Act) may or may not be applied retroactively and could make it more difficult or impossible for us to be treated as a partnership for federal income tax purposes or otherwise adversely affect our business, financial condition or results of operations. Any such changes or interpretations thereof could adversely impact the value of an investment in our common units.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred.
We generally prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of the units on the first day of each month, instead of on the basis of the date a particular unit is transferred. Treasury Regulations allow a similar monthly simplifying convention, but such regulations do not specifically authorize all aspects of our proration method. If the IRS were to successfully challenge our proration method, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.
A successful IRS contest of the federal income tax positions we take may adversely impact the market for our common units and the cost of any IRS contest will reduce our cash available for distribution to unitholders.
The IRS has made no determination as to our status as a partnership for U.S. federal income tax purposes. The IRS may adopt positions that differ from the positions we take, even positions taken with advice of counsel. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of the positions we take. As a result, any such contest with the IRS may materially and adversely impact the market for our common units and the price at which our common units trade. In addition, our costs of any contest with the IRS, principally legal, accounting and related fees, will be indirectly borne by our unitholders because the costs will reduce our cash available for distribution.
If the IRS makes audit adjustments to our income tax returns for tax years beginning after December 31, 2017, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us, in which case we would pay the taxes directly to the IRS. If we bear such payment, our cash available for distribution to our unitholders might be substantially reduced.
Pursuant to the Bipartisan Budget Act of 2015, for tax years beginning after December 31, 2017, if the IRS makes audit adjustments to our income tax returns, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us. Our general partner would cause us to pay the taxes (including any applicable penalties and interest) directly to the IRS. As a result, our current unitholders may bear some or all of the tax liability resulting from such audit adjustment, even if such unitholders did not own common units in us during the tax year under audit. If, as a result of any such audit adjustment, we are required to make payments of taxes, penalties and interest, our cash available for distribution to our unitholders might be substantially reduced.
Our unitholders may be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.
Because our unitholders will be treated as partners to whom we will allocate taxable income which could be different in amount from the cash that we distribute, our unitholders may be required to pay federal income taxes and, in some cases, state and local income taxes on their share of our taxable income, whether or not they receive any cash distributions from us. Our common unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability resulting from their share of our taxable income.
Tax gains or losses on the disposition of our common units could be more or less than expected.
If our unitholders sell their common units, they will recognize a gain or loss equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of a unitholder’s allocable share of our net taxable income decrease the unitholder’s tax basis in the unitholder’s common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if the unitholder sells such common units at a price greater than the unitholder’s tax basis in those common units, even if the price received is less than the unitholder’s original cost. A substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items such as depreciation. In addition, because the amount realized may include a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units may incur a tax liability in excess of the amount of the cash received from the sale.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.
Investments in our common units by tax-exempt entities, such as individual retirement accounts (“IRAs”) or other retirement plans, and non-U.S. persons raise issues unique to them. For example, virtually all of our income allocated to unitholders who are organizations exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal income tax returns and pay tax on their share of our taxable income.
Additionally, gain recognized by a non-U.S. person on the sale of common units occurring on or after November 27, 2017, will generally be treated as effectively connected income and subject to U.S. federal income tax. The transferee of such common units is generally required to withhold 10% of the amount realized by the transferor unless the transferor certifies that it is not a foreign person, and we are required to deduct and withhold from the transferee amounts that should have been withheld by the transferee but were not withheld. The IRS has issued proposed regulations that would treat the total cash purchase price for a common unit as the amount realized for purposes of this 10% withholding tax. This withholding tax obligation is currently suspended in the case of a disposition of certain publicly traded partnership interests, including our common units, until 60 days after the proposed regulations are finalized. A unitholder that is a tax-exempt entity or a non-U.S. person should consult a tax advisor before investing in our common units.
We treat each purchaser of our common units as having the same tax benefits without regard to the common units purchased. The IRS may challenge this treatment, which could adversely affect the value of our common units.
Because we cannot match transferors and transferees of common units, we adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to a common unitholder. It also could affect the timing of these tax benefits or the amount of gain from a sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to the unitholder’s tax returns.
Our common unitholders will likely be subject to state and local taxes and return filing requirements in states where they do not live as a result of an investment in our common units.
In addition to federal income taxes, our common unitholders will likely be subject to other taxes, such as state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes imposed by the various jurisdictions in which we do business or own property now or in the future, even if the unitholder does not live in any of those jurisdictions. Our common unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. We currently own property or conduct business in a substantial number of states, many of which impose an income tax on individuals, corporations and other entities. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal or corporate income tax. It is the responsibility of each unitholder to file its own federal, state and local tax returns, as applicable.
A unitholder whose common units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of common units) may be considered as having disposed of those common units. If so, the unitholder would no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.
Because there are no specific rules governing the U.S. federal income tax consequence of loaning a partnership interest, a unitholder whose common units are the subject of a securities loan may be considered to have disposed of the loaned units. In that case, the unitholder may no longer be treated for tax purposes as a partner with respect to those common units during the period of the loan and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a securities loan are urged to consult a tax advisor to determine whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from lending their common units.
We have adopted certain valuation methodologies in determining a unitholder’s allocations of income, gain, loss and deduction. The IRS may challenge these methods or the resulting allocations and such a challenge could adversely affect the value of our common units.
In determining the items of income, gain, loss and deduction allocable to our unitholders, we must routinely determine the fair market value of our respective assets. Although we may from time to time consult with professional appraisers regarding valuation matters, we make fair market value estimates using a methodology based on the market value of our common units as a means to measure the fair market value of our respective assets. The IRS may challenge these valuation methods and the resulting allocations of income, gain, loss and deduction.
A successful IRS challenge to these methods or allocations could adversely affect the amount, character, and timing of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.
ITEM 1B.
ITEM 1B. UNRESOLVED SEC STAFF COMMENTS.
None.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
As part of our normal business activities, we may be named as defendants in legal proceedings. Although we are insured against various risks to the extent we believe it is prudent, there is no assurance that the nature and amount of such insurance will be adequate, in every case, to fully indemnify us against losses arising from legal proceedings. We will vigorously defend the partnership in litigation matters. Except as set forth below, we are not aware of any material pending legal proceedings as of the filing date of this annual report to which we are a party, other than routine litigation incidental to our business.
Energy Transfer Matter
In connection with a proposed pipeline project, we and Energy Transfer Partners, L.P. (“ETP”) signed a non-binding letter of intent in April 2011 that disclaimed any partnership or joint venture related to such project absent executed definitive documents and board approvals of the respective companies. Definitive agreements were never executed and board approval was never obtained for the potential pipeline project. In August 2011, the proposed pipeline project was cancelled due to a lack of customer support.
In September 2011, ETP filed suit against us and a third party in connection with the cancelled project alleging, among other things, that we and ETP had formed a “partnership.” The case was tried in the District Court of Dallas County, Texas, 298th Judicial District. While we firmly believe, and argued during our defense, that no agreement was ever executed forming a legal joint venture or partnership between the parties, the jury found that the actions of the two companies, nevertheless, constituted a legal partnership. As a result, the jury found that ETP was wrongfully excluded from a subsequent pipeline project involving a third party, and awarded ETP $319.4 million in actual damages on March 4, 2014. On July 29, 2014, the trial court entered judgment against us in an aggregate amount of $535.8 million, which included (i) $319.4 million as the amount of actual damages awarded by the jury, (ii) an additional $150.0 million in disgorgement for the alleged benefit we received due to a breach of fiduciary duties by us against ETP and (iii) prejudgment interest in the amount of $66.4 million. The trial court also awarded post-judgment interest on such aggregate amount, to accrue at a rate of 5%, compounded annually.
We filed our Brief of the Appellant in the Court of Appeals for the Fifth District of Dallas, Texas on March 30, 2015 and ETP filed its Brief of Appellees on June 29, 2015. We filed our Reply Brief of Appellant on September 18, 2015. Oral argument was conducted on April 20, 2016, and the case was then submitted to the Court of Appeals for its consideration. On July 18, 2017, a panel of the Dallas Court of Appeals issued a unanimous opinion reversing the trial court’s judgment as to all of ETP’s claims against us, rendering judgment that ETP take nothing on those claims, and affirming our counterclaim against ETP of $0.8 million, plus interest.
On August 31, 2017, ETP filed a motion for rehearing before the Dallas Court of Appeals, which was denied on September 13, 2017. On December 27, 2017, ETP filed its Petition for Review with the Supreme Court of Texas and we filed our Response to the Petition for Review on February 26, 2018. On June 8, 2018, the Supreme Court of Texas requested that the parties file briefs on the merits, and the parties filed their respective submittals. On June 28, 2019, the Supreme Court of Texas requested oral argument, which was held on October 8, 2019. On January 31, 2020, the Supreme Court of Texas issued a unanimous opinion affirming the judgment of the Dallas Court of Appeals.
We did not record a provision for this matter at December 31, 2019 as management believed that payment of damages by us was not probable.
PDH Litigation
In July 2013, we executed a contract with Foster Wheeler USA Corporation (“Foster Wheeler”) pursuant to which Foster Wheeler was to serve as the general contractor responsible for the engineering, procurement, construction and installation of our PDH 1 facility. In November 2014, Foster Wheeler was acquired by an affiliate of AMEC plc to form Amec Foster Wheeler plc, and Foster Wheeler is now known as Amec Foster Wheeler USA Corporation (“AFW”). In December 2015, Enterprise and AFW entered into a transition services agreement under which AFW was partially terminated from the PDH 1 project. In December 2015, Enterprise engaged a second contractor, Optimized Process Designs LLC (“OPD”), to complete the construction and installation of PDH 1.
On September 2, 2016, we terminated AFW for cause and filed a lawsuit in the 151st Judicial Civil District Court of Harris County, Texas against AFW and its parent company, Amec Foster Wheeler plc, asserting claims for breach of contract, breach of warranty, fraudulent inducement, string-along fraud, gross negligence, professional negligence, negligent misrepresentation and attorneys’ fees. We intend to diligently prosecute these claims and seek all direct, consequential, and exemplary damages to which we may be entitled.
Other
On occasion, we are assessed monetary penalties by governmental authorities related to administrative or judicial proceedings involving environmental matters.
In June 2019, we received a Notice of Violation from the U.S. Environmental Protection Agency in connection with regulatory requirements applicable to facilities that we operate in Baton Rouge, Louisiana. The eventual resolution of this matter may result in monetary sanctions in excess of $0.1 million; however, we do not expect such expenditures to be material to our consolidated financial statements.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED UNITHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common units are listed on the NYSE under the ticker symbol “EPD.” As of January 31, 2020, there were approximately 2,300 unitholders of record of our common units. For information regarding our quarterly cash distributions to partners, see Note 8 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Recent Issuance of Unregistered Securities
There were no issuances of unregistered equity securities during the year ended December 31, 2019.
Common Units Authorized for Issuance Under Equity Compensation Plan
See “Securities Authorized for Issuance Under Equity Compensation Plans” included under Part III, Item 12 of this annual report, which is incorporated by reference into this Item 5.
Issuer Purchases of Equity Securities
The following table summarizes our equity repurchase activity during the fourth quarter of 2019:
(1)
In January 2019, we announced the 2019 Buyback Program, which authorized the repurchase of up to $2 billion of EPD’s common units. See “Significant Recent Developments” under Part II, Item 7 of this annual report for additional information. Units repurchased under this program during 2019 were cancelled immediately upon acquisition.
(2)
Of the 76,988 phantom unit awards that vested in November 2019 and converted to common units, 25,970 units were sold back to us by employees to cover related withholding tax requirements. These repurchases are not part of any announced program. We cancelled these units immediately upon acquisition.
(3)
Of the 7,395 phantom unit awards that vested in December 2019 and converted to common units, 1,811 units were sold back to us by employees to cover related withholding tax requirements. These repurchases are not part of any announced program. We cancelled these units immediately upon acquisition.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected historical consolidated financial data of our partnership. This information has been derived from and should be read in conjunction with our audited financial statements included under Part II, Item 8 of this annual report. As presented in the table, amounts are in millions (except per unit data).
Fluctuations in our consolidated revenues and cost of sales amounts are explained in large part by changes in energy commodity prices. Energy commodity prices fluctuate for a variety of reasons, including supply and demand imbalances and geopolitical tensions. For additional information regarding energy commodity prices, see “Selected Energy Commodity Price Data” included under Part II, Item 7
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For the Years Ended December 31, 2019, 2018 and 2017
The following discussion and analysis of our financial condition, results of operations and related information for the years ended December 31, 2019 and 2018, including applicable year-to-year comparisons, should be read in conjunction with our Consolidated Financial Statements and accompanying notes included under Part II, Item 8 of this annual report. Our financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”).
Discussion and analysis of matters pertaining to the year ended December 31, 2017 and year-to-year comparisons between the years ended December 31, 2018 and 2017 are not included in this Form 10-K, but can be found under Part II, Item 7 of our annual report on Form 10-K for the year ended December 31, 2018 that was filed on March 1, 2019.
Key References Used in this Management’s Discussion and Analysis
Unless the context requires otherwise, references to “we,” “us,” “our” or “Enterprise” are intended to mean the business and operations of Enterprise Products Partners L.P. and its consolidated subsidiaries. References to “EPD” mean Enterprise Products Partners L.P. on a standalone basis. References to “EPO” mean Enterprise Products Operating LLC, which is an indirect wholly owned subsidiary of EPD, and its consolidated subsidiaries, through which EPD conducts its business. Enterprise is managed by its general partner, Enterprise Products Holdings LLC (“Enterprise GP”), which is a wholly owned subsidiary of Dan Duncan LLC, a privately held Texas limited liability company.
The membership interests of Dan Duncan LLC are owned by a voting trust, the current trustees (“DD LLC Trustees”) of which are: (i) Randa Duncan Williams, who is also a director and Chairman of the Board of Directors (the “Board”) of Enterprise GP; (ii) Richard H. Bachmann, who is also a director and Vice Chairman of the Board of Enterprise GP; and (iii) Dr. Ralph S. Cunningham, who is also an advisory director of Enterprise GP. Ms. Duncan Williams and Mr. Bachmann also currently serve as managers of Dan Duncan LLC along with W. Randall Fowler, who is also a director and the Co-Chief Executive Officer and Chief Financial Officer of Enterprise GP.
References to “EPCO” mean Enterprise Products Company, a privately held Texas corporation, and its privately held affiliates. A majority of the outstanding voting capital stock of EPCO is owned by a voting trust, the current trustees (“EPCO Trustees”) of which are: (i) Ms. Duncan Williams, who serves as Chairman of EPCO; (ii) Dr. Cunningham, who serves as Vice Chairman of EPCO; and (iii) Mr. Bachmann, who serves as the President and Chief Executive Officer of EPCO. Ms. Duncan Williams and Mr. Bachmann also currently serve as directors of EPCO along with Mr. Fowler, who is also the Executive Vice President and Chief Financial Officer of EPCO. EPCO, together with its privately held affiliates, owned approximately 32% of EPD’s limited partner common units at December 31, 2019.
As generally used in the energy industry and in this annual report, the acronyms below have the following meanings:
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This annual report on Form 10-K for the year ended December 31, 2019 (our “annual report”) contains various forward-looking statements and information that are based on our beliefs and those of Enterprise GP, as well as assumptions made by us and information currently available to us. When used in this document, words such as “anticipate,” “project,” “expect,” “plan,” “seek,” “goal,” “estimate,” “forecast,” “intend,” “could,” “should,” “would,” “will,” “believe,” “may,” “potential” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. Although we and Enterprise GP believe that our expectations reflected in such forward-looking statements are reasonable, neither we nor Enterprise GP can give any assurances that such expectations will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions as described in more detail under Part I, Item 1A of this annual report. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. You should not put undue reliance on any forward-looking statements. The forward-looking statements in this annual report speak only as of the date hereof. Except as required by federal and state securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason.
Overview of Business
We are a publicly traded Delaware limited partnership, the common units of which are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “EPD.” We were formed in April 1998 to own and operate certain natural gas liquids (“NGLs”) related businesses of EPCO and are a leading North American provider of midstream energy services to producers and consumers of natural gas, NGLs, crude oil, petrochemicals and refined products.
Our integrated midstream energy asset network links producers of natural gas, NGLs and crude oil from some of the largest supply basins in the U.S., Canada and the Gulf of Mexico with domestic consumers and international markets. Our midstream energy operations currently include: natural gas gathering, treating, processing, transportation and storage; NGL transportation, fractionation, storage, and export and import terminals (including those used to export liquefied petroleum gases, or “LPG,” and ethane); crude oil gathering, transportation, storage, and export and import terminals; petrochemical and refined products transportation, storage, export and import terminals, and related services; and a marine transportation business that operates primarily on the U.S. inland and Intracoastal Waterway systems. Our assets currently include approximately 50,000 miles of pipelines; 260 MMBbls of storage capacity for NGLs, crude oil, petrochemicals and refined products; and 14 Bcf of natural gas storage capacity.
The safe operation of our assets is a top priority. We are committed to protecting the environment and the health and safety of the public and those working on our behalf by conducting our business activities in a safe and environmentally responsible manner. For additional information, see “Environmental, Safety and Conservation” within the Regulatory Matters section of Part I, Items 1 and 2 of this annual report.
We conduct substantially all of our business through EPO and are owned 100% by our limited partners from an economic perspective. Enterprise GP manages our partnership and owns a non-economic general partner interest in us. We, Enterprise GP, EPCO and Dan Duncan LLC are affiliates under the collective common control of the DD LLC Trustees and the EPCO Trustees. Like many publicly traded partnerships, we have no employees. All of our management, administrative and operating functions are performed by employees of EPCO pursuant to an administrative services agreement (the “ASA”) or by other service providers.
Our operations are reported under four business segments: (i) NGL Pipelines & Services, (ii) Crude Oil Pipelines & Services, (iii) Natural Gas Pipelines & Services, and (iv) Petrochemical & Refined Products Services. Our business segments are generally organized and managed according to the types of services rendered (or technologies employed) and products produced and/or sold.
Each of our business segments benefits from the supporting role of our related marketing activities. The main purpose of our marketing activities is to support the utilization and expansion of assets across our midstream energy asset network by increasing the volumes handled by such assets, which results in additional fee-based earnings for each business segment. In performing these support roles, our marketing activities also seek to participate in supply and demand opportunities as a supplemental source of gross operating margin, a non-generally accepted accounting principle (“non-GAAP”) financial measure, for the partnership. The financial results of our marketing efforts fluctuate due to changes in volumes handled and overall market conditions, which are influenced by current and forward market prices for the products bought and sold.
Our results of operations and financial condition are subject to certain significant risks. Factors that can affect the demand for our products and services include domestic and international economic conditions, the market price and demand for energy, the cost to develop natural gas and crude oil reserves in the U.S., federal and state regulation, the cost and availability of capital to energy companies to invest in upstream exploration and production activities and the credit quality of our customers. For information regarding such risks, see Part I, Item 1A of this annual report.
In addition, our business activities are subject to various federal, state and local laws and regulations governing a wide variety of topics, including commercial, operational, environmental and other matters. For a discussion of the principal effects of such laws and regulations on our business activities, see “Regulatory Matters” included under Part I, Items 1 and 2 of this annual report.
Significant Recent Developments
Enterprise Provides Distribution and Buyback Guidance for 2020
In January 2020, management announced its plans to continue to recommend to the Board of Enterprise GP an increase of $0.0025 per unit per quarter to our cash distribution rate with respect to 2020. The anticipated rate of increase would result in distributions for 2020 (of $1.805 per unit) being 2.3% higher than those paid with respect to 2019 (of $1.765 per unit). The payment of any quarterly cash distribution is subject to Board approval and management’s evaluation of our financial condition, results of operations and cash flows in connection with such payments.
In addition, management announced its intention to use approximately 2.0% of net cash flow provided by operating activities, or cash flow from operations (“CFFO”), in 2020 to repurchase EPD common units under the Buyback Program approved in January 2019 (the “2019 Buyback Program”). For information regarding the 2019 Buyback Program, including repurchases of common units in 2019, see “Liquidity and Capital Resources - Common Unit Buyback Program” within this Part II, Item 7.
Enterprise Begins Service at Mentone Natural Gas Processing Facility
In December 2019, we completed the first processing train at our Mentone cryogenic natural gas processing facility (“Mentone I”) and placed it into service. The Mentone facility, which is located in Loving County, Texas, has a current capacity to process 300 MMcf/d of natural gas and extract more than 40 MBPD of NGLs. Mentone and its related infrastructure further extends our presence in the Delaware Basin and provides producers access to our fully integrated midstream asset network, including our Texas Intrastate System and Shin Oak NGL Pipeline. We own and operate the Mentone facility and related infrastructure. With Mentone I in operation, we have the capability to process up to 1.6 Bcf/d of natural gas and extract up to 250 MBPD of NGL production from our processing facilities in the Delaware Basin.
On a related note, we completed and placed into service a third processing train (“Orla III”) at our cryogenic natural gas processing facility located near Orla, Texas in Reeves County in July 2019. The Orla facility is capable of processing up to 900 MMcf/d of natural gas and extracting up to 140 MBPD of NGLs. Like Mentone, the Orla facility and related infrastructure supports continued growth of NGL-rich natural gas production from the Delaware Basin. We own and operate the Orla facility.
Enterprise Begins Service at Bulldog Natural Gas Processing Plant
In November 2019, we placed our Bulldog cryogenic natural gas processing plant, which is located near Carthage, Texas, into service. The Bulldog plant has the capability to process up to 200 MMcf/d of natural gas and extract up to 12 MBPD of NGLs. When combined with our legacy Panola cryogenic plant, Bulldog provides us with the capacity to process up to a total of 320 MMcf/d of natural gas and extract up to 18 MBPD of NGLs in the region. The new plant supports continued growth of natural gas production from the Cotton Valley and Haynesville formations in East Texas. In addition, the Bulldog plant complements our value chain as the mixed NGLs produced at the plant are transported on the Panola pipeline to Mont Belvieu for fractionation.
Enterprise Begins Service at Isobutane Dehydrogenation Unit
In December 2019, we completed construction and placed our isobutane dehydrogenation (“iBDH”) unit into service. The facility, which is located at our Mont Belvieu complex and supported by long-term, fee-based contracts, is capable of processing approximately 25 MBPD of butane into nearly 1 billion pounds per year of isobutylene. Production from the iBDH plant will enable us to optimize our methyl tertiary butyl ether (“MTBE”) and high purity isobutylene (“HPIB”) assets and meet growing market demand for isobutylene.
Steam crackers and refineries have historically been the major source of propane and butane olefins for downstream use; however, with the increased use of light-end feedstocks such as ethane, the need for “on purpose” olefins production has increased. Like our PDH facility, the iBDH plant will help meet market demand where traditional supplies have been reduced. The iBDH plant will increase our production of high purity and low purity isobutylene, both of which are used as feedstocks to manufacture lubricants, rubber products and fuel additives.
Enterprise Begins Service at Ethylene Export Terminal
In December 2019, we placed our ethylene export terminal into limited service, with the first cargo of 25 million pounds of ethylene exported in January 2020. The terminal, which we operate, is located at our Morgan’s Point facility on the Houston Ship Channel and features two docks and the capacity to load 2.2 billion pounds of ethylene per year. A refrigerated storage tank for 66 million pounds of ethylene is being constructed on-site that will allow the terminal to load ethylene up to a rate of 2.2 million pounds per hour. Full commercial operations at the terminal are expected in the fourth quarter of 2020 once certain refrigeration assets are complete. We own a 50% member interest in Enterprise Navigator Ethylene Terminal LLC, which owns the export facility.
Our ethylene system is being developed to serve as an open market storage and trading hub for the ethylene industry using storage capacity, connections to multiple ethylene pipelines, and high-volume export capabilities. In support of our ethylene business, we recently placed into service a high-capacity underground ethylene storage well at our Mont Belvieu complex having a storage capacity of 600 million pounds of ethylene. The storage well is connected to our Morgan’s Point ethylene export terminal by a 16-mile pipeline, which was placed into service in December 2019. An additional 8 miles of ethylene pipelines extending from Morgan’s Point to Bayport, Texas are under construction and expected to be completed and placed into service in the fourth quarter of 2020.
In May 2019, we announced plans to further expand our ethylene pipeline and logistics system by constructing the Baymark ethylene pipeline in South Texas, which is a leading growth area for new ethylene crackers and related facilities. The Baymark pipeline will originate in Bayport, Texas and extend approximately 90 miles to Markham, Texas. The Baymark pipeline is supported by long-term customer commitments and is expected to begin service in the fourth quarter of 2020. We will own a 70% interest in and operate the Baymark pipeline. Customers using the Baymark pipeline will have access to our high-capacity ethylene storage well in Mont Belvieu and our export terminal at Morgan’s Point.
Enterprise Announces Final Investment Decision Regarding the Sea Port Oil Terminal
In July 2019, we announced the execution of long-term customer agreements with Chevron U.S.A. Inc. (“Chevron”) supporting the development of our Sea Port Oil Terminal (“SPOT”) in the Gulf of Mexico. As a result of the Chevron agreements, we announced our final investment decision with respect to SPOT, subject to obtaining the required approvals and licenses from the federal Maritime Administration, which is currently reviewing our SPOT application.
The SPOT project consists of onshore and offshore facilities, including a fixed platform located approximately 30 nautical miles off the Brazoria County, Texas coast in approximately 115 feet of water. SPOT is designed to load Very Large Crude Carriers (“VLCCs”) at rates of approximately 85,000 barrels per hour. We believe that SPOT’s design meets or exceeds federal requirements for such facilities and, unlike existing and other proposed offshore terminals, is designed with a vapor control system to minimize emissions.
In December 2019, we announced the execution of a letter of intent (“LOI”) with an affiliate of Enbridge Inc. (“Enbridge”) to jointly develop our SPOT in the Gulf of Mexico. Under terms of the LOI, we agreed to negotiate an equity participation right agreement with Enbridge whereby, subject to SPOT receiving a deepwater port license, an affiliate of Enbridge could acquire a noncontrolling member interest in SPOT Terminal Services LLC, which owns SPOT.
Enterprise to Build Midland-to-ECHO 4 Pipeline
In October 2019, we announced long-term agreements supporting construction of the “Midland-to-ECHO 4” pipeline. The Midland-to-ECHO 4 pipeline will connect our Midland terminal in Midland, Texas with our ECHO terminal in Houston, Texas utilizing both new construction and segments of our existing crude oil pipelines in South Texas. The Midland-to-ECHO 4 pipeline is expected to enter service during the second quarter of 2021 and have an initial transportation capacity of 450 MBPD (expandable up to 540 MBPD). When placed into service, the Midland-to-ECHO 4 pipeline will allow our shippers with crude oil and condensate production in both the Permian Basin and the Eagle Ford Shale to maximize the value of their contracted pipeline capacity by allowing shippers to source barrels from the Permian Basin and/or the Eagle Ford Shale. This unmatched flexibility will allow shippers and producers to dynamically match their pipeline capacity to their allocation of capital and respective production profiles between the two basins. Their production will be delivered into our integrated storage, pipeline, distribution and marine terminal system that has access to both domestic and international markets.
The Midland-to-ECHO 4 pipeline complements our Midland-to-ECHO 1 and 2 pipelines, which entered full service in the second quarter of 2018 and first quarter of 2019, respectively, as well as our Midland-to-ECHO 3 pipeline. The Midland-to-ECHO 3 pipeline, which is comprised of a 29% undivided interest in a 36-inch pipeline we are currently constructing from Midland, Texas to our ECHO terminal and further to a third-party terminal in Webster, Texas, is expected to provide 200 MBPD of transportation capacity when placed into service during the third quarter of 2020, increasing to approximately 450 MBPD during the fourth quarter of 2020. Together, these four projects (Midland-to-ECHO 1, 2, 3 and 4) comprise our Midland-to-ECHO System, which supports crude oil production growth from the Permian Basin (and Eagle Ford Shale, as applicable) by providing producers and other shippers with transportation solutions that are both cost-efficient and operationally flexible. The Midland-to-ECHO System is expected to include 6 MMBbls of storage at our Midland terminal and access to more than 45 MMBbls of storage and approximately 4 MMBPD of export capacity at partnership assets along the Texas Gulf Coast. The network connects to every refinery in the Houston, Texas City and Beaumont/Port Arthur area, which we believe represents approximately 8 MMBPD of refining capacity.
In January 2019, we completed the conversion of the Midland-to-Sealy segment of one of our two Seminole NGL pipelines from NGL service to crude oil service, thus creating the Midland-to-ECHO 2 pipeline. The pipeline originates at our Midland terminal and extends 444 miles to our Sealy terminal, with crude oil volumes arriving at Sealy transported to our ECHO terminal using the Rancho II pipeline. The Midland-to-ECHO 2 pipeline, which was placed into limited service in February 2019 and full service in April 2019, provides us with up to 225 MBPD of incremental crude oil transportation capacity. We retain the flexibility to convert this pipeline back to NGL service should future market conditions support the need for additional NGL transportation capacity out of the Permian Basin.
Enterprise to Build Second Propane Dehydrogenation (“PDH”) Plant
In September 2019, we announced the execution of long-term, fee-based contracts with affiliates of LyondellBasell Industries N.V. that support construction of our second PDH facility (referred to as “PDH 2”). The new plant is expected to have the capacity to consume up to 35 MBPD of propane and produce up to 1.65 billion pounds per year of PGP. PDH 2 will be located in Chambers County, Texas at our Mont Belvieu complex and is scheduled to begin service in the first quarter of 2023. Once PDH 2 is placed into service and integrated with PDH 1 and our other propylene production facilities, we will have the capability to produce 11 billion pounds of propylene per year.
Enterprise to Expand and Extend Acadian Gas System
In September 2019, we announced plans to expand and extend our Acadian Gas System in order to deliver growing natural gas production from the Haynesville Shale to the liquefied natural gas (“LNG”) market in South Louisiana. The expansion project will include construction of an approximately 80-mile natural gas pipeline (the “Gillis Lateral”) extending from near Cheneyville, Louisiana to third-party pipeline interconnects near Gillis, Louisiana, including multiple pipelines serving regional LNG export facilities. In addition to construction of the Gillis Lateral, we plan to increase the transportation capacity of the Haynesville Extension from 1.8 Bcf/d to 2.1 Bcf/d by adding horsepower at our compressor station in Mansfield, Louisiana. The Mansfield project and construction of the Gillis Lateral are supported by long-term customer contracts and are expected to begin service in the third quarter of 2021. Once the expansion project is completed, we expect that our Acadian Gas System will be able to deliver up to 2.1 Bcf/d of Haynesville Shale production into the LNG market, South Louisiana industrial complex and other pipeline interconnects that serve attractive southeastern U.S. markets.
Shin Oak NGL Pipeline Commences Operations; Altus Acquires 33% Equity Interest in Shin Oak
The Shin Oak NGL Pipeline (“Shin Oak”) transports NGL production from the Permian Basin to our NGL fractionation and storage complex located at the Mont Belvieu hub. In February 2019, the 24-inch diameter mainline segment of Shin Oak from Orla, Texas to Mont Belvieu was placed into limited service with an initial transportation capacity of 250 MBPD. In June 2019, an additional pipeline segment, the 20-inch diameter Waha lateral, was placed into service and increased Shin Oak’s transportation capacity to 350 MBPD. We completed construction of the remaining components of Shin Oak in the fourth quarter of 2019, which increased its transportation capacity to 550 MBPD.
In May 2018, we granted Apache Midstream LLC (“Apache”) an option to acquire up to a 33% equity interest in our consolidated subsidiary that owns Shin Oak. In November 2018, Apache contributed this option to Altus Midstream Processing LP (“Altus”), which is a consolidated subsidiary of Apache. In July 2019, Altus exercised the option and acquired a 33% equity interest (effective July 31, 2019) in our subsidiary that owns Shin Oak. As a result, we received a $440.7 million cash payment from Altus, which is included in contributions from noncontrolling interests as presented on our Statement of Consolidated Cash Flows for the year ended December 31, 2019.
Expansion Projects at EHT
In July 2019, we announced expansion projects at EHT that are expected to increase our loading capacity for crude oil and LPG at the terminal. With respect to crude oil, we are adding an eighth deep-water ship dock at EHT that is expected to increase our crude oil loading capacity by 840 MBPD, thereby increasing our overall nameplate crude oil loading capacity at EHT to 2.75 MMBPD, or nearly 83 MMBbls per month. The new dock is designed to accommodate a Suezmax vessel, which is the largest ship class that can navigate the Houston Ship Channel, and is scheduled to be placed into service during the fourth quarter of 2020.
With respect to LPG, our current estimated maximum loading capacity at EHT is approximately 835 MBPD, with 175 MBPD of this loading capacity placed into service during the third quarter of 2019. The expansion project announced in July 2019 is currently expected to increase our LPG loading capacity at EHT by an additional 265 MBPD and be placed into service during the second half of 2021. When this latest expansion project is completed, EHT will have a new maximum LPG loading capacity of approximately 1.1 MMBPD, or 33 MMBbls per month.
In light of growing international demand for PGP, we also announced in July 2019 an expansion project at EHT that is currently expected to increase its export capability for semi- or fully-refrigerated PGP by 3,500 barrels per hour, or approximately 84 MBPD. Our current loading capacity at EHT for PGP is approximately 2,500 barrels per hour, or 60 MBPD, of semi-refrigerated product. With the addition of fully refrigerated volumes due to the expansion project, EHT will be able to co-load fully refrigerated PGP and LPG volumes onto the same vessel. This expansion project is expected to be placed into service during the second half of 2021.
General Outlook for 2020
We provide midstream energy services to producers and consumers of natural gas, NGLs, crude oil, petrochemicals and refined products. Our financial position, results of operations and cash flows are contingent on the supply of, and demand for the energy commodities we handle across our integrated midstream energy asset network. The following information presents our views on key midstream energy supply and demand fundamentals going into 2020.
Supply Side Observations
The upstream energy industry, led by the efforts of major oil companies, continues to shift resources to shale supply basins. Domestic shale resources continue to play a key role in both U.S. and global markets, further supporting that the U.S. is a major oil supplier on par with the Organization of Petroleum Exporting Countries (“OPEC”) and Russia. The U.S. became a net natural gas exporter on an annual basis in 2017, and it continued to export more natural gas than it imported in both 2018 and 2019. We believe that a significant portion of the expected growth in U.S. crude oil, natural gas and NGL production in 2020 will be destined for export markets.
As measured by New York Mercantile Exchange (“NYMEX”), WTI oil prices started 2019 at $45.41 per barrel but rapidly increased to $66.30 per barrel on April 23, 2019 as OPEC and Russia maintained their supply cuts and the U.S. imposed sanctions on Iran, which restricted crude oil exports from that country to a minimum. However, prices subsequently softened as a result of continued trade disputes between the U.S. and other countries, with China in particular. Counteracting these “trade headwinds” was the fact that crude oil production growth in the U.S. was slowing in response to producers cutting back on drilling activities in an effort to preserve cash and enhance their financial condition in a capital-constrained environment. Consequently, WTI prices fluctuated between $51 and $66 per barrel for the rest of 2019. The WTI oil price finished 2019 at $61.06 per barrel and averaged $57.03 per barrel for all of 2019 compared to an average of $64.77 per barrel for 2018. WTI prices in 2020 have ranged from a high of $63.27 per barrel to a low of $49.57 per barrel through February 10, 2020. The forward commodity markets for WTI (as reported by the NYMEX) currently indicate monthly pricing in the range of $51.17 to $52.11 per barrel for periods extending through February 2021.
As reported by the EIA, U.S. crude oil production, having finished 2018 at 12 MMBPD, spent the first seven months of 2019 between 11.7 MMBPD and 12.1 MMBPD. Nevertheless, U.S. crude oil production accelerated during the latter part of the year at a record high of 12.9 MMBPD in November 2019. In addition, as reported by the EIA, U.S. production of NGLs increased steadily throughout 2019 and averaged a record 4.8 MMBPD for the year. For 2018, U.S. production of NGLs averaged 4.4 MMBPD. The focus of U.S. exploration and production companies in 2019 was more on exercising capital discipline than increasing production. Rig counts (as reported by Baker Hughes) reflect this emphasis, declining 26% over the course of 2019 from 1,083 in December 2018 to 805 in December 2019. However, not all regions slowed equally. The Permian Basin rig count fell 17% while the Haynesville Shale rig count fell 6%, whereas the Cana Woodford rig count fell 64%. As rig counts declined and fewer wells were drilled in 2019, producers gradually began to work off their inventory of drilled but uncompleted wells (“DUCs”). As reported by the EIA, the DUC count declined to approximately 7,600 in November 2019 from 8,000 in December 2018. Of the current DUCs, approximately 3,600 are in the Permian Basin. DUCs represent a significant potential volume that will continue to be brought into production.
Near-term global economic growth has been adversely impacted by the emergence of the coronavirus, officially designated as Covid-19, in China, and then in several other countries and regions including the U.S., Japan and Europe. As a result of this public health concern, a significant amount of global commerce has been affected due to travel restrictions, quarantines, and similar measures. Analysts from S&P recently estimated that the virus could lower China’s gross domestic product by approximately 1% in 2020, with a peak effect in the first quarter of 2020 before rebounding in the third quarter of 2020. Overall, economists estimate that headwinds from the virus could reduce global economic growth in 2020 by 0.2% to 0.3%, while in the U.S. first quarter of 2020 growth could be reduced by 0.2% to 0.4%. The impact of reduced hydrocarbon demand in Asia due to the virus has been felt in the price of crude oil. WTI prices have declined approximately 22% since the beginning of 2020 (as reported by the NYMEX), which we believe was largely attributable to perceived global economic weakness caused by responses to the virus. In response to the crisis, OPEC is considering production cuts to limit the potential oversupply of crude oil in global markets. We continue to monitor this situation and its potential impact on our operations.
U.S. natural gas production increased from an average of 84 Bcf/d in 2018 to 91 Bcf/d in 2019 per the EIA. As a result, natural gas prices, as measured by the NYMEX at Henry Hub, averaged $2.53 per MMBtu in 2019 compared to an average of $3.07 per MMBtu in 2018. Henry Hub natural gas prices in 2020 have ranged from a high of $2.20 per MMBtu to a low of $1.77 per MMBtu through February 10, 2020. The decline in price is generally due to lower demand due to warmer winter weather and abundant natural gas supplies due to shale production. The forward commodity markets for Henry Hub natural gas (as reported by the NYMEX) currently indicate monthly pricing in the range of $1.85 to $2.61 per MMBtu for periods extending through March 2021, with longer term prices currently indicated at $2.20 to $3.20 per MMBtu. Assuming stable natural gas prices, we believe that U.S. natural gas production should be sufficient to meet both domestic and export demand.
With the continued growth in shale production, the EIA reports that the U.S. is becoming a major exporter of natural gas, with LNG exports averaging 4.6 Bcf/d in 2019 and pipeline exports to Mexico averaging 5.1 Bcf/d in 2019. With the completion of several construction projects by the end of 2020, U.S. LNG liquefaction capacity (according to the Federal Energy Regulatory Commission (“FERC”)) is expected to exceed 9 Bcf/d, which we believe will make natural gas production and prices highly sensitive to fluctuations in LNG exports. In fact, some in the industry would argue that U.S. gas prices could become more dependent on international LNG markets in contrast to being traditionally dependent on domestic demand and weather.
We operate in a number of major domestic supply basins, including the Permian, Eagle Ford, Haynesville and Rockies. The following information represents our general outlook for each of these key basins:
• The Permian Basin in West Texas and southeastern New Mexico has experienced the largest increase in production in the country. According to the December 2019 EIA Drilling Productivity Report (“2019 EIA Report”), production in the Permian Basin was 4.7 MMBPD of crude oil and 16.3 Bcf/d of natural gas in November 2019. The basin continues to have many advantages relative to other producing regions, including up to 10 or more stacked pay zones, light sweet crude oil and significant infrastructure. With 405 drilling rigs working in the Permian Basin as of December 2019 (as reported by Baker Hughes), and major oil companies such as Exxon and Chevron focused on developing their presence in the basin, we expect production to continue to grow.
A prime example of our commitment to Permian Basin producers is our Midland-to-ECHO System. This network supports crude oil production growth from the basin by providing producers and other shippers with transportation solutions that are both cost efficient and operationally flexible. We placed our Midland-to-ECHO 1 and Midland-to-ECHO 2 pipelines into full commercial service during the second quarter of 2018 and second quarter of 2019, respectively. The Midland-to-ECHO 3 and Midland-to-ECHO 4 projects are expected to begin service during the third quarter of 2020 and first half of 2021, respectively. When fully complete, our Midland-to-ECHO System is expected to provide us with up to 1.8 MMBPD of crude oil transportation capacity to U.S. Gulf Coast and international markets, while assuring the quality and grade of the crude oil being shipped.
An area of particular focus for us has been the development of midstream infrastructure serving producers in the Delaware Basin, which is part of the Permian Basin. Prior to the shale production boom, the Delaware Basin was a lightly drilled area due to a lack of conventional targets; however, with the introduction of horizontal drilling techniques and identification of stacked targets of tight rock and shales, drilling in the Delaware Basin has accelerated greatly over the past five years. These drilling targets have proven to produce not only crude oil but also condensate and NGLs, which present us with a significant number of opportunities to provide midstream services to producers. We are actively working with producers to identify those midstream infrastructure projects that best serve their needs and complement our integrated asset network.
Two examples of our initiatives in the Delaware Basin are the Orla and Mentone natural gas processing facilities. At our Orla processing facility, we placed two processing trains (Orla I and II) into service in 2018, and a third processing train (Orla III) was placed into service in July 2019. With three trains, the Orla facility has 900 MMcf/d of total processing capacity and allows us to extract up to 140 MBPD of mixed NGLs. Our Mentone natural gas processing facility was announced in October 2018 and its first processing train (Mentone I) entered service in December 2019. Following the completion of Mentone I, we have the capability to process up to 1.6 Bcf/d of natural gas and extract up to 250 MBPD of NGLs from our processing facilities in the Delaware Basin. Given our investment in NGL pipeline infrastructure in the region (e.g., Shin Oak), we believe that we are well positioned to accommodate NGL production growth from these plants and third party natural gas processing facilities in the Permian Basin.
Overall, we have a positive outlook regarding the Permian Basin and continue to evaluate projects that meet the midstream needs of producers.
• In the Eagle Ford Shale (“Eagle Ford”), crude oil and natural gas production for 2019 was essentially the same as that for 2018. According to the 2019 EIA Report, production in the Eagle Ford was 1.4 MMBPD of crude oil and 6.9 Bcf/d of natural gas in November 2019. The number of drilling rigs working in the Eagle Ford (as reported by Baker Hughes) decreased from 80 at the beginning of 2019 to 67 in December 2019; however, it appears that the rig count has stabilized as we enter 2020.
Production acreage in the Eagle Ford continued to change ownership during 2019, which contributed to increased drilling activity in the region by the new owners. ConocoPhillips, EOG and other producers continue to show strong interest in the Eagle Ford, which could result in higher volumes for our midstream network; however, until volumes for the basin exceed historical peak production, there will be excess capacity of midstream infrastructure available in the region. According to the EIA, the historical peak for Eagle Ford crude oil and natural gas production occurred in March 2015 and was 1.7 MMBPD and 7.4 Bcf/d, respectively.
We believe that the Eagle Ford offers producers some of the best returns on capital of any region in the country due to its proximity to major consumption and export markets along the U.S. Gulf Coast. Furthermore, we believe that our integrated midstream network will provide us with operating leverage as production increases.
• With respect to the Haynesville Shale (“Haynesville”), natural gas production is increasing due to higher rig counts and improved drilling efficiencies. As reported by Baker Hughes, the number of gas drilling rigs working in the Haynesville has increased from a low of 11 rigs in 2016 to an average of 52 rigs in 2019. Like the Eagle Ford, we saw several significant changes in the ownership of producing properties in 2019, which contributed to increased drilling activity in the region by the new owners. According to the 2019 EIA Report, natural gas production in the Haynesville reached record levels in 2019, with production increasing to approximately 12.3 Bcf/d in November 2019. Assuming supportive natural gas prices, we believe these trends will continue.
In 2017, the U.S. Geological Survey estimated that the Haynesville and the associated Bossier Shale plays hold a combined 304 trillion cubic feet of technically recoverable shale gas resources, which is the second highest level in the U.S. after the Appalachia region. The Haynesville benefits from its close proximity to U.S. Gulf Coast markets where significant petrochemical plant projects and LNG export facilities are being constructed. According to the FERC, the LNG market in South Louisiana and Southeast Texas, including facilities under construction, is expected to reach an aggregate 15 Bcf/d of export capacity. In September 2019, we announced construction of the Gillis Lateral and Mansfield compressor station project, both of which will support continued production growth in the Haynesville.
• In the Rocky Mountain region, rig counts (as reported by Baker Hughes) in the Piceance and San Juan basins and also in the Jonah field were essentially flat in 2019 when compared to 2018; however, the predominant producer in the Pinedale field suspended drilling in 2019 due to low commodity prices. As we move into 2020, we expect that Piceance, San Juan and Jonah producers will continue a modest level of conventional drilling with certain developments showing encouraging long-term trends. In the Piceance Basin, operators have drilled several horizontal wells in the Williams Fork formation and obtained permits for deeper wells in the Mancos Shale. In the San Juan Basin, operators continue to drill horizontal wells in both the crude oil and natural gas horizons of the Mancos Shale. In the Jonah field, producers saw positive results from recent horizontal well tests and plan to continue these efforts into 2020.
Producers in the Rockies benefit from sufficient natural gas and NGL pipeline infrastructure, which helps the region compete with other North American regions where production takeaway capacity is constrained. We believe that our Rocky Mountain assets will continue to benefit regional producers by allowing them access to major downstream markets such as U.S. Gulf Coast and export destinations.
Demand Side Observations
Global economic growth continues to drive demand for petroleum-based products. In February 2020, the International Energy Agency (“IEA”) reported that global demand for crude oil and NGLs grew by a combined 1.0 MMBPD in 2019 and expects demand to grow by approximately 0.8 MMBPD in 2020. Recent statements by the IEA and other sources suggest that the coronavirus will soften near-term global demand for hydrocarbons, particularly in Asia, in the first quarter of 2020, with a likely rebound in demand during the third quarter of 2020. In December 2019, the IEA forecast that overall long-term demand for crude oil and NGLs by the countries represented by the Organization for Economic Co-operation and Development (“OECD”) will decline by approximately 0.3 MMBPD between 2019 and 2024, while non-OECD demand would increase by 6 MMBPD over the same period. The IEA expects that petrochemicals will account for approximately 31% of the increase in long-term global demand for crude oil and NGLs over this period. As its reference case, the IEA’s long-term outlook for crude oil and NGL demand points to either a plateau after 2030, or to slow growth of approximately 0.2% from 2025 to 2040.
We, along with a majority of forecasters, expect that long-term demand for liquid hydrocarbons such as crude oil and NGLs should not decline before the year 2040. Demand for liquid hydrocarbons is generally driven by the following sectors: airline and rail transportation, marine bunker fuel, motor fuels (gasoline and diesel) for cars, trucks and similar vehicles, industrial users, residential and commercial heating, and feedstocks in petrochemical and plastics manufacturing. Practically speaking, liquid hydrocarbons cannot be reasonably or economically replaced for each of these uses by other forms of energy in this forecast period given current technologies. Although the IEA and other forecasters project electric-powered vehicles modestly supplanting gasoline and diesel-powered vehicles in certain markets during this period, the decrease in motor fuel demand is outweighed by demand growth in other sectors for liquid hydrocarbons.
We continuously review third-party economic forecasts in connection with our long-term planning. In general, third party forecasts such as the IEA’s are subject to a variety of assumptions including: (i) current views of leading economic forecasters and demographers with respect to assumed economic and demographic trends; (ii) improvements in energy production, delivery and consumption technologies; (iii) current laws and regulations that affect the energy sector are unchanged throughout the 2020-2050 projection period; (iv) future commodity prices and (v) reduced costs for renewables. Changes to these and other assumptions by forecasters may yield higher or lower outlooks for hydrocarbon demand and supply over the long-term.
The North American “shale revolution” has transformed the U.S. into the global, low-cost supplier of NGLs. We expect this trend to continue into 2020 and beyond supported by, among other things: (i) the ability of U.S. shale producers to reduce development costs and improve the productivity of new and existing wells, (ii) regulatory changes in various international markets such as India and China favoring the use of clean-burning fuels and low-sulfur hydrocarbons such as those found in U.S. shale oil basins and (iii) higher demand in developing economics for liquid hydrocarbons in general. As a midstream energy company, we continue to foresee a variety of long-term, demand-side opportunities from these developments, including higher demand from the U.S. petrochemical industry and increased exports of hydrocarbons (e.g., ethane, LPG and crude oil) to growing international markets.
International demand for U.S. ethane is expected to remain robust in 2020, as ethane from domestic shale basins offers the global petrochemical industry a low-cost feedstock option plus supply diversification. Our Morgan’s Point Ethane Export Terminal, the largest of its kind in the world, enables us to meet this demand and has an aggregate loading rate (nameplate capacity) of approximately 10,000 barrels per hour of fully refrigerated ethane.
With respect to the U.S. petrochemical industry, abundant supplies of shale-sourced ethane provides the U.S. with one of the cheapest feedstocks available for ethylene production. The American Chemistry Council estimates that over $200 billion is being invested in domestic petrochemical plants, with most of those investments tied directly to producing ethylene from cost-advantaged U.S. ethane. Of the new domestic facilities, seven world-scale ethylene plants are currently operational and we estimate that they have a combined ethylene production capacity of 17.7 billion pounds per year and an ethane consumption rate of approximately 490 MBPD. An additional four plants are being commissioned and expected to enter service in 2020, with an estimated aggregate ethylene production capacity of 7.2 billion pounds per year and an ethane consumption rate of approximately 205 MBPD. An additional four plants are expected to enter service in the early 2020s. We anticipate that these later plants will have a combined ethylene production capacity of 7.5 billion pounds per year and an ethane consumption rate of approximately 205 MBPD. We also anticipate demand growth for ethane as a feedstock resulting from modifications (e.g., debottlenecking, furnace modifications, etc.) made to other existing domestic facilities.
Our midstream assets are located in close proximity to virtually all domestic ethane-consuming petrochemical plants, as well as associated derivative plants that produce various polymer products from ethylene. As a result of the expected growth in U.S. ethylene production capacity, we completed and commissioned an ethylene export terminal located at Morgan’s Point on the Houston Ship Channel in December 2019. The project, which is underwritten by long-term customer commitments, is expected to be fully operational in the fourth quarter of 2020 once certain refrigeration assets are completed.
To a limited extent, global demand for the end products produced by the petrochemical and plastics sector is currently under pressure mostly due to improper plastic disposal methods, particularly the accumulation of plastic garbage in the world’s oceans. This situation has resulted in calls for better collection, recycling and disposal of plastics and bans of certain single-use plastic items. Although higher recycling rates and bans of certain single-use items would effectively reduce the rate of growth in global demand for plastics, we do not believe that such actions will result in a significant long-term decline in the production of plastics (or in the use of liquid hydrocarbons as feedstocks in the production of such items).
With respect to long-term LPG demand, we believe that U.S. exports to Asia, particularly China and India, as well as markets in Northwest Europe and Latin America, will continue to be strong. According to EIA data available through November 2019, U.S. LPG exports increased 17% in 2019 to 1.4 MMBPD, with volumes headed to Asian markets accounting for approximately 51% of this amount. We estimate that LPG exports could reach 2.5 to 2.8 MMBPD by 2025. Our outlook for LPG exports to Asia is supported by several factors including long-term economic growth rates in Asian markets and favorable domestic policies in countries like India and Indonesia where governments are subsidizing their population’s switch from wood-based fuels to LPG for domestic use as a means of reducing pollution and protecting against deforestation. The competitiveness of U.S. Gulf Coast supplies of LPG are enhanced by the recent widening of the Panama Canal in 2016. Due to our expectation of continued growth in LPG exports, we completed an expansion project at EHT in 2019 that increased our LPG loading capacity at the terminal to approximately 835 MBPD. In July 2019, we announced an additional expansion project at EHT that would increase our LPG loading capacity by an additional 265 MBPD and be placed into service during the second half of 2021.
Lastly, as U.S. crude oil production increased, these new domestic barrels continue to supplant more of the U.S.’s crude oil imports, while the remainder are exported to international markets in Central and South America, Asia and Western Europe where the lighter U.S. crudes are used as feedstock in their refining and petrochemical facilities. We expect U.S. refiners to continue to operate at high rates as a result of steady U.S. demand and growing exports of refined products. We believe that our marine terminals and related storage and pipeline infrastructure that handle crude oil, refined products and petrochemicals are strategically located to meet the concurrent needs of export and import customers. We have significant export capabilities, with expansion potential, on the Houston Ship Channel, Beaumont, Freeport and Texas City, Texas.
In July 2019, we announced long-term agreements with Chevron that support the development of SPOT in the Gulf of Mexico. SPOT is designed to load VLCCs at rates of approximately 85,000 barrels per hour. Construction of SPOT remains subject to obtaining the required approvals and licenses from the federal Maritime Administration, which is currently reviewing our SPOT application. SPOT would provide customers with an integrated export solution that leverages our extensive supply, storage and distribution network along the Gulf Coast, with access to approximately 6 MMBbls of crude oil supply and more than 300 MMBbls of storage based on our estimates.
Selected Energy Commodity Price Data
The following table presents selected average index prices for natural gas and selected NGL and petrochemical products for the periods indicated:
(1)
Natural gas prices are based on Henry-Hub Inside FERC commercial index prices as reported by Platts, which is a division of McGraw Hill Financial, Inc.
(2)
NGL prices for ethane, propane, normal butane, isobutane and natural gasoline are based on Mont Belvieu Non-TET commercial index prices as reported by Oil Price Information Service.
(3)
Polymer grade propylene prices represent average contract pricing for such product as reported by IHS Chemical, a division of IHS Inc. (“IHS Chemical”). Refinery grade propylene prices represent weighted-average spot prices for such product as reported by IHS Chemical.
(4)
The “Indicative Gas Processing Gross Spread” represents a generic estimate of the gross economic benefit from extracting NGLs from natural gas production based on certain pricing assumptions. Specifically, it is the amount by which the assumed economic value of a composite gallon of NGLs at Mont Belvieu, Texas exceeds the value of the equivalent amount of energy in natural gas at Henry Hub, Louisiana (as presented in the table above). The indicative spread does not consider the operating costs incurred by a natural gas processing facility to extract the NGLs nor the transportation and fractionation costs to deliver the NGLs to market. In addition, the actual gas processing spread earned at each plant is determined by regional pricing and extraction dynamics. As presented in the table above, the indicative spread assumes that a gallon of NGLs is comprised of 47% ethane, 28% propane, 9% normal butane, 6% isobutane and 10% natural gasoline. The value of an equivalent amount of energy in natural gas to one gallon of NGLs is assumed to be 8.4% of the price of a MMBtu of natural gas at Henry Hub.
The following table presents selected average index prices for crude oil for the periods indicated:
(1)
WTI prices are based on commercial index prices at Cushing, Oklahoma as measured by the NYMEX.
(2)
Midland and Houston crude oil prices are based on commercial index prices as reported by Argus.
(3)
Light Louisiana Sweet (“LLS”) prices are based on commercial index prices as reported by Platts.
Fluctuations in our consolidated revenues and cost of sales amounts are explained in large part by changes in energy commodity prices, which fluctuate for a variety of reasons including supply and demand imbalances and geopolitical tensions. The weighted-average indicative market price for NGLs was $0.47 per gallon in 2019 compared to $0.70 per gallon in 2018.
A decrease in our consolidated marketing revenues due to lower energy commodity sales prices may not result in a decrease in gross operating margin or cash available for distribution, since our consolidated cost of sales amounts would also decrease due to comparable decreases in the purchase prices of the underlying energy commodities. The same type of correlation would be true in the case of higher energy commodity sales prices and purchase costs.
We attempt to mitigate commodity price exposure through our hedging activities and the use of fee-based arrangements. See Note 14 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report for information regarding our commodity hedging activities.
Income Statement Highlights
The following table summarizes the key components of our consolidated results of operations for the years indicated (dollars in millions):
Revenues
The following table presents each business segment’s contribution to consolidated revenues for the years indicated (dollars in millions):
Total revenues for 2019 decreased $3.75 billion when compared to 2018 primarily due to a $3.87 billion decrease in marketing revenues. Revenues from the marketing of NGLs, petrochemicals and refined products decreased a combined net $2.54 billion year-to-year primarily due to lower sales prices, which accounted for a $4.7 billion decrease, partially offset by higher sales volumes, which resulted in a $2.16 billion increase. Revenues from the marketing of crude oil decreased $993.4 million year-to-year primarily due to lower sales volumes, which accounted for a $540.7 million decrease, and lower sales prices, which resulted in an additional $452.7 million decrease. In addition, revenues from the marketing of natural gas decreased a net $336.3 million year-to-year primarily due to lower sales prices.
Revenues from midstream services for 2019 increased $121.5 million when compared to 2018. Revenues from our pipeline assets increased $250.0 million year-to-year primarily due to strong demand for transportation services in Texas. Our Midland-to-ECHO 1 and 2 pipelines accounted for a combined $206.8 million of this increase. Revenue from our Mont Belvieu storage complex increased $94.7 million year-to-year primarily due to higher storage, throughput and other fees. In addition, revenues from our terminal assets increased $75.8 million year-to-year primarily due to an increase in loading volumes at EHT. Revenues from our natural gas plants decreased a net $285.3 million year-to-year primarily due to lower revenues attributable to the equity NGLs we receive as non-cash consideration for processing services, which accounted for a $452.3 million decrease, partially offset by the addition of revenues from our recently completed Orla facility, which accounted for a $142.8 million increase. The year-to-year decline in revenues attributable to equity NGLs is primarily due to lower NGL prices in 2019 when compared to 2018.
Largest customer information
Substantially all of our consolidated revenues are earned in the U.S. and derived from a wide customer base. Our largest non-affiliated customer for 2019 and 2018 was Vitol Holding B.V. and its affiliates (collectively, “Vitol”), which accounted for 10.1% and 7.8%, respectively, of our consolidated revenues. Vitol is a global energy and commodity trading company.
Operating costs and expenses
Total operating costs and expenses for 2019 decreased $4.34 billion when compared to 2018 primarily due to lower cost of sales. The cost of sales associated with our marketing of NGLs, petrochemicals and refined products decreased a combined net $2.93 billion year-to-year primarily due to lower purchase prices, which accounted for a $4.81 billion decrease, partially offset by higher sales volumes, which accounted for a $1.87 billion increase. The cost of sales associated with our marketing of crude oil decreased $1.37 billion year-to-year primarily due to lower purchase prices, which accounted for a $924.1 million decrease, and lower sales volumes, which accounted for an additional $446.9 million decrease. In addition, the cost of sales associated with our marketing of natural gas decreased $420.9 million year-to-year primarily due to lower purchase prices.
Other operating costs and expenses for 2019 increased a net $122.0 million year-to-year primarily due to higher chemical and maintenance expenses, ad valorem taxes, and employee compensation costs, which accounted for a combined $137.7 million increase. The higher costs for 2019 were partially offset by a $33.9 million charge recognized in 2018 in connection with an earnings allocation arrangement with an affiliate of Western Midstream Partners, LP (“WES”) involving the Midland-to-ECHO 1 pipeline.
Depreciation, amortization and accretion expense increased $161.3 million year-to-year primarily due to assets placed into full or limited service since 2018 (e.g., the Shin Oak and Midland-to-ECHO 2 pipelines).
Non-cash asset impairment charges increased $82.2 million year-to-year primarily due to the $76.4 million write-off of our equity method investment in Centennial Pipeline LLC and the planned shutdown of certain natural gas processing assets in Texas and Louisiana.
General and administrative costs
General and administrative costs for 2019 increased $3.4 million when compared to 2018 primarily due to higher employee-related costs partially offset by lower legal costs.
Equity in income of unconsolidated affiliates
Equity income from our unconsolidated affiliates for 2019 increased $83.0 million when compared to 2018 primarily due to increased earnings from our investments in crude oil pipelines.
Operating income
Operating income for 2019 increased $670.1 million when compared to 2018 due to the previously described year-to-year changes in revenues, operating costs and expenses, general and administrative costs and equity in income of unconsolidated affiliates.
Interest expense
The following table presents the components of our consolidated interest expense for the years indicated (dollars in millions):
(1)
Amounts presented for 2019 and 2018 includes $23.1 million and $29.4 million, respectively, of swaption premium income. See discussion below for information regarding an unrealized $94.9 million loss recorded in 2019 related to forward-starting interest rate swaps.
(2)
We capitalize interest costs incurred on funds used to construct property, plant and equipment while the asset is in its construction phase. Capitalized interest amounts become part of the historical cost of an asset and are charged to earnings (as a component of depreciation expense) on a straight-line basis over the estimated useful life of the asset once the asset enters its intended service. When capitalized interest is recorded, it reduces interest expense from what it would be otherwise. Capitalized interest amounts fluctuate based on the timing of when projects are placed into service, our capital investment levels and the interest rates charged on borrowings.
(3)
Primarily reflects facility commitment fees charged in connection with our revolving credit facilities and amortization of debt issuance costs. Amount presented for 2018 includes $14.2 million of debt issuance costs that were written off in connection with the redemption of junior subordinated notes.
Interest charged on debt principal outstanding, which is a key driver of interest expense, increased a net $56.2 million year-to-year primarily due to increased debt principal amounts outstanding during 2019, which accounted for a $68.5 million increase, partially offset by the effect of lower overall interest rates during 2019, which accounted for a $12.3 million decrease. Our weighted-average debt principal balance for 2019 was $27.41 billion compared to $25.94 billion for 2018. In general, our debt principal balances have increased over time due to the partial debt financing of our capital investments. For information regarding our consolidated debt obligations and capital investments, see “Liquidity and Capital Resources” and “Capital Investments,” respectively, within this Part II, Item 7.
In July 2019, we sold options to be put into forward-starting swaps (referred to as “swaptions”) if the market rate of interest fell below the strike rate of the option upon expiration of the derivative instrument. The premium we realized upon sale of these swaptions is reflected as a $13.3 million reduction in interest expense for 2019. Due to declining interest rates, the counterparties to these swaptions exercised their right to put us into ten forward-starting swaps on September 30, 2019 having an aggregate notional value of $1.0 billion. Since the swaptions were not designated as hedging instruments and were subject to mark-to-market accounting, we incurred an unrealized, mark-to-market loss at inception of the forward-starting swaps totaling $94.9 million that is reflected as an increase in interest expense for the year ended December 31, 2019. The ten forward-starting swaps resulting from the swaption exercise on September 30, 2019 were designated as hedging instruments and are subject to cash flow hedge accounting.
Change in fair value of Liquidity Option
We recognize non-cash expense in connection with accretion and changes in management estimates that affect our valuation of the Liquidity Option liability. Expense attributable to changes in the fair value of the Liquidity Option increased to $119.6 million in 2019 from $56.1 million in 2018. The higher level of expense recognized in 2019 is primarily due to a decrease in the discount factor used in determining the present value of the liability since December 31, 2018. The discount rate is based on a weighted-average cost of capital, which declined over the course of 2019 due to lower U.S. interest rates.
The counterparty to the Liquidity Option exercised its rights under the option agreement on February 25, 2020. For additional information regarding the exercise, see “Exercise of Liquidity Option” under the Liquidity and Capital Resources section of this Item 7. In addition, please refer to Note 17 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Gain on step acquisition of unconsolidated affiliate
We recognized a non-cash gain of $39.4 million during 2018 related to the step acquisition of Delaware Basin Gas Processing LLC (“Delaware Processing”). For information regarding this acquisition, see Note 12 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Income taxes
Our provision for income taxes, which primarily reflects our state tax obligations under the Revised Texas Franchise Tax (the “Texas Margin Tax”), decreased $14.7 million in 2019 when compared to 2018. Our partnership is not subject to U.S. federal income tax; however, our partners are individually responsible for paying federal income tax on their share of our taxable income.
Business Segment Highlights
We evaluate segment performance based on our financial measure of gross operating margin. Gross operating margin is an important performance measure of the core profitability of our operations and forms the basis of our internal financial reporting. We believe that investors benefit from having access to the same financial measures that our management uses in evaluating segment results.
The following table presents gross operating margin by segment and non-GAAP total gross operating margin for the years indicated (dollars in millions):
(1)
Within the context of this table, total segment gross operating margin represents a subtotal and corresponds to measures similarly titled within our business segment disclosures found under Note 10 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Total gross operating margin includes equity in the earnings of unconsolidated affiliates, but is exclusive of other income and expense transactions, income taxes, the cumulative effect of changes in accounting principles and extraordinary charges. Total gross operating margin is presented on a 100% basis before any allocation of earnings to noncontrolling interests. Our calculation of gross operating margin may or may not be comparable to similarly titled measures used by other companies. Segment gross operating margin for NGL Pipelines & Services and Crude Oil Pipelines & Services reflect adjustments for shipper make-up rights that are included in management’s evaluation of segment results. However, these adjustments are excluded from non-GAAP total gross operating margin.
The GAAP financial measure most directly comparable to total gross operating margin is operating income. For a discussion of operating income and its components, see the previous section titled “Consolidated Income Statement Highlights” within this Part II, Item 7. The following table presents a reconciliation of operating income to total gross operating margin for the years indicated (dollars in millions):
Each of our business segments benefits from the supporting role of our marketing activities. The main purpose of our marketing activities is to support the utilization and expansion of assets across our midstream energy asset network by increasing the volumes handled by such assets, which results in additional fee-based earnings for each business segment. In performing these support roles, our marketing activities also seek to participate in supply and demand opportunities as a supplemental source of gross operating margin for the partnership. The financial results of our marketing efforts fluctuate due to changes in volumes handled and overall market conditions, which are influenced by current and forward market prices for the products bought and sold.
NGL Pipelines & Services
The following table presents segment gross operating margin and selected volumetric data for the NGL Pipelines & Services segment for the years indicated (dollars in millions, volumes as noted):
(1)
Represents the NGL volumes we earn and take title to in connection with our processing activities.
(2)
Volumes reported correspond to the revenue streams earned by our natural gas processing facilities.
Natural gas processing and related NGL marketing activities
Gross operating margin from natural gas processing and related NGL marketing activities for 2019 decreased $80.4 million when compared to 2018. Gross operating margin from our Rockies natural gas processing facilities (Meeker, Pioneer and Chaco) decreased a combined $130.1 million year-to-year primarily due to lower average processing margins (including the impact of hedging activities), which accounted for a $108.0 million decrease, and lower processing and other fees, which accounted for an additional $19.0 million decrease. On a combined basis, fee-based natural gas processing volumes at these plants increased 58 MMcf/d and equity NGL production volumes decreased 13 MBPD year-to-year.
Gross operating margin from our NGL marketing activities increased a net $63.8 million year-to-year primarily due to higher sales volumes, which accounted for a $153.3 million increase, partially offset by lower average sales margins, which accounted for a $91.1 million decrease. Results from marketing strategies that optimize our transportation, storage and export assets increased a combined $80.5 million year-to-year, partially offset by lower earnings from the optimization of our plant assets, which accounted for a $10.7 million decrease. In addition, results from NGL marketing decreased $6.0 million year-to-year due to non-cash, mark-to-market activity.
Gross operating margin from our South Texas natural gas processing facilities decreased $17.6 million year-to-year primarily due to lower average processing margins (including the impact of hedging activities), which accounted for an $18.3 million decrease, and lower processing volumes, which accounted for an additional $9.3 million decrease, partially offset by higher processing and deficiency fees, which accounted for a $12.0 million increase. Fee-based natural gas processing volumes and equity NGL production from our South Texas plants decreased 121 MMcf/d and 4 MBPD, respectively, year-to-year. Gross operating margin from our Louisiana and Mississippi natural gas processing facilities decreased $12.7 million year-to-year primarily due to lower average processing margins (including the impact of hedging activities), which accounted for a $26.3 million decrease, partially offset by higher fee-based processing volumes, which accounted for a $9.4 million increase. Net to our interest, fee-based natural gas processing volumes and equity NGL production volumes increased 188 MMcf/d and 7 MBPD, respectively, year-to-year.
Gross operating margin from our Permian Basin natural gas processing facilities increased $20.1 million year-to-year primarily due to higher fee-based natural gas processing volumes, which accounted for a $59.1 million increase, partially offset by lower average processing fees, which accounted for a $25.4 million decrease, and higher operating costs, which accounted for an additional $17.3 million decrease. Fee-based processing volumes at our Permian Basin natural gas processing facilities increased 341 MMcf/d year-to-year primarily due to higher volumes at our Orla natural gas processing facility. The first, second and third processing trains at this facility commenced operations in May 2018, October 2018 and July 2019, respectively.
NGL pipelines, storage and terminals
Gross operating margin from our NGL pipelines, storage and terminal assets during 2019 increased $353.9 million when compared to 2018. Shin Oak contributed $112.0 million of gross operating margin in 2019 on year-to-date transportation volumes of (i) 107 MBPD of direct tariff movements (net to our interest) and (ii) 129 MBPD of offload volumes from an affiliate pipeline. Gross operating margin from our Mont Belvieu storage facility increased $106.4 million year-to-year primarily due to higher throughput and handling fees, which accounted for an $81.0 million increase, and higher storage fees, which accounted for an additional $24.3 million increase.
Gross operating margin from LPG-related activities at EHT increased $41.0 million year-to-year primarily due to higher net export volumes of 45 MBPD, which accounted for a $33.2 million increase, and lower operating costs, which accounted for an additional $7.8 million increase. Gross operating margin from our Houston Ship Channel Pipeline System increased $10.6 million year-to-year primarily due to higher transportation volumes, which accounted for $7.0 million of the increase, and higher average transportation fees, which accounted for an additional $5.0 million increase. Transportation volumes on our Houston Ship Channel Pipeline System increased 44 MBPD primarily due to the LPG expansion at EHT that was completed during the third quarter of 2019.
Gross operating margin from our Aegis Pipeline increased $40.9 million year-to-year primarily due to higher transportation volumes of 72 MBPD. Gross operating margin from our Dixie Pipeline and related terminals increased a combined $24.7 million year-to-year primarily due to higher transportation volumes of 23 MBPD, which accounted for an $11.5 million increase, and lower operating costs, which accounted for an additional $10.5 million increase.
Gross operating margin from our South Louisiana NGL Pipeline System increased $11.4 million year-to-year primarily due to a 51 MBPD increase in transportation volumes. Gross operating margin from our Front Range Pipeline increased $8.9 million year-to-year primarily due to a 6 MBPD increase in transportation volumes, net to our interest.
Gross operating margin from our Appalachia-to-Texas Express, or “ATEX,” pipeline decreased $13.1 million year-to-year primarily due to lower transportation volumes. NGL transportation volumes on ATEX decreased 10 MBPD year-to-year.
NGL fractionation
Gross operating margin from NGL fractionation for 2019 decreased $34.4 million when compared to 2018. Gross operating margin at our Hobbs NGL fractionator decreased $26.4 million year-to-year primarily due to the costs of major maintenance activities completed in February 2019, which accounted for a $13.2 million decrease, lower product blending revenues, which accounted for an $8.4 million decrease, and lower fractionation volumes, which accounted for an additional $4.8 million decrease. NGL fractionation volumes at Hobbs decreased 7 MBPD year-to-year.
Gross operating margin at our South Texas NGL fractionators decreased $7.4 million year-to-year primarily due to major maintenance activities completed at our Shoup fractionator during the third quarter of 2019. NGL fractionation volumes at our South Texas NGL fractionators increased 7 MBPD year-to-year.
Crude Oil Pipelines & Services
The following table presents segment gross operating margin and selected volumetric data for the Crude Oil Pipelines & Services segment for the years indicated (dollars in millions, volumes as noted):
Gross operating margin from our Crude Oil Pipelines & Services segment for 2019 increased $576.5 million when compared to 2018.
Gross operating margin from our Midland-to-ECHO System increased $246.7 million year-to-year. Gross operating margin from our Midland-to-ECHO 1 pipeline and related business activities increased $146.8 million year-to-year primarily due to a $133.0 million increase in non-cash mark-to-market earnings, higher transportation volumes, which accounted for a $30.1 million increase, and lower expenses, which accounted for a $27.8 million increase, partially offset by lower average transportation fees, which accounted for a $91.5 million decrease. Expenses in 2018 for the Midland-to-ECHO 1 pipeline included a $33.9 million charge attributable to the allocation of pipeline earnings to WES upon closing of their acquisition of a 20% ownership interest in Whitethorn Pipeline Company LLC (which owns the majority of the Midland-to-ECHO 1 pipeline) in June 2018. Net to our interest, transportation volumes for the Midland-to-ECHO 1 pipeline increased 43 MBPD year-to-year. Gross operating margin from our Midland-to-ECHO 2 pipeline, which commenced operations in February 2019, was $99.9 million on transportation volumes of 197 MBPD.
Mark-to-market earnings attributable to the Midland-to-ECHO 1 pipeline are associated with the hedging of crude oil market price differentials (basis spreads) between the Midland and Houston markets based on the pipeline’s capacity available to us during the hedged periods. These hedges served to lock in a positive per barrel margin on our anticipated purchases of crude oil at Midland and subsequent anticipated sales to customers in the Houston area. The mark-to-market loss in 2018 of $44.6 million reflected an increase in the basis spread between the Midland and Houston markets to an average of $8.48 per barrel through 2020 relative to our average hedged amount of $2.76 per barrel through 2020 (as of December 31, 2018). The mark-to-market gain in 2019 of $88.4 million reflected a decrease in the basis spread between the Midland and Houston markets since December 31, 2018 to an average of $1.81 per barrel through 2020 relative to our average hedged amount of $1.95 per barrel through 2020. At December 31, 2019, there were a limited number of these hedges outstanding. For information regarding our commodity hedging activities, see Note 14 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Gross operating margin from other crude oil marketing activities increased a net $58.9 million year-to-year primarily due to higher average sales margins. These marketing activities benefitted from higher market price differentials for crude oil between the Permian Basin region, Cushing hub and Gulf Coast markets.
Gross operating margin from our West Texas System and equity investment in the Eagle Ford Crude Oil Pipeline System increased a combined $82.6 million year-to-year primarily due to higher transportation volumes of 64 MBPD (net to our interest). Gross operating margin from our South Texas Crude Oil Pipeline System increased $17.5 million year-to-year primarily due to higher deficiency fees. Transportation volumes on the South Texas Crude Oil Pipeline System decreased 15 MBPD year-to-year.
Gross operating margin from our equity investment in the Seaway Pipeline increased $75.6 million year-to-year primarily due to higher transportation volumes, which accounted for a $47.0 million increase, and higher transportation fees, which accounted for an additional $46.5 million increase, partially offset by higher operating costs, which accounted for a $27.4 million decrease. Transportation volumes on the Seaway Pipeline increased 55 MBPD year-to-year (net to our interest). Volumes at Seaway’s Texas City and Freeport marine terminals decreased a combined 22 MBPD year-to-year (net to our interest).
Lastly, gross operating margin from crude oil activities at EHT increased $83.2 million year-to-year primarily due to higher net export volumes of 243 MBPD.
Natural Gas Pipelines & Services
The following table presents segment gross operating margin and selected volumetric data for the Natural Gas Pipelines & Services segment for the years indicated (dollars in millions, volumes as noted):
Gross operating margin from our Natural Gas Pipelines & Services segment for 2019 increased $171.4 million when compared to 2018. Gross operating margin from our natural gas marketing activities increased $122.0 million year-to-year primarily due to higher average sales margins attributable to regional natural gas price spreads.
Gross operating margin from our Texas Intrastate System increased $46.1 million year-to-year primarily due to higher capacity reservation fees. Transportation volumes on our Texas Intrastate System increased 124 BBtus/d. Gross operating margin from our Acadian Gas System increased $12.2 million year-to-year primarily due to a $10.4 million benefit recognized in 2019 in connection with proceeds received from a legal settlement.
Gross operating margin from our Permian Basin Gathering System increased $30.0 million year-to-year primarily due to higher gathering volumes, which accounted for a $23.8 million increase, and an increase in condensate sales, which accounted for an additional $13.5 million increase, partially offset by lower deficiency fees, which accounted for a $10.5 million decrease. Natural gas gathering volumes on the Permian Basin Gathering System increased 357 BBtus/d. Gross operating margin from our San Juan Gathering System decreased $18.0 million year-to-year primarily due to a 94 BBtus/d decrease in gathering volumes, which accounted for a $10.1 million decrease, and lower condensate sales, which accounted for an additional $4.8 million decrease.
Petrochemical & Refined Products Services
The following table presents segment gross operating margin and selected volumetric data for the Petrochemical & Refined Products Services segment for the years indicated (dollars in millions, volumes as noted):
Propylene production and related activities
Gross operating margin from propylene production and related marketing activities for 2019 decreased $17.5 million when compared to 2018. Gross operating margin from our Mont Belvieu propylene splitters decreased $29.6 million year-to-year primarily due to lower sales margins, which accounted for a $65.0 million decrease, lower average propylene fractionation fees, which accounted for a $13.3 million decrease, and lower propylene production volumes, which accounted for an additional $11.2 million decrease, partially offset by higher propylene sales volumes, which accounted for a $59.2 million increase. Propylene production volumes from our splitter units decreased 4 MBPD (net to our interest). Gross operating margin from our PDH 1 facility, which was placed into service in April 2018, increased $14.0 million year-to-year primarily due to higher propylene and associated by-product sales volumes. Plant production for PDH 1, which includes by-products, increased 2 MBPD year-to-year.
Butane isomerization and related operations
Gross operating margin from butane isomerization and deisobutanizer (“DIB”) operations for 2019 decreased $13.5 million when compared to 2018 primarily due to lower average by-product sales prices, which accounted for a $9.5 million decrease, and higher operating costs, which accounted for an additional $5.3 million decrease.
Octane enhancement and related plant operations
Gross operating margin from our octane enhancement facility and HPIB plants for 2019 increased an aggregate $11.9 million when compared to 2018 primarily due to higher average sales margins, which accounted for a $26.4 million increase, partially offset by lower sales volumes, which accounted for a $13.9 million decrease. Additionally, our iBDH facility, which completed construction and was placed into service during December 2019, had a gross operating loss of $4.8 million, primarily due to start-up costs incurred prior to being placed into service.
Refined products pipelines and related activities
Gross operating margin from refined products pipelines and related marketing activities for 2019 increased $10.5 million when compared to 2018.
Gross operating margin from our TE Products Pipeline increased $18.7 million year-to-year primarily due to higher deficiency fee revenues, which accounted for a $26.1 million increase, and higher average transportation fees, which accounted for an additional $8.9 million increase, partially offset by lower transportation volumes, which accounted for an $18.3 million decrease. Transportation volumes on the TE Products Pipeline decreased 79 MBPD primarily due to lower refined products and petrochemical product movements. Gross operating margin from refined products terminals associated with our TE Products Pipeline decreased $12.0 million year-to-year primarily due to higher operating costs, which accounted for a $7.5 million decrease, and lower facility throughput fee revenues, which accounted for an additional $4.5 million decrease.
Gross operating margin from our refined products marketing activities increased $9.3 million year-to-year primarily due to higher average sales margins, which accounted for an $18.7 million increase, partially offset by lower non-cash mark-to-market earnings, which accounted for an $8.9 million decrease. Non-cash mark-to-market earnings for this business was a loss of $7.2 million in 2019 compared to a $1.7 million gain in 2018.
Gross operating margin from our refined products terminal in Beaumont, Texas decreased $11.1 million year-to-year primarily due to lower storage revenues, which accounted for a $7.7 million decrease, and lower terminaling volumes of 23 MBPD, which accounted for an additional $3.3 million decrease.
Marine transportation and other services
Gross operating margin from marine transportation for 2019 increased $20.4 million when compared to 2018 primarily due to higher barge fees, which accounted for $31.8 million of the increase, partially offset by higher operating costs, which accounted for an $11.3 million decrease.
Liquidity and Capital Resources
Based on current market conditions (as of the filing date of this annual report), we believe we will have sufficient liquidity, cash flow from operations and access to capital markets to fund our capital investments and working capital needs for the reasonably foreseeable future. At December 31, 2019, we had $4.85 billion of consolidated liquidity, which was comprised of $4.52 billion of available borrowing capacity under EPO’s revolving credit facilities and $334.7 million of unrestricted cash on hand.
We may issue equity and debt securities to assist us in meeting our future funding and liquidity requirements, including those related to capital investments. We have a universal shelf registration statement (the “2019 Shelf”) on file with the SEC which allows EPD and EPO (each on a standalone basis) to issue an unlimited amount of equity and debt securities, respectively. The 2019 Shelf replaced our prior universal shelf registration statement, which expired in May 2019.
Common Unit Buyback Program
In January 2019, we announced that the Board of Enterprise GP had approved a $2.0 billion multi-year unit buyback program (the “2019 Buyback Program”), which provides EPD with an additional method to return capital to investors. The 2019 Buyback Program authorizes EPD to repurchase its common units from time to time, including through open market purchases and negotiated transactions. The timing and pace of buy backs under the program will be determined by a number of factors including (i) our financial performance and flexibility, (ii) organic growth and acquisition opportunities with higher potential returns on investment, (iii) EPD’s unit price and implied cash flow yield and (iv) maintaining targeted financial leverage with a debt-to-normalized adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of approximately 3.5 times. No time limit has been set for completion of the program, and it may be suspended or discontinued at any time.
EPD repurchased 2,909,128 common units under the 2019 Buyback Program through open market purchases in 2019 (no repurchases were made during the third or fourth quarters of 2019). The total purchase price of these repurchases was $81.1 million, excluding commissions and fees. The repurchased units were cancelled immediately upon acquisition. As of December 31, 2019, the remaining available capacity under the 2019 Buyback Program was $1.92 billion.
As noted previously, management announced in January 2020 its intention to use approximately 2.0% of CFFO in 2020 to repurchase EPD common units under the 2019 Buyback Program.
Exercise of Liquidity Option
In October 2014, we acquired approximately 65.9% of the limited partner interests of Oiltanking Partners, L.P. (“Oiltanking”), all of the member interests of OTLP GP, LLC, the general partner of Oiltanking (“Oiltanking GP”), and the incentive distribution rights held by Oiltanking GP from Oiltanking Holding Americas, Inc. (“OTA”), a U.S. corporation, as the first step (“Step 1”) of a two-step acquisition of Oiltanking. In February 2015, we completed the second step of this transaction consisting of the acquisition of the noncontrolling interests in Oiltanking. In order to fund the equity consideration paid in Step 1 of the Oiltanking acquisition, we issued 54,807,352 common units to OTA on October 1, 2014 in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof. We also entered into a put option agreement (the “Liquidity Option Agreement” or “Liquidity Option”) with OTA and Marquard & Bahls AG (“M&B”), a German corporation and the ultimate parent company of OTA, in connection with Step 1. Under the Liquidity Option Agreement, EPD granted M&B the option to sell to the partnership 100% of the issued and outstanding capital stock of OTA at any time within a 90-day period commencing on February 1, 2020. On February 25, 2020, the partnership received notice from M&B of M&B’s election to exercise its Liquidity Option right.
The Liquidity Option Agreement permits M&B to allow deferred tax liabilities to remain with OTA, including tax liabilities existing at the time of the sale of Oiltanking to us in 2014, and for M&B to directly receive EPD common units upon settlement of the Liquidity Option exercise that are unencumbered by any such liabilities. As a result, the liquidity of M&B is enhanced following exercise and settlement of the option, when compared to its financial position prior thereto (hence the name “Liquidity Option”). Under the terms of the Liquidity Option Agreement, the aggregate consideration to be paid by EPD for OTA’s capital stock at settlement will equal the volume-weighted sales price of EPD common units for the 10-trading day period immediately preceding the exercise notice date, multiplied by the 54,807,352 EPD common units owned by OTA. The consideration paid by the partnership may be in the form of newly issued EPD common units, cash or any mix thereof, as determined solely by EPD. Settlement of the option exercise transaction is expected to occur on March 5, 2020. The partnership currently expects that it will elect to deliver to M&B (or its designated affiliate) 54,807,352 newly issued EPD common units (in lieu of any cash) in connection with such settlement.
The acquisition of OTA upon settlement of the Liquidity Option will be accounted for as the purchase of treasury units and the assumption of related deferred income taxes. Assuming that we issue only EPD common units to M&B as consideration (in lieu of any cash consideration), the number of EPD common units outstanding would not increase as the 54,807,352 newly issued units would be offset by the 54,807,352 EPD common units held by OTA that are reclassified to treasury units.
For additional information regarding the Liquidity Option and the effects of the option exercise, see Note 17 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Consolidated Debt
The following table presents scheduled maturities of our consolidated debt obligations outstanding at December 31, 2019 for the years indicated (dollars in millions):
Issuance of $3.0 Billion of Senior Notes in January 2020
In January 2020, EPO issued $3.0 billion aggregate principal amount of senior notes comprised of (i) $1.0 billion principal amount of senior notes due January 2030 (“Senior Notes AAA”), (ii) $1.0 billion principal amount of senior notes due January 2051 (“Senior Notes BBB”) and (iii) $1.0 billion principal amount of senior notes due January 2060 (“Senior Notes CCC”). Net proceeds from this offering were used by EPO for the repayment of $500 million principal amount of its Senior Notes Q that matured in January 2020, temporary repayment of amounts outstanding under its commercial paper program and for general company purposes. In addition, net proceeds from this offering will be used by EPO for the repayment of $1.0 billion principal amount of its Senior Notes Y upon their maturity in September 2020.
Senior Notes AAA were issued at 99.921% of their principal amount and have a fixed-rate interest rate of 2.80% per year. Senior Notes BBB were issued at 99.413% of their principal amount and have a fixed-rate interest rate of 3.70% per year. Senior Notes CCC were issued at 99.360% of their principal amount and have a fixed-rate interest rate of 3.95% per year. EPD has guaranteed these senior notes through an unconditional guarantee on an unsecured and unsubordinated basis.
Issuance of $2.5 Billion of Senior Notes in July 2019
In July 2019, EPO issued $2.5 billion aggregate principal amount of senior notes comprised of $1.25 billion principal amount of senior notes due July 2029 (“Senior Notes YY”) and $1.25 billion principal amount of senior notes due January 2050 (“Senior Notes ZZ”). Net proceeds from this offering were used by EPO for the repayment of debt and for general company purposes, including for growth capital investments.
Senior Notes YY were issued at 99.955% of their principal amount and have a fixed interest rate of 3.125% per year. Senior Notes ZZ were issued at 99.792% of their principal amount and have a fixed interest rate of 4.20% per year. EPD has guaranteed these senior notes through an unconditional guarantee on an unsecured and unsubordinated basis.
Amendment to Multi-Year Revolving Credit Agreement
In September 2019, EPO entered into an amendment (the “First Amendment”) to its revolving credit agreement dated September 13, 2017 (the “Multi-Year Revolving Credit Agreement”). The First Amendment reduces the borrowing capacity under the Multi-Year Revolving Credit Agreement from $4.0 billion to $3.5 billion (which may be increased by up to $500 million to $4.0 billion at EPO’s election provided certain conditions are met) and extends the maturity date to September 10, 2024, although the maturity date may be extended further at EPO’s request by up to two years, with the consent of required lenders as set forth under the credit agreement. Borrowings under this revolving credit agreement may be used for working capital, capital investments, acquisitions and general company purposes. There are currently no principal amounts outstanding under this revolving credit agreement.
Renewal of 364-Day Revolving Credit Agreement
In September 2019, EPO entered into a 364-Day Revolving Credit Agreement that replaced its prior 364-day credit facility. The new 364-Day Revolving Credit Agreement matures in September 2020. Under the terms of the new 364-Day Revolving Credit Agreement, EPO may borrow up to $1.5 billion (which may be increased by up to $200 million to $1.7 billion at EPO’s election, provided certain conditions are met) at a variable interest rate for a term of up to 364 days, subject to the terms and conditions set forth therein. To the extent that principal amounts are outstanding at the maturity date, EPO may elect to have the entire principal balance then outstanding continued as non-revolving term loans for a period of one additional year, payable in September 2021. Borrowings under this revolving credit agreement may be used for working capital, capital investments, acquisitions and general company purposes. There are currently no principal amounts outstanding under this revolving credit agreement.
For additional information regarding our debt agreements, see Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements included under Part I, Item 1 of this quarterly report.
Credit Ratings
At February 28, 2020, the investment-grade credit ratings of EPO’s long-term senior unsecured debt securities were BBB+ from Standard and Poor’s, Baa1 from Moody’s and BBB+ from Fitch Ratings. In addition, the credit ratings of EPO’s short-term senior unsecured debt securities were A-2 from Standard and Poor’s, P-2 from Moody’s and from Fitch Ratings. EPO’s credit ratings reflect only the view of a rating agency and should not be interpreted as a recommendation to buy, sell or hold any of our securities. A credit rating can be revised upward or downward or withdrawn at any time by a rating agency, if it determines that circumstances warrant such a change. A credit rating from one rating agency should be evaluated independently of credit ratings from other rating agencies.
Issuance of Common Units
The following table summarizes the issuance of new common units in connection with our distribution reinvestment plan (“DRIP”) and employee unit purchase plan (“EUPP”) for the years indicated (dollars in millions, number of units issued as shown):
(1)
The decrease in net cash proceeds from the DRIP and EUPP between 2018 and 2019 is primarily due to (i) lower reinvestments by privately held affiliates of EPCO in 2019, (ii) lower levels of reinvestment by participants due to a reduction in the DRIP discount from 2.5% to 0% beginning with the distribution paid in February 2019 and (iii) the election to satisfy delivery obligations under the DRIP and EUPP using common units purchased on the open market, rather than issuing new common units, beginning with the distribution paid in August 2019.
Net cash proceeds from the issuance of new common units for the years ended December 31, 2019 and 2018 were used to temporarily reduce amounts outstanding under EPO’s commercial paper program and for general company purposes, including for growth capital investments.
DRIP and EUPP
EPD has registration statements on file with the SEC in connection with its DRIP and EUPP.
The DRIP provides unitholders of record and beneficial owners of our common units a voluntary means by which they can increase the number of our common units they own by reinvesting the quarterly cash distributions they receive from us into the purchase of additional common units at a discount ranging from 0% to 5%. Beginning with the distribution declared with respect to the fourth quarter of 2017 and paid in February 2018, the DRIP discount was reduced from 5% to 2.5%. Likewise, beginning with the distribution declared with respect to the fourth quarter of 2018 and paid in February 2019, the DRIP discount was reduced from 2.5% to 0%. The EUPP provides employees of EPCO a voluntary means by which they can purchase our common units at a 10% discount through payroll deductions.
We have the sole discretion to determine whether common units purchased under the DRIP and EUPP will come from our authorized but unissued common units or from common units purchased on the open market by the plan’s administrator. In July 2019, EPD announced that, beginning with the quarterly distribution payment paid in August 2019, it would use common units purchased on the open market, rather than issuing new common units, to satisfy its delivery obligations under the DRIP and EUPP. This election is subject to change in future quarters depending on the partnership’s need for equity capital.
The preceding table shows the number of new common units issued to participants in the DRIP and EUPP during the two years ended December 31, 2019. A total of 2,801,196 additional common units were purchased on the open market in 2019 and delivered to participants in connection with the DRIP and EUPP. Other than amounts attributable to the plan discount available to all participants in the EUPP, the funds used to effect the open market purchases were sourced entirely from the DRIP and EUPP participants. No other partnership funds were used to satisfy these delivery obligations. We used open market purchases to fully satisfy DRIP and EUPP investments in connection with the distribution paid on February 12, 2020. After taking into account the number of common units delivered to participants under the DRIP and EUPP through December 31, 2019, we have the capacity to deliver an additional 56,320,229 and 4,596,585 common units, respectively, under these plans.
ATM Program
We have a registration statement on file with the SEC covering the issuance of up to $2.54 billion of our common units in amounts, at prices and on terms to be determined by market conditions and other factors at the time of such offerings in connection with our ATM program. Pursuant to this program, we may sell common units from time-to-time under an equity distribution agreement between EPD and certain broker-dealers by means of ordinary brokers’ transactions through the NYSE at market prices, in block transactions or as otherwise agreed to with the broker-dealer parties to the agreement. After taking into account the aggregate sales price of common units sold under the ATM program through December 31, 2019, we have the capacity to issue additional common units under the ATM program up to an aggregate sales price of $2.54 billion. We did not issue any common units under the ATM program during the years ended December 31, 2019 or 2018.
For additional information regarding our consolidated equity, see Note 8 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Cash Flow Statement Highlights
The following table summarizes our consolidated cash flows from operating, investing and financing activities for the years indicated (dollars in millions). For additional information regarding our cash flow amounts, please refer to the Statements of Consolidated Cash Flows included under Part II, Item 8 of this annual report.
Net cash flows provided by operating activities are largely dependent on earnings from our consolidated business activities. Changes in energy commodity prices may impact the demand for natural gas, NGLs, crude oil, petrochemical and refined products, which could impact sales of our products and the demand for our midstream services. Changes in demand for our products and services may be caused by other factors, including prevailing economic conditions, reduced demand by consumers for the end products made with hydrocarbon products, increased competition, adverse weather conditions and government regulations affecting prices and production levels.
We may also incur credit and price risk to the extent customers do not fulfill their obligations to us in connection with our marketing activities and long-term take-or-pay agreements. Risks of nonpayment and nonperformance by customers are a major consideration in our businesses, and our credit procedures and policies may not be adequate to sufficiently eliminate customer credit risk. We manage our exposure to credit risk through credit analysis, credit approvals, credit limits and monitoring procedures, and for certain transactions may utilize letters of credit, prepayments, net out agreements and guarantees. However, these procedures and policies do not fully eliminate customer credit risk. We have a concentration of trade receivable balances due from independent and major integrated oil and gas companies and other pipelines and wholesalers. These concentrations may affect our overall credit risk in that these energy industry customers may be similarly affected by changes in economic, regulatory or other factors. For a more complete discussion of these and other risk factors pertinent to our business, see Part I, Item 1A of this annual report.
The following information highlights significant year-to-year fluctuations in our consolidated cash flow amounts:
Operating activities
Net cash flows provided by operating activities in 2019 increased a net $394.2 million when compared to 2018 primarily due to:
• a $779.2 million year-to-year increase resulting from higher partnership earnings in 2019 when compared to 2018 (determined by adjusting our $448.6 million year-to-year increase in net income for changes in the non-cash items identified on our Statements of Consolidated Cash Flows); and
• an $88.6 million year-to-year increase in cash distributions received on earnings from unconsolidated affiliates primarily due to investments in crude oil pipeline businesses; partially offset by
• a $473.6 million year-to-year decrease primarily due to the timing of cash receipts and payments related to operations.
For information regarding significant year-to-year changes in our consolidated net income and underlying segment results, see “Results of Operations” within this Part II, Item 7.
Investing activities
Cash used in investing activities in 2019 increased a net $293.9 million when compared to 2018 primarily due to:
• a $308.5 million year-to-year increase in expenditures for consolidated property, plant and equipment (see “Capital Investments” within this Part II, Item 7 for additional information); and
• a $140.6 million year-to-year decrease in proceeds from asset sales primarily due to the sale of our former Red River System in October 2018 for $134.9 million; partially offset by
• a $150.6 million year-to-year decrease in net cash used for business combinations. We acquired a 50% equity interest in Delaware Processing in March 2018 for $150.6 million.
Financing activities
Cash used in financing activities in 2019 increased $440.2 million when compared to 2018 primarily due to:
• a $456.2 million year-to-year decrease in net cash proceeds from the issuance of common units in connection with the DRIP and EUPP. As noted previously, EPD announced in July 2019 that, beginning with the quarterly distribution payment paid in August 2019, it would use common units purchased on the open market, rather than issuing new common units, to satisfy its delivery obligations under the DRIP and EUPP. Prior to this change, EPD issued an aggregate 2,897,990 common units, which generated $82.2 million of net cash proceeds, in connection with the DRIP and EUPP in 2019. This compares to an aggregate 19,861,951 common units, which generated $538.4 million of net cash proceeds, issued under these plans in 2018;
• a net $175.5 million year-to-year decrease in net cash inflows from debt. During 2019, we issued $2.5 billion aggregate principal amount of senior notes, partially offset by the repayment or repurchase of $1.52 billion principal amount of senior and junior subordinated notes. During 2018, we issued $5.7 billion aggregate principal amount of senior and junior subordinated notes, partially offset by the repayment of $2.3 billion in principal amount of such notes. In addition, net issuances of short term notes under EPO’s commercial paper program were $481.8 million in 2019 compared to net repayments of $1.75 billion in 2018;
• a $112.9 million year-to-year increase in cash distributions paid to limited partners primarily due to an increase in the quarterly cash distribution rate per unit; and
• a $50.3 million year-to-year increase in cash used to acquire common units under our buyback programs; partially offset by
• a $394.7 million year-to-year increase in cash contributions from noncontrolling interests. In July 2019, Altus acquired a 33% equity interest in our consolidated subsidiary that owns Shin Oak for $440.7 million. In June 2019, an affiliate of American Midstream, LP acquired a 25% equity interest in our consolidated subsidiary that owns the Pascagoula natural gas processing facility for $36.0 million in cash. In June 2018, WES acquired a 20% equity interest in our consolidated subsidiary that owns a majority of the Midland-to-ECHO 1 pipeline for $189.6 million in cash. In addition, cash contributions from noncontrolling interests in connection with the construction of our ethylene export facility increased $43.5 million year-to-year.
Non-GAAP Cash Flow Measures
Distributable Cash Flow
Our partnership agreement requires us to make quarterly distributions to our unitholders of all available cash, after any cash reserves established by Enterprise GP in its sole discretion. Cash reserves include those for the proper conduct of our business, including those for capital investments, debt service, working capital, operating expenses, common unit repurchases, commitments and contingencies and other amounts. The retention of cash by the partnership allows us to reinvest in our growth and reduce our future reliance on the equity and debt capital markets.
In January 2020, the Board declared a cash distribution of $0.4450 per common unit with respect to the fourth quarter of 2019. In addition, our management announced plans to recommend to the Board additional quarterly cash distribution increases of $0.0025 per unit with respect to each of the four quarters of 2020. For additional information regarding our expected distribution growth rate, see “Significant Recent Developments” within this Item 7.
We measure available cash by reference to distributable cash flow (“DCF”), which is a non-GAAP cash flow measure. DCF is an important financial measure for our limited partners since it serves as an indicator of our success in providing a cash return on investment. Specifically, this financial measure indicates to investors whether or not we are generating cash flows at a level that can sustain our declared quarterly cash distributions. DCF is also a quantitative standard used by the investment community with respect to publicly traded partnerships since the value of a partnership unit is, in part, measured by its yield, which is based on the amount of cash distributions a partnership can pay to a unitholder. Our management compares the DCF we generate to the cash distributions we expect to pay our partners. Using this metric, management computes our distribution coverage ratio. For the year ended December 31, 2019, our distribution coverage ratio was approximately 1.7 times when compared to the sum of our quarterly cash distributions declared with respect to fiscal 2019. Our calculation of DCF may or may not be comparable to similarly titled measures used by other companies.
Based on the level of available cash each quarter, management proposes a quarterly cash distribution rate to the Board of Enterprise GP, which has sole authority in approving such matters. Unlike several other master limited partnerships, our general partner has a non-economic ownership interest in us and is not entitled to receive any cash distributions from us based on incentive distribution rights or other equity interests.
Our use of DCF for the limited purposes described above and in this report is not a substitute for net cash flows provided by operating activities, which is the most comparable GAAP measure. For a discussion of net cash flows provided by operating activities, see “Cash Flow Statement Highlights” within this Part II, Item 7.
The following table summarizes our calculation of DCF for the years indicated (dollars in millions):
(1)
For a discussion of the primary drivers of changes in our comparative income statement amounts, see “Income Statement Highlights” within this Part II, Item 7.
(2)
Reflects both distributions received on earnings from unconsolidated affiliates and those attributable to a return of capital from unconsolidated affiliates.
(3)
Sustaining capital expenditures include cash payments and accruals applicable to the period.
(4)
See Note 8 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report for additional information regarding our quarterly cash distributions declared with respect to the years indicated.
(5)
At the sole discretion of Enterprise GP, cash retained by the partnership with respect to each of these periods was primarily reinvested in growth capital projects. This retainage of cash substantially reduced our reliance on the equity capital markets to fund such expenditures.
(6)
Distribution coverage ratio is determined by dividing DCF by total cash distributions paid to limited partners and in connection with distribution equivalent rights with respect to the period.
The following table presents a reconciliation of net cash flows provided by operating activities to DCF for the years indicated (dollars in millions):
Free Cash Flow
Free Cash Flow (“FCF”), a non-GAAP financial measure, is a traditional cash flow metric that is widely used by a variety of investors and other participants in the financial community, as opposed to DCF, which is a cash flow measure primarily used by investors and others in evaluating master limited partnerships. In general, FCF is a measure of how much cash flow a business generates during a specified time period after accounting for all capital investments, including expenditures for growth and sustaining capital projects. By comparison, only sustaining capital expenditures are reflected in DCF.
We believe that FCF is important to traditional investors since it reflects the amount of cash available for reducing debt, investing in additional capital projects, paying distributions, common unit repurchases and similar matters. Since business partners fund certain capital projects of our consolidated subsidiaries, our determination of FCF reflects the amount of cash contributed from and distributed to noncontrolling interests. Our calculation of FCF may or may not be comparable to similarly titled measures used by other companies.
Our use of FCF for the limited purposes described above and in this report is not a substitute for net cash flows provided by operating activities, which is the most comparable GAAP measure.
FCF fluctuates based on our earnings, the level of investing activities we undertake each period, and the timing of operating cash receipts and payments. The following table summarizes our calculation of FCF for the years indicated (dollars in millions):
The elements used in calculating FCF are sourced directly from our statements of consolidated cash flows presented under Part II, Item 8 of this annual report. For a discussion of significant year-to-year changes in our cash flow statement amounts, see “Cash Flow Statement Highlights” within this Part II, Item 7.
Capital Investments
An important part of our business strategy involves expansion through growth capital projects, business combinations, asset acquisitions, and investments in joint ventures. We believe that we are well positioned to continue to expand our network of assets through the construction of new facilities and to capitalize on expected increases in natural gas, NGL and crude oil production resulting from development activities in the Permian Basin, Eagle Ford, Haynesville and other domestic shale plays. Although our focus in recent years has been on expansion through growth capital projects, management continues to analyze potential business combinations, asset acquisitions, joint ventures and similar transactions with businesses that operate in complementary markets or geographic regions.
We placed $5.4 billion of major growth capital projects into service during 2019, including Shin Oak, Midland-to-ECHO 2 pipeline, iBDH facility, Mentone I, Bulldog natural gas plant at our Carthage processing facility, expansion of LPG loading capacity at EHT, and our Morgan’s Point ethylene export terminal. At February 1, 2020, we had $7.7 billion of growth capital projects scheduled to be completed by the end of 2023 including the following major projects:
• two NGL fractionators in Chambers County, Texas (“Frac X,” first quarter of 2020; “Frac XI,” third quarter of 2020),
• expansion of our Texas Express Pipeline and Front Range Pipeline (second quarter of 2020):
• the Midland-to-ECHO 3 pipeline (third through fourth quarters of 2020),
• expansion of our natural gas pipelines in northeast Texas in support of our Carthage natural gas processing facility (third quarter of 2020),
• completion of the Baymark ethylene pipeline in South Texas (fourth quarter of 2020),
• an eighth deep-water ship dock at EHT for loading crude oil (fourth quarter of 2020),
• expansion of our ethylene export capabilities at Morgan’s Point (fourth quarter of 2020),
• our Midland-to-ECHO 4 pipeline (second quarter of 2021),
• expansion of our LPG and PGP export capabilities at EHT (second half of 2021),
• expansion and extension of Acadian Gas System (Gillis Lateral and related projects) (third quarter of 2021),
• addition of incremental capacity at our isomerization facility (first quarter of 2022),
• construction of our PDH 2 facility (first quarter of 2023).
Based on information currently available, we expect our total capital investments for 2020 to approximate $3.4 billion to $4.4 billion, which reflects growth capital investments of $3.0 billion to $4.0 billion and approximately $400 million for sustaining capital expenditures. For 2021, we anticipate our total capital investments in growth capital projects to approximate $2.0 billion to $3.0 billion. Our forecast of capital investments for 2020 and 2021 is based on announced strategic operating and growth plans (through the filing date of this annual report), which are dependent upon our ability to generate the required funds from either operating cash flows or other means, including borrowings under debt agreements, the issuance of additional equity and debt securities, and potential divestitures. We may revise our forecast of capital investments due to factors beyond our control, such as adverse economic conditions, weather-related issues and changes in supplier prices. Furthermore, our forecast of capital investments may change due to decisions made by management at a later date, which may include unforeseen acquisition opportunities.
Our success in raising capital, including partnering with other companies to share project costs and risks, continues to be a significant factor in determining how much capital we can invest. We believe our access to capital resources is sufficient to meet the demands of our current and future growth needs and, although we expect to make the forecast capital investments noted above, we may adjust the timing and amounts of projected expenditures in response to changes in capital market conditions.
The following table summarizes our capital investments for the years indicated (dollars in millions):
(1)
Growth and sustaining capital amounts presented in the table above are presented on a cash basis.
(2)
Growth capital projects either (a) result in new sources of cash flow due to enhancements of or additions to existing assets (e.g., additional revenue streams, cost savings resulting from debottlenecking of a facility, etc.) or (b) expand our asset base through construction of new facilities that will generate additional revenue streams and cash flows.
(3)
Sustaining capital expenditures are capital expenditures (as defined by GAAP) resulting from improvements to existing assets. Such expenditures serve to maintain existing operations but do not generate additional revenues or result in significant cost savings.
Fluctuations in our investments in growth capital projects and investments in unconsolidated affiliates are explained in large part by increases or decreases in expenditures for major expansion projects. Our most significant growth capital investments for the year ended December 31, 2019 involve projects at our Mont Belvieu complex, crude oil pipelines in Texas and expansion projects involving our Gulf Coast export terminals. Fluctuations in investments in sustaining capital projects are explained in large part by the timing and cost of pipeline integrity and similar projects.
Investments in growth capital projects at our Mont Belvieu complex increased $623.5 million year-to-year primarily due to construction activities surrounding Frac X and Frac XI, which accounted for a combined $479.0 million increase, our iBDH facility, which accounted for a $115.1 million increase, and expansion projects involving our DIBs, which accounted for an additional $87.2 million increase, partially offset by lower expenditures attributable to PDH 1 and Frac IX, which accounted for a combined $185.3 million decrease. PDH 1 and Frac IX were both placed into service during the second quarter of 2018. We placed our iBDH facility into service in December 2019.
Investments in growth capital projects related to our ethylene business (e.g., pipelines, storage facilities and export terminal) increased $207.4 million year-to-year.
Investments in growth capital projects in support of Permian Basin production decreased $532.1 million year-to-year primarily due to completion of Shin Oak, which accounted for a $524.4 million decrease, and Orla natural gas processing facility, which accounted for an additional $358.4 million decrease, partially offset by increased expenditures for the construction of Mentone I, which accounted for a $249.6 million increase. Shin Oak entered limited service in February 2019, with full capacity available in December 2019. Orla III entered service in July 2019 and Mentone I commenced operations in December 2019.
Net cash used for business combinations during 2018 reflects our acquisition of a 50% member interest in Delaware Processing in March 2018.
Critical Accounting Policies and Estimates
In our financial reporting processes, we employ methods, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our financial statements. These methods, estimates and assumptions also affect the reported amounts of revenues and expenses for each reporting period. Investors should be aware that actual results could differ from these estimates if the underlying assumptions prove to be incorrect. The following sections discuss the use of estimates within our critical accounting policies:
Depreciation Methods and Estimated Useful Lives of Property, Plant and Equipment
In general, depreciation is the systematic and rational allocation of an asset’s cost, less its residual value (if any), to the periods it benefits. The majority of our property, plant and equipment is depreciated using the straight-line method, which results in depreciation expense being incurred evenly over the life of an asset. Depreciation expense incorporates management estimates regarding the useful economic lives and residual values of our assets. At the time we place our assets into service, we believe such assumptions are reasonable; however, circumstances may develop that cause us to change these assumptions, which would change our depreciation amounts prospectively. Examples of such circumstances include (i) changes in laws and regulations that limit the estimated economic life of an asset, (ii) changes in technology that render an asset obsolete, (iii) changes in expected salvage values or (iv) significant changes in our forecast of the remaining life for the associated resource basins, if applicable.
At December 31, 2019 and 2018, the net carrying value of our property, plant and equipment was $41.6 billion and $38.74 billion, respectively. We recorded $1.56 billion and $1.44 billion of depreciation expense for the years ended December 31, 2019 and 2018, respectively. For additional information regarding our property, plant and equipment, see Note 4 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Measuring Recoverability of Long-Lived Assets and Fair Value of Equity Method Investments
Long-lived assets, which consist of intangible assets with finite useful lives and property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable through future cash flows. Examples of such events or changes might be production declines that are not replaced by new discoveries or long-term decreases in the demand or price of natural gas, NGLs, crude oil, petrochemicals or refined products.
The carrying value of a long-lived asset is deemed not recoverable if it exceeds the sum of undiscounted estimated cash flows expected to result from the use and eventual disposition of the asset. Estimates of undiscounted cash flows are based on a number of assumptions including anticipated operating margins and volumes; estimated useful life of the asset or asset group; and estimated residual values. If the carrying value of a long-lived asset is not recoverable, an impairment charge would be recorded for the excess of the asset’s carrying value over its estimated fair value, which is derived from an analysis of the asset’s estimated future cash flows, the market value of similar assets and replacement cost of the asset less any applicable depreciation or amortization. In addition, fair value estimates also include the usage of probabilities when there is a range of possible outcomes.
We evaluate our equity method investments for impairment when there are events or changes in circumstances that indicate there is a potential loss in value of the investment attributable to an other than temporary decline. Examples of such events or changes in circumstances include continuing operating losses of the entity and/or long-term negative changes in the entity’s industry. In the event we determine that the value of an investment is not recoverable due to an other than temporary decline, we record a non-cash impairment charge to adjust the carrying value of the investment to its estimated fair value. We assess the fair value of our equity method investments using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third party sales and discounted estimated cash flow models. Estimates of discounted cash flows are based on a number of assumptions including discount rates; probabilities assigned to different cash flow scenarios; anticipated margins and volumes and estimated useful lives of the investment’s underlying assets.
A significant change in the assumptions we use to measure recoverability of long-lived assets and the fair value of equity method investments could result in our recording a non-cash impairment charge. Any write-down of the carrying values of such assets would increase operating costs and expenses at that time.
In 2019 and 2018, we recognized non-cash asset impairment charges related to long-lived assets and equity method investments of $127.5 million and $46.8 million, respectively, which are a component of operating costs and expenses. For additional information regarding impairment charges, see Note 14 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Valuation and Amortization Methods of Customer Relationships and Contract-Based Intangible Assets
The specific, identifiable intangible assets of an acquired business depend largely upon the nature of its operations and include items such as customer relationships and contracts. The method used to value such assets depends on a number of factors, including the nature of the asset and the economic returns the asset is expected to generate.
Customer relationship intangible assets represent the estimated economic value assigned to commercial relationships acquired in connection with business combinations. In certain instances, the acquisition of these intangible assets provides us with access to customers in a defined resource basin and is analogous to having a franchise in a particular area. Efficient operation of the acquired assets (e.g., a natural gas gathering system) helps to support the commercial relationships with existing producers and provides us with opportunities to establish new ones within our existing asset footprint. The duration of this type of customer relationship is limited by the estimated economic life of the associated resource basin that supports the customer group. When estimating the economic life of a resource basin, we consider a number of factors, including reserve estimates and the economic viability of production and exploration activities.
In other situations, the acquisition of a customer relationship intangible asset provides us with access to customers whose hydrocarbon volumes are not attributable to specific resource basins. As with basin-specific customer relationships, efficient operation of the associated assets (e.g., a marine terminal that handles volumes originating from multiple sources) helps to support the commercial relationships with existing customers and provides us with opportunities to establish new ones. The duration of this type of customer relationship is typically limited to the term of the underlying service contracts, including assumed renewals.
The value we assign to customer relationships is amortized to earnings using methods that closely resemble the pattern in which the estimated economic benefits will be consumed (i.e., the manner in which the intangible asset is expected to contribute directly or indirectly to our cash flows). For example, the amortization period for a basin-specific customer relationship asset is limited by the estimated finite economic life of the associated hydrocarbon resource basin.
Contract-based intangible assets represent specific commercial rights we own arising from discrete contractual agreements. A contract-based intangible asset with a finite life is amortized over its estimated economic life, which is the period over which the contract is expected to contribute directly or indirectly to our cash flows. Our estimates of the economic life of contract-based intangible assets are based on a number of factors, including (i) the expected useful life of the related tangible assets (e.g., a marine terminal, pipeline or other asset), (ii) any legal or regulatory developments that would impact such contractual rights and (iii) any contractual provisions that enable us to renew or extend such arrangements.
If our assumptions regarding the estimated economic life of an intangible asset were to change, then the amortization period for such asset would be adjusted accordingly. Changes in the estimated useful life of an intangible asset would impact operating costs and expenses prospectively from the date of change. If we determine that an intangible asset’s carrying value is not recoverable through its future cash flows, we would be required to reduce the asset’s carrying value to its estimated fair value through the recording of a non-cash impairment charge. Any such write-down of the value of an intangible asset would increase operating costs and expenses at that time.
At December 31, 2019 and 2018, the carrying value of our customer relationship and contract-based intangible asset portfolio was $3.45 billion and $3.61 billion, respectively. We recorded $174.7 million and $170.3 million of amortization expense attributable to intangible assets for the years ended December 31, 2019 and 2018, respectively. For additional information regarding our intangible assets, see Note 6 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Methods We Employ to Measure the Fair Value of Goodwill and Related Assets
At December 31, 2019 and 2018, our goodwill balance was $5.75 billion. Goodwill represents the excess of the purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed in the transaction. Goodwill is not amortized; however, we evaluate goodwill for impairment on December 31 of each year or when impairment indicators (e.g., the loss of a significant customer, adverse long-term supply or demand trends, or technological obsolescence of assets) are present.
Testing goodwill for impairment involves a two-step process. As Step 1 of the process, if impairment indicators are present, the estimated fair value of a reporting unit to which goodwill is assigned is determined and compared to its carrying value. The fair value of a reporting unit is based on assumptions regarding the future economic prospects of the assets that comprise the reporting unit. These assumptions include (i) discrete financial forecasts for the assets classified within the reporting unit, which, in turn, rely on management’s estimates of long-term operating margins, throughput volumes and similar factors; (ii) long-term growth rates for cash flows beyond the discrete forecast period; and (iii) appropriate discount rates. We believe that the assumptions we use in estimating reporting unit fair values are consistent with those that market participants would use in their fair value estimation process. As Step 2 of the process, if the fair value of the reporting unit is less than its carrying value (including associated goodwill), a non-cash impairment charge to earnings is recorded to reduce the carrying value of the goodwill to its implied fair value. We did not record any goodwill impairment charges during the years ended December 31, 2019 and 2018.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We adopted this guidance on January 1, 2020 for future goodwill impairment testing.
For additional information regarding our goodwill, see Note 6 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Use of Estimates for Revenues and Expenses
As noted previously, preparing our consolidated financial statements in conformity with GAAP requires us to make estimates that affect amounts presented in the financial statements. Due to the time required to compile actual billing information and receive third party data needed to record transactions, we routinely employ estimates in connection with revenue and expense amounts in order to meet our accelerated financial reporting deadlines.
Our most significant routine estimates involve revenues and costs of certain natural gas processing facilities, pipeline transportation revenues, fractionation revenues, marketing revenues and related purchases, and power and utility costs. These types of transactions must be estimated since the actual amounts are generally unavailable at the time we complete our accounting close process. The estimates subsequently reverse in the next accounting period when the corresponding actual customer billing or vendor-invoiced amounts are recorded.
Changes in facts and circumstances may result in revised estimates, which could affect our reported financial statements and accompanying disclosures. Prior to issuing our financial statements, we review our revenue and expense estimates based on currently available information to determine if adjustments are required. Investors should be aware that actual results could differ from these estimates if the underlying assumptions prove to be incorrect.
Other Matters
Contractual Obligations
The following table summarizes our significant contractual obligations at December 31, 2019 (dollars in millions):
(1)
Represents scheduled future maturities of our current and long-term debt principal obligations. For information regarding our consolidated debt obligations, see Note 7 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
(2)
Estimated cash payments for interest are based on the principal amount of our consolidated debt obligations outstanding at December 31, 2019, the contractually scheduled maturities of such balances, and the applicable interest rates. Our estimated cash payments for interest are influenced by the long-term maturities of our $2.65 billion in junior subordinated notes (due June 2067 through February 2078). The estimated cash payments assume that (i) the junior subordinated notes are not repaid prior to their respective maturity dates and (ii) the amount of interest paid on the junior subordinated notes is based on either (a) the current fixed interest rate charged or (b) the weighted-average variable rate paid in 2019, as applicable, for each note through the respective maturity date.
(3)
Primarily represents (i) land held pursuant to property leases, (ii) the lease of underground storage caverns for natural gas and NGLs, (iii) the lease of transportation equipment used in our operations and (iv) office space leased from affiliates of EPCO.
(4)
Represents enforceable and legally binding agreements to purchase goods or services as of December 31, 2019. The estimated payment obligations are based on contractual prices in effect at December 31, 2019 applied to all future volume commitments. Actual future payment obligations may vary depending on prices at the time of delivery.
(5)
Primarily represents our unconditional payment obligations under firm pipeline transportation contracts.
(6)
Represents unconditional payment obligations for services to be rendered or products to be delivered in connection with our capital expenditures, including our share of the capital expenditures of unconsolidated affiliates.
(7)
Primarily represents the Liquidity Option liability, the noncurrent portion of asset retirement obligations and deferred revenues. We expect that the Liquidity Option will be replaced with a long-term deferred tax liability of similar amount upon exercise of the Liquidity Option. For a discussion of the Liquidity Option and the effects of the option exercise, see Note 17 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
We are obligated to spend up to an aggregate $270 million over a ten-year period ending in 2025 on specified midstream gathering assets for certain producers utilizing our EFS Midstream System. If constructed, these new assets would be owned by us and be a component of the EFS Midstream System. As of December 31, 2019, we have spent $151 million of the $270 million commitment. Due to the uncertain timing of the remaining potential capital expenditures, we have excluded this amount from the preceding table.
For additional information regarding our significant contractual obligations, see Note 17 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Recent Accounting Developments
For information regarding recent changes in our accounting for leases, see Note 2 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably expected to have a material current or future effect on our financial position, results of operations and cash flows.
Related Party Transactions
For information regarding our related party transactions, see Note 15 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Insurance
For information regarding insurance matters, see Note 18 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.
General
In the normal course of our business operations, we are exposed to certain risks, including changes in interest rates and commodity prices. In order to manage risks associated with assets, liabilities and certain anticipated future transactions, we use derivative instruments such as futures, forward contracts, swaps and other instruments with similar characteristics. Substantially all of our derivatives are used for non-trading activities.
We assess the risk associated with each of our derivative instrument portfolios using a sensitivity analysis model. This approach measures the change in fair value of the derivative instrument portfolio based on a hypothetical 10% change in the underlying interest rates or quoted market prices on a particular day. In addition to these variables, the fair value of each portfolio is influenced by changes in the notional amounts of the instruments outstanding and the discount rates used to determine the present values. The sensitivity analysis approach does not reflect the impact that the same hypothetical price movement would have on the hedged exposures to which they relate. Therefore, the impact on the fair value of a derivative instrument resulting from a change in interest rates or quoted market prices (as applicable) would normally be offset by a corresponding gain or loss on the hedged debt instrument, inventory value or forecasted transaction assuming:
• the derivative instrument functions effectively as a hedge of the underlying risk;
• the derivative instrument is not closed out in advance of its expected term; and
• the hedged forecasted transaction occurs within the expected time period.
We routinely review the effectiveness of our derivative instrument portfolios in light of current market conditions. Accordingly, the nature and volume of our derivative instruments may change depending on the specific exposure being managed.
See Note 14 of the Notes to Consolidated Financial Statements included under Part II, Item 8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our audited consolidated financial statements begin on page of this annual report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
As of the end of the period covered by this annual report, our management carried out an evaluation, with the participation of (i) A. James Teague, Co-Chief Executive Officer of Enterprise GP and (ii) W. Randall Fowler, Co-Chief Executive Officer and Chief Financial Officer of Enterprise GP, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Mr. Teague is our co-principal executive officer (together with Mr. Fowler) and Mr. Fowler is our other co-principal executive officer and our principal financial officer. Based on this evaluation, as of the end of the period covered by this annual report, Messrs. Teague and Fowler concluded:
(i) that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow for timely decisions regarding required disclosures; and
(ii) that our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the fourth quarter of 2019, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Section 302 and 906 Certifications
The required certifications of Messrs. Teague and Fowler under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits to this annual report (see Exhibits 31 and 32 under Part IV, Item 15 of this annual report).
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING AS OF DECEMBER 31, 2019
The management of Enterprise Products Partners L.P. and its consolidated subsidiaries, including its Co-Chief Executive Officer and its Co-Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Our internal control system was designed to provide reasonable assurance to the management of Enterprise Products Partners L.P. and the Board of Directors of its general partner regarding the preparation and fair presentation of Enterprise Products Partners L.P.’s published financial statements.
Our management assessed the effectiveness of Enterprise Products Partners L.P.’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). This assessment included a review of the design and operating effectiveness of internal controls over financial reporting as well as the safeguarding of assets. Based on our assessment, we believe that, as of December 31, 2019, Enterprise Products Partners L.P.’s internal control over financial reporting is effective based on those criteria.
Our Audit and Conflicts Committee is comprised of independent directors who are not officers or employees of our general partner. This committee meets regularly with members of management, internal audit staff and representatives of Deloitte & Touche LLP, which is our independent registered public accounting firm, to discuss the adequacy of Enterprise Products Partners L.P.’s internal controls over financial reporting, consolidated financial statements and the nature, extent and results of the audit effort. Management reviews all of Enterprise Products Partners L.P.’s significant accounting policies and assumptions that affect its results of operations with the Audit and Conflicts Committee. Both the independent registered public accounting firm and our internal auditors have direct access to the Audit and Conflicts Committee without the presence of management.
Deloitte & Touche LLP has issued its attestation report regarding our internal control over financial reporting. That report is included within this Part II, Item 9A (see “Report of Independent Registered Public Accounting Firm”).
Pursuant to the requirements of Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended, this annual report on Internal Control Over Financial Reporting has been signed below by the following persons on behalf of the registrant and in their respective capacities indicated below on February 28, 2020.
/s/ A. James Teague
/s/ W. Randall Fowler
Name:
A. James Teague
Name:
W. Randall Fowler
Title:
Co-Chief Executive Officer
Title:
Co-Chief Executive Officer
of Enterprise Products Holdings LLC
and Chief Financial Officer
of Enterprise Products Holdings LLC
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Enterprise Products Holdings LLC and
Unitholders of Enterprise Products Partners L.P.
Houston, Texas
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Enterprise Products Partners L.P. and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the criteria established in Internal Control-Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 28, 2020, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting as of December 31, 2019. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 28, 2020
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND PARTNERSHIP GOVERNANCE.
Partnership Management
General
On January 2, 2020, Dan Duncan LLC, the sole member of Enterprise GP, re-elected the following individuals to the Board of Directors (the “Board”) of Enterprise GP: Richard H. Bachmann, Carin M. Barth, Murray E. Brasseux, W. Randall Fowler, James T. Hackett, William C. Montgomery, John R. Rutherford, Richard S. Snell, A. James Teague, Harry P. Weitzel and Randa Duncan Williams. Ms. Duncan Williams continues to serve as the non-executive Chairman of the Board, and Mr. Bachmann continues to serve as the non-executive Vice Chairman of the Board. Charles E. McMahen (who served as a director prior to January 2, 2020) was not re-elected to the Board.
In addition, Dr. Ralph S. Cunningham, Larry J. Casey and Edwin C. Smith serve as “advisory directors” for Enterprise GP, and O.S. Andras serves as an “honorary director.” Service as an advisory or honorary director does not confer any of the rights, obligations, liabilities or responsibilities of a director of Enterprise GP (including any power or authority to vote on any matters as a director).
As is commonly the case with publicly traded limited partnerships, we do not directly employ any of the persons responsible for our management, administrative or operating functions. Pursuant to the ASA with EPCO, these roles are performed by employees of EPCO, which are under the direction of the Board and executive officers of Enterprise GP. The executive officers of Enterprise GP are elected for one-year terms and may be removed, with or without cause, only by the Board. Our unitholders do not elect the officers or directors of Enterprise GP. The DD LLC Trustees, through their control of Enterprise GP, have the ability to elect, remove and replace at any time, the officers and directors of Enterprise GP. Each member of the Board of Enterprise GP serves until such member’s death, resignation or removal. The employees of EPCO who served as directors of Enterprise GP during 2019 were Ms. Duncan Williams and Messrs. Bachmann, Fowler, Teague and Weitzel.
Notwithstanding any contractual limitation on its obligations or duties, Enterprise GP is liable for all debts we incur (to the extent not paid by us), except to the extent that such indebtedness or other obligations are non-recourse to Enterprise GP. Whenever possible, Enterprise GP intends to make any such indebtedness or other obligations non-recourse to itself.
Under our limited partnership agreement and subject to specified limitations, we will indemnify to the fullest extent permitted by Delaware law, from and against all losses, claims, damages or similar events, any director or officer, or while serving as director or officer, any person who is or was serving as a tax matters member or as a director, officer, tax matters member, employee, partner, manager, fiduciary or trustee of our partnership or any of our affiliates. Additionally, we will indemnify to the fullest extent permitted by law, from and against all losses, claims, damages or similar events, any person who is or was an employee (other than an officer) or agent of Enterprise GP.
Office of the Chairman
The Office of the Chairman is a management oversight group comprised of four individuals: Ms. Duncan Williams (as Chairman of the Board), Mr. Bachmann (as Vice Chairman of the Board), Mr. Teague (as Co-Chief Executive Officer (“Co-CEO”)) and Mr. Fowler (as Co-CEO and Chief Financial Officer (“CFO”)). The purpose of the Office of the Chairman is for the group to serve collectively as a liaison between the Board and senior management with respect to, and to provide the Chairman, Vice-Chairman, Co-CEO, and Co-CEO/CFO a venue to discuss, certain matters including:
• the strategic direction of Enterprise (including business opportunities through organic growth and acquisitions);
• the vision, leadership and development of the management team;
• business goals and operational performance; and
• strategies to preserve our financial strength.
In addition, the Office of the Chairman assists the Board and its Governance Committee in identifying director education opportunities and in determining the size and composition of the Board and recruitment of new members. The Office of the Chairman also oversees policies that (i) reflect our values and business goals and (ii) enhance the effectiveness of our governance structure. The Office of the Chairman also collectively oversees and provides strategic direction for our legal and human resources departments.
In her role as Chairman of the Board (a non-executive role), Ms. Duncan Williams is responsible for, among other things: (i) presiding over and setting the agendas for meetings of the Board, with due consideration of our values and business goals and an effective governance structure; (ii) overseeing the appropriate flow of information to the Board; (iii) acting as a liaison between the Board and senior management; and (iv) meeting regularly with the Board to review our strategic direction.
In his role as Vice Chairman of the Board (a non-executive role), Mr. Bachmann is responsible for, among other things: (i) assisting the Chairman of the Board in the execution of the Chairman of the Board’s functions and responsibilities, as requested from time to time by the Chairman of the Board; and (ii) meeting regularly with the Board to review our strategic direction.
In his role as Co-CEO, Mr. Teague is our co-principal executive officer and is responsible for, among other things: (i) managing our overall business and financial strategy and day-to-day operations; (ii) a principal focus area of overseeing and providing strategic direction for us, subject to Board approval, in the areas of operations, commercial activities, business development, and health and safety; and (iii) providing the required certifications as co-principal executive officer of Enterprise GP (together with Mr. Fowler) in connection with our disclosure controls and procedures and internal control over financial reporting.
In his role as Co-CEO/CFO, Mr. Fowler is our co-principal executive officer and our principal financial officer and is responsible for, among other things: (i) managing our overall business and financial strategy; (ii) a principal focus are of overseeing and providing strategic direction for us, subject to Board approval, in the areas of accounting, risk management, finance, treasury and cash management, information technology, investor relations, and public relations and (iii) providing the required certifications as both (a) a co-principal executive officer of Enterprise GP (together with Mr. Teague) and (b) the principal financial officer of Enterprise GP in connection with our disclosure controls and procedures and internal control over financial reporting.
Directors and Executive Officers of Enterprise GP
The following table sets forth the name, age and position of each of the directors, excluding advisory or honorary directors, and executive officers of Enterprise GP at February 28, 2020. Each executive officer holds the same respective office shown below in the managing member of EPO.
(1)
Member of Office of the Chairman
(2)
Member of the Governance Committee
(3)
Chairman of the Governance Committee
(4)
Member of the Audit and Conflicts Committee
(5)
Chairman of the Audit and Conflicts Committee
(6)
Member of the Capital Projects Committee
(7)
Co-Chairman of the Capital Projects Committee
(8)
Executive officer
The following information presents a brief description of the business experience of our directors and executive officers:
Randa Duncan Williams
Ms. Duncan Williams was elected Chairman of the Board of Enterprise GP in February 2013 and a director of Enterprise GP in November 2010. She was elected Chairman of EPCO in May 2010, having previously served as Group Co-Chairman since 1994. Ms. Duncan Williams has served as a member of Enterprise GP’s Governance Committee since April 2014 and Capital Projects Committee since November 2016.
Ms. Duncan Williams has served as a director of EPCO since February 1991. She also served as a director of the general partner of Enterprise GP Holdings L.P. (“Holdings GP”) from May 2007 to November 2010.
Prior to joining EPCO in 1994, Ms. Duncan Williams practiced law with the firms Butler & Binion and Brown, Sims, Wise & White. Ms. Duncan Williams previously served on the board of directors of Encore Bancshares from July 2007 until July 2012. She currently serves on the board of trustees for numerous charitable organizations. Ms. Duncan Williams is the daughter of the late Mr. Dan L Duncan, our founder.
Richard H. Bachmann
Mr. Bachmann was elected a director and Vice Chairman of the Board of Enterprise GP in January 2016 and has served as a member of its Capital Projects Committee since November 2016. He previously served as a director of Enterprise GP from November 2010 through April 2014.
Mr. Bachmann was elected President and Chief Executive Officer (“CEO”) of EPCO in May 2010 and has served as a director since January 1999. He previously served as Secretary of EPCO from May 1999 to May 2010 and as a Group Vice Chairman of EPCO from December 2007 to May 2010. Mr. Bachmann served as an Executive Vice President of Holdings GP from April 2005 to November 2010 and as a director of Holdings GP from February 2006 to November 2010. He served as Chief Legal Officer and Secretary of Holdings GP from April 2005 to May 2010. Mr. Bachmann served as Executive Vice President and Chief Legal Officer of Enterprise Products GP, LLC (“EPGP,” the former general partner of Enterprise) from February 1999 until November 2010 and as Secretary of EPGP from November 1999 to November 2010. He previously served as a director of EPGP from June 2000 to January 2004 and from February 2006 to May 2010. Mr. Bachmann served as a director of DEP Holdings, LLC (“DEP GP”), the general partner of Duncan Energy Partners L.P., from October 2006 to May 2010 and as President and CEO of DEP GP from October 2006 to April 2010.
A. James Teague
Mr. Teague was elected Co-CEO of Enterprise GP in January 2020 and has been a director of Enterprise GP since November 2010. Mr. Teague previously served as CEO of Enterprise GP from January 2016 to January 2020, as the Chief Operating Officer (“COO”) of Enterprise GP from November 2010 to December 2015 and served as an Executive Vice President of Enterprise GP from November 2010 until February 2013. He has served as Co-Chairman of the Capital Projects Committee of Enterprise GP since November 2016.
Mr. Teague served as an Executive Vice President of EPGP from November 1999 to November 2010 and additionally as a director from July 2008 to November 2010 and as COO from September 2010 to November 2010. In addition, he served as Chief Commercial Officer of EPGP from July 2008 until October 2010. He served as Executive Vice President and Chief Commercial Officer of DEP GP from July 2008 until September 2011. He previously served as a director of DEP GP from July 2008 to May 2010 and as a director of Holdings GP from October 2009 to May 2010.
Mr. Teague joined Enterprise in connection with its purchase of certain midstream energy assets from affiliates of Shell Oil Company in 1999. From 1998 to 1999, Mr. Teague served as President of Tejas Natural Gas Liquids, LLC, then an affiliate of Shell. From 1997 to 1998, he was President of Marketing and Trading for MAPCO, Inc. Mr. Teague also serves on the board of directors of Solaris Oilfield Infrastructure, Inc.
W. Randall Fowler
Mr. Fowler was elected a director of Enterprise GP in September 2011 and has served as its Co-CEO since January 2020, having previously served as President from January 2016 to January 2020 and as Chief Administrative Officer from April 2015 to January 2016. Mr. Fowler has served as CFO of Enterprise GP since August 2018, having previously served as Executive Vice President and CFO of Enterprise GP from November 2010 to March 2015 and as Executive Vice President and CFO of EPGP from August 2007 to November 2010. He has served as Co-Chairman of the Capital Projects Committee of Enterprise GP since November 2016.
Mr. Fowler was elected Vice Chairman and CFO of EPCO in May 2010. He previously served as President and CEO of EPCO from December 2007 to May 2010 and as its CFO from April 2005 to December 2007.
Mr. Fowler also served as President and CEO of DEP GP from April 2010 until September 2011 and as Executive Vice President and CFO of DEP GP from August 2007 to April 2010. He served as a director of DEP GP from September 2006 until September 2011. Mr. Fowler served as Senior Vice President and Treasurer of EPGP from February 2005 to August 2007 and of DEP GP from October 2006 to August 2007. Mr. Fowler also previously served as a director of EPGP and of Holdings GP from February 2006 to May 2010. Mr. Fowler also served as Senior Vice President and CFO of Holdings GP from August 2005 to August 2007.
Mr. Fowler, a Certified Public Accountant (inactive), joined Enterprise as Director of Investor Relations in January 1999. He also serves as Chairman of the Board of the Energy Infrastructure Council (formerly the Master Limited Partnership Association). Mr. Fowler is on the Advisory Board of Alerian, an independent provider of market intelligence for master limited partnerships (“MLPs”), which includes its benchmark Alerian MLP Index, or AMZ. He also serves on the Advisory Board for the College of Business at Louisiana Tech University.
Carin M. Barth
Ms. Barth was elected a director of Enterprise GP in October 2015. She has served as a member of its Governance Committee since October 2015 and its Capital Projects Committee since November 2016.
Ms. Barth is co-founder and President of LB Capital Inc., a private equity investment firm established in 1988. She currently serves on the following boards of directors: Black Stone Minerals, L.P., where she is Chair of the Audit Committee, Group 1 Automotive, Inc., where she is Chair of the Audit Committee and BBVA USA Bancshares, Inc., a subsidiary of BBVA Group. Additionally, she is Chairman of The Welch Foundation and a board member of the Ronald McDonald House of Houston.
Ms. Barth previously served on the Housing Commission at the Bi-Partisan Policy Center in Washington, DC from 2011 to 2014, and was a Commissioner of the Texas Department of Public Safety from 2008 to 2014. She also served as a board member of the following: Bill Barrett Corporation from June 2012 to May 2016; Halcon Resources Corporation from April 2019 to October 2019; Western Refining Inc., where she was Chair of the Audit Committee from March 2006 to January 2016; Methodist Hospital Research Institute from 2007 to 2012; Encore Bancshares, Inc. from 2009 to 2012; Amegy Bancorporation, Inc. from 2006 to 2009; the Texas Public Finance Authority from 2006 to 2008; and the Texas Tech University System Board of Regents from 1999 to 2005. She was appointed by President George W. Bush to serve as CFO of the U.S. Department of Housing and Urban Development from 2004 to 2005.
Murray E. Brasseux
Mr. Brasseux was elected a director of Enterprise GP and a member of its Audit and Conflicts Committee in January 2019.
Mr. Brasseux is also a member of the board of directors of Adams Resources & Energy, Inc., a publicly-traded company primarily engaged in the business of crude oil marketing and tank truck transportation of liquid and dry bulk chemicals. Mr. Brasseux retired from Compass Bank in December 2014 after 20 years of service, having most recently served as Managing Director of Oil & Gas Finance. Mr. Brasseux also served as a consultant to Compass Bank from January 2015 to June 2015 and as a consultant to Loughlin Management Partners (a restructuring and advisory firm) from June 2015 to December 2017. Mr. Brasseux also serves on the board of the Rare Book School (an affiliate of the University of Virginia).
James T. Hackett
Mr. Hackett was elected a director of Enterprise GP in April 2014. He has served as a member of its Governance Committee since April 2014, including in the role of committee Chairman since November 2016. In addition, Mr. Hackett has served as a member of Enterprise GP’s Capital Projects Committee since November 2016.
Mr. Hackett is a senior advisor with Riverstone Holdings LLC (“Riverstone”), a private energy investment firm. Mr. Hackett serves as Executive Chairman of Alta Mesa Resources, Inc. (formerly named Silver Run Acquisition Corporation II) (“Alta Mesa”). In September 2019, Alta Mesa and certain of its affiliates filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). In January 2020, Kingfisher Midstream, LLC, an affiliate of Alta Mesa engaged in providing certain midstream energy services, including crude oil and gas gathering, processing and marketing to producers of natural gas, natural gas liquids, crude oil and condensate (where Mr. Hackett previously served as CEO and President), filed a voluntary petition for reorganization under Chapter 11.
Mr. Hackett served as Executive Chairman of the board of directors of Anadarko Petroleum Corporation (“Anadarko”), an independent oil and natural gas exploration and production company, from 2012 to 2013 after serving as its CEO from 2003 to 2012 and Chairman of the Board from 2006 to 2012. He also served as Anadarko’s President from 2003 to 2010. Mr. Hackett is a board member of Fluor Corporation and National Oilwell Varco, Inc. as well as Talen Energy (a portfolio company of Riverstone). He is a former director of Bunge Ltd. and the former Chairman of the Board of the Federal Reserve Bank of Dallas. He is a past Chairman of the National Petroleum Council, a member of the Society of Petroleum Engineers, a member of the Baylor College of Medicine Board of Trustees and a member of the Rice University Board of Trustees. Mr. Hackett also currently serves as a faculty member at The University of Texas (Austin).
William C. Montgomery
Mr. Montgomery was elected a director of Enterprise GP and appointed a member of its Audit and Conflicts Committee in October 2015. Mr. Montgomery has served as Chairman of the Audit and Conflicts Committee since January 2020.
Mr. Montgomery has served as a Partner of Quantum Energy Partners since 2011 and is also a member of its Executive and Investment Committees. He is responsible for originating and overseeing investments in the oil and gas upstream and oilfield service sectors. Mr. Montgomery also serves on the board of Apache Corporation.
Prior to joining Quantum Energy Partners, Mr. Montgomery was a Partner in the Investment Banking Division of Goldman, Sachs & Co. where he headed the firm’s Americas Natural Resources Group as well as its Houston office. His career as a banker spanned 22 years and was focused on large cap energy companies primarily in the upstream and oil service sectors. Mr. Montgomery has been an active civic leader, chairing the boards of The Houston Museum of Natural Science and The St. Francis Episcopal Day School and currently serves on the board of trustees of The Episcopal Health Foundation and the Board of Visitors of the MD Anderson Cancer Center.
John R. Rutherford
Mr. Rutherford was elected a director of Enterprise GP and appointed a member of its Audit and Conflicts Committee in January 2019.
Mr. Rutherford currently serves as a Senior Managing Director of NRI Energy Partners LLC, a firm that evaluates and invests in private and public energy companies and provides financial and strategic consulting services to energy companies and investment firms. Mr. Rutherford previously served as Executive Vice President (Strategic Planning, M&A and Business Development) of the general partner of Plains All American Pipeline, L.P. (“Plains”) and as a member of Plains’ executive committee from October 2010 through July 2015. Mr. Rutherford also served as a financial consultant to Plains from July 2015 through September 2018. His career includes over 20 years of investment banking experience as a mergers and acquisitions and strategic advisor to public and private energy companies, investment firms, management teams and boards of directors. Prior to joining Plains, Mr. Rutherford served as Managing Director of the North American Energy Practice of Lazard Freres & Company from 2007 until 2010. Prior to joining Lazard, he was a partner at Simmons & Company for over ten years.
Richard S. Snell
Mr. Snell was elected a director of Enterprise GP and appointed a member of its Audit and Conflicts Committee in September 2011. He has served as a member of its Capital Projects Committee since November 2016.
Mr. Snell is a Certified Public Accountant and is of counsel with the law firm of Ytterberg Deery Knull LLP, having been with the firm since January 2017. He previously served as an attorney with the law firms of Thompson & Knight LLP (from 2000 to early 2017) and Snell & Smith, P.C. (from its founding in 1993 until 2000).
Mr. Snell served as a director of DEP GP from January 2010 to September 2011 and as a director of the general partner of TEPPCO Partners, L.P. from January 2006 until October 2009. From June 2000 until February 2006, he served as a director of EPGP.
Harry P. Weitzel
Mr. Weitzel was elected a director of Enterprise GP and appointed a member of its Capital Projects Committee in November 2016 and has served as Executive Vice President, General Counsel and Secretary of Enterprise GP since January 2020. He previously served as Senior Vice President, General Counsel and Secretary of Enterprise GP from April 2016 to January 2020 and as Senior Vice President, Deputy General Counsel and Secretary of Enterprise GP from January 2015 to April 2016. Mr. Weitzel is responsible for all legal functions of Enterprise, including securities, litigation, employment, mergers and acquisitions, corporate governance and commercial transactions.
Mr. Weitzel has extensive experience as a commercial litigator, having practiced over 24 years in Texas and California. He has successfully represented individual, corporate and governmental clients as plaintiffs and defendants in a wide variety of business-related matters. Mr. Weitzel has tried cases in state and federal courts, as well as arbitrations under the American Arbitration Association, JAMS and the International Chamber of Commerce. He has handled appeals in state and federal courts. Prior to joining Enterprise, Mr. Weitzel was a commercial litigation partner with Pepper Hamilton LLP in Irvine, California from October 2009 to December 2014.
Graham W. Bacon
Mr. Bacon was elected Executive Vice President and Chief Operating Officer of Enterprise GP in September 2019. Mr. Bacon most recently served as Executive Vice President (Operations and Engineering) of Enterprise GP from October 2015 to August 2019 and continues to have responsibility for our operations and engineering teams in his new role. He previously served as Group Senior Vice President (Operations and Environmental, Health, Safety & Training) from February 2014 to October 2015; as Senior Vice President (Operations) from January 2012 to February 2014; as Vice President (Operations) from June 2006 to January 2012, and as Vice President (Engineering) from September 2005 to May 2006. He joined EPCO in 1991 and has held a variety of operations and engineering roles. Prior to joining EPCO, Mr. Bacon worked for Vista Chemical Company.
R. Daniel Boss
Mr. Boss, a Certified Public Accountant, was elected Executive Vice President - Accounting, Risk Control and Information Technology of Enterprise GP in January 2020 and previously served as Senior Vice President (Accounting and Risk Control) from August 2016 to January 2020. He is responsible for the overall leadership of our Accounting, Risk Control and Information Technology organizations. Mr. Boss served as a Senior Vice President of Enterprise GP from March 2015 to August 2016 with responsibility over our regulated business. He also served as Vice President (Risk Control) from April 2013 to March 2015 and as Senior Director (Risk Control) from January 2010 to March 2013. While serving in these positions, Mr. Boss was Chairman of the Risk Management Committee and had responsibilities for our marketing risk management policies, transaction controls and derivatives and hedging strategies compliance. Mr. Boss also served as Director (Volume Accounting) from November 2008 until January 2010 where he was responsible for gas marketing and commodity derivatives accounting, hedging and reporting. Prior to joining Enterprise, Mr. Boss held leadership positions with Merrill Lynch Commodities and Dynegy Inc.
Christian M. Nelly
Mr. Nelly was elected Executive Vice President - Finance and Treasurer of Enterprise GP in January 2020 and previously served as Senior Vice President (Finance) and Treasurer from March 2019 to January 2020. Mr. Nelly is responsible for managing Enterprise’s financing activities, business planning and analysis, credit, cash management, corporate risk and insurance, investor relations and public relations groups. Mr. Nelly served as Vice President and Treasurer from April 2015 to February 2019; Senior Director of Finance from April 2011 until March 2015; and Director of Finance from January 2008 to March 2011. Prior to joining Enterprise, Mr. Nelly spent 10 years with various corporate and investment banks where he executed transactions and maintained relationships with midstream and upstream energy companies and gained experience in strategic advisory, valuation, mergers and acquisitions, and capital raising.
Robert D. Sanders
Mr. Sanders was elected Executive Vice President, Asset Optimization in January 2020 and previously served as Senior Vice President (Asset Optimization) from January 2015 to January 2020. He served as Vice President (Asset Optimization) from June 2011 to January 2015. Mr. Sanders has served Enterprise in several capacities, including as Director of Asset Optimization from September 2006 to June 2011, Director of NGL Pipelines from December 2005 to September 2006, and Director of International Business from November 2004 to December 2005. Mr. Sanders has been in the midstream oil and gas business for over 35 years. Prior to joining Enterprise in 1979, he worked for the Texas Railroad Commission as an investigative auditor from 1976 to 1979.
Brent B. Secrest
Mr. Secrest was elected Executive Vice President and Chief Commercial Officer of Enterprise GP in September 2019. Mr. Secrest most recently served as Senior Vice President (Commercial) of Enterprise GP from July 2018 to August 2019. He previously served as Senior Vice President (Liquid Hydrocarbons Marketing) of Enterprise GP from May 2016 to June 2018, as Vice President (Crude Oil and Refined Products Marketing) from October 2015 to May 2016 and as Vice President (Crude Oil Pipelines and Terminals) from October 2012 to October 2015. He has also served us in various other leadership positions, including in the areas of NGL marketing and supply, commercial development, distribution, and business analysis. Mr. Secrest has over 20 years of experience in the energy industry and began his career at Basis Petroleum Inc. prior to joining EPCO in 1996.
Michael W. Hanson
Mr. Hanson was elected a Vice President of Enterprise GP in April 2011 and its Principal Accounting Officer in August 2016. His responsibilities include team leadership in financial and management reporting matters, including the preparation of Enterprise’s quarterly and annual reports. Mr. Hanson reports to Mr. Boss. Mr. Hanson has served Enterprise and its affiliates in various accounting roles since 1992, including as an Assistant Controller from April 2007 to July 2016 and Director of Financial Reporting from November 2004 to March 2007.
Director Experience, Qualifications, Attributes and Skills
The following is a brief discussion of the experience, qualifications, attributes and skills that led us to the conclusion that each of the following persons should serve as a director of Enterprise GP.
Five of our directors are current employees of EPCO and officers of Enterprise GP or its affiliates. Each of these directors has significant experience in our industry as executive officers as well as other qualifications, attributes and skills. These include:
• for Ms. Duncan Williams, legal and community involvement with numerous charitable organizations, and active involvement in EPCO’s businesses, including ownership in and management of our businesses;
• for Mr. Teague, over 40 years of commercial management of midstream assets and marketing and trading activities, both for third parties and for us;
• for Mr. Fowler, over 20 years of experience with our midstream assets, including finance, accounting and investor relations and, for over the last ten years, as a member of our executive management team;
• for Mr. Bachmann, over 30 years of experience with our midstream assets, including legal, regulatory, contracts and mergers and acquisitions and, for approximately 20 years, as a member of either EPCO’s or our executive management teams; and
• for Mr. Weitzel, over 25 years of experience in Texas and California as a commercial litigator, having successfully represented individual, corporate and governmental clients as plaintiffs and defendants in a wide variety of business-related matters.
Our six outside voting directors also have significant experience in a variety of capacities, as well as other qualifications, attributes and skills. These include:
• for Ms. Barth, executive management experience in various financial and governance roles;
• for Mr. Brasseux, executive management experience in banking and finance as well as governance roles;
• for Mr. Hackett, executive management of a major oil and gas exploration and production company;
• for Mr. Montgomery, executive management of both an investment banking firm and a private equity investment firm serving the global energy industry;
• for Mr. Rutherford, executive management experience in the midstream energy industry (including in the areas of strategic planning, mergers and acquisitions, investment banking and finance); and
• for Mr. Snell, professional experience involving complex legal and accounting matters.
As advisory directors, Dr. Cunningham has a long history with Enterprise and its operations, Mr. Casey has executive management experience in NGL and petrochemicals trading and related storage businesses, and Mr. Smith has experience in banking and investment matters. As an honorary director, Mr. Andras has a long history with Enterprise and its operations, including being a former CEO.
Partnership Governance
We are committed to sound principles of governance. Such principles are critical for us to achieve our performance goals and maintain the trust and confidence of investors, employees, suppliers, business partners and other stakeholders.
A key element of strong governance is having independent members of the Board. Pursuant to the NYSE listing standards, a director will be considered independent if the Board determines that he or she does not have a material relationship with Enterprise GP or us (either directly or as a partner, unitholder or officer of an organization that has a material relationship with Enterprise GP or us). Based on the foregoing, the Board has affirmatively determined that Ms. Barth and Messrs. Brasseux, Hackett, Montgomery, Rutherford and Snell are independent directors under the NYSE rules.
Because we are a limited partnership and meet the definition of a “controlled company” under the listing standards of the NYSE, we are not required to comply with certain NYSE rules. In particular, we are not required to comply with Section 303A.01 of the NYSE Listed Company Manual, which would require that the Board of Enterprise GP be comprised of a majority of independent directors. Currently, six of the eleven Board members of Enterprise GP are independent under NYSE rules; however, this composition may not always be in effect. Also, we have elected to not comply with Sections 303A.04 and 303A.05 of the NYSE Listed Company Manual, which would require that the Board of Enterprise GP maintain a Nominating Committee and a Compensation Committee, each consisting entirely of independent directors.
Code of Conduct and Ethics and Corporate Governance Guidelines
Enterprise GP has adopted a “Code of Conduct” that applies to its directors, officers and employees. This code sets forth our requirements for compliance with legal and ethical standards in the conduct of our business, including general business principles, legal and ethical obligations, compliance policies for specific subjects, obtaining guidance on complying with the code, the reporting of compliance issues, and discipline for violations of the code. The Code of Conduct also establishes policies applicable to our Co-CEO, Co-CEO/CFO, and senior financial and other managers to prevent wrongdoing and to promote honest and ethical conduct, including ethical handling of actual and apparent conflicts of interest, compliance with applicable laws, rules and regulations, full, fair, accurate, timely and understandable disclosure in public communications, and prompt internal reporting of violations of the code (and thus accountability for adherence to the code). Employees are required to certify their understanding and compliance with the Code of Conduct on an annual basis. Training on the Code of Conduct is also provided to employees, where applicable.
Governance guidelines, together with applicable committee charters, provide the framework for effective governance of our partnership. The Board has adopted the Governance Guidelines of Enterprise Products Partners (“Governance Guidelines”), which address several matters, including qualifications for directors, responsibilities of directors, retirement of directors, the composition and responsibilities of Board committees, the conduct and frequency of Board and committee meetings, management succession plans, director access to management and outside advisors, director compensation, director and executive officer equity ownership, director orientation and continuing education, and annual self-evaluation of the Board. The Board recognizes that effective governance is an on-going process, and thus, it will review the Governance Guidelines annually or more often as deemed necessary.
Audit and Conflicts Committee
The purpose of the Board’s Audit and Conflicts Committee is to address audit and conflicts-related matters. In accordance with NYSE rules and the Securities Exchange Act of 1934, the Board has named four of its members to serve on the Audit and Conflicts Committee. Members of the Audit and Conflicts Committee must have a basic understanding of finance and accounting matters and be able to read and understand financial statements, and at least one member of the Audit and Conflicts Committee shall have accounting or related financial management expertise. The current members of the Audit and Conflicts Committee are Messrs. Brasseux, Montgomery, Rutherford and Snell, all of whom are independent directors, free from any relationship with us or any of our subsidiaries that would interfere with the exercise of independent judgment. The Board has affirmatively determined that Mr. Montgomery satisfies the definition of “Audit Committee Financial Expert” as that term is defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC.
The primary responsibilities of the Audit and Conflicts Committee include (i) reviewing potential conflicts of interest, including related party transactions, (ii) monitoring the integrity of our financial reporting process and related systems of internal control, (iii) ensuring our legal and regulatory compliance and that of Enterprise GP, (iv) overseeing the independence and performance of our independent public accountant, (v) approving all services performed by our independent public accountant, (vi) providing for an avenue of communication among the independent public accountant, management, internal audit function and the Board, (vii) encouraging adherence to and continuous improvement of our policies, procedures and practices at all levels and (viii) reviewing areas of potential significant financial risk to our businesses.
If the Board believes that a particular matter presents a conflict of interest and proposes a resolution, the Audit and Conflicts Committee has the authority to review such matter to determine if the proposed resolution is fair and reasonable to us. Any matters approved by the Audit and Conflicts Committee are conclusively deemed to be fair and reasonable to us, approved by all of our partners and not a breach by Enterprise GP or the Board of any duties they may owe us or our unitholders.
Pursuant to its formal written charter, the Audit and Conflicts Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities, and it has direct access to our independent public accountants as well as any EPCO personnel whom it deems necessary in fulfilling its responsibilities. The Audit and Conflicts Committee has the ability to retain, at our expense, special legal, accounting or other consultants or experts it deems necessary in the performance of its duties.
Governance Committee
The primary purpose of the Governance Committee is to develop and recommend to the Board a set of governance guidelines applicable to our partnership, to review such guidelines from time to time and to oversee governance matters related to our business, including Board and Committee composition, qualifications of Board candidates, director independence, succession planning and related matters. The Governance Committee also assists in Board oversight of management’s establishment and administration of our environmental, safety and transportation compliance policies, procedures, programs and initiatives, and related matters. In accordance with its charter, the Governance Committee shall be composed of not less than three members, at least a majority of whom shall be independent directors. Currently, the Governance Committee is comprised of Ms. Duncan Williams and two independent directors (Ms. Barth and Mr. Hackett).
Like the Audit and Conflicts Committee, the Governance Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities, and it has direct access to our independent public accountants as well as any EPCO personnel whom it deems necessary in fulfilling its responsibilities. In addition, the Governance Committee has the ability to retain, at our expense, special legal, accounting or other consultants or experts it deems necessary in the performance of its duties.
A subcommittee of the Governance Committee, the Incentive Plan Administration Subcommittee, is involved in decision-making regarding employee compensation matters, including grants of equity-based awards. In accordance with the Governance Committee charter, this subcommittee shall be composed of two or more non-employee directors (currently, Ms. Barth and Mr. Hackett) and shall (i) review and approve all aspects of compensation of our Co-CEO and Co-CEO/CFO, (ii) administer the long-term incentive plans of the partnership and its affiliates and (iii) review and approve all equity grants made to employees, consultants and/or directors as required by such long-term incentive plans. For more information regarding this subcommittee’s role in executive compensation matters, see “Overview of Decision-Making Process regarding Compensation of Named Executive Officers” under Part III, Item 11
ITEM 11. EXECUTIVE COMPENSATION.
Executive Officer Compensation
We do not directly employ any of the persons responsible for managing our business. Instead, we are managed by Enterprise GP, the executive officers of which are employees of EPCO. Our management, administrative and operating functions are primarily performed by employees of EPCO in accordance with the ASA. Pursuant to the ASA, we reimburse EPCO for its compensation costs related to the employment of personnel working on our behalf. For information regarding the ASA, see Note 15 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Summary Compensation Table
The following table presents total compensation amounts paid, accrued or otherwise expensed by us with respect to our (i) co-principal executive officers, (ii) principal financial officer, (iii) three highest paid officers of our general partner, other than our principal executive and financial officers, who were serving in such capacity at December 31, 2019 and (iv) a former officer of our general partner who would have been among the three highest paid officers, other than our principal executive and financial officers, except that he had retired prior to December 31, 2019. Collectively, these six individuals were our “named executive officers” for 2019. To the extent such individuals were named executive officers in the prior two years, their total compensation for those years is presented as well.
(1)
Amounts represent our estimated share of the aggregate grant date fair value of equity-based awards granted during each year presented.
(2)
Amounts include (i) contributions in connection with funded, qualified, defined contribution retirement plans, (ii) quarterly distributions paid on equity-based awards, (iii) the imputed value of life insurance premiums paid on behalf of the officer, (iv) employee retention payments and (v) other amounts.
(3)
Mr. Ordemann retired effective August 16, 2019.
Bonus amounts shown in the preceding table represent discretionary annual awards earned by each named executive officer with respect to the year presented. The bonus amounts for the year ended December 31, 2019 were paid in cash in February 2020. For the year ended December 31, 2018, the dollar value of each officer’s bonus (less applicable deductions and taxes) was remitted half in cash and half through the issuance of an equivalent value of newly issued Enterprise common units, with both amounts provided to the employee in February 2019. For the year ended December 31, 2017, the dollar value of each officer’s bonus (less applicable deductions and taxes) was remitted through the issuance of an equivalent value of newly issued Enterprise common units in February 2018.
The following table presents the components of “All Other Compensation” for each named executive officer for the year ended December 31, 2019:
(1)
Reflects aggregate cash payments made to the named executive officer in connection with (i) distribution equivalent rights
(“DERs”) issued in tandem with phantom unit awards and (ii) distributions paid in connection with profits interest awards. With respect to DER amounts allocated to us, the following cash payments were made to the named executive officers during the year ended December 31, 2019: Mr. Teague, $748,254; Mr. Fowler, $460,374; Mr. Bacon, $305,153; Mr. Secrest, $156,656; Mr. Ordemann, $196,370 and Mr. Weitzel, $148,651.
(2)
Upon his retirement, Mr. Ordemann was granted a travel voucher in the amount of $100,000 and additional compensation of $65,000 as a gross-up for the related taxes. These amounts are included in the “Other” category for Mr. Ordemann.
Compensation Discussion and Analysis
Elements of Compensation
With respect to our named executive officers, compensation paid or awarded by us reflects only that portion of compensation paid by EPCO and allocated to us pursuant to the ASA, including an allocation of a portion of the cost of long-term incentive plans of EPCO. The elements of EPCO’s compensation program, along with EPCO’s other incentives (e.g., benefits, work environment and career development), are intended to provide a total rewards package to employees. The objective of EPCO’s compensation program is to provide competitive compensation opportunities that will align and drive employee performance toward the creation of sustained long-term unitholder value. We believe that our compensation program allows us to attract, motivate and retain high quality talent with the skills and competencies we require. Our compensation packages are designed to reward contributions by employees in support of the business strategies of EPCO and its affiliates at both our partnership and individual levels and to avoid risks that are likely to conflict with our risk management policies.
For the three years ended December 31, 2019, the primary elements of compensation for the named executive officers consisted of annual cash base salary, a discretionary annual bonus, equity awards under long-term incentive arrangements and other compensation, including very limited perquisites. With respect to the annual periods presented in the Summary Compensation Table, EPCO’s compensation package for the named executive officers did not include any compensation elements based on targeted performance-based criteria. We believe that the absence of targeted performance-based criteria has the effect of discouraging excessive risk taking by our named executive officers.
Changes in the base salaries of our named executive officers during the three years ending December 31, 2019 were largely budget-driven and made consistent relative to increases in the base salaries of our other executive officers.
The bonus awards are discretionary and, in combination with annual base salaries, are intended to yield competitive total compensation levels for the named executive officers and drive performance in support of our business strategies, as well as the performance of other EPCO affiliates for which the named executive officer may perform services. The annual bonus amount presented for each named executive officer reflects a general consideration of our overall financial and certain operating results for those periods. This consideration takes into account a number of our financial measures including cash flow from operating activities per unit, distributable cash flow per unit, gross operating margin, return on invested capital, and our 3-year and 5-year equity total return performance relative to peers. Operating results considered include certain safety performance and direct carbon dioxide equivalent (“CO2-e”) emission measures. No weight or formula is given to any specific financial or operating performance measure. In addition, a subjective judgment of each named executive officer’s performance for those periods is taken into account and reflected in the annual bonus amounts. The bonus amounts are also based on the level and position of such named executive officers and the relative compensation paid to our other executive officers.
Each of our named executive officers has been granted equity-based compensation. The amount of equity-based compensation granted to our named executive officers reflects a general consideration of our overall financial and certain operating results described in the preceding paragraph, along with a subjective judgment of each named executive officer’s contribution in support of that performance, without any weight or formula given to any specific financial or operating performance measure. The values of equity-based awards granted to the named executive officers are also based on the level and position of such named executive officers and the relative compensation paid to our other executive officers. Each of the named executive officers received grants of phantom unit awards for the periods presented in the summary compensation table.
In addition, each of our named executive officers was granted a “profits interest” in one or more of the Employee Partnerships, which serve as long-term incentive arrangements for key employees of EPCO. The names of the Employee Partnerships in which one or more of our named executive officers participate are: EPD PubCo Unit I L.P. (“PubCo I”); EPD PubCo Unit II L.P. (“PubCo II”); EPD PrivCo Unit I L.P. (“PrivCo I”); and EPD 2018 Unit IV L.P. (“EPD IV”). If certain conditions are met, the employee participants in each Employee Partnership will be entitled to (i) a residual profits interest in the assets of the Employee Partnership at liquidation, along with (ii) quarterly cash distributions. For a brief description of the profits interest awards, see Note 13 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
EPCO expects to continue its policy of paying for limited perquisites attributable to our named executive officers. EPCO also makes matching contributions under its defined contribution plans for the benefit of our named executive officers in the same manner as it does for other EPCO employees.
EPCO does not offer our named executive officers a defined benefit pension plan. Also, none of our named executive officers had nonqualified deferred compensation during the three years ended December 31, 2019.
In the second quarter of 2019, each of Messrs. Teague, Fowler, Bacon and Secrest entered into a separate retention bonus agreement with EPCO. Pursuant to the retention bonus agreements, each such person will be entitled to a cash retention payment of $5 million (in the case of each of Messrs. Teague and Fowler) or $1 million (in the case of each of Messrs. Bacon and Secrest), less all applicable withholding taxes and other required deductions on such payment (in each case, the applicable “Retention Payment”), in a lump sum within seven business days following his completion of continuous active fulltime employment with EPCO from April 15, 2019 through (i) May 31, 2022 (in the case of Mr. Teague) or (ii) May 31, 2023 (in the case of each of Messrs. Fowler, Bacon and Secrest) (in each case, the applicable “Retention Period”), and provided that such person continues to perform his duties during the applicable Retention Period in a highly effective manner, as determined by the key executives of EPCO (the “Performance Requirement”).
Notwithstanding the foregoing, in the event of an involuntary termination of any such person’s employment prior to the end of his applicable Retention Period for specified reasons, including death, disability or termination of his employment by EPCO other than for “cause” (as defined in each retention bonus agreement), such person will receive (or in the event of his death, his designated beneficiary will receive), a cash payment equal to a pro-rata amount of his applicable Retention Payment, determined based on the number of days he is employed during the applicable Retention Period over the total number of days in such Retention Period (subject to meeting the Performance Requirement through his termination date). Any Retention Payment is in addition to any discretionary incentive compensation that EPCO or any of its affiliates may grant or have in place from time to time.
Overview of Decision-Making Process Regarding Compensation of Named Executive Officers
Prior to May 8, 2019, the Audit and Conflicts Committee of our general partner had review and approval authority with respect to the compensation of our Co-CEO and our Co-CEO/CFO. In connection therewith, the Audit and Conflicts Committee had considered input and recommendations from the EPCO Trustees and the EPCO Human Resources department. Effective on May 8, 2019, a subcommittee of the Governance Committee of our general partner, the Incentive Plan Administration Subcommittee (the “IPA Subcommittee”), has, and, for the foreseeable future, will have, final and ultimate decision-making authority with respect to all aspects of compensation of our Co-CEO and Co-CEO/CFO. The current members of the IPA Subcommittee are Mr. Hackett and Ms. Barth, both of whom are “Non-Employee Directors” (as defined in SEC Rule 16b-3). It is anticipated that the IPA Subcommittee will, at its sole option and in its sole discretion, consider input and recommendations from the EPCO Trustees and EPCO’s Human Resources department in making its compensation decisions for our Co-CEO and our Co-CEO/CFO.
The compensation of our other named executive officers (other than equity-based awards granted under EPCO’s long-term incentive plans) is determined by our Co-CEO and Co-CEO/CFO. Neither EPCO nor our general partner has a separate compensation committee; however grants of equity-based compensation under EPCO’s long-term incentive plans (e.g., phantom unit awards) to our named executive officers, including our Co-CEO and our Co-CEO/CFO have been approved by the Audit and Conflicts Committee for grants prior to May 8, 2019, and have been, and for the foreseeable future, will be, approved by the IPA Subcommittee for grants on and after May 8, 2019.
The issuance of profits interest awards was approved by EPCO’s Board of Directors.
The overall compensation of each named executive officer is not based on any formula or specific performance criteria; rather, the Audit and Conflicts Committee (prior to May 8, 2019), the IPA Subcommittee (on and after May 8, 2019), our Co-CEO, our Co-CEO/CFO, and EPCO (as applicable) determine an appropriate level and mix of compensation for each officer on a case-by-case basis. Further, there is no established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. However, some considerations that may be taken into account in making the case-by-case compensation determinations include the total value of all elements of compensation, the appropriate balance of internal pay equity among our executive officers, individual performance and potential, levels of responsibility and value to the organization. All compensation determinations are subjective and discretionary.
In making compensation decisions, EPCO considers market data for determining relevant compensation levels and compensation program elements through the review of and, in certain cases, participation in, relevant compensation surveys and reports. These surveys and reports are conducted and prepared by third party compensation consultants. In 2019, EPCO engaged Meridian Compensation Partners, LLC (the “Consultant”) to complete a detailed review of executive compensation relative to our industry. In connection with this review, the Consultant provided comparative market data on compensation practices and programs for executive level positions based on an analysis of industry competitors. The market data for industry competitors included information from CenterPoint Energy, Inc.; Dominion Energy, Inc.; Enbridge Inc.; ETP; Kinder Morgan Inc.; Magellan Midstream Partners, L.P.; ONEOK, Inc.; Plains All American Pipeline, L.P.; Targa Resources Corporation; The Williams Companies, Inc.; and TransCanada Corporation.
Neither we, nor EPCO, which engages the Consultant, are aware of the specific data of the companies included in the Consultant’s proprietary database for specific positions. EPCO uses the information provided in the Consultant’s analysis to gauge whether compensation levels reported by the Consultant and the general ranges of compensation for EPCO employees in similar positions are comparable, but that comparison is only a factor taken into consideration and may or may not impact compensation of our named executive officers, for which our Audit and Conflicts Committee prior to May 8, 2019 or IPA Subcommittee on and after May 8, 2019 (in the case of our Co-CEO/CFO’s and our Co-CEO’s compensation) or our Co-CEO/CFO and our Co-CEO (in the case of compensation to be paid to our other named executive officers) have the ultimate decision-making authority. EPCO does not otherwise engage in benchmarking for the named executive officers’ positions.
Allocation of Compensation Between Us and EPCO and its Other Affiliates
Under the ASA, the compensation costs of our named executive officers, including those costs related to equity-based awards, are allocated between us and other affiliates of EPCO based on the estimated amount of time that each officer spends on our consolidated businesses in any fiscal year. These percentages are reassessed at least quarterly.
With the exception of Messrs. Fowler and Weitzel, each of our named executive officers devoted all of their time to our consolidated businesses during the years ended December 31, 2019, 2018 and 2017. Mr. Fowler devoted 75% of his time to our consolidated businesses during the same three year period, with the remainder of his time allocated to EPCO and its privately held affiliates. On average, Mr. Weitzel devoted 87.5% of his time to our consolidated businesses during 2019, with the remainder of his time allocated to EPCO and its privately held affiliates.
Grants of Equity-Based Awards in Fiscal Year 2019
The following table presents information concerning each grant of an equity-based award in 2019 to a named executive officer for which we will be allocated our pro rata share of the related cost under the ASA.
(1)
Amounts presented reflect that portion of grant date fair value allocable to us based on the estimated percentage of time each named executive officer spent on our consolidated business activities during 2019. Based on current allocations, we estimate that the compensation expense we record for each named executive officer with respect to these awards will equal these amounts over time.
(2)
The grant date fair value presented for the phantom unit awards is based, in part, on the closing price of our common units on February 11, 2019 of $27.75 per unit. For information about assumptions utilized in the valuation of these awards, see Note 13 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report, the applicable disclosures of which are incorporated by reference into this Item 11.
The 2008 Enterprise Products Long-Term Incentive Plan (Third Amendment and Restatement) (the “2008 Plan”) provides for incentive awards to EPCO’s key employees and non-employee directors and consultants who perform management, administrative or operational functions for us or our affiliates. Awards granted under the 2008 Plan may be in the form of phantom units, DERs, restricted common units, unit options, unit appreciation rights and other unit-based awards or substitute awards. For information regarding the number of our common units authorized for issuance under the 2008 Plan, see “Securities Authorized for Issuance Under Equity Compensation Plans” under Part III, Item 13 of this annual report.
Phantom unit awards
Phantom unit awards allow recipients to acquire EPD common units (at no cost to the recipient apart from fulfilling service and other conditions) once a defined vesting period expires, subject to customary forfeiture provisions. Phantom unit awards generally vest at a rate of 25% per year beginning one year after the grant date and are non-vested until the required service periods expire. At December 31, 2019, substantially all of our phantom unit awards are expected to result in the issuance of common units upon vesting; therefore, the applicable awards are accounted for as equity-classified awards. Each phantom unit award includes a tandem DER, which entitles the holder to nonforfeitable cash payments equal to the product of the number of phantom unit awards outstanding for the participant and the cash distribution per common unit paid to our common unitholders.
Vesting of Equity-Based Awards in 2019
The following table presents the vesting of phantom unit awards to our named executive officers during the year ended December 31, 2019. These amounts are presented on a gross basis and do not reflect any allocation of compensation to affiliates under the ASA.
(1)
Represents the gross number of common units acquired upon vesting of phantom unit awards, before adjustments for associated tax withholdings.
(2)
Amount determined by multiplying the gross number of vested phantom unit awards by the closing price of our common units on the date of vesting.
(3)
Of the 203,125 phantom unit awards presented for Mr. Ordemann, 146,250 of these awards vested upon his retirement on August 16, 2019.
Equity-Based Awards Outstanding at December 31, 2019
The following information summarizes each named executive officer’s long-term incentive awards outstanding at December 31, 2019. These amounts are presented on a gross basis and do not reflect any allocation of compensation to affiliates under the ASA.
(1)
Represents the total number of phantom unit awards outstanding for each named executive officer.
(2)
With respect to amounts presented for phantom unit awards, the market values were derived by multiplying the total number of each award type outstanding for the named executive officer by the closing price of our common units on December 31, 2019 (the last trading day of 2019) of $28.16 per unit.
(3)
With respect to amounts presented for the profits interest awards, amount represents the estimated liquidation value to be received by the named executive officer based on the closing price of our common units on December 31, 2019 and the terms of liquidation outlined in the applicable Employee Partnership agreement.
(4)
Of the 1,185,462 phantom unit awards presented in the table, the vesting schedule is as follows: 442,437 in 2020; 353,450 in 2021; 249,325 in 2022 and 140,250 in 2023.
(5)
With respect to PubCo I, the profits interest share held by Messrs. Teague and Bacon at December 31, 2019 was approximately 5.47% and 6.25%, respectively.
(6)
Mr. Fowler’s share of the profits interest in PrivCo I was approximately 15.46% at December 31, 2019.
(7)
With respect to EPD IV, the profits interest share held by Messrs. Bacon, Secrest and Weitzel at December 31, 2019 was approximately 5.00%, 4.00% and 4.00%, respectively.
(8)
With respect to PubCo II, the profits interest share held by Messrs. Secrest and Weitzel at December 31, 2019 was approximately 3.25% and 2.60%, respectively.
Phantom unit awards
For a description of phantom unit awards, see “Grants of Equity-Based Awards in Fiscal Year 2019” within this Item 11.
Profits interest awards
For a description of the profits interest awards, see Note 13 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report.
Potential Payments Upon Termination or Change-in-Control
None of the named executive officers have any employment agreements that call for the payment of termination or severance benefits or provide for any payments in the event of a change in control of Enterprise GP.
EPCO has entered into retention bonus agreements with each of Messrs. Teague, Fowler, Bacon and Secrest, which are described under “Compensation Discussion and Analysis” within this Part III, Item 11. These agreements provide that, in the event of an involuntary termination of any such person’s employment prior to the end of his applicable Retention Period for specified reasons, including death, disability or termination of his employment by EPCO other than for “cause” (as defined in each retention bonus agreement), such person will receive (or in the event of his death, his designated beneficiary will receive), a cash payment equal to a pro-rata amount of his applicable Retention Payment (set forth previously), determined based on the number of days he is employed during the applicable Retention Period over the total number of days in such Retention Period (subject to meeting the Performance Requirement through his termination date).
The vesting of profits interest awards under the Employee Partnerships is subject to acceleration upon a change of control (as defined below). In addition, vesting of equity-based awards under EPCO’s long-term incentive plans is subject to acceleration upon a qualifying termination, including termination after a change of control of Enterprise GP. Qualifying termination under such awards generally means a termination as an employee of EPCO or an affiliated group member (i) upon death, (ii) a qualifying long-term disability, (iii) a qualifying retirement, or (iv) within one year after a change of control (as defined), other than a termination for cause (as defined) or termination by such person that is not a qualifying termination for good reason (as defined).
A “change of control” under these awards is generally defined to mean that the descendants, heirs and/or legatees of Dan L Duncan, and/or trusts (including, without limitation, one or more voting trusts) established for their benefit, collectively, cease, directly or indirectly, to control our general partner. Mr. Duncan passed away in March 2010.
Compensation Committee Report
We do not have a separate compensation committee. In addition, we do not directly employ or compensate our named executive officers. Rather, under the ASA, we reimburse EPCO for the compensation of our executive officers. As described in Compensation Discussion and Analysis, decisions regarding the compensation of our named executive officers with respect to 2019 were made, as applicable, by EPCO and Enterprise GP’s Co-CEO, Co-CEO/CFO and the Audit and Conflicts Committee (prior to May 8, 2019) or the IPA Subcommittee (on and after May 8, 2019).
In light of the foregoing, the Board has reviewed and discussed with management the Compensation Discussion and Analysis set forth above and determined that it be included in this annual report for the year ended December 31, 2019.
Submitted by: Randa Duncan Williams
Richard H. Bachmann
A. James Teague
W. Randall Fowler
Carin M. Barth
Murray E. Brasseux
James T. Hackett
William C. Montgomery
John R. Rutherford
Richard S. Snell
Harry P. Weitzel
Notwithstanding anything to the contrary set forth in any previous filings under the Securities Act, as amended, or the Securities Exchange Act, as amended, that incorporate future filings, including this annual report, in whole or in part, the foregoing Compensation Committee Report shall not be incorporated by reference into any such filings.
Compensation Committee Interlocks and Insider Participation
None of the directors or executive officers of Enterprise GP served as members of the compensation committee of another entity that has or had an executive officer who served as a member of our Board during the year ended December 31, 2019. As previously noted, we do not have a separate compensation committee. As described in Compensation Discussion and Analysis, decisions regarding the compensation of our named executive officers with respect to 2019 were made, as applicable, by EPCO and Enterprise GP’s Co-CEO, Co-CEO/CFO and Audit and Conflicts Committee (prior to May 8,2019) or the IPA Subcommittee (on and after May 8, 2019).
Pay Ratio Disclosure
The following disclosure presents the ratio of (i) the median of the total annual compensation of all employees of EPCO to (ii) the total annual compensation of Mr. Teague, who served as the CEO of Enterprise GP and as our principal executive officer during the year ended December 31, 2019. The pay ratio for the year ended December 31, 2019 is as follows:
The median total annual compensation was determined as follows:
• First, a list was prepared of all active EPCO employees, excluding Mr. Teague and those on long-term disability, that devote all or a substantial portion of their time to our consolidated businesses and affairs. This list was based on employee information as of December 31, 2019. There are approximately 7,300 EPCO personnel who spend all or a substantial portion of their time engaged in our business.
• Second, basic wage data for each employee was extracted from Form W-2 information provided to the Internal Revenue Service for calendar year 2019. This information was then sorted and the employee who earned the median compensation (the “median employee”) was selected from the list.
• Third, once the median employee was selected, his or her respective total annual compensation for 2019 was determined using the same method used to determine Mr. Teague’s total annual compensation for 2019 as presented in the Summary Compensation Table within this Part III, Item 11.
Director Compensation
For the year ended December 31, 2019, the independent voting directors of Enterprise GP were compensated as follows:
• each received an $85,000 annual cash retainer and an annual grant of our common units having a fair market value, based on the closing price of such security on the trading day immediately preceding the date of grant, of $85,000;
• if the individual served as a chairman of the Audit and Conflicts Committee, then such individual received an additional $20,000 annual cash retainer;
• if the individual served as a chairman of the Governance Committee, then such individual received an additional $15,000 annual cash retainer; and,
• for those independent voting directors that serve on the Capital Projects Committee, a $2,500 per meeting cash fee for attendance at meetings of this committee.
The compensation program for independent voting directors for 2020 is expected to be the same as 2019.
We bear all costs attributable to the compensation of independent voting directors of Enterprise GP. The following table summarizes compensation paid to these directors in 2019:
(1)
Mr. Hackett serves as chairman of the Governance Committee.
(2)
Mr. McMahen served as a director and as chairman of the Audit and Conflicts Committee in 2019. He was not re-elected to the Board for 2020.
Messrs. Casey, Cunningham and Smith each received $150,000 in cash for their services as advisory directors in 2019. As an honorary director, O.S. Andras received $20,000 in cash in 2019.
Neither we nor Enterprise GP provide additional compensation to employees of EPCO for their services as voting directors of Enterprise GP. The employees of EPCO who served as voting directors of Enterprise GP in 2019 were Ms. Duncan Williams and Messrs. Bachmann, Teague, Fowler and Weitzel.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED UNITHOLDER MATTERS.
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information as of February 19, 2020, regarding each person known by Enterprise GP to beneficially own more than 5% of our limited partner units:
(1)
For a detailed listing of the ownership amounts that comprise Ms. Duncan Williams’ total beneficial ownership of our common units, see the table presented in the following section, “Security Ownership of Management,” within this Part III, Item 12.
Ms. Duncan Williams is a DD LLC Trustee and an EPCO Trustee. Ms. Duncan Williams is also currently Chairman and a director of EPCO and Chairman of the Board and a director of Enterprise GP. Ms. Duncan Williams disclaims beneficial ownership of the limited partner units beneficially owned by the EPCO Trustees, except to the extent of her voting and dispositive interests in such units.
Security Ownership of Management
The following tables set forth certain information regarding the beneficial ownership of our common units, as of February 19, 2020 by (i) our named executive officers for 2019; (ii) the current directors of Enterprise GP; and (iii) the current directors and executive officers (including named executive officers) of Enterprise GP as a group. All beneficial ownership information has been furnished by the respective directors and executive officers. Each person has sole voting and dispositive power over the securities shown unless indicated otherwise.
* Represents a beneficial ownership of less than 1% of class
(1)
Within 30 days after February 22, 2020, PubCo I (one of the Employee Partnerships) will be liquidated and expects to distribute to EPCO Holdings, Inc. (the Class A limited partner of PubCo I) a total number of common units having a fair market value equal to $63,746,647. Any remaining common units will be distributed in kind to the Class B limited partners of PubCo I (including the named executive officers specified in the table below), pro rata relative to their share in PubCo I.
(2)
The number of common units presented for Ms. Duncan Williams includes common units held by family trusts for which she serves as a director of an entity trustee but has disclaimed beneficial ownership (except to the extent of her pecuniary interest therein).
(3)
The number of common units presented for Ms. Duncan Williams includes 9,090 common units held by her spouse and 4,040 common units held jointly with her spouse.
EPCO and its privately held affiliates have pledged 108,222,618 of our common units that they own as security under their credit facilities. These credit facilities include customary provisions regarding potential events of default. As a result, a change in ownership of these units could result if an event of default ultimately occurred.
* Represents a beneficial ownership of less than 1% of class
(1)
The number of common units presented for Mr. Bachmann includes 9,588 common units held by his spouse.
(2)
These individuals are named executive officers for the year ended December 31, 2019.
(3)
The number of common units presented for Mr. Teague includes (i) 56,721 common units held by a trust and (ii) 37,175 common units held by his spouse. The number of common units presented for Mr. Teague (a Class B limited partner in PubCo I) does not include any common units that he may receive upon liquidation of PubCo I.
(4)
The number of common units presented for Mr. Fowler includes 605,927 common units held by a family limited partnership (for which he has disclaimed beneficial ownership except to the extent of his pecuniary interest).
(5)
The number of common units presented for Mr. Brasseux includes 2,882 common units held by his spouse.
(6)
The number of common units presented for Mr. Hackett includes (i) 9,661 common units held by family trusts and (ii) 33,000 common units held by a family limited partnership.
(7)
The number of common units presented for Mr. Snell includes 2,956 common units held by his spouse.
(8)
The number of common units presented for Mr. Bacon (a Class B limited partner in PubCo I) does not include any common units that he may receive upon liquidation of PubCo I.
(9)
The ownership information presented is based on Mr. Ordemann’s reported holdings of our common units immediately prior to his retirement. Mr. Ordemann retired effective August 16, 2019.
Equity Ownership Guidelines
In order to further align the interests and actions of our general partner’s directors and executive officers with our long-term interests and those of our general partner and other unitholders, the Board has adopted and approved certain equity ownership guidelines for our general partner’s directors and executive officers. Under these guidelines:
• each non-management director of our general partner is required to own Enterprise common units having an aggregate value (as defined in the guidelines) of three times the dollar amount of such non-management director’s aggregate annual cash retainer for service on the Board for the most recently completed calendar year; and
• each executive officer of our general partner is required to own Enterprise common units having an aggregate value (as defined in the guidelines) of three times the dollar amount of such executive officer’s aggregate annual base salary for the most recently completed calendar year.
Securities Authorized for Issuance Under Equity Compensation Plans
The 2008 Plan is EPCO’s only long-term incentive plan under which our common units have been authorized for issuance. The 2008 Plan provides for awards of our common units and other rights to our non-management directors and to consultants and employees of EPCO and its affiliates providing services to us. Awards under the 2008 Plan may be granted in the form of unit options, restricted common units, phantom units, UARs, DERs, unit awards and other unit-based awards or substitute awards.
The following table sets forth certain information regarding the 2008 Plan as of January 1, 2020.
(1)
At December 31, 2019, the total number of common units authorized for issuance under the 2008 Plan was 50,000,000 common units. This amount increased by 5,000,000 common units on January 1, 2020 and will increase by an additional 5,000,000 common units subsequently on each January 1 thereafter during the term of the 2008 Plan; provided, however, that in no event shall the maximum aggregate amount available for issuance under the 2008 Plan exceed 70,000,000 common units.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE.
Certain Relationships and Related Transactions
We believe that the terms and provisions of our related party agreements are fair to us; however, such agreements and transactions may not be as favorable to us as we could have obtained from unaffiliated third parties.
Additional information regarding our related party transactions is set forth in Note 15 of the Notes to Consolidated Financial Statements included under Part II, Item 8 of this annual report and is incorporated by reference into this Part III, Item 13.
Review and Approval of Transactions with Related Parties
We consider transactions between us and our subsidiaries and unconsolidated affiliates, on the one hand, and our executive officers and directors (or their immediate family members), Enterprise GP or its affiliates (including other companies owned or controlled by the DD LLC Trustees or the EPCO Trustees), on the other hand, to be related party transactions. As further described below, our partnership agreement sets forth general procedures by which related party transactions and conflicts of interest may be approved or resolved by Enterprise GP or its Audit and Conflicts Committee. In addition, the Audit and Conflicts Committee charter, Enterprise GP’s written internal review and approval policies and procedures (referred to as its “management authorization policy”) and the amended and restated ASA with EPCO address specific types of related party transactions, as further described below.
Our Audit and Conflicts Committee is comprised of four independent directors: Messrs. Brasseux, Montgomery, Rutherford and Snell. In accordance with its charter, the Audit and Conflicts Committee reviews and approves related party transactions:
• pursuant to our partnership agreement or the limited liability company agreement of Enterprise GP, as such agreements may be amended from time to time;
• in which an officer or director of Enterprise GP or any of our subsidiaries, or an immediate family member of such an officer or director, has a material financial interest or is otherwise a party;
• when requested to do so by management or the Board;
• with a value of $5 million or more (unless such transaction is equivalent to an arm’s length transaction with a third party); or
• that it may otherwise deem appropriate from time to time.
Enterprise GP’s management authorization policy generally requires Board approval for asset purchase or sales transactions and capital investments to the extent such transactions have a value in excess of $250 million. Any such transaction would typically also require Audit and Conflicts Committee review under its charter if such transaction is also a related party transaction.
As noted previously, all of our management, administrative and operating functions are performed by employees of EPCO (pursuant to an administrative services agreement, or ASA) or by other service providers. The ASA governs numerous day-to-day transactions between us, Enterprise GP and EPCO and its affiliates, including the provision by EPCO of administrative and other services to us and our reimbursement to EPCO of costs, without markup or discount, for those services. The ASA was reviewed, approved and recommended to the Board by our Audit and Conflicts Committee, and the Board also approved it upon receiving such recommendation.
Related party transactions that are outside the scope of the ASA and not reviewed by the Audit and Conflicts Committee are subject to Enterprise GP’s management authorization policy. This policy, which applies to related party transactions as well as transactions with third parties, specifies thresholds for our general partner’s officers and Board to authorize various categories of transactions, including purchases and sales of assets, commercial and financial transactions and legal agreements.
Partnership Agreement Standards for Audit and Conflicts Committee Review
Under our partnership agreement, whenever a potential conflict of interest exists or arises between Enterprise GP or any of its affiliates, on the one hand, and us, any of our subsidiaries or any partner, on the other hand, any resolution or course of action by Enterprise GP or its affiliates in respect of such conflict of interest is permitted and deemed approved by our limited partners, and will not constitute a breach of our partnership agreement or any agreement contemplated by such agreement, or of any duty stated or implied by law or equity, if the resolution or course of action is or, by operation of the partnership agreement is deemed to be, fair and reasonable to us; provided that, any conflict of interest and any resolution of such conflict of interest will be conclusively deemed fair and reasonable to us if such conflict of interest or resolution is (i) approved by a majority of the members of the Audit and Conflicts Committee (i.e., a “Special Approval” is granted) or (ii) on terms objectively demonstrable to be no less favorable to us than those generally being provided to or available from third parties.
The Audit and Conflicts Committee (in connection with its Special Approval process) may consider the following when resolving conflicts of interest:
• the relative interests of any party to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interest;
• the totality of the relationships between the parties involved (including other transactions that may be particularly favorable or advantageous to us);
• any customary or accepted industry practices and any customary or historical dealings with a particular party;
• any applicable generally accepted accounting or engineering practices or principles;
• the relative cost of capital of the parties involved and the consequent rates of return to the equity holders of such parties; and
• such additional factors as the Audit and Conflicts Committee determines in its sole discretion to be relevant, reasonable or appropriate under the circumstances.
The level of review and work performed by the Audit and Conflicts Committee with respect to a given transaction varies depending upon the nature of the transaction and the scope of the Audit and Conflicts Committee’s obligation. Examples of functions the Audit and Conflicts Committee may, as it deems appropriate, perform in the course of reviewing a transaction include, but are not limited to:
• assessing the business rationale for the transaction;
• reviewing the terms and conditions of the proposed transaction, including consideration and financing requirements, if any;
• assessing the effect of the transaction on our results of operations, financial condition, cash available for distribution, properties or prospects;
• conducting due diligence, including interviews and discussions with management and other representatives and reviewing transaction materials and findings of management and other representatives;
• considering the relative advantages and disadvantages of the transactions to the parties involved;
• engaging third party financial advisors to provide financial advice and assistance, including fairness opinions if requested;
• engaging legal advisors; and
• evaluating and negotiating the transaction and recommending for approval or approving the transaction, as the case may be.
Nothing contained in our partnership agreement requires the Audit and Conflicts Committee to consider the interests of any party other than us. In the absence of the Audit and Conflicts Committee or our general partner acting in bad faith, the resolution, action or terms so made, taken or provided (including granting Special Approval) by the Audit and Conflicts Committee or our general partner with respect to such matter are deemed conclusive and binding on all persons (including all of our limited partners) and do not constitute a breach of partnership agreement, or any other agreement contemplated thereby, or a breach of any standard of care or duty imposed in our partnership agreement or under the Delaware Revised Uniform Limited Partnership Act or any other law, rule or regulation. Our partnership agreement provides that it is presumed that the resolution, action or terms made, taken or provided by the Audit and Conflicts Committee or our general partner were not made, taken or provided in bad faith, and in any proceeding brought by any limited partner or by or on behalf of such limited partner or any other limited partner or us challenging such resolution, action or terms, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.
Director Independence
Each of the current members of the Audit and Conflicts Committee, namely Messrs. Brasseux, Montgomery, Rutherford and Snell, and two members of the Governance Committee, namely Ms. Barth and Mr. Hackett, have been determined to be independent under the applicable NYSE listing standards and rules of the SEC. For a discussion of independence standards applicable to our Board and factors considered by our Board in making its independence determinations, please refer to “Partnership Governance” included under Part III, Item 10 of this annual report.
Other Matters
An immediate family member of Mr. Teague, an immediate family member of Mr. Sanders and two immediate family members of William Ordemann (who served as an executive officer of Enterprise GP for a portion of 2019) are employees of EPCO that perform services on our behalf. None of these individuals serves as an executive officer of Enterprise GP, EPCO or any of their respective affiliates, and each such individual’s compensation and other terms of employment are determined on a basis consistent with EPCO’s human resources policies. For 2019, (i) the immediate family member of Mr. Teague earned total compensation from EPCO of $650 thousand, (ii) the immediate family member of Mr. Sanders earned total compensation from EPCO of $160 thousand and (iii) the two immediate family members of Mr. Ordemann earned total compensation from EPCO of $220 thousand and $200 thousand, respectively.
Mr. Brasseux owns a minority equity interest in Worldwide Power Products, LLC (“Worldwide”), a privately-owned company in the business of buying, selling, renting and servicing generators and buying and selling generator parts. Mr. Brasseux’s son-in-law is the Chief Executive Officer and majority equity owner of Worldwide. From time to time, we engage in business transactions with Worldwide. The aggregate dollar amount involved in these transactions was approximately $138,000 for 2019. The terms of these transactions are determined on an arms-length basis, and Mr. Brasseux (who does not serve as an employee or director of Worldwide) does not participate in the negotiation or approval of any such transactions.
In November 2019, we purchased pipeline right-of-way from a private family corporation, approximately 80% of which is owned by Mr. Snell and members of his immediate family and for which Mr. Snell regularly acts as legal counsel. The total purchase price paid to the family corporation for the right-of-way was approximately $0.3 million and was based on market rates recently paid by us in similar transactions with unaffiliated landowners.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
With the approval of the Audit and Conflicts Committee of Enterprise GP, we have engaged Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, “Deloitte & Touche”) as our independent registered public accounting firm and principal accountants. The following table summarizes amounts billed to us by Deloitte & Touche for each of the years presented, as applicable:
(1)
Audit fees for 2019 and 2018 include $40,000 and $50,000, respectively, of charges for audit-related projects that were reimbursed by business partners.
As presented in the preceding table, “Audit Fees” represent amounts billed for each year in connection with (i) the annual audit of our consolidated financial statements filed on Form 10-K and related internal controls over financial reporting, (ii) the quarterly review of our consolidated financial statements filed on Form 10-Q, (iii) standalone annual audits of our consolidated subsidiaries and (iv) those services normally provided by Deloitte & Touche in connection with our statutory and regulatory filings or engagements, including comfort letters, consents and other services related to SEC matters. We did not engage Deloitte & Touche to perform any other services for us during the last two years. We are prohibited from using Deloitte & Touche to perform general bookkeeping, human resources or management functions for us, and any other service not permitted by the PCAOB.
In connection with its oversight responsibilities, the Audit and Conflicts Committee has adopted a pre-approval policy regarding any services to be performed by Deloitte & Touche. The pre-approval policy includes four primary service categories: Audit, Audit-related, Tax and Other. When Deloitte & Touche’s services are required, management and Deloitte & Touche discuss the proposed work with the Audit and Conflicts Committee. These discussions typically address the reasons for the project, the scope of the work to be performed and an estimate of the fee to be charged by Deloitte & Touche for such work. The Audit and Conflicts Committee discusses the request with management and Deloitte & Touche and, if the work is deemed necessary and appropriate for Deloitte & Touche to perform, approves the request subject to the fee estimate (the initial “pre-approved” fee amount). If at a later date, it appears that the initial pre-approved fee amount is insufficient to complete the work, management and Deloitte & Touche must present a supplemental request to the Audit and Conflicts Committee to increase the approved amount along with reasons for the increase. Under the pre-approval policy, management cannot act upon its own to authorize an expenditure for Deloitte & Touche services outside of the pre-approved amounts. On a quarterly basis, the Audit and Conflicts Committee is provided a schedule that compares the pre-approved amounts for each primary service category with the actual fees billed for each type of service. We believe the Audit and Conflicts Committee’s pre-approval process maintains the independence of Deloitte & Touche from management.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as a part of this annual report:
(1) Financial Statements: See “Index to Consolidated Financial Statements” beginning on page of this annual report for the financial statements included herein.
(2) Financial Statement Schedules: The separate filing of financial statement schedules has been omitted because such schedules are either not applicable or the information called for therein appears in the footnotes of our Consolidated Financial Statements.
(3) Exhibits:
Exhibit Number
Exhibit*
2.1
Merger Agreement, dated as of December 15, 2003, by and among Enterprise Products Partners L.P., Enterprise Products GP, LLC, Enterprise Products Management LLC, GulfTerra Energy Partners, L.P. and GulfTerra Energy Company, L.L.C. (incorporated by reference to Exhibit 2.1 to Form 8-K filed December 15, 2003).
2.2
Amendment No. 1 to Merger Agreement, dated as of August 31, 2004, by and among Enterprise Products Partners L.P., Enterprise Products GP, LLC, Enterprise Products Management LLC, GulfTerra Energy Partners, L.P. and GulfTerra Energy Company, L.L.C. (incorporated by reference to Exhibit 2.1 to Form 8-K filed September 7, 2004).
2.3
Parent Company Agreement, dated as of December 15, 2003, by and among Enterprise Products Partners L.P., Enterprise Products GP, LLC, Enterprise Products GTM, LLC, El Paso Corporation, Sabine River Investors I, L.L.C., Sabine River Investors II, L.L.C., El Paso EPN Investments, L.L.C. and GulfTerra GP Holding Company (incorporated by reference to Exhibit 2.2 to Form 8-K filed December 15, 2003).
2.4
Amendment No. 1 to Parent Company Agreement, dated as of April 19, 2004, by and among Enterprise Products Partners L.P., Enterprise Products GP, LLC, Enterprise Products GTM, LLC, El Paso Corporation, Sabine River Investors I, L.L.C., Sabine River Investors II, L.L.C., El Paso EPN Investments, L.L.C. and GulfTerra GP Holding Company (incorporated by reference to Exhibit 2.1 to Form 8-K filed April 21, 2004).
2.5
Purchase and Sale Agreement (Gas Plants), dated as of December 15, 2003, by and between El Paso Corporation, El Paso Field Services Management, Inc., El Paso Transmission, L.L.C., El Paso Field Services Holding Company and Enterprise Products Operating L.P. (incorporated by reference to Exhibit 2.4 to Form 8-K filed December 15, 2003).
2.6
Agreement and Plan of Merger, dated as of June 28, 2009, by and among Enterprise Products Partners L.P., Enterprise Products GP, LLC, Enterprise Sub B LLC, TEPPCO Partners, L.P. and Texas Eastern Products Pipeline Company, LLC (incorporated by reference to Exhibit 2.1 to Form 8-K filed June 29, 2009).
2.7
Agreement and Plan of Merger, dated as of June 28, 2009, by and among Enterprise Products Partners L.P., Enterprise Products GP, LLC, Enterprise Sub A LLC, TEPPCO Partners, L.P. and Texas Eastern Products Pipeline Company, LLC (incorporated by reference to Exhibit 2.2 to Form 8-K filed June 29, 2009).
2.8
Agreement and Plan of Merger, dated as of September 3, 2010, by and among Enterprise Products Partners L.P., Enterprise Products GP, LLC, Enterprise ETE LLC, Enterprise GP Holdings L.P. and EPE Holdings, LLC (incorporated by reference to Exhibit 2.1 to Form 8-K filed September 7, 2010).
2.9
Agreement and Plan of Merger, dated as of September 3, 2010, by and among Enterprise Products GP, LLC, Enterprise GP Holdings L.P. and EPE Holdings, LLC (incorporated by reference to Exhibit 2.2 to Form 8-K filed September 7, 2010).
2.10
Contribution Agreement, dated as of September 30, 2010, by and between Enterprise Products Company and Enterprise Products Partners L.P. (incorporated by reference to Exhibit 2.1 to Form 8-K filed October 1, 2010).
2.11
Agreement and Plan of Merger, dated as of April 28, 2011, by and among Enterprise Products Partners L.P., Enterprise Products Holdings LLC, EPD MergerCo LLC, Duncan Energy Partners L.P. and DEP Holdings, LLC (incorporated by reference to Exhibit 2.1 to Form 8-K filed April 29, 2011).
2.12
Contribution and Purchase Agreement, dated as of October 1, 2014, by and among Enterprise Products Partners L.P., Oiltanking Holding Americas, Inc. and OTB Holdco, LLC (incorporated by reference to Exhibit 2.1 to Form 8-K filed October 1, 2014).
2.13
Agreement and Plan of Merger, dated as of November 11, 2014, by and among Enterprise Products Partners L.P., Enterprise Products Holdings LLC, EPOT MergerCo LLC, Oiltanking Partners, L.P. and OTLP GP, LLC (incorporated by reference to Exhibit 2.1 to Form 8-K filed November 12, 2014).
2.14
Amendment No. 1 dated as of June 6, 2018 to Contribution and Purchase Agreement, by and among Enterprise Products Partners L.P., Oiltanking Holding Americas, Inc., Enterprise Products Holdings LLC and Marquard & Bahls, AG (incorporated by reference to Exhibit 2.2 to Form 8-K filed June 12, 2018).
3.1
Certificate of Limited Partnership of Enterprise Products Partners L.P. (incorporated by reference to Exhibit 3.6 to Form 10-Q filed November 9, 2007).
3.2
Certificate of Amendment to Certificate of Limited Partnership of Enterprise Products Partners L.P., filed on November 22, 2010 with the Delaware Secretary of State (incorporated by reference to Exhibit 3.6 to Form 8-K filed November 23, 2010).
3.3
Sixth Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P., dated November 22, 2010 (incorporated by reference to Exhibit 3.2 to Form 8-K filed November 23, 2010).
3.4
Amendment No. 1 to Sixth Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P., dated effective as of August 11, 2011 (incorporated by reference to Exhibit 3.1 to Form 8-K filed August 16, 2011).
3.5
Amendment No. 2 to Sixth Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P., dated effective as of August 21, 2014 (incorporated by reference to Exhibit 3.1 to Form 8-K filed August 26, 2014).
3.6
Amendment No. 3 to the Sixth Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P., dated as of November 28, 2017 (incorporated by reference to Exhibit 3.1 to Form 8-K filed December 1, 2017).
3.7
Amendment No. 4 to the Sixth Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P., dated as of February 26, 2019 (incorporated by reference to Exhibit 3.7 to Form 10-K filed March 1, 2019).
3.8
Certificate of Formation of Enterprise Products Holdings LLC (formerly named EPE Holdings, LLC) (incorporated by reference to Exhibit 3.3 to Form S-1/A Registration Statement, Reg. No. 333-124320, filed by Enterprise GP Holdings L.P. on July 22, 2005).
3.9
Certificate of Amendment to Certificate of Formation of Enterprise Products Holdings LLC (formerly named EPE Holdings, LLC), filed on November 22, 2010 with the Delaware Secretary of State (incorporated by reference to Exhibit 3.5 to Form 8-K filed November 23, 2010).
3.10
Fifth Amended and Restated Limited Liability Company Agreement of Enterprise Products Holdings LLC dated effective as of September 7, 2011 (incorporated by reference to Exhibit 3.1 to Form 8-K filed September 8, 2011).
3.11
Amendment No. 1 to Fifth Amended and Restated Limited Liability Company Agreement of Enterprise Products Holdings LLC, dated effective as of April 26, 2017 (incorporated by reference to Exhibit 3.1 to Form 8-K filed May 2, 2017).
3.12
Amendment No. 2 to Fifth Amended and Restated Limited Liability Company Agreement of Enterprise Products Holdings LLC, dated effective as of November 6, 2019 (incorporated by reference to Exhibit 3.12 to Form 10-Q filed November 8, 2019).
3.13
Company Agreement of Enterprise Products Operating LLC dated June 30, 2007 (incorporated by reference to Exhibit 3.3 to Form 10-Q filed August 8, 2007).
3.14
Certificate of Incorporation of Enterprise Products OLPGP, Inc., dated December 3, 2003 (incorporated by reference to Exhibit 3.5 to Form S-4 Registration Statement, Reg. No. 333-121665, filed December 27, 2004).
3.15
Bylaws of Enterprise Products OLPGP, Inc., dated December 8, 2003 (incorporated by reference to Exhibit 3.6 to Form S-4 Registration Statement, Reg. No. 333-121665, filed December 27, 2004).
4.1
Form of Common Unit certificate (incorporated by reference to Exhibit A to Exhibit 3.1 to Form 8-K filed August 16, 2011).
4.2#
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.
4.3
Indenture, dated as of March 15, 2000, among Enterprise Products Operating L.P., as Issuer, Enterprise Products Partners L.P., as Guarantor, and First Union National Bank, as Trustee (incorporated by reference to Exhibit 4.1 to Form 8-K filed March 14, 2000).
4.4
Second Supplemental Indenture, dated as of February 14, 2003, among Enterprise Products Operating L.P., as Issuer, Enterprise Products Partners L.P., as Guarantor, and Wachovia Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 10-K filed March 31, 2003).
4.5
Third Supplemental Indenture, dated as of June 30, 2007, among Enterprise Products Operating L.P., as Original Issuer, Enterprise Products Partners L.P., as Parent Guarantor, Enterprise Products Operating LLC, as New Issuer, and U.S. Bank National Association, as successor Trustee (incorporated by reference to Exhibit 4.55 to Form 10-Q filed August 8, 2007).
4.6
Indenture, dated as of October 4, 2004, among Enterprise Products Operating L.P., as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Form 8-K filed October 6, 2004).
4.7
Fourth Supplemental Indenture, dated as of October 4, 2004, among Enterprise Products Operating L.P., as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.5 to Form 8-K filed October 6, 2004).
4.8
Sixth Supplemental Indenture, dated as of March 2, 2005, among Enterprise Products Operating L.P., as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed March 3, 2005).
4.9
Tenth Supplemental Indenture, dated as of June 30, 2007, among Enterprise Products Operating L.P., as Original Issuer, Enterprise Products Partners L.P., as Parent Guarantor, Enterprise Products Operating LLC, as New Issuer, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.54 to Form 10-Q filed August 8, 2007).
4.10
Thirteenth Supplemental Indenture, dated as of April 3, 2008, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.4 to Form 8-K filed April 3, 2008).
4.11
Sixteenth Supplemental Indenture, dated as of October 5, 2009, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed October 5, 2009).
4.12
Seventeenth Supplemental Indenture, dated as of October 27, 2009, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Form 8-K filed October 28, 2009).
4.13
Eighteenth Supplemental Indenture, dated as of October 27, 2009, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to Form 8-K filed October 28, 2009).
4.14
Nineteenth Supplemental Indenture, dated as of May 20, 2010, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed May 20, 2010).
4.15
Twentieth Supplemental Indenture, dated as of January 13, 2011, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed January 13, 2011).
4.16
Twenty-First Supplemental Indenture, dated as of August 24, 2011, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed August 24, 2011).
4.17
Twenty-Second Supplemental Indenture, dated as of February 15, 2012, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.25 to Form 10-Q filed May 10, 2012).
4.18
Twenty-Third Supplemental Indenture, dated as of August 13, 2012, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed August 13, 2012).
4.19
Twenty-Fourth Supplemental Indenture, dated as of March 18, 2013, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed March 18, 2013).
4.20
Twenty-Fifth Supplemental Indenture, dated as of February 12, 2014, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed February 12, 2014).
4.21
Twenty-Sixth Supplemental Indenture, dated as of October 14, 2014, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.4 to Form 8-K filed October 14, 2014).
4.22
Twenty-Seventh Supplemental Indenture, dated as of May 7, 2015, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Parent Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed May 7, 2015).
4.23
Twenty-Eighth Supplemental Indenture, dated as of April 13, 2016, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.4 to Form 8-K filed April 13, 2016).
4.24
Twenty-Ninth Supplemental Indenture, dated as of August 16, 2017, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed August 16, 2017).
4.25
Thirtieth Supplemental Indenture, dated as of February 15, 2018, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.4 to Form 8-K filed February 15, 2018).
4.26
Thirty-First Supplemental Indenture, dated as of February 15, 2018, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed February 15, 2018).
4.27
Thirty-Second Supplemental Indenture, dated as of October 11, 2018, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed October 11, 2018).
4.28
Thirty-Third Supplemental Indenture, dated as of July 8, 2019, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed July 8, 2019).
4.29
Thirty-Fourth Supplemental Indenture, dated as of January 15, 2020, among Enterprise Products Operating LLC, as Issuer, Enterprise Products Partners L.P., as Guarantor, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to Form 8-K filed January 15, 2020).
4.30
Form of Global Note representing $499.2 million principal amount of 6.875% Series B Senior Notes due 2033 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.3 to Form 10-K filed March 31, 2003).
4.31
Form of Global Note representing $350.0 million principal amount of 6.65% Series B Senior Notes due 2034 with attached Guarantee (incorporated by reference to Exhibit 4.19 to Form S-3 Registration Statement, Reg. No. 333-123150, filed March 4, 2005).
4.32
Form of Global Note representing $250.0 million principal amount of 5.75% Series B Senior Notes due 2035 with attached Guarantee (incorporated by reference to Exhibit 4.32 to Form 10-Q filed November 4, 2005).
4.33
Form of Global Note representing $700.0 million principal amount of 6.50% Senior Notes due 2019 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.4 to Form 8-K filed April 3, 2008).
4.34
Form of Global Note representing $500.0 million principal amount of 5.25% Senior Notes due 2020 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.3 to Form 8-K filed October 5, 2009).
4.35
Form of Global Note representing $600.0 million principal amount of 6.125% Senior Notes due 2039 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed October 5, 2009).
4.36
Form of Global Note representing $399.6 million principal amount of 7.55% Senior Notes due 2038 with attached Guarantee (incorporated by reference to Exhibit E to Exhibit 4.1 to Form 8-K filed October 28, 2009).
4.37
Form of Global Note representing $285.8 million principal amount of Junior Subordinated Notes due 2067 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.2 to Form 8-K filed October 28, 2009).
4.38
Form of Global Note representing $1.0 billion principal amount of 5.20% Senior Notes due 2020 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed May 20, 2010).
4.39
Form of Global Note representing $600.0 million principal amount of 6.45% Senior Notes due 2040 with attached Guarantee (incorporated by reference to Exhibit C to Exhibit 4.3 to Form 8-K filed May 20, 2010).
4.40
Form of Global Note representing $750.0 million principal amount of 5.95% Senior Notes due 2041 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed January 13, 2011).
4.41
Form of Global Note representing $650.0 million principal amount of 4.05% Senior Notes due 2022 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.3 to Form 8-K filed August 24, 2011).
4.42
Form of Global Note representing $600.0 million principal amount of 5.70% Senior Notes due 2042 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed August 24, 2011).
4.43
Form of Global Note representing $750.0 million principal amount of 4.85% Senior Notes due 2042 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.25 to Form 10-Q filed May 10, 2012).
4.44
Form of Global Note representing $1.1 billion principal amount of 4.45% Senior Notes due 2043 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed August 13, 2012).
4.45
Form of Global Note representing $1.25 billion principal amount of 3.35% Senior Notes due 2023 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.3 to Form 8-K filed March 18, 2013).
4.46
Form of Global Note representing $1.0 billion principal amount of 4.85% Senior Notes due 2044 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed March 18, 2013).
4.47
Form of Global Note representing $850.0 million principal amount of 3.90% Senior Notes due 2024 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.3 to Form 8-K filed February 12, 2014).
4.48
Form of Global Note representing $1.15 billion principal amount of 5.10% Senior Notes due 2045 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed February 12, 2014).
4.49
Form of Global Note representing $800.0 million principal amount of 2.55% Senior Notes due 2019 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.4 to Form 8-K filed October 14, 2014).
4.50
Form of Global Note representing $1.15 billion principal amount of 3.75% Senior Notes due 2025 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.4 to Form 8-K filed October 14, 2014).
4.51
Form of Global Note representing $400.0 million principal amount of 4.95% Senior Notes due 2054 with attached Guarantee (incorporated by reference to Exhibit C to Exhibit 4.4 to Form 8-K filed October 14, 2014).
4.52
Form of Global Note representing $400.0 million principal amount of 4.85% Senior Notes due 2044 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed March 18, 2013).
4.53
Form of Global Note representing $875.0 million principal amount of 3.70% Senior Notes due 2026 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed May 7, 2015).
4.54
Form of Global Note representing $875.0 million principal amount of 4.90% Senior Notes due 2046 with attached Guarantee (incorporated by reference to Exhibit C to Exhibit 4.3 to Form 8-K filed May 7, 2015).
4.55
Form of Global Note representing $575.0 million principal amount of 2.85% Senior Notes due 2021 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.4 to Form 8-K filed April 13, 2016).
4.56
Form of Global Note representing $575.0 million principal amount of 3.95% Senior Notes due 2027 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.4 to Form 8-K filed April 13, 2016).
4.57
Form of Global Note representing $100.0 million principal amount of 4.90% Senior Notes due 2046 with attached Guarantee (incorporated by reference to Exhibit C to Exhibit 4.3 to Form 8-K filed May 7, 2015).
4.58
Form of Global Note representing $700 million principal amount of Junior Subordinated Notes D due 2077 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.3 to Form 8-K filed August 16, 2017).
4.59
Form of Global Note representing $1.0 billion principal amount of Junior Subordinated Notes E due 2077 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed August 16, 2017).
4.60
Form of Global Note representing $750.0 million principal amount of 2.80% Senior Notes due 2021 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.4 to Form 8-K filed February 15, 2018).
4.61
Form of Global Note representing $1.25 billion principal amount of 4.25% Senior Notes due 2048 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.4 to Form 8-K filed February 15, 2018).
4.62
Form of Global Note representing $700 million principal amount of Junior Subordinated Notes F due 2078 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.3 to Form 8-K filed February 15, 2018).
4.63
Form of Global Note representing $750.0 million principal amount of 3.50% Senior Notes due 2022 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.3 to Form 8-K filed October 11, 2018).
4.64
Form of Global Note representing $1,000.0 million principal amount of 4.15% Senior Notes due 2028 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed October 11, 2018).
4.65
Form of Global Note representing $1,250.0 million principal amount of 4.80% Senior Notes due 2049 with attached Guarantee (incorporated by reference to Exhibit C to Exhibit 4.3 to Form 8-K filed October 11, 2018).
4.66
Form of Global Note representing $1,250.0 million principal amount of 3.125% Senior Notes due 2029 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.3 to Form 8-K filed July 8, 2019).
4.67
Form of Global Note representing $1,250.0 million principal amount of 4.200% Senior Notes due 2050 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed July 8, 2019).
4.68
Form of Global Note representing $1,000.0 million principal amount of 2.800% Senior Notes due 2030 with attached Guarantee (incorporated by reference to Exhibit A to Exhibit 4.3 to Form 8-K filed January 15, 2020).
4.69
Form of Global Note representing $1,000.0 million principal amount of 3.700% Senior Notes due 2051 with attached Guarantee (incorporated by reference to Exhibit B to Exhibit 4.3 to Form 8-K filed January 15, 2020).
4.70
Form of Global Note representing $1,000.0 million principal amount of 3.950% Senior Notes due 2060 with attached Guarantee (incorporated by reference to Exhibit C to Exhibit 4.3 to Form 8-K filed January 15, 2020).
4.71
Replacement Capital Covenant, dated October 27, 2009, executed by Enterprise Products Operating LLC and Enterprise Products Partners L.P. in favor of the covered debtholders described therein (incorporated by reference to Exhibit 4.9 to Form 8-K filed October 28, 2009).
4.72
Amendment to Replacement Capital Covenants, dated May 6, 2015, executed by Enterprise Products Operating LLC and Enterprise Products Partners L.P. in favor of the covered debtholders described therein (incorporated by reference to Exhibit 4.59 to Form 10-Q filed May 8, 2015).
4.73
Indenture, dated February 20, 2002, by and among TEPPCO Partners, L.P., as Issuer, TE Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering Company, as Subsidiary Guarantors, and First Union National Bank, NA, as Trustee (incorporated by reference to Exhibit 99.2 to the Form 8-K filed by TEPPCO Partners, L.P. on February 20, 2002).
4.74
Supplemental Indenture, dated June 27, 2002, by and among TEPPCO Partners, L.P., as Issuer, TE Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P. and Jonah Gas Gathering Company, as Initial Subsidiary Guarantors, Val Verde Gas Gathering Company, L.P., as New Subsidiary Guarantor, and Wachovia Bank, National Association, formerly known as First Union National Bank, as Trustee (incorporated by reference to Exhibit 4.6 to the Form 10-Q filed by TEPPCO Partners, L.P. on August 14, 2002).
4.75
Full Release of Guarantee, dated July 31, 2006, by Wachovia Bank, National Association, as Trustee, in favor of Jonah Gas Gathering Company (incorporated by reference to Exhibit 4.8 to the Form 10-Q filed by TEPPCO Partners, L.P. on November 7, 2006).
4.76
Seventh Supplemental Indenture, dated March 27, 2008, by and among TEPPCO Partners, L.P., as Issuer, TE Products Pipeline Company, LLC, TCTM, L.P., TEPPCO Midstream Companies, LLC and Val Verde Gas Gathering Company, L.P., as Subsidiary Guarantors, and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.13 to the Form 10-Q filed by TEPPCO Partners, L.P. on May 8, 2008).
4.77
Eighth Supplemental Indenture, dated October 27, 2009, by and among TEPPCO Partners, L.P., as Issuer, TE Products Pipeline Company, LLC, TCTM, L.P., TEPPCO Midstream Companies, LLC and Val Verde Gas Gathering Company, L.P., as Subsidiary Guarantors, and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Form 8-K filed by TEPPCO Partners, L.P. on October 28, 2009).
4.78
Full Release of Guarantee, dated November 23, 2009, of TE Products Pipeline Company, LLC, TCTM, L.P., TEPPCO Midstream Companies, LLC and Val Verde Gas Gathering Company, L.P. by U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.64 to Form 10-K filed March 1, 2010).
4.79
Indenture, dated May 14, 2007, by and among TEPPCO Partners, L.P., as Issuer, TE Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P. and Val Verde Gas Gathering Company, L.P., as Subsidiary Guarantors, and The Bank of New York Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 99.1 of the Form 8-K filed by TEPPCO Partners, L.P. on May 15, 2007).
4.80
First Supplemental Indenture, dated May 18, 2007, by and among TEPPCO Partners, L.P., as Issuer, TE Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P. and Val Verde Gas Gathering Company, L.P., as Subsidiary Guarantors, and The Bank of New York Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the Form 8-K filed by TEPPCO Partners, L.P. on May 18, 2007).
4.81
Second Supplemental Indenture, dated as of June 30, 2007, by and among TEPPCO Partners, L.P., as Issuer, TE Products Pipeline Company, Limited Partnership, TCTM, L.P., TEPPCO Midstream Companies, L.P. and Val Verde Gas Gathering Company, L.P., as Existing Subsidiary Guarantors, TE Products Pipeline Company, LLC and TEPPCO Midstream Companies, LLC, as New Subsidiary Guarantors, and The Bank of New York Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the Form 8-K filed by TE Products Pipeline Company, LLC on July 6, 2007).
4.82
Third Supplemental Indenture, dated as of October 27, 2009, by and among TEPPCO Partners, L.P., as Issuer, TE Products Pipeline Company, LLC, TCTM, L.P., TEPPCO Midstream Companies, LLC and Val Verde Gas Gathering Company, L.P., as Subsidiary Guarantors, and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the Form 8-K filed by TEPPCO Partners, L.P. on October 28, 2009).
4.83
Full Release of Guarantee, dated as of November 23, 2009, of TE Products Pipeline Company, LLC, TCTM, L.P., TEPPCO Midstream Companies, LLC and Val Verde Gas Gathering Company, L.P. by The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.70 to Form 10-K filed March 1, 2010).
10.1***
Enterprise Products 1998 Long-Term Incentive Plan (Amended and Restated as of February 23, 2010) (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 26, 2010).
10.2***
Form of Employee Restricted Unit Grant Award under the Enterprise Products 1998 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.5 to Form 10-Q filed August 9, 2010).
10.3***
2008 Enterprise Products Long-Term Incentive Plan (Third Amendment and Restatement) (incorporated by reference to Annex A to Definitive Proxy Statement filed August 26, 2013).
10.4***
Form of Employee Phantom Unit Grant Award under the 2008 Enterprise Products Long-Term Incentive Plan (incorporated by reference to Exhibit 10.4 to Form 10-K filed February 24, 2017).
10.5
Eighth Amended and Restated Administrative Services Agreement, effective as of February 13, 2015, by and among Enterprise Products Company, EPCO Holdings, Inc., Enterprise Products Holdings LLC, Enterprise Products Partners L.P., Enterprise Products OLPGP, Inc., Enterprise Products Operating LLC and the Oiltanking Parties named therein (incorporated by reference to Exhibit 10.1 to Form 8-K filed February 13, 2015).
10.6
364-Day Revolving Credit Agreement, dated as of September 10, 2019 among Enterprise Products Operating LLC, the Lenders party thereto, and Citibank, N.A. as Administrative Agent (incorporated by reference to Exhibit 10.1 to Form 8-K filed September 11, 2019).
10.7
Guaranty Agreement, dated as of September 10, 2019, by Enterprise Products Partners L.P. in favor of Citibank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to Form 8-K filed September 11, 2019).
10.8
Revolving Credit Agreement, dated as of September 13, 2017, among Enterprise Products Operating LLC, the Lenders party thereto, Wells Fargo Bank, National Association, as Administrative Agent, Citibank, N.A., DNB Bank ASA, New York Branch, JPMorgan Chase Bank, N.A., Mizuho Bank, Ltd. and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Co-Syndication Agents, and Barclays Bank PLC, Royal Bank of Canada, Sumitomo Mitsui Banking Corporation, SunTrust Bank, The Bank of Nova Scotia and The Toronto-Dominion Bank, New York Branch, as Co-Documentation Agents (incorporated by reference to Exhibit 10.3 to Form 8-K filed September 15, 2017).
10.9
First Amendment to Revolving Credit Agreement, dated as of September 10, 2019, among Enterprise Products Operating LLC, the Lenders party thereto, and Wells Fargo Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.3 to Form 8-K filed September 11, 2019).
10.10
Guaranty Agreement, dated as of September 13, 2017, by Enterprise Products Partners L.P. in favor of Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.4 to Form 8-K filed September 15, 2017).
10.11
Liquidity Option Agreement, dated as of October 1, 2014, between Enterprise Products Partners, L.P., Oiltanking Holding Americas, Inc., and Marquard & Bahls AG (incorporated by reference to Exhibit 10.3 to Form 8-K filed October 1, 2014).
10.12
Support Agreement, dated as of November 11, 2014, by and among Enterprise Products Partners L.P., Enterprise Products Operating LLC and Oiltanking Partners, L.P. (incorporated by reference to Exhibit 10.1 to Form 8-K filed November 12, 2014).
10.13***
EPD PubCo Unit I L.P. Amended and Restated Agreement of Limited Partnership dated November 3, 2016 (incorporated by reference to Exhibit 10.17 to Form 10-K filed February 24, 2017).
10.14***
EPD PubCo Unit II L.P. Amended and Restated Agreement of Limited Partnership dated November 3, 2016 (incorporated by reference to Exhibit 10.18 to Form 10-K filed February 24, 2017).
10.15***
EPD PrivCo Unit I L.P. Amended and Restated Agreement of Limited Partnership dated November 3, 2016 (incorporated by reference to Exhibit 10.19 to Form 10-K filed February 24, 2017).
10.16***
EPD 2018 Unit IV L.P. Agreement of Limited Partnership dated December 3, 2018 (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 6, 2018).
10.17***
EPCO Unit II L.P. Agreement of Limited Partnership dated December 3, 2018 (incorporated by reference to Exhibit 10.2 to Form 8-K filed December 6, 2018).
10.18
Equity Distribution Agreement, dated December 1, 2017, by and among Enterprise Products Partners L.P., Enterprise Products OLPGP, Inc., Enterprise Products Operating LLC and Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., DNB Markets, Inc., Jefferies LLC, J.P. Morgan Securities LLC, Mizuho Securities USA Inc., Morgan Stanley & Co. LLC, MUFG Securities Americas Inc., Raymond James & Associates, Inc., RBC Capital Markets, LLC, Scotia Capital (USA) Inc., SG Americas Securities, LLC, SMBC Nikko Securities America, Inc., SunTrust Robinson Humphrey, Inc., TD Securities (USA) LLC, UBS Securities LLC, USCA Securities LLC and Wells Fargo Securities, LLC. (incorporated by reference to Exhibit 1.1 to Form 8-K filed December 1, 2017).
10.19***
Retention Bonus Agreement between A. James Teague and Enterprise Products Company dated effective April 15, 2019 (incorporated by reference to Exhibit 10.1 to Form 8-K filed April 18, 2019).
10.20***
Retention Bonus Agreement between W. Randall Fowler and Enterprise Products Company dated effective April 15, 2019 (incorporated by reference to Exhibit 10.2 to Form 8-K filed April 18, 2019).
10.21***
Retention Bonus Agreement between Graham W. Bacon and Enterprise Products Company dated effective April 15, 2019 (incorporated by reference to Exhibit 10.3 to Form 8-K filed April 18, 2019).
10.22***
Retention Bonus Agreement between Brent B. Secrest and Enterprise Products Company dated effective April 15, 2019 (incorporated by reference to Exhibit 10.4 to Form 8-K filed April 18, 2019).
10.23***
Retirement, Consulting Services and Release Agreement, dated effective as of August 16, 2019, between Enterprise Products Company and William Ordemann (incorporated by reference to Exhibit 10.1 to Form 8-K filed August 22, 2019).
21.1#
List of consolidated subsidiaries as of February 1, 2020.
23.1#
Consent of Deloitte & Touche LLP.
31.1#
Sarbanes-Oxley Section 302 certification of A. James Teague for Enterprise Products Partners L.P.’s annual report on Form 10-K for the year ended December 31, 2019.
31.2#
Sarbanes-Oxley Section 302 certification of W. Randall Fowler for Enterprise Products Partners L.P.’s annual report on Form 10-K for the year ended December 31, 2019.
32.1#
Sarbanes-Oxley Section 906 certification of A. James Teague for Enterprise Products Partners L.P.’s annual report on Form 10-K for the year ended December 31, 2019.
32.2#
Sarbanes-Oxley Section 906 certification of W. Randall Fowler for Enterprise Products Partners L.P.’s annual report on Form 10-K for the year ended December 31, 2019.
101#
Interactive data files pursuant to Rule 405 of Regulation S-T formatted in iXBRL (Inline Extensible Business Reporting Language) in this Form 10-K includes: (i) the Consolidated Balance Sheets, (ii) the Statements of Consolidated Operations, (iii) the Statements of Consolidated Comprehensive Income, (iv) the Statements of Consolidated Cash Flows, (v) the Statements of Consolidated Equity and (vi) Notes to the Consolidated Financial Statements.
104#
Cover Page Interactive Data File (embedded within the Inline XBRL document).
*
With respect to any exhibits incorporated by reference to any Exchange Act filings, the Commission file numbers for Enterprise Products Partners L.P., Enterprise GP Holdings L.P, TEPPCO Partners, L.P. and TE Products Pipeline Company, LLC are 1-14323, 1-32610, 1-10403 and 1-13603, respectively.
***
Identifies management contract and compensatory plan arrangements.
#
Filed with this report.
ITEM 16. FORM 10-K SUMMARY.
Not included.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 28, 2020.
ENTERPRISE PRODUCTS PARTNERS L.P.
(A Delaware Limited Partnership)
By:
Enterprise Products Holdings LLC, as General Partner
By:
/s/ R. Daniel Boss
Name:
R. Daniel Boss
Title:
Executive Vice President - Accounting, Risk Control and
Information Technology of the General Partner
By:
/s/ Michael W. Hanson
Name:
Michael W. Hanson
Title:
Vice President and Principal Accounting Officer
of the General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on February 28, 2020.
Signature
Title (Position with Enterprise Products Holdings LLC)
/s/ Randa Duncan Williams
Director and Chairman of the Board
Randa Duncan Williams
/s/ Richard H. Bachmann
Director and Vice-Chairman of the Board
Richard H. Bachmann
/s/ A. James Teague
Director and Co-Chief Executive Officer
A. James Teague
/s/ W. Randall Fowler
Director, Co-Chief Executive Officer and Chief Financial Officer
W. Randall Fowler
/s/ Harry P. Weitzel
Director and Executive Vice President, General Counsel and Secretary
Harry P. Weitzel
/s/ Carin M. Barth
Director
Carin M. Barth
/s/ Murray E. Brasseux
Director
Murray E. Brasseux
/s/ James T. Hackett
Director
James T. Hackett
/s/ William C. Montgomery
Director
William C. Montgomery
/s/ John R. Rutherford
Director
John R. Rutherford
/s/ Richard S. Snell
Director
Richard S. Snell
/s/ R. Daniel Boss
Executive Vice President - Accounting, Risk Control and Information Technology
R. Daniel Boss
/s/ Michael W. Hanson
Vice President and Principal Accounting Officer
Michael W. Hanson
Item 8. Financial Statements and Supplementary Data.
ENTERPRISE PRODUCTS PARTNERS L.P.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Enterprise Products Holdings LLC and
Unitholders of Enterprise Products Partners L.P.
Houston, Texas
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Enterprise Products Partners L.P. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related statements of consolidated operations, comprehensive income, cash flows, and equity for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill-Natural Gas Pipelines & Services Reportable Business Segment-Refer to Note 6 to the consolidated financial statements
Critical Audit Matter Description
Goodwill amounts are assessed for impairment on an annual basis or when impairment indicators are present. In performing the goodwill assessment, the estimated fair value of the reporting unit to which the goodwill is assigned is determined and compared to its carrying value. If the fair value of the reporting unit is less than its carrying value (including associated goodwill), a non-cash impairment charge to earnings is recorded to reduce the carrying value of
the goodwill to its estimated fair value. The Company’s goodwill balance was $5,745.2 million as of December 31, 2019, of which $296.3 million was allocated to a reporting unit within the Natural Gas Pipelines & Services reportable business segment. Reporting unit estimated fair values are based on assumptions regarding the future economic prospects of the businesses that comprise each reporting unit, including (i) forecasted operating margin for the associated assets, including any planned capital projects and related contract fees; (ii) long-term growth rates for cash flows beyond the discrete forecast period; and (iii) appropriate discount rates. No goodwill impairment was recognized during the year ended December 31, 2019.
We have identified goodwill for a reporting unit within the Natural Gas Pipelines & Services reportable business segment as a critical audit matter due to significant judgments and assumptions made by management related to planned capital projects and related contract fees underlying the forecasted operating margin, the long-term growth rate for cash flows beyond the discrete forecast period, and the discount rate on the Company’s estimated fair value of goodwill. Auditing management’s judgments required especially subjective judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions for this reporting unit.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s judgments regarding forecasted operating margin and the selection of the long-term growth rate and discount rate for this reporting unit included the following, among others:
•
We tested the effectiveness of controls over goodwill, including those over the assumptions related to planned capital projects and related contract fees underlying the forecasted operating margin, the long-term growth rate for cash flows beyond the discrete forecast period, and the discount rate.
•
We evaluated management’s ability to reasonably forecast operating margin by performing a look-back test comparing actual results to management’s historical forecasts.
•
We evaluated the reasonableness of management’s operating margin forecast for planned capital projects and related contract fees by comparing the forecast to:
-
Internal communications to management and the Board of Directors regarding the projects.
-
Forecasted information regarding the projects included in analyst and industry reports for the Company and certain of its peer companies.
•
With the assistance of our fair value specialists, we evaluated the reasonableness of the long-term growth rate for cash flows beyond the discrete forecast period and the discount rate by:
-
Testing the source information underlying the determination of the long-term growth rate and discount rate, and the mathematical accuracy of the calculations.
-
Developing a range of independent estimates and comparing those to the long-term growth rate and discount rate selected by management.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 28, 2020
We have served as the Company’s auditor since 1997.
ENTERPRISE PRODUCTS PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
See Notes to Consolidated Financial Statements.
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF CONSOLIDATED OPERATIONS
(Dollars in millions, except per unit amounts)
See Notes to Consolidated Financial Statements.
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Dollars in millions)
See Notes to Consolidated Financial Statements.
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
See Notes to Consolidated Financial Statements.
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF CONSOLIDATED EQUITY
(See Note 8 for Unit History, Accumulated Other Comprehensive
Income (Loss) and Noncontrolling Interests)
(Dollars in millions)
See Notes to Consolidated Financial Statements.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With the exception of per unit amounts, or as noted within the context of each disclosure,
the dollar amounts presented in the tabular data within these disclosures are
stated in millions of dollars.
KEY REFERENCES USED IN THESE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless the context requires otherwise, references to “we,” “us,” “our” or “Enterprise” are intended to mean the business and operations of Enterprise Products Partners L.P. and its consolidated subsidiaries. References to “EPD” or the “Partnership” mean Enterprise Products Partners L.P. on a standalone basis. References to “EPO” mean Enterprise Products Operating LLC, which is an indirect wholly owned subsidiary of EPD, and its consolidated subsidiaries, through which EPD conducts its business. Enterprise is managed by its general partner, Enterprise Products Holdings LLC (“Enterprise GP”), which is a wholly owned subsidiary of Dan Duncan LLC, a privately held Texas limited liability company.
The membership interests of Dan Duncan LLC are owned by a voting trust, the current trustees (“DD LLC Trustees”) of which are: (i) Randa Duncan Williams, who is also a director and Chairman of the Board of Directors (the “Board”) of Enterprise GP; (ii) Richard H. Bachmann, who is also a director and Vice Chairman of the Board of Enterprise GP; and (iii) Dr. Ralph S. Cunningham, who is also an advisory director of Enterprise GP. Ms. Duncan Williams and Mr. Bachmann also currently serve as managers of Dan Duncan LLC along with W. Randall Fowler, who is also a director and the Co-Chief Executive Officer and Chief Financial Officer of Enterprise GP.
References to “EPCO” mean Enterprise Products Company, a privately held Texas corporation, and its privately held affiliates. A majority of the outstanding voting capital stock of EPCO is owned by a voting trust, the current trustees (“EPCO Trustees”) of which are: (i) Ms. Duncan Williams, who serves as Chairman of EPCO; (ii) Dr. Cunningham, who serves as Vice Chairman of EPCO; and (iii) Mr. Bachmann, who serves as the President and Chief Executive Officer of EPCO. Ms. Duncan Williams and Mr. Bachmann also currently serve as directors of EPCO along with Mr. Fowler, who is also the Executive Vice President and Chief Financial Officer of EPCO. EPCO, together with its privately held affiliates, owned approximately 32% of EPD’s limited partner common units at December 31, 2019.
Note 1. Partnership Organization and Operations
We are a publicly traded Delaware limited partnership, the common units of which are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “EPD.” We were formed in April 1998 to own and operate certain natural gas liquids (“NGLs”) related businesses of EPCO and are a leading North American provider of midstream energy services to producers and consumers of natural gas, NGLs, crude oil, petrochemicals and refined products.
Our integrated midstream energy asset network links producers of natural gas, NGLs and crude oil from some of the largest supply basins in the United States (“U.S.”), Canada and the Gulf of Mexico with domestic consumers and international markets. Our midstream energy operations currently include: natural gas gathering, treating, processing, transportation and storage; NGL transportation, fractionation, storage, and export and import terminals (including those used to export liquefied petroleum gases, or “LPG,” and ethane); crude oil gathering, transportation, storage, and export and import terminals; petrochemical and refined products transportation, storage, export and import terminals, and related services; and a marine transportation business that operates primarily on the U.S. inland and Intracoastal Waterway systems. Our assets currently include approximately 50,000 miles of pipelines; 260 million barrels (“MMBbls”) of storage capacity for NGLs, crude oil, petrochemicals and refined products; and 14 billion cubic feet (“Bcf”) of natural gas storage capacity. All statistical data (e.g., pipeline mileage, processing capacity and similar operating metrics) in these notes to consolidated financial statements are unaudited.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We conduct substantially all of our business through EPO and are owned 100% by EPD’s limited partners from an economic perspective. Enterprise GP manages our Partnership and owns a non-economic general partner interest in us. We, Enterprise GP, EPCO and Dan Duncan LLC are affiliates under the collective common control of the DD LLC Trustees and the EPCO Trustees. Like many publicly traded partnerships, we have no employees. All of our management, administrative and operating functions are performed by employees of EPCO pursuant to an administrative services agreement (the “ASA”) or by other service providers. See Note 15 for information regarding related party matters.
Our operations are reported under four business segments: (i) NGL Pipelines & Services, (ii) Crude Oil Pipelines & Services, (iii) Natural Gas Pipelines & Services and (iv) Petrochemical & Refined Products Services. See Note 10 for additional information regarding our business segments.
Note 2. Summary of Significant Accounting Policies
Our consolidated financial statements are prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”).
Allowance for Doubtful Accounts
Our allowance for doubtful accounts is determined based on specific identification and estimates of future uncollectible accounts, including those related to natural gas imbalances. Our procedure for estimating the allowance for doubtful accounts is based on: (i) historical experience with customers, (ii) the perceived financial stability of customers based on our research and (iii) the levels of credit we grant to customers. In addition, we may increase the allowance for doubtful accounts in response to the specific identification of customers involved in bankruptcy proceedings and similar financial difficulties. On a routine basis, we review estimates associated with the allowance for doubtful accounts to ensure that we have recorded sufficient reserves to cover potential losses.
The following table presents our allowance for doubtful accounts activity for the years indicated:
See “Credit Risk” in Note 18 for additional information.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The new guidance, referred to as the current expected credit loss (“CECL”) model, requires the measurement of expected credit losses for financial assets (e.g., accounts receivable) held at the reporting date based on historical experience, current economic conditions, and reasonable and supportable forecasts. These changes are expected to result in the more timely recognition of losses. The adoption of this new guidance on January 1, 2020 did not have a material impact on our consolidated financial statements.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents represent unrestricted cash on hand and highly liquid investments with original maturities of less than three months from the date of purchase.
Restricted cash primarily represents amounts held in segregated bank accounts by our clearing brokers as margin in support of our commodity derivative instruments portfolio and related physical purchases and sales of natural gas, NGLs, crude oil and refined products. Additional cash may be restricted to maintain our commodity derivative instruments portfolio as prices fluctuate or margin requirements change. See Note 14 for information regarding our derivative instruments and hedging activities.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation of cash and cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the amounts shown in the Statements of Consolidated Cash Flows.
Consolidation Policy
Our consolidated financial statements include our accounts and those of our majority-owned subsidiaries in which we have a controlling interest, after the elimination of all intercompany accounts and transactions. We also consolidate other entities and ventures in which we possess a controlling financial interest as well as partnership interests where we are the sole general partner of the partnership. We evaluate our financial interests in business enterprises to determine if they represent variable interest entities where we are the primary beneficiary. If such criteria are met, we consolidate the financial statements of such businesses with those of our own. Third party or affiliate ownership interests in our controlled subsidiaries are presented as noncontrolling interests. See Note 8 for information regarding noncontrolling interests.
If the entity is organized as a limited partnership or limited liability company and maintains separate ownership accounts, we account for our investment using the equity method if our ownership interest is between 3% and 50%, unless our interest is so minor that we have virtually no influence over the investee’s operating and financial policies. For all other types of investments, we apply the equity method of accounting if our ownership interest is between 20% and 50% and we exercise significant influence over the investee’s operating and financial policies. In consolidation, we eliminate our proportionate share of profits and losses from transactions with equity method unconsolidated affiliates to the extent such amounts remain on our Consolidated Balance Sheets (or those of our equity method investments) in inventory or similar accounts.
Contingencies
Certain conditions may exist as of the date our consolidated financial statements are issued, which may result in a loss to us but which will only be resolved when one or more future events occur or fail to occur. Management has regular quarterly litigation reviews, including updates from legal counsel, to assess the need for accounting recognition or disclosure of these contingencies, and such assessment inherently involves an exercise in judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, our management and legal counsel evaluate the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
We accrue an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. We do not record a contingent liability when the likelihood of loss is probable but the amount cannot be reasonably estimated or when the likelihood of loss is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is reasonably possible and the impact would be material to our consolidated financial statements, we disclose the nature of the contingency and, where feasible, an estimate of the possible loss or range of loss.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. See Note 17 for additional information regarding our contingencies.
Current Assets and Current Liabilities
We present, as individual captions in our Consolidated Balance Sheets, all components of current assets and current liabilities that exceed 5% of total current assets and current liabilities, respectively.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments
We use derivative instruments such as futures, swaps, forward contracts and other arrangements to manage price risks associated with inventories, firm commitments, interest rates and certain anticipated future commodity transactions. To qualify for hedge accounting, the hedged item must expose us to risk and the related derivative instrument must reduce the exposure to that risk and meet specific hedge documentation requirements related to designation dates, expectations for hedge effectiveness and the probability that hedged future transactions will occur as forecasted. We formally designate derivative instruments as hedges and document and assess their effectiveness at inception of the hedge and on a monthly basis thereafter. Forecasted transactions are evaluated for the probability of occurrence and are periodically back-tested once the forecasted period has passed to determine whether forecasted transactions are probable of occurring in the future.
We are required to recognize derivative instruments at fair value as either assets or liabilities on our Consolidated Balance Sheets unless such instruments meet certain normal purchase/normal sale criteria. While all derivatives are required to be reported at fair value on the balance sheet, changes in fair value of derivative instruments are reported in different ways, depending on the nature and effectiveness of the hedging activities to which they relate. After meeting specified conditions, a qualified derivative may be designated as a total or partial hedge of:
• Changes in the fair value of a recognized asset or liability, or an unrecognized firm commitment - In a fair value hedge, gains and losses for both the derivative instrument and the hedged item are recognized in income during the period of change.
• Variable cash flows of a forecasted transaction - In a cash flow hedge, the change in the fair value of the hedge is reported in other comprehensive income (loss) and is reclassified to earnings when the forecasted transaction affects earnings.
An effective hedge relationship is one in which the change in fair value of a derivative instrument can be expected to offset 80% to 125% of the changes in fair value of a hedged item at inception and throughout the life of the hedging relationship. The effective portion of a hedge relationship is the amount by which the derivative instrument exactly offsets the change in fair value of the hedged item during the reporting period.
A contract designated as a cash flow hedge of an anticipated transaction that is not probable of occurring is immediately recognized in earnings.
Certain of our derivative instruments do not qualify for hedge accounting treatment; therefore, these instruments are accounted for using mark-to-market accounting.
For certain physical forward commodity derivative contracts, we apply the normal purchase/normal sale exception, whereby changes in the mark-to-market values of such contracts are not recognized in income. As a result, the revenues and expenses associated with such physical transactions are recognized during the period when volumes are physically delivered or received. Physical forward commodity contracts subject to this exception are evaluated for the probability of future delivery and are periodically back-tested once the forecasted period has passed to determine whether similar forward contracts are probable of physical delivery in the future. See Note 14 for additional information regarding our derivative instruments.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Environmental Costs
Environmental costs for remediation are accrued based on estimates of known remediation requirements. Such accruals are based on management’s best estimate of the ultimate cost to remediate a site and are adjusted as further information and circumstances develop. Those estimates may change substantially depending on information about the nature and extent of contamination, appropriate remediation technologies and regulatory approvals. Expenditures to mitigate or prevent future environmental contamination are capitalized. Ongoing environmental compliance costs are charged to expense as incurred. In accruing for environmental remediation liabilities, costs of future expenditures for environmental remediation are not discounted to their present value, unless the amount and timing of the expenditures are fixed or reliably determinable. At December 31, 2019, none of our estimated environmental remediation liabilities were discounted to present value since the ultimate amount and timing of cash payments for such liabilities were not readily determinable.
The following table presents the activity of our environmental reserves for the years indicated:
At December 31, 2019 and 2018, $5.8 million and $3.2 million, respectively, of our environmental reserves were classified as current liabilities.
Estimates
Preparing our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates that affect amounts presented in the financial statements. Our most significant estimates relate to (i) the useful lives and depreciation/amortization methods used for fixed and identifiable intangible assets; (ii) measurement of fair value and projections used in impairment testing of fixed and intangible assets (including goodwill); (iii) contingencies; and (iv) revenue and expense accruals.
Actual results could differ materially from our estimates. On an ongoing basis, we review our estimates based on currently available information. Any changes in the facts and circumstances underlying our estimates may require us to update such estimates, which could have a material impact on our consolidated financial statements.
Fair Value Measurements
Our fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk, in the principal market of the asset or liability at a specified measurement date. Recognized valuation techniques employ inputs such as contractual prices, quoted market prices or rates, operating costs, discount factors and business growth rates. These inputs may be either readily observable, corroborated by market data or generally unobservable. In developing our estimates of fair value, we endeavor to utilize the best information available and apply market-based data to the highest extent possible. Accordingly, we utilize valuation techniques (such as the market approach) that maximize the use of observable inputs and minimize the use of unobservable inputs.
A three-tier hierarchy has been established that classifies fair value amounts recognized in the financial statements based on the observability of inputs used to estimate such fair values. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). At each balance sheet reporting date, we categorize our financial assets and liabilities using this hierarchy.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The characteristics of fair value amounts classified within each level of the hierarchy are described as follows:
• Level 1 fair values are based on quoted prices, which are available in active markets for identical assets or liabilities as of the measurement date. Active markets are defined as those in which transactions for identical assets or liabilities occur with sufficient frequency so as to provide pricing information on an ongoing basis (e.g., the New York Mercantile Exchange (“NYMEX”)). Our Level 1 fair values consist of financial assets and liabilities such as exchange-traded commodity derivative instruments.
• Level 2 fair values are based on pricing inputs other than quoted prices in active markets (as reflected in Level 1 fair values) and are either directly or indirectly observable as of the measurement date. Level 2 fair values include instruments that are valued using financial models or other appropriate valuation methodologies. Such financial models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, the time value of money, volatility factors, current market and contractual prices for the underlying instruments and other relevant economic measures. Substantially all of these assumptions (i) are observable in the marketplace throughout the full term of the instrument; (ii) can be derived from observable data; or (iii) are validated by inputs other than quoted prices (e.g., interest rate and yield curves at commonly quoted intervals). Our Level 2 fair values primarily consist of commodity derivative instruments such as forwards, swaps and other instruments transacted on an exchange or over-the-counter and interest rate derivative instruments. The fair values of these derivative instruments are based on observable price quotes for similar products and locations. The fair value of our interest rate derivatives are determined using financial models that incorporate third-party yield curves for the same period as the future interest rate swap settlements.
• Level 3 fair values are based on unobservable inputs. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Unobservable inputs reflect management’s ideas about the assumptions that market participants would use in pricing an asset or liability (including assumptions about risk). Unobservable inputs are based on the best information available to us in the circumstances, which might include our internally developed data. Level 3 inputs are typically used in connection with internally developed valuation methodologies where we make our best estimate of an instrument’s fair value. With regards to commodity derivatives, our Level 3 fair values primarily consist of the following commodity derivative instruments which are used to hedge our various inventories and transportation capacities: (i) NGL-based contracts with terms greater than one year; (ii) crude, natural gas and refined products-based contracts with terms greater than 36 months; (iii) over-the-counter options; and (iv) exchange traded options with terms greater than one year. In addition, we often rely on price quotes from reputable brokers who publish price quotes on certain products and compare these prices to other reputable brokers for the same products in the same markets whenever possible. These prices, when combined with data from our commodity derivative instruments, are used in our models to determine the fair value of such instruments.
Impairment Testing for Goodwill
See Note 6 for information regarding our annual goodwill impairment test.
Impairment Testing for Long-Lived Assets
Long-lived assets, which consist of intangible assets with finite useful lives and property, plant and equipment, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Long-lived assets with carrying values that are not expected to be recovered through future cash flows are written-down to their estimated fair values. The carrying value of a long-lived asset is deemed not recoverable if it exceeds the sum of undiscounted estimated cash flows expected to result from the use and eventual disposition of the asset. If the asset’s carrying value exceeds the sum of its undiscounted cash flows, a non-cash asset impairment charge equal to the excess of the asset’s carrying value over its estimated fair value is recorded. Fair value is defined as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at a specified measurement date. We measure fair value using market price indicators or, in the absence of such data, appropriate valuation techniques. See Note 14 for information regarding non-cash impairment charges related to long-lived assets.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment Testing for Unconsolidated Affiliates
We evaluate our equity method investments for impairment when there are events or changes in circumstances that indicate there is a potential loss in value of the investment attributable to an other than temporary decline. Examples of such events or changes in circumstances include continuing operating losses of the entity and/or long-term negative changes in the entity’s industry. In the event we determine that the value of an investment is not recoverable due to an other than temporary decline, we record a non-cash impairment charge to adjust the carrying value of the investment to its estimated fair value.
There were no impairment charges related to our equity method investments during the years ended December 31, 2018 and 2017. In 2019, we recorded a $76.4 million impairment charge to write-off our investment in Centennial Pipeline LLC. See Note 5 for information regarding our equity method investments.
Inventories
Inventories primarily consist of NGLs, petrochemicals, refined products, crude oil and natural gas volumes that are valued at the lower of cost or net realizable value. We capitalize, as a cost of inventory, shipping and handling charges (e.g., pipeline transportation and storage fees) and other related costs associated with purchased volumes. As volumes are sold and delivered out of inventory, the cost of these volumes (including freight-in charges that have been capitalized as part of inventory cost) are charged to operating costs and expenses. Shipping and handling fees associated with products we sell and deliver to customers are charged to operating costs and expenses as incurred. See Note 3 for additional information regarding our inventories.
Leases
In February 2016, the FASB issued Accounting Standards Codification (“ASC”) 842, Leases, which requires substantially all leases be recorded on the balance sheet. We adopted the new standard on January 1, 2019 and applied it to (i) all new leases entered into after January 1, 2019 and (ii) all existing lease contracts as of January 1, 2019. ASC 842 supersedes existing lease accounting guidance found under ASC 840, Leases.
The new standard introduces two lessee accounting models, which results in a lease being classified as either a “finance” or “operating” lease based on whether the lessee effectively obtains control of the underlying asset during the lease term. A lease would be classified as a finance lease if it meets one of five classification criteria, four of which are generally consistent with ASC 840 lease accounting guidance. By default, a lease that does not meet the criteria to be classified as a finance lease will be deemed an operating lease. Regardless of classification, the initial measurement of both lease types will result in the balance sheet recognition of a right-of-use (“ROU”) asset (representing a company’s right to use the underlying asset for a specified period of time) and a corresponding lease liability. The lease liability will be recognized at the present value of the future lease payments, and the ROU asset will equal the lease liability adjusted for any prepaid rent, lease incentives provided by the lessor, and any indirect costs.
The subsequent measurement of each type of lease varies. For finance leases, a lessee will amortize the ROU asset (generally on a straight-line basis in a manner similar to depreciation) and accrete the lease liability (as a component of interest expense) using the effective interest method. Operating leases will result in the recognition of a single lease expense amount that is recorded on a straight-line basis.
ASC 842 resulted in changes to the way our operating leases are recorded, presented and disclosed in our consolidated financial statements. Upon adoption of ASC 842 on January 1, 2019, we recognized a ROU asset and a corresponding lease liability based on the present value of then existing long-term operating lease obligations. In addition, we elected to apply several practical expedients and made accounting policy elections upon adoption of ASC 842 including:
• We do not recognize ROU assets and lease liabilities for short-term leases and instead record them in a manner similar to operating leases under legacy lease accounting guidelines. A short term lease is one with a maximum lease term of 12 months or less and does not include a purchase option the lessee is reasonably certain to exercise.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• We did not reassess whether any expired or existing contracts as of January 1, 2019 contained leases or the lease classification for any such existing or expired leases.
• The impact of adopting ASC 842 was prospective beginning January 1, 2019. We did not recast prior periods presented in our consolidated financial statements to reflect the new lease accounting guidance.
• We combine lease and nonlease components relating to our office and warehouse leases, as applicable.
See Note 17 for our disclosures regarding operating lease obligations.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Expenditures for additions, improvements and other enhancements to property, plant and equipment are capitalized, and minor replacements, maintenance, and repairs that do not extend asset life or add value are charged to expense as incurred. When property, plant and equipment assets are retired or otherwise disposed of, the related cost and accumulated depreciation is removed from the accounts and any resulting gain or loss is included in results of operations for the respective period.
We capitalize interest costs incurred on funds used to construct property, plant and equipment while the asset is in its construction phase. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life as a component of depreciation expense. When capitalized interest is recorded, it reduces interest expense from what it would be otherwise.
In general, depreciation is the systematic and rational allocation of an asset’s cost, less its residual value (if any), to the periods it benefits. The majority of our property, plant and equipment is depreciated using the straight-line method, which results in depreciation expense being incurred evenly over the life of an asset. Our estimate of depreciation expense incorporates management assumptions regarding the useful economic lives and residual values of our assets. With respect to midstream energy assets such as natural gas gathering systems that are reliant upon a specific natural resource basin for throughput volumes, the anticipated useful economic life of such assets may be limited by the estimated life of the associated natural resource basin from which the assets derive benefit. Our forecast of the remaining life for the applicable resource basins is based on several factors, including information published by the U.S. Energy Information Administration. Where appropriate, we use other depreciation methods (generally accelerated) for tax purposes.
Leasehold improvements are recorded as a component of property, plant and equipment. The cost of leasehold improvements is charged to earnings using the straight-line method over the shorter of (i) the remaining lease term or (ii) the estimated useful lives of the improvements. We consider renewal terms that are deemed reasonably assured when estimating remaining lease terms.
Our assumptions regarding the useful economic lives and residual values of our assets may change in response to new facts and circumstances, which would prospectively impact our depreciation expense amounts. Examples of such circumstances include, but are not limited to: (i) changes in laws and regulations that limit the estimated economic life of an asset; (ii) changes in technology that render an asset obsolete; (iii) changes in expected salvage values or (iv) significant changes in the forecast life of the applicable resource basins, if any.
Certain of our plant operations entail periodic planned outages for major maintenance activities. These planned shutdowns typically result in significant expenditures, which are principally comprised of amounts paid to third parties for materials, contract services and related items. We use the expense-as-incurred method for our planned major maintenance activities for plant operations; however, the cost of annual planned major maintenance projects for such plants are deferred and recognized on a straight-line basis over the remaining portion of the fiscal year in which the maintenance occurred. With regard to the planned major maintenance activities on our marine transportation assets and underground storage caverns, we use the deferral method to account for such costs. Under this method, major maintenance costs are capitalized and amortized over the period until the next major overhaul or cavern integrity project.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset retirement obligations (“AROs”) are legal obligations associated with the retirement of tangible long-lived assets that result from their acquisition, construction, development and/or normal operation. When an ARO is incurred, we record a liability for the ARO and capitalize an equal amount as an increase in the carrying value of the related long-lived asset. ARO amounts are measured at their estimated fair value using expected present value techniques. Over time, the ARO liability is accreted to its present value (through accretion expense) and the capitalized amount is depreciated over the remaining useful life of the related long-lived asset. We will incur a gain or loss to the extent that our ARO liabilities are not settled at their recorded amounts.
See Note 4 for additional information regarding our property, plant and equipment and AROs.
Revenues
For periods prior to January 1, 2018, we accounted for our revenue streams using ASC 605, Revenue Recognition. Under ASC 605, we recognized revenue when all of the following criteria were met: (i) persuasive evidence of an exchange arrangement existed between us and the counterparty (e.g., published tariffs), (ii) delivery of products or the rendering of services had occurred, (iii) the price of the products or the fee for services was fixed or determinable and (iv) collectibility of the amount owed by the counterparty was reasonably assured.
We adopted ASC 606, Revenue from Contracts with Customers, on January 1, 2018 using a modified retrospective approach that applied the new revenue recognition standard to existing contracts at the implementation date and any future revenue contracts. As such, our consolidated revenues and related financial information for periods prior to January 1, 2018 were not adjusted and continue to be reported in accordance with ASC 605. We did not record a cumulative effect adjustment upon initially applying ASC 606 since there was no impact on partners’ equity upon adoption; however, the extent of our revenue-related disclosures has increased under the new standard. There are no material differences in the amount or timing of revenues recognized under ASC 606 when compared to ASC 605.
The core principle of ASC 606 is that a company should recognize revenue in a manner that fairly depicts the transfer of goods or services to customers in amounts that reflect the consideration the company expects to receive for those goods or services. We apply this core principle by following five key steps outlined in ASC 606: (i) identify the contract; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the performance obligation is satisfied. Each of these steps involves management judgment and an analysis of the contract’s material terms and conditions.
Substantially all of our revenues are accounted for under ASC 606; however, to a limited extent, some revenues are accounted for under other guidance such as ASC 842, Leases, ASC 845, Nonmonetary Transactions, or ASC 815, Derivatives and Hedging Activities.
Under ASC 606, we recognize revenue when or as we satisfy our performance obligation to the customer. In situations where we have recognized revenue, but have a conditional right to consideration (based on something other than the passage of time) from the customer, we recognize unbilled revenue (a contract asset) on our consolidated balance sheet. Unbilled revenue is reclassified to accounts receivable when we have an unconditional right of payment from the customer. Payments received from customers in advance of the period in which we satisfy a performance obligation are recorded as deferred revenue (a contract liability) on our consolidated balance sheet.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our revenue streams are derived from the sale of products and providing midstream services. Revenues from the sale of products are recognized at a point in time, which represents the transfer of control (and the satisfaction of our performance obligation under the contract) to the customer. From that point forward, the customer is able to direct the use of, and obtain substantially all the benefits from, its use of the products. With respect to midstream services (e.g., interruptible transportation), we satisfy our performance obligations over time and recognize revenues when the services are provided and the customer receives the benefits based on an output measure of volumes redelivered. We believe this measure is a faithful depiction of the transfer of control for midstream services since there is (i) an insignificant period of time between the receipt of customers’ volumes and their subsequent redelivery, and (ii) it is not possible to individually track and differentiate customers’ inventories as they traverse our facilities. For stand-ready performance obligations (e.g., a storage capacity reservation contract), we recognize revenues over time on a straight-line basis as time elapses over the term of the contract. We believe that these approaches accurately depict the transfer of benefits to the customer.
Customers are invoiced for products purchased or services rendered when we have an unconditional right to consideration under the associated contract. The consideration we are entitled to invoice may be either fixed, variable or a combination of both. Examples of fixed consideration would be fixed payments from customers under take-or-pay arrangements, storage capacity reservation agreements and firm transportation contracts. Variable consideration represents payments from customers that are based on factors that fluctuate (or vary) based on volumes, prices or both. Examples of variable consideration include interruptible transportation agreements, market-indexed product sales contracts and the value of NGLs we retain under natural gas processing agreements. The terms of our billings are typical of the industry for the products we sell.
Under certain midstream service agreements, customers are required to provide a minimum volume over an agreed-upon period with a provision that allows the customer to make-up any volume shortfalls over an agreed-upon period (referred to as “make-up rights”). Revenue pursuant to such agreements is initially deferred and subsequently recognized when either the make-up rights are exercised, the likelihood of the customer exercising the rights becomes remote, or we are otherwise released from the performance obligation.
Customers may contribute funds to us to help offset the construction costs related to pipeline construction activities and production well tie-ins. Under ASC 605, these amounts were accounted for as contributions in aid of construction costs (“CIACs”) and netted against property, plant and equipment. Under ASC 606, these receipts are recognized as additional service revenues over the term of the associated midstream services provided to the customer.
For those contracts under which we have the ability to invoice the customer in an amount that corresponds directly with the value of the performance obligation completed to date, we recognize revenue as we have the right to invoice.
See Note 9 regarding our revenue disclosures.
Note 3. Inventories
Our inventory amounts by product type were as follows at the dates indicated:
In those instances where we take ownership of inventory volumes through percent-of-liquids contracts and similar arrangements (as opposed to outright purchases from third parties for cash), these volumes are valued at market-based prices during the month in which they are acquired.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents our total cost of sales amounts and lower of cost or net realizable value adjustments for the years indicated:
(1)
Cost of sales is a component of “Operating costs and expenses,” as presented on our Statements of Consolidated Operations. Fluctuations in these amounts are primarily due to changes in energy commodity prices and sales volumes associated with our marketing activities.
Due to fluctuating commodity prices, we recognize lower of cost or net realizable value adjustments when the carrying value of our available-for-sale inventories exceeds their net realizable value. These non-cash charges are a component of cost of sales in the period they are recognized. To the extent our commodity hedging strategies address inventory-related price risks and are successful, these inventory valuation adjustments are mitigated or offset. See Note 14 for a description of our commodity hedging activities.
Note 4. Property, Plant and Equipment
The historical costs of our property, plant and equipment and related accumulated depreciation balances were as follows at the dates indicated:
(1)
Plants, pipelines and facilities include processing plants; NGL, natural gas, crude oil and petrochemical and refined products pipelines; terminal loading and unloading facilities; buildings; office furniture and equipment; laboratory and shop equipment and related assets. We placed a number of major growth projects into service during 2019 including the Shin Oak NGL pipeline, Midland-to-ECHO 2 pipeline, an isobutane dehydrogenation facility, the Mentone and Bulldog natural gas processing plants, and LPG-related expansion projects at our Enterprise Hydrocarbons Terminal.
(2)
Underground and other storage facilities include underground product storage caverns; above ground storage tanks; water wells and related assets.
(3)
Transportation equipment includes tractor-trailer tank trucks and other vehicles and similar assets used in our operations.
(4)
Marine vessels include tow boats, barges and related equipment used in our marine transportation business.
(5)
In general, the estimated useful lives of major assets within this category are: processing plants, 20-35 years; pipelines and related equipment, 5-45 years; terminal facilities, 10-35 years; buildings, 20-40 years; office furniture and equipment, 3-20 years; and laboratory and shop equipment, 5-35 years.
(6)
In general, the estimated useful lives of assets within this category are: underground storage facilities, 5-35 years; storage tanks, 10-40 years; and water wells, 5-35 years.
The following table summarizes our depreciation expense and capitalized interest amounts for the years indicated:
(1)
Depreciation expense is a component of “Costs and expenses” as presented on our Statements of Consolidated Operations.
(2)
Capitalized interest is a component of “Interest expense” as presented on our Statements of Consolidated Operations.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Asset Retirement Obligations
We record AROs in connection with legal requirements to perform specified retirement activities under contractual arrangements and/or governmental regulations. Our contractual AROs primarily result from right-of-way agreements associated with our pipeline operations and property leases associated with our plant sites. In addition, we record AROs in connection with governmental regulations associated with the abandonment or retirement of above-ground brine storage pits and certain marine vessels. We also record AROs in connection with regulatory requirements associated with the renovation or demolition of certain assets containing hazardous substances such as asbestos. We typically fund our AROs using cash flow from operations.
Property, plant and equipment at December 31, 2019 and 2018 includes $69.6 million and $72.5 million, respectively, of asset retirement costs capitalized as an increase in the associated long-lived asset.
The following table presents information regarding our AROs for the years indicated:
The following table presents our forecast of ARO-related accretion expense for the years indicated:
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Investments in Unconsolidated Affiliates
The following table presents our investments in unconsolidated affiliates by business segment at the dates indicated. We account for these investments using the equity method.
(1)
The investment in Centennial was written off in December 2019.
NGL Pipelines & Services
The principal business activity of each investee included in our NGL Pipelines & Services segment is described as follows:
• VESCO owns the Venice natural gas processing facility and a related gathering system located in south Louisiana.
• Promix owns an NGL fractionation facility and a related gathering system located in south Louisiana.
• BRF owns an NGL fractionation facility located in south Louisiana.
• Skelly-Belvieu owns a pipeline that transports mixed NGLs from Skellytown, Texas to Mont Belvieu, Texas.
• Texas Express owns an NGL pipeline that extends from Skellytown to our Mont Belvieu NGL fractionation and storage complex. Mixed NGLs from the Rocky Mountains, Permian Basin and Mid-Continent regions are delivered to the Texas Express Pipeline via an interconnect with our Mid-America Pipeline System near Skellytown. In addition, mixed NGLs from the Denver-Julesburg (“DJ”) Basin in Colorado are delivered to the Texas Express Pipeline via an interconnect with the Front Range Pipeline near Skellytown. The Texas Express Pipeline is also used to transport mixed NGLs gathered by TEG to Mont Belvieu.
• TEG owns two NGL gathering systems that deliver mixed NGLs to the Texas Express Pipeline.
• Front Range owns an NGL pipeline that transports mixed NGLs from natural gas processing facilities located in the DJ Basin to an interconnect with our Texas Express Pipeline and Mid-America Pipeline System and other third party facilities near Skellytown.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Crude Oil Pipelines & Services
The principal business activity of each investee included in our Crude Oil Pipelines & Services segment is described as follows:
• Seaway owns a crude oil pipeline system that connects the Cushing, Oklahoma hub, which is a major industry trading hub and price settlement point for West Texas Intermediate on the NYMEX, with markets in Southeast Texas. The Seaway Pipeline is comprised of the Longhaul System, the Freeport System and the Texas City System.
• Eagle Ford Crude Oil Pipeline owns a pipeline that transports crude oil and condensate for producers in South Texas. The system originates in Gardendale, Texas and extends to Three Rivers, Texas and further to Corpus Christi, Texas. The system interconnects with our South Texas Crude Oil Pipeline System and a marine terminal owned by Eagle Ford Corpus Christi.
• Eagle Ford Corpus Christi owns a marine crude oil terminal located in Corpus Christi, Texas that can load ocean-going vessels with either crude oil or condensate. The terminal commenced operations in the third quarter of 2019.
Natural Gas Pipelines & Services
The principal business activity of each investee included in our Natural Gas Pipelines & Services segment is described as follows:
• White River Hub owns a natural gas hub facility serving producers in the Piceance Basin of northwest Colorado.
• Old Ocean owns a natural gas pipeline that extends from near Maypearl, Texas to Sweeny, Texas.
Petrochemical & Refined Products Services
The principal business activity of each investee included in our Petrochemical & Refined Products Services segment is described as follows:
• BRPC owns a propylene fractionation facility located in south Louisiana.
• Transport 4 provides pipeline and terminal logistics services used by our refined products pipelines.
Centennial
In December 2019, we recorded a $76.4 million impairment charge to fully write-off our 50% equity method investment in Centennial, which owns the Centennial Pipeline and related terminal infrastructure. The impairment charge is a component of operating costs and expenses for the year ended December 31, 2019 as presented on our Statements of Consolidated Operations.
The Centennial assets were idled in 2013 while management investigated multiple capital project opportunities to repurpose the pipeline. As a result of losses incurred following idling of the pipeline, we tested our equity method investment in Centennial for impairment in each of the last three fiscal years. Our valuation estimates, which were based on a combination of market and income approaches, indicated that the fair value of our investment was in excess of its carrying value during the years ended December 31, 2018 and 2017 and that no impairment was indicated. However, due to recent declines in the viability of potential commercial transactions involving the pipeline, we concluded that our investment was not recoverable and had no fair value at December 31, 2019.
We continue to own a 50% equity interest in the Centennial Pipeline, which is being maintained in an idled state in accordance with governmental regulations.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Earnings
The following table presents our equity in income (loss) of unconsolidated affiliates by business segment for the years indicated:
(1)
The losses recorded for this segment are primarily due to protection, maintenance and pipeline integrity costs of the idled Centennial Pipeline, which was purged and filled with nitrogen in 2013. Although we wrote off our investment in Centennial in 2019, we, as a 50% owner of Centennial, have a continuing obligation to fund the pipeline’s costs in its idled state.
Excess Cost
On occasion, the price we pay to acquire an ownership interest in a company exceeds the underlying carrying value of the capital accounts we acquire. These excess cost amounts are attributable to the fair value of the underlying tangible assets of these entities exceeding their respective book carrying values at the time of our acquisition of ownership interests in these entities. We amortize such excess cost amounts as a reduction to equity earnings in a manner similar to depreciation. The following table presents our unamortized excess cost amounts by business segment at the dates indicated:
In total, amortization of excess cost amounts were $2.1 million for each of the years ended December 31, 2019, 2018 and 2017. We forecast that our amortization of excess cost amount will approximate $2.0 million in each of the next five years.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized Combined Financial Information of Unconsolidated Affiliates
Combined balance sheet information for the last two years and results of operations data for the last three years for our unconsolidated affiliates are summarized in the following table (all data presented on a 100% basis):
Note 6. Intangible Assets and Goodwill
Identifiable Intangible Assets
The following table summarizes our intangible assets by business segment at the dates indicated:
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the amortization expense of our intangible assets by business segment for the years indicated:
The following table presents our forecast of amortization expense associated with existing intangible assets for the years indicated:
Customer relationship intangible assets
Customer relationship intangible assets represent the estimated economic value assigned to commercial relationships acquired in connection with business combinations. Our customer relationship intangible assets are classified as either (i) basin-specific or (ii) general. Basin-specific customer relationships represent access to customers associated with a defined resource basin (e.g., customers using a natural gas gathering system serving a specific production field) and is analogous to having a franchise in a particular area. General customer relationships are associated with customers whose hydrocarbon volumes are not attributable to specific resource basins (e.g. customers at a marine terminal that handles volumes originating from multiple sources).
The estimated fair value of each customer relationship intangible asset was determined at the time of acquisition using a discounted cash flow analysis, which incorporates various assumptions regarding the acquired business. The assumptions may include Level 3 fair value inputs, including long-range cash flow forecasts that extend for the estimated economic life of the hydrocarbon resource base served by the asset network, anticipated service contract renewals, resource base depletion rates and expected customer attrition rates.
The recognition of customer relationships are supported by a variety of factors. In general, midstream infrastructure requires a significant investment, both in terms of initial construction costs and ongoing maintenance, and is generally supported by long-term contracts that establish a customer base. The level of expenditures and regulatory requirements involved in constructing new midstream asset networks can create significant economic barriers to entry that may limit potential competition. Furthermore, efficient, continuous operation of the acquired fixed assets not only supports the commercial relationships existing at the time of the acquisition, but it provides us with opportunities to establish new ones. These factors support the long-term value attributed to our customer relationship intangible assets.
With respect to amortization periods, the duration of a basin-specific customer relationship is limited to the estimated economic life of the associated resource basin. The duration of our other customer relationships is typically limited to the term of the underlying service contracts, including assumed renewals. Amortization expense attributable to customer relationships is recorded in a manner that closely resembles the pattern in which we expect to benefit from such relationships.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2019, the carrying value of our portfolio of customer relationship intangible assets was $3.2 billion, the principal components of which were as follows:
• The EFS Midstream customer relationships provide us with long-term access to condensate and natural gas producers in the Eagle Ford Shale served by our EFS Midstream System. The EFS Midstream System provides condensate gathering and processing services along with gathering, treating and compression services for associated natural gas.
• The State Line and Fairplay customer relationships provide us with long-term access to natural gas producers served by our Haynesville and Fairplay Gathering Systems. The Haynesville Gathering System gathers and treats natural gas produced from the Haynesville and Bossier Shale supply basins and the Cotton Valley and Taylor Sand formations in Louisiana and East Texas. The Fairplay Gathering System gathers natural gas produced from the Cotton Valley formation in East Texas.
• The San Juan Gathering customer relationships provide us with long-term access to natural gas producers in the San Juan Basin served by our San Juan Gathering System.
• The Oiltanking customer relationships provide us with long-term access to crude oil and refined products storage and terminal customers served at our Houston Ship Channel and Beaumont, Texas terminals.
Contract-based intangible assets
Contract-based intangible assets represent specific commercial rights we acquired in connection with business combinations. These intangible assets are typically valued using an income approach that incorporate the terms of the agreements. At December 31, 2019, the carrying value of our portfolio of contract-based intangible assets was $254.9 million, the principal components of which were as follows:
• The Oiltanking customer contracts represent the estimated value we assigned to crude oil storage and terminal agreements we acquired in 2014 associated with our Houston and Beaumont marine terminals. Amortization expense attributable to these contracts is recorded using a straight-line approach over the terms of the underlying contracts.
• The Jonah natural gas gathering agreements represent the estimated value we assigned to natural gas gathering contracts acquired in 2001 associated with the Jonah Gathering System. Amortization expense attributable to these intangible assets is recorded using a units-of-production method based on gathering volumes.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• The Delaware Basin natural gas processing contracts represent the estimated value we assigned to natural gas processing contracts we acquired in March 2018 in connection with our step acquisition of the remaining 50% member interest in Delaware Basin Gas Processing LLC (“Delaware Processing”) (see Note 12). Amortization expense attributable to these contracts is recorded using a straight-line approach over the terms of the underlying contracts.
Goodwill
At December 31, 2019 and 2018, our goodwill balance was $5.75 billion. Goodwill represents the excess of the purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed in the transaction. Goodwill is not amortized; however, we evaluate goodwill for impairment on December 31 of each year or when impairment indicators (e.g., the loss of a significant customer, adverse long-term supply or demand trends, or technological obsolescence of assets) are present. Testing goodwill for impairment involves a two-step process. As Step 1 of the process, if impairment indicators are present, the estimated fair value of a reporting unit to which goodwill is assigned is determined and compared to its carrying value. As Step 2 of the process, if the fair value of the reporting unit is less than its carrying value (including associated goodwill), a non-cash impairment charge to earnings is recorded to reduce the carrying value of the goodwill to its implied fair value.
The results of our December 31, 2019 annual goodwill impairment test indicated that the estimated fair value of each applicable reporting unit exceeded its carrying value. Our fair value estimates are primarily based on the income approach to fair value, which relies on the use of discounted cash flows. The fair value estimates are based on Level 3 inputs of the fair value hierarchy. For example, the estimated fair values incorporate assumptions regarding the future economic prospects of the assets and operations that comprise each reporting unit including: (i) discrete financial forecasts for the assets classified within the reporting unit, which, in turn, rely on management’s estimates of long-term operating margins, throughput volumes and similar factors; (ii) long-term growth rates for cash flows beyond the discrete forecast period; and (iii) appropriate discount rates. We believe that the assumptions we use in estimating reporting unit fair values are consistent with those that market participants would use in their fair value estimation process.
We did not record any goodwill impairment charges, or reclassify any goodwill amounts between business segments, during the years ended December 31, 2019, 2018 or 2017. See Note 10 for our goodwill by segment balances.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We adopted this guidance on January 1, 2020 for future goodwill impairment testing.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Debt Obligations
The following table presents our consolidated debt obligations (arranged by company and maturity date) at the dates indicated:
(1)
Variable rate is reset quarterly and based on 3-month London Interbank Offered Rate ("LIBOR") plus 2.778%.
(2)
Fixed rate of 4.875% through August 15, 2022; thereafter, a variable rate reset quarterly and based on 3-month LIBOR plus 2.986%.
(3)
Fixed rate of 5.250% through August 15, 2027; thereafter, a variable rate reset quarterly and based on 3-month LIBOR plus 3.033%.
(4)
Fixed rate of 5.375% through February 14, 2028; thereafter, a variable rate reset quarterly and based on 3-month LIBOR plus 2.57%.
References to “TEPPCO” mean TEPPCO Partners, L.P. prior to its merger with one of our wholly owned subsidiaries in October 2009.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the range of interest rates and weighted-average interest rates paid on our consolidated variable-rate debt during the year ended December 31, 2019:
Amounts borrowed under our 364-Day and Multi-Year Revolving Credit Agreements bear interest, at our election, equal to: (i) LIBOR, plus an additional variable spread; or (ii) an alternate base rate, which is the greater of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.5%, or (c) the LIBO Market Index Rate in effect on such day plus 1% and a variable spread. The applicable spreads are determined based on our debt ratings.
The following table presents the scheduled contractual maturities of principal amounts of our consolidated debt obligations at December 31, 2019 for the next five years, and in total thereafter:
Parent-Subsidiary Guarantor Relationships
EPD acts as guarantor of the consolidated debt obligations of EPO, with the exception of the remaining debt obligations of TEPPCO. If EPO were to default on any of its guaranteed debt, EPD would be responsible for full and unconditional repayment of that obligation.
EPO Debt Obligations
Commercial Paper Notes
EPO maintains a commercial paper program under which it may issue (and have outstanding at any time) up to $3.0 billion in aggregate principal amount of short-term notes. As a back-stop to the program, we intend to maintain a minimum available borrowing capacity under EPO’s Multi-Year Revolving Credit Agreement equal to the aggregate amount outstanding under our commercial paper notes. All commercial paper notes issued under the program are senior unsecured obligations of EPO that are unconditionally guaranteed by EPD.
364-Day Credit Agreement
In September 2019, EPO entered into a new 364-Day Revolving Credit Agreement that replaced its prior 364-day credit facility. The new 364-Day Revolving Credit Agreement matures in September 2020. There are currently no principal amounts outstanding under this revolving credit agreement.
Under the terms of the new 364-Day Revolving Credit Agreement, EPO may borrow up to $1.5 billion (which may be increased by up to $200 million to $1.7 billion at EPO’s election, provided certain conditions are met) at a variable interest rate for a term of up to 364 days, subject to the terms and conditions set forth therein. To the extent that principal amounts are outstanding at the maturity date, EPO may elect to have the entire principal balance then outstanding continued as non-revolving term loans for a period of one additional year, payable in September 2021. Borrowings under this revolving credit agreement may be used for working capital, capital expenditures, acquisitions and general company purposes.
The new 364-Day Revolving Credit Agreement contains customary representations, warranties, covenants (affirmative and negative) and events of default, the occurrence of which would permit the lenders to accelerate the maturity date of any amounts borrowed under this credit agreement. The credit agreement also restricts EPO’s ability to pay cash distributions to its parent, EPD, if an event of default (as defined in the credit agreement) has occurred and is continuing at the time such distribution is scheduled to be paid or would result therefrom.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EPO’s obligations under the new 364-Day Revolving Credit Agreement are not secured by any collateral; however, they are guaranteed by EPD.
Multi-Year Revolving Credit Agreement
In September 2019, EPO entered into an amendment (the “First Amendment”) to its revolving credit agreement dated September 13, 2017 (the “Multi-Year Revolving Credit Agreement”). The First Amendment reduces the borrowing capacity under the Multi-Year Revolving Credit Agreement from $4.0 billion to $3.5 billion (which may be increased by up to $500 million to $4.0 billion at EPO’s election provided certain conditions are met) and extends the maturity date to September 10, 2024, although the maturity date may be extended further at EPO’s request by up to two years, with the consent of required lenders as set forth under the credit agreement. Borrowings under this revolving credit agreement may be used for working capital, capital expenditures, acquisitions and general company purposes.
The Multi-Year Revolving Credit Agreement contains customary representations, warranties, covenants (affirmative and negative) and events of default, the occurrence of which would permit the lenders to accelerate the maturity date of any amounts borrowed under this credit agreement. The Multi-Year Revolving Credit Agreement also restricts EPO’s ability to pay cash distributions to its parent, EPD, if an event of default (as defined in the credit agreement) has occurred and is continuing at the time such distribution is scheduled to be paid or would result therefrom.
EPO’s obligations under the Multi-Year Revolving Credit Agreement are not secured by any collateral; however, they are guaranteed by EPD.
Senior Notes
EPO’s fixed-rate senior notes are unsecured obligations of EPO that rank equal with its existing and future unsecured and unsubordinated indebtedness. They are senior to any existing and future subordinated indebtedness of EPO. EPO’s senior notes are subject to make-whole redemption rights and were issued under indentures containing certain covenants, which generally restrict its ability (with certain exceptions) to incur debt secured by liens and engage in sale and leaseback transactions. In total, EPO issued $2.5 billion and $5.0 billion of senior notes during the years ended December 31, 2019 and 2018, respectively.
In July 2019, EPO issued $2.5 billion aggregate principal amount of senior notes comprised of $1.25 billion principal amount of senior notes due July 2029 (“Senior Notes YY”) and $1.25 billion principal amount of senior notes due January 2050 (“Senior Notes ZZ”). Net proceeds from this offering were used by EPO for the repayment of debt and for general company purposes, including for growth capital expenditures. Senior Notes YY were issued at 99.955% of their principal amount and have a fixed interest rate of 3.125% per year. Senior Notes ZZ were issued at 99.792% of their principal amount and have a fixed interest rate of 4.20% per year. EPD has guaranteed these senior notes through an unconditional guarantee on an unsecured and unsubordinated basis.
See Note 22, Subsequent Events, for information regarding the issuance of Senior Notes AAA, BBB and CCC in January 2020.
EPO Junior Subordinated Notes
EPO’s payment obligations under its junior notes are subordinated to all of its current and future senior indebtedness (as defined in the related indenture agreement). EPD guarantees repayment of amounts due under these junior notes through an unsecured and subordinated guarantee. The indenture agreement governing these notes allows EPO to defer interest payments on one or more occasions for up to ten consecutive years subject to certain conditions. Subject to certain exceptions, during any period in which interest payments are deferred, neither we nor EPO can declare or make any distributions on any of our respective equity securities or make any payments on indebtedness or other obligations that rank equal with or are subordinate to our junior notes. Each series of our junior notes rank equal with each other. Generally, each series of junior notes are not redeemable by EPO while such notes bear interest at a fixed annual rate. In total, EPO issued $700.0 million and $1.7 billion of junior notes during the years ended December 31, 2018 and 2017, respectively.
In connection with the issuance of EPO’s Junior Subordinated Notes C, EPO entered into a Replacement Capital Covenant in favor of covered debt holders (as defined in the underlying documents) pursuant to which EPO agreed, for the benefit of such debt holders, that it would not redeem or repurchase such junior notes unless such redemption or repurchase is made using proceeds from the issuance of certain securities.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the second quarter of 2019, EPO repurchased and retired $24.2 million in principal amount of its Junior Subordinated Notes C. A $1.5 million gain on the extinguishment of these debt obligations is included in “Other, net” on our Statements of Consolidated Operations with respect to the year ended December 31, 2019.
Letters of Credit
At December 31, 2019, EPO had $101.4 million of letters of credit outstanding primarily related to our commodity hedging activities.
Lender Financial Covenants
We were in compliance with the financial covenants of our consolidated debt agreements at December 31, 2019.
Note 8. Equity and Distributions
Partners Equity
Partners’ equity reflects the classes of our limited partner interests outstanding. Our common units represent limited partner interests, which give the holders thereof the right to participate in distributions and to exercise the other rights or privileges available to them under our Sixth Amended and Restated Agreement of Limited Partnership (as amended from time to time, the “Partnership Agreement”). We are managed by our general partner, Enterprise GP.
In accordance with our Partnership Agreement, capital accounts are maintained for our limited partners. The capital account provisions of our Partnership Agreement incorporate principles established for U.S. federal income tax purposes and are not comparable to the equity amounts presented in our consolidated financial statements prepared in accordance with GAAP. Earnings and cash distributions are allocated to holders of our common units in accordance with their respective percentage interests.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes changes in the number of our units issued and outstanding since December 31, 2016:
The net cash proceeds we received from the issuance of common units during the year ended December 31, 2019 were used to temporarily reduce amounts outstanding under EPO’s commercial paper program and for general partnership purposes.
Common unit repurchases under buyback programs
In January 2019, we announced that the Board of Enterprise GP had approved a $2.0 billion multi-year unit buyback program (the “2019 Buyback Program”), which provides EPD with an additional method to return capital to investors. The 2019 Buyback Program authorizes EPD to repurchase its common units from time to time, including through open market purchases and negotiated transactions. The timing and pace of buy backs under the program will be determined by a number of factors including (i) our financial performance and flexibility, (ii) organic growth and acquisition opportunities with higher potential returns on investment, (iii) EPD’s unit price and implied cash flow yield and (iv) maintaining targeted financial leverage with a debt-to-normalized adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of approximately 3.5 times. No time limit has been set for completion of the program, and it may be suspended or discontinued at any time.
EPD repurchased 2,909,128 common units under the 2019 Buyback Program through open market purchases during the year ended December 31, 2019. The total purchase price of these repurchases was $81.1 million, excluding commissions and fees. The repurchased units were cancelled immediately upon acquisition. At December 31, 2019, the remaining available capacity under the 2019 Buyback Program was $1.92 billion.
In December 1998, we announced a common unit buyback program whereby we, together with certain affiliates, could repurchase up to 4,000,000 EPD common units on the open market (the “Legacy Buyback Program”). EPD purchased the remaining authorized amount of 1,236,800 common units in December 2018 for $30.8 million. The repurchased units were cancelled immediately upon acquisition.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Distribution reinvestment plan and employee unit purchase plan
We have a registration statement on file with the SEC in connection with our distribution reinvestment plan (“DRIP”). The DRIP provides unitholders of record and beneficial owners of our common units a voluntary means by which they can increase the number of our common units they own by reinvesting the quarterly cash distributions they receive from us into the purchase of additional common units at a discount ranging from 0% to 5.0%. Beginning with the distribution declared with respect to the fourth quarter of 2017 and paid in February 2018, the discount was reduced from 5.0% to 2.5%. Likewise, beginning with the distribution declared with respect to the fourth quarter of 2018 and paid in February 2019, the discount was reduced from 2.5% to 0%. We have the sole discretion to determine whether common units purchased under the DRIP will come from our authorized but unissued common units or from common units purchased on the open market by the DRIP administrator.
Activity under our DRIP for the last three years was as follows: 2,601,727 new common units issued during 2019, which generated net cash proceeds of $73.7 million; 19,316,781 new common units issued during 2018, which generated net cash proceeds of $523.3 million; and 18,541,355 new common units issued during 2017, which generated net cash proceeds of $462.9 million. Privately held affiliates of EPCO reinvested $29 million, $213 million and $100 million through the DRIP in each of the years ended December 31, 2019, 2018 and 2017, respectively (this amount being a component of the net cash proceeds presented for each period).
After taking into account the number of common units delivered under the DRIP through December 31, 2019, we have the capacity to deliver an additional 56,320,229 common units under this plan.
In addition to the DRIP, we have registration statements on file with the SEC in connection with our employee unit purchase plan (“EUPP”). Activity under our EUPP for the last three years was as follows: 296,263 new common units issued during 2019, which generated net cash proceeds of $8.5 million; 545,170 new common units issued during 2018, which generated net cash proceeds of $15.1 million; and 504,664 new common units issued during 2017, which generated net cash proceeds of $13.5 million.
After taking into account the number of common units delivered under the EUPP through December 31, 2019, we have the capacity to deliver an additional 4,596,585 common units under this plan.
In July 2019, EPD announced that, beginning with the quarterly distribution paid in August 2019, it would use common units purchased on the open market, rather than issuing new common units, to satisfy its delivery obligations under the DRIP and EUPP. This election is subject to change in future quarters depending on the Partnership’s need for equity capital. During 2019, a total of 2,801,196 common units were purchased on the open market and delivered to participants in connection with the DRIP and EUPP. Apart from $0.9 million attributable to the plan discount available to all participants in the EUPP, the funds used to effect these purchases were sourced from the DRIP and EUPP participants. No other Partnership funds were used to satisfy these obligations. We also used open market purchases to satisfy DRIP and EUPP investments in connection with the distribution paid on February 12, 2020.
Phantom unit vestings and related treasury unit transactions
During the year ended December 31, 2019, a total of 3,895,049 phantom units vested and 1,174,446 units were sold back to us by employees to cover withholding tax requirements in connection with the vestings. During the year ended December 31, 2018, a total of 3,479,958 phantom units vested and 1,037,522 units were sold back to us. During the year ended December 31, 2017, an aggregate 3,166,624 phantom and restricted unit awards vested and 1,027,798 units were sold back to us. We cancelled such treasury units immediately upon acquisition.
The total cost of these treasury unit purchases was $33.7 million, $27.3 million and $29.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. These amounts are reflected as a component of “Other, net” as presented on our Statements of Consolidated Equity.
See Note 13 for additional information regarding our equity-based awards.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common units issued in connection with employee compensation
In February 2019, 2018 and 2017, certain employees of EPCO received discretionary bonus payments, less any retirement plan deductions and applicable withholding taxes, for work performed on our behalf during the prior fiscal year (e.g., the bonus paid in February 2019 was with respect to the year ended December 31, 2018). The net dollar value of the bonus amounts was remitted to employees through the issuance of an equivalent value of newly issued EPD common units under EPCO’s 2008 Enterprise Products Long-Term Incentive Plan (Third Amendment and Restatement) (referred to as the “2008 Plan”).
In February 2019, we issued 1,626,041 common units, which had a value of $45.6 million, in connection with the employee bonus awards. In February 2018, we issued 1,443,586 common units, which had a value of $39.1 million, in connection with the employee bonus awards. In February 2017, we issued 1,176,103 common units, which had a value of $33.7 million. The compensation expense associated with each bonus award was recognized during the year in which the work was performed.
Common units issued in connection with land acquisition
In April 2018, we acquired land in the Houston, Texas area for $85.2 million. The consideration paid consisted of $55.2 million in cash with the balance funded by the issuance of 1,223,242 EPD common units.
At-the-Market (“ATM”) Program
In November 2017, we filed an amended registration statement with the SEC covering the issuance of up to $2.54 billion of our common units in amounts, at prices and on terms to be determined by market conditions and other factors at the time of such offerings in connection with our ATM program. Pursuant to this program, we may sell common units under an equity distribution agreement between EPD and certain broker-dealers from time-to-time by means of ordinary brokers’ transactions through the NYSE at market prices, in block transactions or as otherwise agreed to with the broker-dealer parties to the agreement.
We did not issue any common units under the ATM program during 2019 or 2018. During 2017, we issued 21,807,726 common units under the ATM program for aggregate gross cash proceeds of $603.1 million, resulting in total net cash proceeds of $597.0 million. After taking into account the aggregate sales price of common units sold under the ATM program through December 31, 2019, we have the capacity to issue additional common units under the ATM program up to an aggregate sales price of $2.54 billion.
Universal shelf registration statement
We have a universal shelf registration statement (the “2019 Shelf”) on file with the SEC which allows EPD and EPO (each on a standalone basis) to issue an unlimited amount of equity and debt securities, respectively. The 2019 Shelf replaced our prior universal shelf registration statement, which expired in May 2019. EPO used the 2019 Shelf to issue $2.5 billion aggregate principal amount of senior notes during the year ended December 31, 2019 (see Note 7). In addition, EPO used the 2019 Shelf to issue $3.0 billion aggregate principal amount of senior notes in January 2020 (see Note 22). We may issue additional equity and debt securities in the future to assist us in meeting our funding and liquidity requirements, including those related to capital investments.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) primarily reflects cumulative gain or loss on derivative instruments designated and qualified as cash flow hedges from inception less gains or losses previously reclassified from accumulated other comprehensive income (loss) into earnings. Gain or loss amounts related to cash flow hedges recorded in accumulated other comprehensive income (loss) are reclassified to earnings in the same period(s) in which the underlying hedged forecasted transactions affect earnings. If it becomes probable that a forecasted transaction will not occur, the related net gain or loss in accumulated other comprehensive income (loss) is immediately reclassified into earnings.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the components of accumulated other comprehensive income (loss) as reported on our Consolidated Balance Sheets at the dates indicated:
The following table presents reclassifications of (income) loss out of accumulated other comprehensive income (loss) into net income during the years indicated:
For information regarding our interest rate and commodity derivative instruments, see Note 14.
Noncontrolling Interests
Noncontrolling interests represent third party ownership interests in our consolidated subsidiaries.
Breviloba LLC
In July 2019, Altus Midstream Processing LP acquired a noncontrolling 33% equity interest in our consolidated subsidiary, Breviloba LLC, that owns the Shin Oak NGL Pipeline for $440.7 million in cash.
Pascagoula Gas Processing LLC
In June 2019, an affiliate of Third Coast Midstream, LLC acquired a noncontrolling 25% equity interest in our consolidated subsidiary, Pascagoula Gas Processing LLC, that owns the Pascagoula natural gas processing plant for $36.0 million in cash.
Baymark Pipeline LLC
In May 2019, we formed a new business venture with Lavaca Pipe Line Company (“Lavaca”) to construct and own an ethylene pipeline in South Texas. Lavaca holds a noncontrolling 30% equity interest in Baymark Pipeline LLC, which owns the pipeline.
Whitethorn Pipeline Company LLC
In June 2018, an affiliate of Western Gas Partners, LP acquired a noncontrolling 20% equity interest in our subsidiary, Whitethorn Pipeline Company LLC (“Whitethorn”), for $189.6 million in cash. Whitethorn owns the majority of our Midland-to-ECHO 1 pipeline.
Enterprise Navigator Ethylene Terminal LLC
In January 2018, we formed a new business venture with Navigator Ethylene Terminals LLC (“Navigator”) to construct and own an ethylene export terminal, which is located at Morgan’s Point on the Houston Ship Channel. Navigator holds a noncontrolling 50% equity interest in Enterprise Navigator Ethylene Terminal LLC, which owns the export facility.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Distributions
The following table presents Enterprise’s declared quarterly cash distribution rates per common unit with respect to the quarter indicated. Actual cash distributions are paid by Enterprise within 45 days after the end of each fiscal quarter.
In January 2020, based on current expectations, management announced its plans to continue to recommend to the Board an increase of $0.0025 per unit per quarter to our cash distribution rate with respect to 2020. The anticipated rate of increase would result in distributions for 2020 (of $1.8050 per unit) being 2.3% higher than those paid for 2019 (of $1.7650 per unit). The payment of any quarterly cash distribution is subject to Board approval and management’s evaluation of our financial condition, results of operations and cash flows in connection with such payment.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Revenues
We classify our revenues into sales of products and midstream services. Product sales relate primarily to our various marketing activities whereas midstream services represent our other integrated businesses (i.e., gathering, processing, transportation, fractionation, storage and terminaling). The following table presents our revenues by business segment, and further by revenue type, for the years indicated:
(1)
Revenues are accounted for under ASC 606.
(2)
Revenues are accounted for under ASC 605.
Substantially all of our revenues are derived from contracts with customers as defined within ASC 606. The following information describes the nature of our significant revenue streams by segment and type:
NGL Pipelines & Services
Sales of NGLs and related products
NGL marketing activities generate revenues from spot and term sales of NGLs and related products that we take title to through our natural gas processing activities (i.e., our equity NGL production) and open market and long-term contract purchases. Revenue from these sales contracts is recognized when the NGLs are sold and delivered to customers at market-based prices.
Midstream services
Natural gas processing utilizes service contracts that are either fee-based, commodity-based or a combination of the two. When a cash fee for natural gas processing services is stipulated by a contract, we record revenue when a producer’s natural gas has been processed and redelivered. Our commodity-based contracts include keepwhole, margin-band, percent-of-liquids, percent-of-proceeds and contracts featuring a combination of commodity and fee-based terms.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We recognize midstream service revenues in connection with the equity NGLs we receive under commodity-based contracts (once the processing service has been performed and we are entitled to such volumes). The value assigned to this non-cash consideration and related inventory is based on the market value of the equity NGLs at the time the services are performed. As noted previously, we also recognize product sales revenue, along with a corresponding cost of sales, when these NGLs are delivered and sold to downstream customers under NGL marketing contracts. Prior to the adoption of ASC 606, we did not recognize revenue in connection with the receipt of equity NGL volumes. We only recognized product sales revenue when the associated NGLs were delivered and sold to downstream customers under NGL marketing contracts. Following adoption of ASC 606, the additional midstream service revenue recognized for this non-cash consideration increased our total consolidated revenues by approximately 2% for the year ended December 31, 2018 when compared to the amount of revenues we would have recognized in 2018 if we had applied ASC 605. Furthermore, due to the rapid turnover of our inventories of NGL products each month, there was no significant change in our gross operating margin from natural gas processing and related NGL marketing activities as a result of the changes required by ASC 606.
NGL pipeline transportation contracts and tariffs generate revenue based on a fixed fee per gallon multiplied by the volume transported and delivered (or capacity reserved). Transportation fees charged to shippers are based on either tariffs regulated by governmental agencies or contractual arrangements. Under certain agreements, customers are required to ship a minimum volume with a provision that allows the shipper to make-up any volume shortfalls over an agreed-upon period (referred to as “make-up rights”). Revenue attributable to such agreements is initially deferred and subsequently recognized at the earlier of when the deficiency volume is shipped, when the likelihood of the shipper’s ability to meet the minimum volume commitment becomes remote, or when the pipeline is otherwise released from its performance obligation.
NGL fractionation generates revenue using fee-based arrangements. These fees are contractually subject to adjustment for changes in certain fractionation expenses (e.g., fuel costs) and are recognized in the period services are provided.
NGL and related product storage contracts generate revenue from capacity reservations where we collect a fee for reserving storage capacity for customers in our underground storage wells and above-ground storage tanks. Under these agreements, revenue is recognized on a straight-line basis over the reservation period. In addition, we generally charge customers throughput fees based on volumes delivered into and subsequently withdrawn from storage, which are recognized as the service is provided.
NGL import and export terminaling activities generate revenue in the period services are provided. Customers are typically billed a fee per unit of volume loaded or unloaded.
Crude Oil Pipelines & Services
Sales of crude oil
Crude oil marketing activities generate revenues from the sale and delivery of crude oil purchased either directly from producers or on the open market. Revenue from these sales contracts is recognized when crude oil is sold and delivered to customers at market-based prices.
Midstream services
Crude oil transportation contracts and tariffs generate revenue based upon a fixed fee per barrel multiplied by the volume transported and delivered (or capacity reserved). Transportation fees charged to shippers are based on either tariffs regulated by governmental agencies or contractual arrangements. Under certain agreements, customers are required to ship a minimum volume over an agreed-upon period, with make-up rights. Revenue attributable to such agreements is initially deferred and subsequently recognized at the earlier of when the deficiency volume is shipped, when the likelihood of the shipper’s ability to meet the minimum volume commitment becomes remote, or when the pipeline is otherwise released from its performance obligation.
Crude oil storage contracts generate revenue from capacity reservations where we collect a fee for reserving storage capacity for customers at our terminals. Under these agreements, revenue is recognized on a straight-line basis over the reservation period. In addition, customers are billed a fee per unit of volume handled at our terminals. Revenue is recognized as the terminaling service is provided.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Natural Gas Pipelines & Services
Sales of natural gas
Natural gas marketing activities generate revenue from the sale and delivery of natural gas purchased from producers, natural gas processing facilities, and on the open market. Revenue from these sales contracts is recognized when natural gas is sold and delivered to customers at market-based prices.
Midstream services
Natural gas transportation contracts generate revenues based on a fee per unit of volume transported multiplied by the volume gathered or delivered. Transportation fees charged to shippers are based on either tariffs regulated by governmental agencies or contractual arrangements. Revenues under transportation contracts are recognized when the volumes are transported and delivered to customers. In addition, certain of our natural gas pipelines offer firm capacity reservation services whereby the shipper pays a contractual fee based on the level of throughput capacity reserved. Revenues are recognized when the firm capacity services are provided to the shipper.
Petrochemical & Refined Products Services
Sales of petrochemicals and refined products
Our petrochemical and refined products marketing activities generate revenue from the sale and delivery of products to customers at market-based prices. The products handled by these marketing groups include polymer grade propylene, octane additives, high purity isobutylene and various refined products.
Midstream services
Propylene fractionation units and butane isomerization facilities generate revenue through fee-based tolling arrangements with customers. Revenue from such agreements is recognized in the period the services are provided.
Petrochemical and refined products transportation contracts generate revenue based upon a fixed fee per volume multiplied by the volume transported and delivered. Transportation fees charged to shippers are based on either tariffs regulated by governmental agencies or contractual arrangements.
Refined products storage contracts generate revenue from capacity reservations where we collect a fee for reserving storage capacity for customers at our terminals. Under these agreements, revenue is recognized on a straight-line basis over the reservation period. In addition, customers are billed a fee per unit of volume handled at our terminals. Revenue is recognized as the terminaling service is provided.
Marine transportation contracts generate revenue based on set day rates or a set fee per cargo movement recognized over the transit time of individual tows. Additionally, we record revenue for the costs of fuel and other operating costs that are directly reimbursed by our marine customers.
Unbilled Revenue and Deferred Revenue
The following table provides information regarding our contract assets and contract liabilities at the dates indicated:
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents significant changes in our unbilled revenue and deferred revenue balances during the years indicated:
(1)
Unbilled revenues are transferred to accounts receivable once we have an unconditional right to consideration from the customer. Deferred revenues are recognized as revenue upon satisfaction of our performance obligation to the customer.
Remaining Performance Obligations
The following table presents estimated fixed future consideration from revenue contracts that contain minimum volume commitments, deficiency and similar fees and the term of the contracts exceeds one year. These amounts represent the revenues we expect to recognize in future periods from these contracts as of December 31, 2019.
For a significant portion of our revenue, we bill customers a contractual rate for the services provided multiplied by the amount of volume handled in a given period. We have the right to invoice the customer in the amount that corresponds directly with the value of our performance completed to date. Therefore, we are not required to disclose information about the variable consideration of remaining performance obligations since we recognize revenue equal to the amount that we have the right to invoice.
Major Customer Information
Our largest non-affiliated customer for the years ended December 31, 2019, 2018 and 2017 was Vitol Holding B.V. and its affiliates (collectively, “Vitol”), which accounted for approximately 10.1%, 7.8% and 11.2%, respectively, of our consolidated revenues. Vitol is a global energy and commodity trading company.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Business Segments and Related Information
Segment Overview
Our operations are reported under four business segments: (i) NGL Pipelines & Services, (ii) Crude Oil Pipelines & Services, (iii) Natural Gas Pipelines & Services and (iv) Petrochemical & Refined Products Services. Our business segments are generally organized and managed according to the types of services rendered (or technologies employed) and products produced and/or sold.
Financial information regarding these segments is evaluated regularly by our co-chief operating decision makers in deciding how to allocate resources and in assessing our operating and financial performance. The co-principal executive officers of our general partner have been identified as our chief operating decision makers. While these two officers evaluate results in a number of different ways, the business segment structure is the primary basis for which the allocation of resources and financial results are assessed.
The following information summarizes the assets and operations of each business segment (mileage and other statistics are unaudited):
• Our NGL Pipelines & Services business segment currently includes natural gas processing facilities and associated NGL marketing activities; approximately 19,900 miles of NGL pipelines; NGL and related product storage facilities; and NGL fractionators. This segment also includes our NGL marine terminals and related operations.
• Our Crude Oil Pipelines & Services business segment currently includes approximately 5,300 miles of crude oil pipelines, crude oil storage and marine terminals, and associated crude oil marketing activities.
• Our Natural Gas Pipelines & Services business segment currently includes approximately 19,400 miles of natural gas pipeline systems that provide for the gathering and transportation of natural gas in Colorado, Louisiana, New Mexico, Texas and Wyoming. This segment also includes our natural gas marketing activities.
• Our Petrochemical & Refined Products Services business segment currently includes (i) propylene production facilities, which include propylene fractionation units and a PDH facility, approximately 800 miles of pipelines, and associated marketing operations; (ii) a butane isomerization complex and related deisobutanizer units; (iii) isobutane dehydrogenation, octane enhancement and high purity isobutylene production facilities; (iv) refined products pipelines aggregating approximately 3,300 miles, terminals and associated marketing activities; (v) an ethylene export terminal and related operations, and (v) marine transportation.
Our plants, pipelines and other fixed assets are located in the U.S.
Segment Gross Operating Margin
We evaluate segment performance based on our financial measure of gross operating margin. Gross operating margin is an important performance measure of the core profitability of our operations and forms the basis of our internal financial reporting. We believe that investors benefit from having access to the same financial measures that our management uses in evaluating segment results. Gross operating margin is exclusive of other income and expense transactions, income taxes, the cumulative effect of changes in accounting principles and extraordinary charges. Gross operating margin is presented on a 100% basis before any allocation of earnings to noncontrolling interests. Our calculation of gross operating margin may or may not be comparable to similarly titled measures used by other companies.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents our measurement of total segment gross operating margin for the years indicated. The GAAP financial measure most directly comparable to total segment gross operating margin is operating income.
(1)
Since make-up rights entail a future performance obligation by the pipeline to the shipper, these receipts are recorded as deferred revenue for GAAP purposes; however, these receipts are included in gross operating margin in the period of receipt since they are nonrefundable to the shipper.
(2)
As deferred revenues attributable to make-up rights are subsequently recognized as revenue under GAAP, gross operating margin must be adjusted to remove such amounts to prevent duplication since the associated non-refundable payments were previously included in gross operating margin.
The results of operations from our liquids pipelines are primarily dependent upon the volumes transported and the associated fees we charge for such transportation services. Typically, pipeline transportation revenue is recognized when volumes are re-delivered to customers. However, under certain pipeline transportation agreements, customers are required to ship a minimum volume over an agreed-upon period. These arrangements may entail the shipper paying a transportation fee based on a minimum volume commitment, with a provision that allows the shipper to make-up any volume shortfalls over the agreed-upon period (referred to as shipper “make-up rights”). Revenue pursuant to such agreements is initially deferred and subsequently recognized under GAAP at the earlier of when the deficiency volume is shipped, when the likelihood of the shipper’s ability to meet the minimum volume commitment becomes remote, or when the pipeline is otherwise released from its performance obligation.
However, management includes deferred transportation revenues relating to the “make-up rights” of committed shippers when reviewing the financial results of certain pipelines (Texas Express Pipeline, Front Range Pipeline, ATEX, Aegis Ethane Pipeline and Seaway Pipeline). From an internal (and segment) reporting standpoint, management considers the transportation fees paid by committed shippers on these pipelines, including any non-refundable revenues that may be deferred under GAAP related to make-up rights, to be important in assessing the financial performance of these pipeline assets. Although the adjustments for make-up rights are included in segment gross operating margin, our consolidated revenues do not reflect any deferred revenues until the conditions for recognizing such revenues are met in accordance with GAAP.
Gross operating margin by segment is calculated by subtracting segment operating costs and expenses from segment revenues, with both segment totals reflecting the adjustments noted in the preceding table, as applicable, and before the elimination of intercompany transactions. The following table presents gross operating margin by segment for the years indicated:
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summarized Segment Financial Information
Information by business segment, together with reconciliations to amounts presented on our Statements of Consolidated Operations, is presented in the following table:
Segment revenues include intersegment and intrasegment transactions, which are generally based on transactions made at market-based rates. Our consolidated revenues reflect the elimination of intercompany transactions. Substantially all of our consolidated revenues are earned in the U.S. and derived from a wide customer base.
We include equity in income of unconsolidated affiliates in our measurement of segment gross operating margin and operating income. Equity investments with industry partners are a significant component of our business strategy. They are a means by which we conduct our operations to align our interests with those of customers and/or suppliers. This method of operation enables us to achieve favorable economies of scale relative to the level of investment and business risk assumed. Many of these businesses perform supporting or complementary roles to our other midstream business operations.
Our integrated midstream energy asset network (including the midstream energy assets owned by our unconsolidated affiliates) provides services to producers and consumers of natural gas, NGLs, crude oil, refined products and certain petrochemicals. In general, hydrocarbons may enter our asset system in a number of ways, such as through a natural gas gathering pipeline, natural gas processing facility, a crude oil pipeline or terminal, an NGL fractionator, an NGL storage facility or an NGL gathering or transportation pipeline. The assets of many of our equity investees are included within our integrated midstream network. For example, we use the Front Range Pipeline and Texas Express Pipeline to transport mixed NGLs to our Mont Belvieu NGL fractionation and storage complex and the Seaway Pipeline to transport crude oil to our terminals in the Houston, Texas area. Given the integral nature of these equity method investees to our operations, we believe the presentation of equity earnings from such investees as a component of gross operating margin and operating income is meaningful and appropriate.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information by business segment, together with reconciliations to our Consolidated Balance Sheet totals, is presented in the following table:
Segment assets consist of property, plant and equipment, investments in unconsolidated affiliates, intangible assets and goodwill. The carrying values of such amounts are assigned to each segment based on each asset’s or investment’s principal operations and contribution to the gross operating margin of that particular segment. Since construction-in-progress (a component of property, plant and equipment) does not contribute to segment gross operating margin, such amounts are excluded from segment asset totals until the underlying assets are placed in service. Intangible assets and goodwill are assigned to each segment based on the classification of the assets to which they relate. The remainder of our consolidated total assets, which consist primarily of working capital assets, are excluded from segment assets since these amounts are not attributable to one specific segment (e.g. cash).
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Revenue and Expense Information
The following table presents additional information regarding our consolidated revenues and costs and expenses for the years indicated:
(1)
Represents the cost of operating our plants, pipelines and other fixed assets excluding: depreciation, amortization and accretion charges; asset impairment and related charges; and net losses (or gains) attributable to asset sales and insurance recoveries.
Fluctuations in our product sales revenues and related cost of sales amounts are explained in part by changes in energy commodity prices. In general, lower energy commodity prices result in a decrease in our revenues attributable to product sales; however, these lower commodity prices also decrease the associated cost of sales as purchase costs are lower. The same type of correlation would be true in the case of higher energy commodity sales prices and purchase costs.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Earnings Per Unit
The following table presents our calculation of basic and diluted earnings per unit for the years indicated:
(1)
Phantom units are considered participating securities for purposes of computing basic earnings per unit. See Note 13 for information regarding our phantom units.
Note 12. Business Combinations
Acquisition of Delaware Processing
In March 2018, we acquired the remaining 50% member interest in our former Delaware Processing joint venture for $151 million in cash, net of $3.9 million of cash held by the venture. As a result, Delaware Processing became a wholly-owned consolidated subsidiary of ours. Delaware Processing owns a cryogenic natural gas processing facility having a capacity of 150 million cubic feet per day (“MMcf/d”). The facility, which is located in Reeves County, Texas and entered service in August 2016, serves producers in the Delaware Basin in West Texas and southern New Mexico.
The following table presents the final fair value allocation of assets acquired and liabilities assumed in the Delaware Processing acquisition.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to this acquisition, we accounted for our investment using the equity method. On a historical pro forma basis, our consolidated revenues, costs and expenses, operating income, net income attributable to Enterprise Products Partners L.P. and earnings per unit amounts for the years ended December 31, 2018 and 2017 would not have differed materially from those we reported had the acquisition been completed on January 1, 2017 rather than March 29, 2018.
At March 29, 2018, our 50% equity investment in Delaware Processing was recorded at $107.0 million. Upon acquisition of the remaining 50% member interest, our existing equity investment was remeasured to fair value resulting in the recognition of a non-cash $39.4 million gain, which is presented within “Other income (expense)” on our Consolidated Statement of Operations for the year ended December 31, 2018.
The results for this business are reported under the NGL Pipelines & Services business segment.
Acquisition of Azure Midstream
In April 2017, we acquired a midstream energy business from Azure Midstream Partners, LP and its operating subsidiaries (collectively, “Azure”) for $191.4 million in cash. The acquired business consists of approximately 750 miles of natural gas gathering pipelines and two natural gas processing facilities located in East Texas. These assets serve producers working in the Haynesville Shale and Bossier, Cotton Valley and Travis Peak formations.
The financial results of the acquired business are reflected in our consolidated results from April 30, 2017, which was the effective date of the Azure acquisition. On a historical pro forma basis, our consolidated revenues, costs and expenses, operating income, net income attributable to Enterprise Products Partners L.P., and earnings per unit amounts for the year ended December 31, 2017 would not have differed materially from those we reported had the acquisition been completed on January 1, 2017 rather than April 30, 2017.
The following table presents the final fair value allocation of assets acquired and liabilities assumed in the Azure acquisition.
The contribution of this acquired business to our consolidated revenues and net income was not material for the year ended December 31, 2017.
Note 13. Equity-Based Awards
An allocated portion of the fair value of EPCO’s equity-based awards is charged to us under the ASA. The following table summarizes compensation expense we recognized in connection with equity-based awards for the years indicated:
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of equity-classified awards is amortized to earnings over the requisite service or vesting period. Equity-classified awards are expected to result in the issuance of common units upon vesting. Compensation expense for liability-classified awards is recognized over the requisite service or vesting period based on the fair value of the award remeasured at each reporting date. Liability-classified awards are settled in cash upon vesting.
Phantom Unit Awards
Subject to customary forfeiture provisions, phantom unit awards allow recipients to acquire EPD common units once a defined vesting period expires (at no cost to the recipient apart from fulfilling required service and other conditions). We expect phantom units to result in the issuance of common units upon vesting; therefore, these grants are accounted for as equity-classified awards. Phantom unit awards generally vest at a rate of 25% per year beginning one year after the grant date and are non-vested until the required service periods expire.
The grant date fair value of a phantom unit award is based on the market price per unit of EPD common units on the date of grant. Compensation expense is recognized based on the grant date fair value, net of an allowance for estimated forfeitures, over the requisite service or vesting period.
The following table presents phantom unit award activity for the years indicated:
(1)
Determined by dividing the aggregate grant date fair value of awards (before an allowance for forfeitures) by the number of awards issued.
(2)
The aggregate grant date fair value of phantom unit awards issued during 2017 was $123.1 million based on a grant date market price of EPD common units ranging from $24.55 to $28.87 per unit. An estimated annual forfeiture rate of 3.8% was applied to these awards.
(3)
The aggregate grant date fair value of phantom unit awards issued during 2018 was $134.3 million based on a grant date market price of EPD common units ranging from $25.40 to $29.22 per unit. An estimated annual forfeiture rate of 3.2% was applied to these awards.
(4)
The aggregate grant date fair value of phantom unit awards issued during 2019 was $190.2 million based on a grant date market price of EPD common units ranging from $26.32 to $29.29 per unit. An estimated annual forfeiture rate of 3.0% was applied to these awards.
The phantom unit awards were granted under the 2008 Plan, which is a long-term incentive plan under which any employee or consultant of EPCO, us or our affiliates that provides services to us, directly or indirectly, may receive incentive compensation awards in the form of phantom units, options, restricted common units, unit appreciation rights, unit awards, other unit-based awards or substitute awards. Non-employee directors of our general partner may also participate in the 2008 Plan. The maximum number of EPD common units authorized for issuance under the 2008 Plan was 50,000,000 at December 31, 2019. This amount automatically increased under the terms of the 2008 Plan by 5,000,000 common units on January 1, 2020 and will continue to automatically increase annually on January 1 thereafter during the term of the 2008 Plan; provided, however, that in no event shall the maximum aggregate number exceed 70,000,000 common units. The 2008 Plan is effective until September 30, 2023 or, if earlier, until (i) the time that all available common units under the 2008 Plan have been delivered to participants or (ii) the time of termination of the 2008 Plan by the Board of Directors of EPCO or by the Incentive Plan Administration Subcommittee of the Governance Committee of Enterprise GP. After giving effect to awards granted under the 2008 Plan through December 31, 2019, a total of 17,106,486 additional common units were available for issuance. After taking into account tax withholding requirements, we issued 2,720,603, 2,442,436 and 1,687,692 common units in connection with the vesting of phantom unit awards in the years ended December 31, 2019, 2018 and 2017, respectively.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2008 Plan provides for the issuance of DERs in connection with phantom unit awards. A DER entitles the participant to nonforfeitable cash payments equal to the product of the number of phantom unit awards outstanding for the participant and the cash distribution per common unit paid by EPD to its common unitholders. Cash payments made in connection with DERs are charged to partners’ equity when the phantom unit award is expected to result in the issuance of common units; otherwise, such amounts are expensed.
The following table presents supplemental information regarding phantom unit awards for the years indicated:
For the EPCO group of companies, the unrecognized compensation cost associated with phantom unit awards was $138.1 million at December 31, 2019, of which our share of such cost is currently estimated to be $113.3 million. Due to the graded vesting provisions of these awards, we expect to recognize our share of the unrecognized compensation cost for these awards over a weighted-average period of 2.1 years.
Profits Interest Awards
In 2016 and 2018, EPCO Holdings Inc. (“EPCO Holdings”), a privately held affiliate of EPCO, contributed a portion of the EPD common units it owned to form limited partnerships (referred to as “Employee Partnerships”) that serve as long-term incentive arrangements for key employees of EPCO by providing them a “profits interest” in an Employee Partnership. The Employee Partnerships named (i) EPD PubCo Unit I L.P. (“PubCo I”), (ii) EPD PubCo Unit II L.P. (“PubCo II”), and (iii) EPD PrivCo Unit I L.P. (“PrivCo I”) were formed by EPCO Holdings in 2016. The Employee Partnerships named (i) EPD 2018 Unit IV L.P. (“EPD IV”) and (ii) EPCO Unit II L.P. (“EPCO II”) were formed by EPCO Holdings in 2018.
In exchange for the contributions of EPD common units, EPCO Holdings was admitted as the Class A limited partner of each Employee Partnership. Also on the applicable contribution date, certain key EPCO employees were issued Class B limited partner interests (i.e., profits interest awards) and admitted as Class B limited partners of each Employee Partnership, all without any capital contribution by such employees. EPCO serves as the general partner of each Employee Partnership.
Each quarter, the Employee Partnerships, as owners of EPD common units, receive a cash distribution from EPD as do EPD’s other common unitholders. The cash received by the Employee Partnership is first used to pay the Class A limited partner a cash distribution equal to the product of (i) the number of EPD common units owned by the Employee Partnership and (ii) the Class A Preference Return (subject to equitable adjustment in order to reflect any equity split, equity distribution or dividend, reverse split, combination, reclassification, recapitalization or other similar event affecting such common units). To the extent that the Employee Partnership has cash remaining after making this quarterly payment to the Class A limited partner, the residual cash is distributed to the Class B limited partners on a quarterly basis as a distribution.
Upon liquidation of an Employee Partnership, assets having a then current fair market value equal to the Class A limited partner’s capital base in such Employee Partnership will be distributed to the Class A limited partner. Any remaining assets of such Employee Partnership will be distributed to the Class B limited partners of such Employee Partnership as a residual profits interest, which represents the appreciation in value of the Employee Partnership’s assets since the date of EPCO Holdings’ contribution to it, as described above.
Unless otherwise agreed to by EPCO and a majority in interest of the limited partners of each Employee Partnership, such Employee Partnership will terminate at the earliest to occur of (i) 30 days following its vesting date, (ii) a change of control or (iii) a dissolution of the Employee Partnership.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Individually, each Class B limited partner interest is subject to forfeiture if the participating employee’s employment with EPCO is terminated prior to vesting, with customary exceptions for death, disability and certain retirements. The risk of forfeiture will also lapse upon certain change of control events. Forfeited individual Class B limited partner interests are allocated to the remaining Class B limited partners.
The following table summarizes key elements of each Employee Partnership as of December 31, 2019:
(1)
Represents the fair market value of EPD common units contributed to each Employee Partnership at the applicable contribution date.
(2)
Represents the total grant date fair value of the profits interest awards awarded to the Class B limited partners of each Employee Partnership irrespective of how such costs will be allocated between us and EPCO and its privately held affiliates.
(3)
Represents our expected share of the unrecognized compensation cost at December 31, 2019. We expect to recognize our share of the unrecognized compensation cost for PubCo II, PrivCo I, EPD IV and EPCO II over a weighted-average period of 1.1 years, 1.1 years, 3.9 years and 3.9 years, respectively. The Class B limited partner interests of PubCo I vested on February 22, 2020.
The grant date fair value of each Employee Partnership is based on (i) the estimated value (as determined using a Black-Scholes option pricing model) of such Employee Partnership’s assets that would be distributed to the Class B limited partners thereof upon liquidation and (ii) the value, based on a discounted cash flow analysis, of the residual quarterly cash amounts that such Class B limited partners are expected to receive over the life of the Employee Partnership.
The following table summarizes the assumptions we used in applying a Black-Scholes option pricing model to derive that portion of the estimated grant date fair value of the profits interest awards for each Employee Partnership:
Compensation expense attributable to the profits interest awards is based on the estimated grant date fair value of each award. A portion of the fair value of these equity-based awards is allocated to us under the ASA as a non-cash expense. We are not responsible for reimbursing EPCO for any expenses of the Employee Partnerships, including the value of any contributions of units made by EPCO Holdings.
Restricted Common Unit Awards
Restricted common unit awards allowed recipients to acquire EPD common units (at no cost to the recipient apart from fulfilling service and other conditions) once a defined vesting period expired, subject to customary forfeiture provisions. There have been no restricted common unit awards outstanding since 2017.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Derivative Instruments, Hedging Activities and Fair Value Measurements
In the normal course of our business operations, we are exposed to certain risks, including changes in interest rates and commodity prices. In order to manage risks associated with assets, liabilities and certain anticipated future transactions, we use derivative instruments such as futures, forward contracts, swaps, options and other instruments with similar characteristics. Substantially all of our derivatives are used for non-trading activities.
Interest Rate Hedging Activities
We may utilize interest rate swaps, forward-starting swaps, options to enter into forward-starting swaps (“swaptions”), and similar derivative instruments to manage our exposure to changes in interest rates charged on borrowings under certain consolidated debt agreements. This strategy may be used in controlling our overall cost of capital associated with such borrowings.
Swaptions
In 2019 and 2018, we sold options to be put into forward-starting swaps, or swaptions, if the market rate of interest fell below the strike rate of the option upon expiration of the derivative instrument. The premiums we realized upon sale of the swaptions are reflected as a $23.1 million and $29.4 million reduction in interest expense for the year ended December 31, 2019 and 2018, respectively.
Due to declining interest rates, the counterparties to swaptions we sold in July 2019 exercised their right to put us into ten forward-starting swaps on September 30, 2019 having an aggregate notional value of $1.0 billion. Since the swaptions were not designated as hedging instruments and were subject to mark-to-market accounting, we incurred an unrealized, mark-to-market loss at inception of the forward-starting swaps totaling $94.9 million that is reflected as an increase in interest expense for the year ended December 31, 2019. The ten forward-starting swaps resulting from the swaption exercise on September 30, 2019 were designated as hedging instruments and are subject to cash flow hedge accounting.
Forward-Starting Swaps
Forward-starting swaps hedge the risk of an increase in underlying benchmark interest rates during the period of time between the inception date of the swap agreement and the future date of a debt issuance. Under the terms of the forward-starting swaps, we pay to the counterparties (at the expected settlement dates of the instruments) amounts based on a fixed interest rate applied to a notional amount and receive from the counterparties an amount equal to a variable interest rate (based on LIBOR or an equivalent index rate) on the same notional amount.
The following table summarizes our portfolio of 30-year forward-starting swaps at December 31, 2019, all of which are associated with the expected future issuance of senior notes.
(1)
These swaps were entered into in May 2019.
(2)
These swaps were entered into in September 2019 as a result of the exercise of swaptions.
In total, the notional amount of forward-starting swaps outstanding at December 31, 2019 was $1.15 billion. The weighted-average fixed interest rate of these derivative instruments is 2.16%.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of market conditions, we terminated an aggregate $275 million notional amount of forward-starting swaps in 2017, which resulted in cash proceeds totaling $30.6 million. As cash flow hedges, gains on these derivative instruments are reflected as a component of accumulated other comprehensive income and are being amortized to earnings (as a decrease in interest expense) over the 30-year life of the associated debt through February 2048. Likewise, in 2018, we terminated an aggregate $275 million notional amount of forward-starting swaps (cash flow hedges), which resulted in cash proceeds totaling $22.1 million that are being amortized to earnings (as a decrease in interest expense) over a 30-year period through February 2049.
Commodity Hedging Activities
The prices of natural gas, NGLs, crude oil, petrochemicals and refined products are subject to fluctuations in response to changes in supply and demand, market conditions and a variety of additional factors that are beyond our control. In order to manage such price risks, we enter into commodity derivative instruments such as physical forward contracts, futures contracts, fixed-for-float swaps and basis swaps.
At December 31, 2019, our predominant commodity hedging strategies consisted of (i) hedging anticipated future purchases and sales of commodity products associated with transportation, storage and blending activities, (ii) hedging natural gas processing margins and (iii) hedging the fair value of commodity products held in inventory.
• The objective of our anticipated future commodity purchases and sales hedging program is to hedge the margins of certain transportation, storage, blending and operational activities by locking in purchase and sale prices through the use of derivative instruments and related contracts.
• The objective of our natural gas processing hedging program is to hedge an amount of earnings associated with these activities. We achieve this objective by executing fixed-price sales for a portion of our expected equity NGL production using derivative instruments and related contracts. For certain natural gas processing contracts, the hedging of expected equity NGL production also involves the purchase of natural gas for shrinkage, which is hedged using derivative instruments and related contracts.
• The objective of our inventory hedging program is to hedge the fair value of commodity products currently held in inventory by locking in the sales price of the inventory through the use of derivative instruments and related contracts.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes our portfolio of commodity derivative instruments outstanding at December 31, 2019 (volume measures as noted):
(1)
Volume for derivatives designated as hedging instruments reflects the total amount of volumes hedged whereas volume for derivatives not designated as hedging instruments reflects the absolute value of derivative notional volumes.
(2)
The maximum term for derivatives designated as cash flow hedges, derivatives designated as fair value hedges and derivatives not designated as hedging instruments is January 2021, April 2020 and December 2022, respectively.
(3)
Reflects the use of derivative instruments to manage risks associated with transportation, processing and storage assets.
The carrying amount of our inventories subject to fair value hedges was $31.7 million and $50.2 million at December 31, 2019 and 2018, respectively.
Certain basis swaps, basis spread options and other derivative instruments not designated as hedging instruments are used to manage market risks associated with anticipated purchases and sales of commodity products. There is some uncertainty involved in the timing of these transactions often due to the development of more favorable profit opportunities or when spreads are insufficient to cover variable costs thus reducing the likelihood that the transactions will occur during the periods originally forecasted. In accordance with derivatives accounting guidance, these instruments do not qualify for hedge accounting even though they are effective at managing the risk exposures of the underlying assets. Due to volatility in commodity prices, any non-cash, mark-to-market earnings variability cannot be predicted.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular Presentation of Fair Value Amounts, and Gains and Losses on
Derivative Instruments and Related Hedged Items
The following table provides a balance sheet overview of our derivative assets and liabilities at the dates indicated:
Certain of our commodity derivative instruments are subject to master netting arrangements or similar agreements. The following tables present our derivative instruments subject to such arrangements at the dates indicated:
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative assets and liabilities recorded on our Consolidated Balance Sheets are presented on a gross-basis and determined at the individual transaction level. This presentation method is applied regardless of whether the respective exchange clearing agreements, counterparty contracts or master netting agreements contain netting language often referred to as “rights of offset.” Although derivative amounts are presented on a gross-basis, having rights of offset enable the settlement of a net as opposed to gross receivable or payable amount under a counterparty default or liquidation scenario.
Cash is paid and received as collateral under certain agreements, particularly for those associated with exchange transactions. For any cash collateral payments or receipts, corresponding assets or liabilities are recorded to reflect the variation margin deposits or receipts with exchange clearing brokers and customers. These balances are also presented on a gross-basis on our Consolidated Balance Sheets.
The tabular presentation above provides a means for comparing the gross amount of derivative assets and liabilities, excluding associated accounts payable and receivable, to the net amount that would likely be receivable or payable under a default scenario based on the existence of rights of offset in the respective derivative agreements. Any cash collateral paid or received is reflected in these tables, but only to the extent that it represents variation margins. Any amounts associated with derivative prepayments or initial margins that are not influenced by the derivative asset or liability amounts or those that are determined solely on their volumetric notional amounts are excluded from these tables.
The following tables present the effect of our derivative instruments designated as fair value hedges on our Statements of Consolidated Operations for the years indicated:
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the effect of our derivative instruments designated as cash flow hedges on our Statements of Consolidated Operations and Statements of Consolidated Comprehensive Income for the years indicated:
(1)
The fair value of these derivative instruments will be reclassified to their respective locations on the Statement of Consolidated Operations upon settlement of the underlying derivative transactions, as appropriate.
Over the next twelve months, we expect to reclassify $39.7 million of losses attributable to interest rate derivative instruments from accumulated other comprehensive loss to earnings as an increase in interest expense. Likewise, we expect to reclassify $55.7 million of gains attributable to commodity derivative instruments from accumulated other comprehensive income to earnings, $55.4 million as an increase in revenue and $0.3 million as a decrease to operating costs and expenses.
The following table presents the effect of our derivative instruments not designated as hedging instruments on our Statements of Consolidated Operations for the years indicated:
The $5.1 million loss recognized for the year ended December 31, 2019 (as noted in the preceding table) from derivatives not designated as hedging instruments consists of (i) $24.2 million of realized gains and $65.6 million of net unrealized mark-to-market gains attributable to commodity derivatives and (ii) $94.9 million of unrealized mark-to-market losses attributable to interest rate derivatives.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In total and inclusive of both fair value hedges and derivatives not designated as hedging instruments, unrealized mark-to-market gains (losses) included in gross operating margin and interest expense for the years indicated:
Fair Value Measurements
The following tables set forth, by level within the Level 1, 2 and 3 fair value hierarchy (see Note 2), the carrying values of our financial assets and liabilities at the dates indicated. These assets and liabilities are measured on a recurring basis and are classified based on the lowest level of input used to estimate their fair value. Our assessment of the relative significance of such inputs requires judgment.
The values for commodity derivatives are presented before and after the application of Chicago Mercantile Exchange (“CME”) Rule 814, which deems that financial instruments cleared by the CME are settled daily in connection with variation margin payments. As a result of this exchange rule, CME-related derivatives are considered to have no fair value at the balance sheet date for financial reporting purposes; however, the derivatives remain outstanding and subject to future commodity price fluctuations until they are settled in accordance with their contractual terms. Derivative transactions cleared on exchanges other than the CME (e.g., the Intercontinental Exchange or ICE) continue to be reported on a gross basis.
In the aggregate, the fair value of our commodity hedging portfolios at December 31, 2019 was a net derivative asset of $35.2 million prior to the impact of CME Rule 814.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide quantitative information regarding our recurring Level 3 fair value measurements for commodity derivatives at the dates indicated:
With respect to commodity derivatives, we believe forward commodity prices are the most significant unobservable inputs in determining our Level 3 recurring fair value measurements at December 31, 2019. In general, changes in the price of the underlying commodity increases or decreases the fair value of a commodity derivative depending on whether the derivative was purchased or sold. We generally expect changes in the fair value of our derivative instruments to be offset by corresponding changes in the fair value of our hedged exposures.
The recurring fair value measurement pertaining to the Liquidity Option is based on a number of Level 3 inputs. See Note 17 for a discussion of this liability.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth a reconciliation of changes in the fair values of our recurring Level 3 financial assets and liabilities on a combined basis for the years indicated:
(1)
There were $0.2 million of unrealized gains and $1.2 million of unrealized losses included in these amounts for the years ended December 31, 2019 and 2018, respectively.
(2)
Transfers out of Level 3 into Level 2 were due to shorter remaining transaction maturities falling inside of the Level 2 range at December 31, 2019 and 2018.
Nonrecurring Fair Value Measurements
Long-lived assets, which consist of intangible assets with finite useful lives and property, plant and equipment, are reviewed for impairment (i.e., subject to nonrecurring fair value measurements) when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Long-lived assets with carrying values that are not expected to be recovered through future cash flows are written-down to their estimated fair values. Similarly, we evaluate our equity method investments for impairment when there are events or changes in circumstances that indicate there is a potential loss in value of the investment attributable to an other than temporary decline. In the event we determine that the value of an investment is not recoverable due to an other than temporary decline, we record a non-cash impairment charge to adjust the carrying value of the investment to its estimated fair value.
As presented in the following tables, our estimated fair values were based on management’s expectation of the market values for such assets based on their knowledge and experience in the industry (a Level 3 type measure involving significant unobservable inputs). In many cases, there are no active markets (Level 1) or other similar recent transactions (Level 2) to compare to. Our assumptions used in such analyses are based on the highest and best use of the asset and include estimated probabilities where multiple cash flow outcomes are possible.
When probability weights are used, the weights are generally obtained from business management personnel having oversight responsibilities for the assets being tested. Key commercial assumptions (e.g., anticipated operating margins, throughput or processing volume growth rates, timing of cash flows, etc.) that represent Level 3 unobservable inputs and test results are reviewed and certified by members of senior management.
The following table presents categories of long-lived assets that were subject to non-recurring fair value measurements during the year ended December 31, 2019:
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As presented on our Statement of Consolidated Cash Flows, total non-cash asset impairment and related charges for the year ended December 31, 2019 were $132.8 million, which consisted of $76.4 million for the impairment of our investment in Centennial (see Note 5), $51.1 million of impairment charges attributable to long-lived assets and $5.3 million of impairment charges attributable to the write-down of surplus materials classified as current assets. The impairment charges attributable to long-lived assets were primarily due to the planned abandonment of certain terminal and natural gas processing plants in Texas.
The following table presents categories of long-lived assets, primarily property, plant and equipment, that were subject to non-recurring fair value measurements during the year ended December 31, 2018:
Total non-cash asset impairment and related charges during 2018 were $50.5 million, which consisted of $46.8 million of impairment charges attributable to long-lived assets and $3.7 million of impairment charges attributable to the write-down of surplus materials classified as current assets. The impairment charges attributable to long-lived assets were primarily due to the planned abandonment of certain terminal and natural gas processing plants in Texas.
The following table presents categories of long-lived assets, primarily property, plant and equipment, that were subject to non-recurring fair value measurements during the year ended December 31, 2017:
Total non-cash asset impairment and related charges during 2017 were $49.8 million, which consisted of $37.8 million of impairment charges attributable to long-lived assets and $12.0 million of impairment charges attributable to the write-down of surplus materials classified as current assets. The impairment charges attributable to long-lived assets were primarily due to the write-down of certain natural gas pipeline laterals and other pipelines in Texas and for the planned abandonment of certain storage and pipeline assets in Texas.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Fair Value Information
The carrying amounts of cash and cash equivalents (including restricted cash balances), accounts receivable, commercial paper notes and accounts payable approximate their fair values based on their short-term nature. The estimated total fair value of our fixed-rate debt obligations was $30.37 billion and $25.97 billion at December 31, 2019 and 2018, respectively. The aggregate carrying value of these debt obligations was $27.15 billion and $26.15 billion at December 31, 2019 and 2018, respectively. These values are primarily based on quoted market prices for such debt or debt of similar terms and maturities (Level 2) and our credit standing. Changes in market rates of interest affect the fair value of our fixed-rate debt. The carrying values of our variable-rate long-term debt obligations approximate their fair values since the associated interest rates are market-based. We do not have any long-term investments in debt or equity securities recorded at fair value.
Note 15. Related Party Transactions
The following table summarizes our related party transactions for the years indicated:
The following table summarizes our related party accounts receivable and accounts payable balances at the dates indicated:
We believe that the terms and provisions of our related party agreements are fair to us; however, such agreements and transactions may not be as favorable to us as we could have obtained from unaffiliated third parties.
Relationship with EPCO and Affiliates
We have an extensive and ongoing relationship with EPCO and its privately held affiliates (including Enterprise GP, our general partner), which are not a part of our consolidated group of companies.
At December 31, 2019, EPCO and its privately held affiliates (including Dan Duncan LLC and certain Duncan family trusts) beneficially owned the following limited partner interests in us:
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Of the total number of units held by EPCO and its privately held affiliates, 108,222,618 have been pledged as security under the credit facilities of EPCO and its privately held affiliates at December 31, 2019. These credit facilities contain customary and other events of default, including defaults by us and other affiliates of EPCO. An event of default, followed by a foreclosure on the pledged collateral, could ultimately result in a change in ownership of these units and affect the market price of EPD’s common units.
We and Enterprise GP are both separate legal entities apart from each other and apart from EPCO and its other affiliates, with assets and liabilities that are also separate from those of EPCO and its other affiliates. EPCO and its privately held affiliates depend on the cash distributions they receive from us and other investments to fund their other activities and to meet their debt obligations. During the years ended December 31, 2019, 2018 and 2017, we paid EPCO and its privately held affiliates cash distributions totaling $1.19 billion, $1.16 billion and $1.12 billion, respectively.
From time-to-time, EPCO and its privately held affiliates elect to purchase additional common units under EPD’s DRIP and ATM program. During the years ended December 31, 2019, 2018 and 2017, privately held affiliates of EPCO reinvested $29 million, $213 million and $100 million, respectively, through our DRIP. See Note 8 for additional information regarding our DRIP and ATM program.
We lease office space from affiliates of EPCO on a long-term basis. The rental rates in these lease agreements approximate market rates. For the years ended December 31, 2019, 2018 and 2017, we recognized $14.9 million, $13.9 million and $15.8 million respectively, of related party operating lease expense in connection with these office space leases.
EPCO ASA. We have no employees. All of our administrative and operating functions are provided either by employees of EPCO (pursuant to the ASA) or by other service providers. We and our general partner are parties to the ASA.
Under the ASA, EPCO provides us with the administrative and operating services deemed necessary to manage and operate our businesses, properties and assets (all in accordance with prudent industry practices). Our operating costs and expenses include amounts paid to EPCO for the actual direct and indirect costs it incurs to operate our facilities, including the compensation of its employees. Likewise, our general and administrative costs include amounts paid to EPCO for management and other administrative services, including the compensation of its employees. In general, our reimbursement to EPCO for administrative services is either (i) on an actual basis for direct expenses it may incur on our behalf (e.g., the purchase of office supplies) or (ii) based on an allocation of such charges between the various parties to the ASA based on the estimated use of such services by each party (e.g., the allocation of legal or accounting salaries based on estimates of time spent on each entity’s business and affairs). In addition, we have agreed to pay all sales, use, excise, value added or similar taxes, if any, that may be applicable from time to time with respect to the services provided to us by EPCO.
The ASA allows us to participate as a named insured in EPCO’s overall insurance program, with the associated premiums and other costs being allocated to us. See Note 18 for additional information regarding our insurance programs.
The following table presents our related party costs and expenses attributable to the ASA with EPCO for the years indicated:
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Since the vast majority of such expenses are charged to us on an actual basis (i.e., no mark-up is charged or subsidy is received), we believe that such expenses are representative of what the amounts would have been on a standalone basis. With respect to allocated costs, we believe that the proportional direct allocation method employed by EPCO is reasonable and reflective of the estimated level of costs we would have incurred on a standalone basis.
Relationships with Unconsolidated Affiliates
Many of our unconsolidated affiliates perform supporting or complementary roles to our other business operations. The following information summarizes significant related party transactions with our unconsolidated affiliates:
• For the years ended December 31, 2019, 2018 and 2017, we paid Seaway $194.5 million, $163.2 million and $98.8 million, respectively, for pipeline transportation and storage services in connection with our crude oil marketing activities. Revenues from Seaway were $42.7 million, $74.4 million and $19.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.
• For the years ended December 31, 2019 and 2018, we purchased $89.2 million and $157.9 million, respectively, of NGLs from VESCO.
• We pay Promix for the transportation, storage and fractionation of NGLs. Expenses with Promix were $34.8 million, $31.9 million and $27.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. In addition, we sell natural gas to Promix for its plant fuel requirements. Revenues from Promix were $9.1 million, $9.5 million and $7.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
• For the years ended December 31, 2019, 2018 and 2017, we paid Texas Express $33.5 million, $57.6 million and $29.5 million, respectively, for pipeline transportation services.
• For the years ended December 31, 2019, 2018 and 2017, we paid Eagle Ford Crude Oil Pipeline $36.0 million, $18.5 million and $42.8 million, respectively, for pipeline transportation services.
• We perform management services for certain of our unconsolidated affiliates. We charged such affiliates $9.9 million, $11.6 million and $10.6 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Note 16. Provision for Income Taxes
Publicly traded partnerships like ours are treated as corporations unless they have 90% or more in “qualifying income” (as that term is defined in the Internal Revenue Code). We satisfied this requirement in each of the years ended December 31, 2019, 2018 and 2017 and, as a result, are not subject to federal income tax. However, our partners are individually responsible for paying federal income tax on their share of our taxable income. Net earnings for financial reporting purposes may differ significantly from taxable income reportable to our unitholders as a result of differences between the tax basis and financial reporting basis of certain assets and liabilities and other factors. We do not have access to information regarding each partner’s individual tax basis in our limited partner interests.
Provision for income taxes primarily reflects our state tax obligations under the Revised Texas Franchise Tax (the “Texas Margin Tax”). Deferred income tax assets and liabilities are recognized for temporary differences between the assets and liabilities of our tax paying entities for financial reporting and tax purposes.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our federal, state and foreign income tax provision (benefit) is summarized below:
A reconciliation of the provision for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows:
(1)
Although the Texas Margin Tax is not considered a state income tax, it has the characteristics of an income tax since it is determined by applying a tax rate to a base that considers our Texas-sourced revenues and expenses.
The following table presents the significant components of deferred tax assets and deferred tax liabilities at the dates indicated:
(1)
These losses expire in various years between 2020 and 2037 and are subject to limitations on their utilization.
Accounting guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. We did not rely on any uncertain tax positions in recording our income tax-related amounts during the years ended December 31, 2019, 2018 or 2017.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Commitments and Contingencies
Litigation
As part of our normal business activities, we may be named as defendants in legal proceedings, including those arising from regulatory and environmental matters. Although we are insured against various risks to the extent we believe it is prudent, there is no assurance that the nature and amount of such insurance will be adequate, in every case, to fully indemnify us against losses arising from future legal proceedings. We will vigorously defend the Partnership in litigation matters.
Management has regular quarterly litigation reviews, including updates from legal counsel, to assess the possible need for accounting recognition and disclosure of these contingencies. We accrue an undiscounted liability for those contingencies where the loss is probable and the amount can be reasonably estimated. If a range of probable loss amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum amount in the range is accrued.
We do not record a contingent liability when the likelihood of loss is probable but the amount cannot be reasonably estimated or when the likelihood of loss is believed to be only reasonably possible or remote. For contingencies where an unfavorable outcome is reasonably possible and the impact would be material to our consolidated financial statements, we disclose the nature of the contingency and, where feasible, an estimate of the possible loss or range of loss. Based on a consideration of all relevant known facts and circumstances, we do not believe that the ultimate outcome of any currently pending litigation directed against us will have a material impact on our consolidated financial statements either individually at the claim level or in the aggregate.
At December 31, 2019 and 2018, our accruals for litigation contingencies were $0.2 million and $0.5 million, respectively, and were recorded in our Consolidated Balance Sheets as a component of “Other current liabilities.” Our evaluation of litigation contingencies is based on the facts and circumstances of each case and predicting the outcome of these matters involves uncertainties. In the event the assumptions we use to evaluate these matters change in future periods or new information becomes available, we may be required to record additional accruals. In an effort to mitigate expenses associated with litigation, we may settle legal proceedings out of court.
Energy Transfer Matter
In connection with a proposed pipeline project, we and ETP signed a non-binding letter of intent in April 2011 that disclaimed any partnership or joint venture related to such project absent executed definitive documents and board approvals of the respective companies. Definitive agreements were never executed and board approval was never obtained for the potential pipeline project. In August 2011, the proposed pipeline project was cancelled due to a lack of customer support.
In September 2011, ETP filed suit against us and a third party in connection with the cancelled project alleging, among other things, that we and ETP had formed a “partnership.” The case was tried in the District Court of Dallas County, Texas, 298th Judicial District. While we firmly believe, and argued during our defense, that no agreement was ever executed forming a legal joint venture or partnership between the parties, the jury found that the actions of the two companies, nevertheless, constituted a legal partnership. As a result, the jury found that ETP was wrongfully excluded from a subsequent pipeline project involving a third party, and awarded ETP $319.4 million in actual damages on March 4, 2014. On July 29, 2014, the trial court entered judgment against us in an aggregate amount of $535.8 million, which included (i) $319.4 million as the amount of actual damages awarded by the jury, (ii) an additional $150.0 million in disgorgement for the alleged benefit we received due to a breach of fiduciary duties by us against ETP and (iii) prejudgment interest in the amount of $66.4 million. The trial court also awarded post-judgment interest on such aggregate amount, to accrue at a rate of 5%, compounded annually.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We filed our Brief of the Appellant in the Court of Appeals for the Fifth District of Dallas, Texas on March 30, 2015 and ETP filed its Brief of Appellees on June 29, 2015. We filed our Reply Brief of Appellant on September 18, 2015. Oral argument was conducted on April 20, 2016, and the case was then submitted to the Court of Appeals for its consideration. On July 18, 2017, a panel of the Dallas Court of Appeals issued a unanimous opinion reversing the trial court’s judgment as to all of ETP’s claims against us, rendering judgment that ETP take nothing on those claims, and affirming our counterclaim against ETP of $0.8 million, plus interest. On August 31, 2017, ETP filed a motion for rehearing before the Dallas Court of Appeals, which was denied on September 13, 2017. On December 27, 2017, ETP filed its Petition for Review with the Supreme Court of Texas and we filed our Response to the Petition for Review on February 26, 2018. On June 8, 2018, the Supreme Court of Texas requested that the parties file briefs on the merits, and the parties filed their respective submittals. On June 28, 2019, the Supreme Court of Texas requested oral argument, which was held on October 8, 2019. On January 31, 2020, the Supreme Court of Texas issued a unanimous opinion affirming the judgment of the Dallas Court of Appeals.
We did not record a provision for this matter at December 31, 2019 as management believed that payment of damages by us was not probable.
PDH Litigation
In July 2013, we executed a contract with Foster Wheeler USA Corporation (“Foster Wheeler”) pursuant to which Foster Wheeler was to serve as the general contractor responsible for the engineering, procurement, construction and installation of our initial propane dehydrogenation (“PDH 1”) facility. In November 2014, Foster Wheeler was acquired by an affiliate of AMEC plc to form Amec Foster Wheeler plc, and Foster Wheeler is now known as Amec Foster Wheeler USA Corporation (“AFW”). In December 2015, Enterprise and AFW entered into a transition services agreement under which AFW was partially terminated from the PDH 1 project. In December 2015, Enterprise engaged a second contractor, Optimized Process Designs LLC, to complete the construction and installation of PDH 1.
On September 2, 2016, we terminated AFW for cause and filed a lawsuit in the 151st Judicial Civil District Court of Harris County, Texas against AFW and its parent company, Amec Foster Wheeler plc, asserting claims for breach of contract, breach of warranty, fraudulent inducement, string-along fraud, gross negligence, professional negligence, negligent misrepresentation and attorneys’ fees. We intend to diligently prosecute these claims and seek all direct, consequential, and exemplary damages to which we may be entitled.
Redelivery Commitments
We store natural gas, crude oil, NGLs and certain petrochemical products owned by third parties under various agreements. Under the terms of these agreements, we are generally required to redeliver volumes to the owner on demand. At December 31, 2019, we had approximately 8.9 trillion British thermal units (“TBtus”) of natural gas, 20.4 MMBbls of crude oil, and 38.1 MMBbls of NGL and petrochemical products in our custody that were owned by third parties. We maintain insurance coverage in connection with such volumes that is consistent with our exposure. See Note 18 for information regarding insurance matters.
Commitments Under Equity Compensation Plans of EPCO
In accordance with our agreements with EPCO, we reimburse EPCO for our share of its compensation expense attributable to employees who perform management, administrative and operating functions for us. See Notes 13 and 15 for additional information regarding our accounting for equity-based awards and related party information, respectively.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual Obligations
The following table summarizes our various contractual obligations at December 31, 2019. A description of each type of contractual obligation follows:
Scheduled Maturities of Debt
We have long-term and short-term payment obligations under debt agreements. Amounts shown in the preceding table represent our scheduled future maturities of debt principal for the years indicated. See Note 7 for additional information regarding our consolidated debt obligations.
Estimated Cash Interest Payments
Our estimated cash payments for interest are based on the principal amount of our consolidated debt obligations outstanding at December 31, 2019, the contractually scheduled maturities of such balances, and the applicable interest rates. Our estimated cash payments for interest are influenced by the long-term maturities of our $2.65 billion in junior subordinated notes (due June 2067 through February 2078). The estimated cash payments assume that (i) the junior subordinated notes are not repaid prior to their respective maturity dates and (ii) the amount of interest paid on the junior subordinated notes is based on either (a) the current fixed interest rate charged or (b) the weighted-average variable rate paid in 2019, as applicable, for each note through the respective maturity date. See Note 7 for information regarding fixed and weighted-average variable interest rates charged in 2019.
Operating Lease Obligations
We lease certain property, plant and equipment under noncancelable and cancelable operating leases. Amounts shown in the preceding table represent minimum cash lease payment obligations under our operating leases with terms in excess of one year.
Our significant lease agreements consist of (i) land held pursuant to property leases, (ii) the lease of underground storage caverns for natural gas and NGLs, (iii) the lease of transportation equipment used in our operations and (iv) office space leased from affiliates of EPCO. These lease agreements have terms that range from 5 to 30 years. The agreements to lease office space from affiliates of EPCO and those relating to underground NGL storage caverns we lease from a third party include renewal options that could extend these contracts for up to an additional 20 years. The remainder of our significant lease agreements do not provide for additional renewal terms.
Lease expense is charged to operating costs and expenses on a straight-line basis over the period of expected economic benefit. Contingent rental payments are expensed as incurred. We are generally required to perform routine maintenance on the underlying leased assets. In addition, certain leases give us the option to make leasehold improvements. Maintenance and repairs of leased assets resulting from our operations are charged to expense as incurred.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents information regarding operating leases where we are the lessee at December 31, 2019:
(1)
ROU asset amounts are a component of “Other assets” on our consolidated balance sheet.
(2)
At December 31, 2019, lease liabilities of $40.4 million and $171.6 million were included within “Other current liabilities” and “Other liabilities,” respectively.
(3)
The discount rate for each category of assets represents the weighted average of either (i) the implicit rate applicable to the underlying leases (where determinable) or (ii) our incremental borrowing rate adjusted for collateralization (if the implicit rate is not determinable). In general, the discount rates are based on either (i) information available at the lease commencement date or (ii) January 1, 2019 for leases existing at the adoption date for ASC 842.
In total, operating lease expense was $106.6 million, $86.4 million and $103.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. The following table disaggregates our total operating lease expense for year ended December 31, 2019:
Fixed lease expense is charged to earnings on a straight-line basis over the contractual term, with any variable lease payments expensed as incurred. Short-term operating lease expense is expensed as incurred. Cash paid for operating lease liabilities recorded on our balance sheet was $48.1 million for the year ended December 31, 2019.
We recognized $246.1 million in ROU assets and lease liabilities for long-term operating leases at January 1, 2019 in connection with the adoption of ASC 842. On an undiscounted basis, our long-term operating lease obligations aggregated to $314.4 million at January 1, 2019.
We do not have any significant operating or direct financing leases where we are the lessor. Our operating lease income for the year ended December 31, 2019 was $14.4 million. We do not have any sales-type leases.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Obligations
We define purchase obligations as agreements with remaining terms in excess of one year to purchase goods or services that are enforceable and legally binding (i.e., unconditional) on us that specify all significant terms, including (i) fixed or minimum quantities to be purchased, (ii) fixed, minimum or variable price provisions and (iii) the approximate timing of the transactions. We classify our unconditional purchase obligations into the following categories:
• We have long-term product purchase obligations for natural gas, NGLs, crude oil, and petrochemicals and refined products with third party suppliers. The prices that we are obligated to pay under these contracts approximate market prices at the time we take delivery of the volumes. The preceding table presents our estimated future payment obligations under these contracts based on the contractual price in each agreement at December 31, 2019 applied to all future volume commitments. Actual future payment obligations may vary depending on prices at the time of delivery.
• We have long-term commitments to pay service providers, including those attributable to obligations under firm pipeline transportation contracts. Payment obligations vary by contract, but generally represent a price per unit of volume multiplied by a firm transportation volume commitment.
• We have short-term payment obligations relating to our capital expenditures, including our share of the capital expenditures of unconsolidated affiliates. These commitments represent unconditional payment obligations for services to be rendered or products to be delivered in connection with capital projects.
Other Commitments
We are obligated to spend up to an aggregate $270 million over a ten-year period ending in 2025 on specified midstream gathering assets for certain producers utilizing our EFS Midstream System. If constructed, these new assets would be owned by us and be a component of the EFS Midstream System. As of December 31, 2019, we have spent $151 million of the $270 million commitment.
Other Long-Term Liabilities
The following table summarizes the components of “Other long-term liabilities” as presented on our Consolidated Balance Sheets at the dates indicated:
We classify the Liquidity Option liability as long-term since we expect that it will be replaced by a long-term deferred tax liability of similar amount upon exercise of the Liquidity Option. See the following discussion titled “Liquidity Option” within this Note 17.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liquidity Option
In October 2014, we acquired approximately 65.9% of the limited partner interests of Oiltanking Partners, L.P. (“Oiltanking”), all of the member interests of OTLP GP, LLC, the general partner of Oiltanking (“Oiltanking GP”), and the incentive distribution rights held by Oiltanking GP from Oiltanking Holding Americas, Inc. (“OTA”), a U.S. corporation, as the first step (“Step 1”) of a two-step acquisition of Oiltanking. In February 2015, we completed the second step of this transaction consisting of the acquisition of the noncontrolling interests in Oiltanking. In order to fund the equity consideration paid in Step 1 of the Oiltanking acquisition, we issued 54,807,352 common units to OTA on October 1, 2014 in a transaction exempt from the registration requirements of the Securities Act of 1933 (the “Securities Act”), as amended, pursuant to Section 4(a)(2) thereof. We also entered into a put option agreement (the “Liquidity Option Agreement” or “Liquidity Option”) with OTA and Marquard & Bahls AG (“M&B”), a German corporation and the ultimate parent company of OTA, in connection with Step 1. Under the Liquidity Option Agreement, the Partnership granted M&B the option to sell to the Partnership 100% of the issued and outstanding capital stock of OTA at any time within a 90-day period commencing on February 1, 2020. On February 25, 2020, the Partnership received notice from M&B of M&B’s election to exercise its Liquidity Option right.
The Liquidity Option Agreement permits M&B to allow deferred tax liabilities to remain with OTA, including tax liabilities existing at the time of the sale of Oiltanking to us in 2014, and for M&B to directly receive EPD common units upon settlement of the Liquidity Option exercise that are unencumbered by any such liabilities. As a result, the liquidity of M&B is enhanced following exercise and settlement of the option, when compared to its financial position prior thereto (hence the name “Liquidity Option”).
Under the terms of the Liquidity Option Agreement, the aggregate consideration to be paid by the Partnership for OTA’s capital stock at settlement will equal the volume-weighted sales price of EPD common units for the 10-trading day period immediately preceding the exercise notice date, multiplied by the 54,807,352 EPD common units owned by OTA. The consideration paid by the Partnership may be in the form of newly issued EPD common units, cash or any mix thereof, as determined solely by the Partnership. Settlement of the option exercise transaction is expected to occur on March 5, 2020. The Partnership currently expects that it will elect to deliver to M&B (or its designated affiliate) 54,807,352 newly issued EPD common units (in lieu of any cash) in connection with such settlement.
Upon settlement of the Liquidity Option exercise, we will indirectly acquire the 54,807,352 EPD common units owned by OTA, and assume all future income tax obligations of OTA associated with (i) owning EPD common units encumbered by the entity-level taxes of a U.S. corporation and (ii) the deferred tax liability as of the settlement date. In total, the partners’ capital balance for common units as presented on the Consolidated Balance Sheet will increase by the market value of the new EPD common units issued to M&B at settlement. Assuming that we issue only EPD common units to M&B as consideration (in lieu of any cash consideration), the number of EPD common units outstanding would not increase as the 54,807,352 newly issued units would be offset by the 54,807,352 EPD common units held by OTA that are reclassified to treasury units.
The new EPD common units issued to M&B upon settlement of the Liquidity Option will constitute “restricted securities” in the meaning of Rule 144 under the Securities Act and may not be resold except pursuant to an effective registration statement or an available exemption under the Securities Act. M&B will have the right to request that we prepare and file a registration statement to permit and otherwise facilitate the public resale of all or a portion of such EPD common units that M&B and its affiliates then own. Our obligation to M&B to effect such transactions is limited to five registration statements and underwritten offerings.
The acquisition of OTA upon settlement of the Liquidity Option will be accounted for as the purchase of treasury units and the assumption of related deferred income taxes. OTA does not meet the definition of a business as described in ASC 805, Business Combinations. In consolidation, the 54,807,352 EPD common units will be presented as treasury units held at cost, with cost measured as the fair value of consideration paid or issued to M&B in connection with exercise of the Liquidity Option.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2019 and 2018, we estimated that our liability under the Liquidity Option Agreement, which is a component of “Other long-term liabilities” on our Consolidated Balance Sheet was $509.6 million and $390.0 million, respectively. The Liquidity Option liability, at any measurement date, represents the present value of estimated federal and state income taxes that we believe a market participant would incur due to ownership of OTA, including its deferred income tax liabilities. Our valuation estimate for the Liquidity Option liability at December 31, 2019 incorporates several estimates that are not readily observable in the market (i.e., Level 3 inputs) such as: (i) a discount rate of 5.7%; (ii) a blended federal and state income tax rate of approximately 22.8%; (iii) forecasted annual growth rates in our taxable earnings ranging from approximately 0.7% to 2.2%; (iv) allocations of Partnership income to OTA ranging from approximately 2.3% to 2.5%; and (v) the length of time that OTA is in existence following exercise of the option (up to 30 years). The valuation estimate reflects the most recent U.S. federal income tax reforms along with certain tax planning strategies that we believe could be employed by a market participant.
Changes in the fair value of the Liquidity Option are recognized in earnings as a component of other income (expense) on our Statements of Consolidated Operations. Results for the years ended December 31, 2019, 2018 and 2017 include $119.6 million, $56.1 million and $64.3 million, respectively, of aggregate non-cash expense attributable to accretion and changes in management estimates regarding inputs to the valuation model. The higher level of expense recognized in 2019 is primarily due to a decrease in the discount factor used in determining the present value of the liability since December 31, 2018. The discount rate is based on a weighted-average cost of capital, which declined over the course of 2019 due to lower U.S. interest rates.
When the Liquidity Option is exercised, the Liquidity Option liability will be replaced by the deferred income tax liabilities of OTA as calculated in accordance with ASC 740, Income Taxes. If OTA’s deferred tax liabilities exceed the then-current book value of the Liquidity Option liability at the exercise date, we will recognize expense for the difference. Conversely, if the book value of the Liquidity Option exceeds the deferred tax liabilities, we will recognize a benefit. Based on our current estimates, we do not believe that this difference will be material to our consolidated financial statements.
Note 18. Significant Risks and Uncertainties
Nature of Operations
We operate predominantly in the midstream energy industry, which includes gathering, transporting, processing, fractionating and storing natural gas, NGLs, crude oil, and petrochemical and refined products. As such, changes in the prices of hydrocarbon products and in the relative price levels among hydrocarbon products could have a material adverse effect on our financial position, results of operations and cash flows. Changes in prices may impact demand for hydrocarbon products, which in turn may impact production, demand and the volumes of products for which we provide services. In addition, decreases in demand may be caused by other factors, including prevailing economic conditions, reduced demand by consumers for the end products made with hydrocarbon products, increased competition, adverse weather conditions and government regulations affecting prices and production levels.
The natural gas, NGL and crude oil volumes currently transported, gathered or processed at our facilities originate primarily from existing domestic resource basins, which naturally deplete over time. To offset this natural decline, our facilities need access to production from newly discovered properties. Many economic and business factors beyond our control can adversely affect the decision by producers to explore for and develop new reserves. These factors could include relatively low crude oil and natural gas prices, cost and availability of equipment and labor, regulatory changes, capital budget limitations, the lack of available capital or the probability of success in finding hydrocarbons. A decrease in exploration and development activities in the regions where our facilities and other energy logistics assets are located could result in a decrease in volumes handled by our assets, which could have a material adverse effect on our financial position, results of operations and cash flows.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Even if crude oil and natural gas reserves exist in the areas served by our assets, we may not be chosen by producers in these areas to gather, transport, process, fractionate, store or otherwise handle the hydrocarbons extracted. We compete with other companies for such production on the basis of many factors, including, but not limited to, geographic proximity to the production, costs of connection, available capacity, rates and access to markets.
Credit Risk
We may incur credit risk to the extent counterparties do not fulfill their obligations to us in connection with our marketing of natural gas, NGLs, crude oil, and petrochemicals and refined products and under long-term contracts with minimum volume commitments or fixed demand charges. Risks of nonpayment and nonperformance by customers are a major consideration in our businesses, and our credit procedures and policies may not be adequate to sufficiently eliminate customer credit risk. Further, adverse economic conditions in our industry, such as those experienced in 2015 and 2016, increase the risk of nonpayment and nonperformance by customers, particularly customers that have sub-investment grade credit ratings or small-scale companies. We manage our exposure to credit risk through credit analysis, credit approvals, credit limits and monitoring procedures, and for certain transactions may utilize letters of credit, prepayments, net out agreements and guarantees. However, these procedures and policies do not fully eliminate customer credit risk.
The primary markets for our services are the Gulf Coast, Southwest, Rocky Mountain, Northeast and Midwest regions of the U.S. We have a concentration of trade receivables due from independent and major integrated oil and gas companies and other pipelines and wholesalers operating in these markets. These concentrations may affect our overall credit risk in that these energy industry customers may be similarly affected by adverse changes in economic, regulatory or other factors.
In those situations where we are exposed to credit risk in our derivative instrument transactions, we analyze the counterparty’s financial condition prior to entering into an agreement, establish credit and/or margin limits and monitor the appropriateness of these limits on an ongoing basis. Generally, we do not require collateral for such transactions nor do we currently anticipate nonperformance by our material counterparties.
Insurance Matters
We participate as a named insured in EPCO’s insurance program, which provides us with property damage, business interruption and other insurance coverage, the scope and amounts of which we believe are customary and prudent for the nature and extent of our operations. While we believe EPCO maintains adequate insurance coverage on our behalf, insurance may not fully cover every type of damage, interruption or other loss that might occur. If we were to incur a significant loss for which we were not fully insured, it could have a material adverse impact on our financial position, results of operations and cash flows.
In addition, there may be timing differences between amounts we accrue related to property damage expense, amounts we are required to pay in connection with a loss, and amounts we subsequently receive from insurance carriers as reimbursements. Any event that materially interrupts the revenues generated by our consolidated operations, or other losses that require us to make material expenditures not reimbursed by insurance, could reduce our ability to pay distributions to our unitholders and, accordingly, adversely affect the market price of EPD common units.
Involuntary conversions result from the loss of an asset due to some unforeseen event (e.g., destruction due to a fire). Some of these events are covered by insurance, thus resulting in a property damage insurance recovery. Amounts we receive from insurance carriers are net of any deductibles related to the covered event. We record a receivable from insurance to the extent we recognize a loss from an involuntary conversion event and the likelihood of our recovering such loss is deemed probable. To the extent that any of our insurance claim receivables are later judged not probable of recovery (e.g., due to new information), such amounts are expensed. We recognize gains on involuntary conversions when the amount received from insurance exceeds the net book value of the retired assets.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, we do not recognize gains related to insurance recoveries until all contingencies related to such proceeds have been resolved, that is, a non-refundable cash payment is received from the insurance carrier or we have a binding settlement agreement with the carrier that clearly states that a non-refundable payment will be made. To the extent that an asset is rebuilt, the associated expenditures are capitalized, as appropriate, on our Consolidated Balance Sheets and presented as “Capital expenditures” on our Statements of Consolidated Cash Flows.
Under our current insurance program, the standalone deductible for property damage claims is $30 million. We also have business interruption protection; however, such claims must involve physical damage and have a combined loss value in excess of $30 million and the period of interruption must exceed 60 days. With respect to named windstorm claims, the maximum amount of insurance coverage available to us for any single event is $200 million, after applying the appropriate deductibles. A named windstorm is a hurricane, typhoon, tropical storm or cyclone as declared by the U.S. National Weather Service.
Note 19. Supplemental Cash Flow Information
The following table provides information regarding the net effect of changes in our operating accounts and cash payments for interest and income taxes for the years indicated:
We incurred liabilities for construction in progress that had not been paid at December 31, 2019, 2018 and 2017 of $432.0 million, $567.6 million and $373.0 million, respectively. Such amounts are not included under the caption “Capital expenditures” on our Statements of Consolidated Cash Flows.
Capital expenditures for the year ended December 31, 2017 reflect the receipt of $46.1 million of CIACs from third parties.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents our cash proceeds from asset sales for the years indicated:
The following table presents net gains (losses) attributable to asset sales for the years indicated:
See Note 14 for information regarding asset impairment and related charges as presented on our Statements of Consolidated Cash Flows.
Note 20. Quarterly Financial Information (Unaudited)
The following table presents selected quarterly financial data for the periods indicated:
The sum of our quarterly earnings per unit amounts may not equal our full year amounts due to slight rounding differences.
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21. Condensed Consolidating Financial Information
EPO conducts all of our business. Currently, we have no independent operations and no material assets outside those of EPO.
EPO has issued publicly traded debt securities. As the parent company of EPO, EPD guarantees substantially all of the debt obligations of EPO. If EPO were to default on any of its guaranteed debt, EPD would be responsible for full and unconditional repayment of that obligation. See Note 7 for additional information regarding our consolidated debt obligations.
EPO’s consolidated subsidiaries have no significant restrictions on their ability to pay distributions or make loans to EPD.
Enterprise Products Partners L.P.
Condensed Consolidating Balance Sheet
December 31, 2019
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Enterprise Products Partners L.P.
Condensed Consolidating Balance Sheet
December 31, 2018
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Enterprise Products Partners L.P.
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2019
Enterprise Products Partners L.P.
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2018
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Enterprise Products Partners L.P.
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2017
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Enterprise Products Partners L.P.
Condensed Consolidating Statement of Comprehensive Income
For the Year Ended December 31, 2019
Enterprise Products Partners L.P.
Condensed Consolidating Statement of Comprehensive Income
For the Year Ended December 31, 2018
Enterprise Products Partners L.P.
Condensed Consolidating Statement of Comprehensive Income
For the Year Ended December 31, 2017
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Enterprise Products Partners L.P.
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2019
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Enterprise Products Partners L.P.
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2018
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Enterprise Products Partners L.P.
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2017
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 22. Subsequent Event
Issuance of $3.0 Billion of Senior Notes in January 2020
In January 2020, EPO issued $3.0 billion aggregate principal amount of senior notes comprised of (i) $1.0 billion principal amount of senior notes due January 2030 (“Senior Notes AAA”), (ii) $1.0 billion principal amount of senior notes due January 2051 (“Senior Notes BBB”) and (iii) $1.0 billion principal amount of senior notes due January 2060 (“Senior Notes CCC”). Net proceeds from this offering were used by EPO for the repayment of $500 million principal amount of its Senior Notes Q that matured in January 2020, temporary repayment of amounts outstanding under its commercial paper program and for general company purposes. In addition, net proceeds from this offering will be used by EPO for the repayment of $1.0 billion principal amount of its Senior Notes Y upon their maturity in September 2020.
Senior Notes AAA were issued at 99.921% of their principal amount and have a fixed-rate interest rate of 2.80% per year. Senior Notes BBB were issued at 99.413% of their principal amount and have a fixed-rate interest rate of 3.70% per year. Senior Notes CCC were issued at 99.360% of their principal amount and have a fixed-rate interest rate of 3.95% per year. EPD guaranteed these senior notes through an unconditional guarantee on an unsecured and unsubordinated basis.
In January 2020, we terminated an aggregate $575 million notional amount of forward-starting swaps (cash flow hedges), which resulted in cash payments of $33.3 million. The termination of these swaps was done in connection with EPO’s issuance of $3.0 billion aggregate principal amount of senior notes in January 2020.
Exercise of Liquidity Option in February 2020
On February 25, 2020, the Partnership received notice from M&B of M&B’s election to exercise its Liquidity Option right. Settlement of the option exercise transaction is expected to occur on March 5, 2020. For additional information regarding the Liquidity Option and the effects of the option exercise, see Note 17.