01—Abstract
Summary
Summary of the 10-K filed March 2, 2015. Cited figures are marked; the original filing is the authoritative source.
Energy Transfer Equity, L.P.
(ETE) reported record 2014 results driven by its consolidated subsidiaries, principally Energy Transfer Partners (ETP) and Regency Energy Partners (Regency). Total revenues rose to $55.7 billiona from $48.3 billion, operating income increased to $2.47 billion from $1.55 billion, and net income attributable to partners was $633 million versus $196 million in 2013, though 2014 results include a $370 million goodwill impairment at Regency's Permian unit and $473 million of inventory write-downs. Segment Adjusted EBITDA grew to $5.84 billion from $4.37 billion, led by ETP's $4.83 billion and Regency's $1.17 billion.
ETE's own cash flow depends entirely on distributions from ETP and Regency, and the filing makes clear that these distributions are not guaranteed. ETE also has $30.66 billionb of consolidated debt, a leverage level investors should weigh against its reliance on subsidiary distributions and on incentive distribution rights that are partly relinquished under IDR subsidy arrangements through 2024. Pending transactions are significant: ETP's acquisition of Regency (expected Q2 2015), and ETE's transfer of its Bakken pipeline interest to ETP in exchange for ETP Class H units (expected March 2015), which would reshape ETE's economic interests.
Key risks include commodity price exposure, reliance on ETP and Regency growth capital spending (ETP plans roughly $6.25c-7.07 billion of 2015 capex, Regency $1.6 billion), pending litigation over the Regency merger, the Enterprise litigation appeal, MTBE liabilities at Sunoco, and environmental and pipeline-safety regulation. The Bakken and Regency transactions, the IDR relinquishments, and the parent's dependence on subsidiary cash flows are the central items for investors to track.
02—Key points
Key Highlights
- Consolidated revenues of $55.7 billion (up 15% from $48.3 billion) and operating income of $2.47 billion (up 59%), with net income of $1.12 billion including noncontrolling interests.
- Segment Adjusted EBITDA of $5.84 billion, with ETP contributing $4.83 billion and Regency $1.17 billion; Regency's segment EBITDA nearly doubled after the PVR and Eagle Rock acquisitions.
- Pending Regency Merger: Regency will become a wholly owned ETP subsidiary, with each Regency common unit receiving 0.4066 ETP units plus a make-whole amount; expected to close in Q2 2015 and subject to unitholder approval and litigation.
- Pending Bakken Pipeline Transaction: ETE will transfer its 45% Dakota Access and Energy Transfer Crude Oil interests, 30.8 million ETP units, and $879 million cash to ETP for Class H units, raising ETE's share of Sunoco Logistics IDRs to 90.05%; expected March 2015.
- Parent leverage is substantial: approximately $30.66 billion of consolidated debt, with a portion of cash flow dependent on subsidiary distributions and partially offset by IDR relinquishments of $86 million in 2015 rising to $107 million in 2016 (currently effective).
- Goodwill impairments of $370 million at Regency's Permian unit and $473 million of inventory valuation write-downs weighed on Q4 2014 results, which posted a net loss attributable to ETE's limited partners for the quarter.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Energy Transfer LP kept $0.01.
- Revenue$55.69B100.0%
- Cost of revenue−$48.39B86.9%
- Gross profit$7.30B13.1%
- Operating costs−$4.83B8.7%
- Operating income$2.47B4.4%
- Interest, other & tax−$1.84B3.3%
- Net income$633.0M1.1%
Where FY2014 revenue went
$55.69B- Cost of revenue: $48.41B, 87% of revenue
- Net income: $633.0M, 1.1% of revenue
- SG&A: $611.0M, 1.1% of revenue
- Other operating costs: $4.20B, 7.5% of revenue
- Interest, other & tax: $1.84B, 3.3% of revenue
Kept 1.1% as net incomeNet income $633.0M · 1.1%SG&A $611.0M · 1.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed March 2, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $55.69B$48.34B | +15.2% |
| Cost of Revenue | $48.41B$42.58B | +13.7% |
| Gross Profit | $7.30B$5.78B | +26.3% |
| SG&A Expenses | $611.00M$533.00M | +14.6% |
| Operating Expenses | $53.22B$46.78B | +13.8% |
| Operating Income | $2.47B$1.55B | +59.3% |
| Interest Expense | $1.37B$1.22B | +12.1% |
| Net Income | $633.00M$196.00M | +223.0% |
05—Questions
Frequently Asked Questions
How does Energy Transfer Equity generate its cash to pay unitholder distributions?
ETE has no significant assets other than its general partner interests and incentive distribution rights in ETP and Regency, plus Class H units in ETP and its Lake Charles LNG subsidiary. Its distributions therefore depend entirely on what ETP and Regency pay their unitholders, and the filing states ETE cannot guarantee future distributions. Its quarterly distribution was raised to $0.45 per unit for Q4 2014, with $866 million paid to limited partners in 2014.
What happens to ETE's economics if the Regency merger and Bakken transaction close as planned?
The Regency merger would make Regency a wholly owned ETP subsidiary, and ETE has agreed to reduce ETP incentive distributions by $320 million over five years ($80 million in year one, $60 million per year thereafter). The Bakken transaction increases ETE's Class H interest to 90.05% of Sunoco Logistics' GP and IDR cash flows. Management states ETE's aggregate ownership of ETP common units would fall to about 5% on a pro forma basis, reducing its direct exposure to ETP's common unit economics while increasing its share of certain IDR-related cash flows.
What are the main risks that could reduce ETE's distributions?
Key risks include commodity price declines affecting midstream margins, the volume dependence of pipelines on drilling activity, interest rate exposure (about $5.89 billion of variable-rate consolidated debt), limits on ETP and Regency distributions from their own debt covenants, and the risk that IDRs decline if subsidiary distributions fall. Regulatory risks include FERC rate changes, pipeline safety rules, and climate-related regulation of methane and greenhouse gases.
What litigation and contingent liabilities should investors note?
Lawsuits challenging the Regency merger seek to enjoin or rescind the transaction, and a preliminary injunction could delay closing. Sunoco, Inc. faces MTBE groundwater claims in five cases, with the outcome not estimable beyond amounts accrued. ETP has a $536 million judgment against Enterprise Products under appeal that is not recognized in the financial statements. Environmental accruals totaled about $401 million at year-end 2014.
How strong is ETE's liquidity and debt position?
ETE had $847 million of cash and about $2.34 billion of floating-rate borrowings under its revolving credit facilities at year-end 2014. Management stated it was in compliance with all covenants, which include a maximum parent leverage ratio of 6.0 to 1 and an interest coverage minimum of 1.5 to 1. ETE repurchased about $1 billion of its common units in 2014 and announced a new $2 billion repurchase program in February 2015.
06—Continue