01—Abstract
Summary
Summary of the 10-K filed February 24, 2017. Cited figures are marked; the original filing is the authoritative source.
Energy Transfer Equity, L.P.
(ETE) reported a sharp earnings decline for 2016 despite stable underlying segment cash generation. Consolidated net income fell to $41 milliona from $1.09 billion in 2015, driven primarily by $1.49 billion of impairment losses (including goodwill write-downs of $638 million at ETP interstate operations, $32 million at ETP midstream, and $642 million at Sunoco LP), a $308 million impairment of its MEP equity investment, and $273 million of favorable inventory adjustments that partly offset the losses. Total Segment Adjusted EBITDA was essentially flat at $6.0 billion versus $5.9 billion in 2015, and operating cash flow rose to $3.42 billion, which supports the view that the earnings weakness is largely non-cash.
Consolidated debt increased to about $43.8 billionb from $37.0 billion, reflecting heavy growth capital spending, the PennTex and Vitol acquisitions, and Sunoco Logistics and Sunoco LP financing, and the Parent Company's stand-alone debt rose to roughly $6.4 billion. The Parent Company's cash flow depends almost entirely on distributions from ETP and Sunoco LP, including IDR payments that are subject to incentive-distribution relinquishments (ETE agreed to give up $626 million in 2017 alone). The planned ETP-Sunoco Logistics unit-for-unit merger, expected to close in April 2017, and the Sunoco Logistics unit issuance of roughly 827 million units would significantly change the structure and distribution flows.
Material legal overhangs include the WMB litigation (WMB seeks a $410 million termination fee and up to $10 billionc in damages, while ETE counterclaims for $1.48 billion), Dakota Access construction protests, and new unitholder suits tied to the ETP merger. Investors should weigh the stable segment EBITDA and distribution coverage against elevated leverage, a balance sheet with $79 billion of total assets and $22.5 billion of total equity, litigation exposure, and the uncertain outcome of the pending merger and the Dakota Access pipeline.
02—Key points
Key Highlights
- Net income collapsed to $41 million in 2016 from $1.09 billion in 2015, largely due to $1.49 billion of impairment losses and a $308 million write-down of the MEP equity investment.
- Total Segment Adjusted EBITDA was roughly flat at $6.0 billion (vs. $5.9 billion in 2015), while operating cash flow increased to $3.42 billion (vs. $3.07 billion).
- Consolidated long-term debt rose to $42.6 billion (total debt $43.8 billion) from $36.8 billion, and the Parent Company's stand-alone debt was about $6.4 billion.
- Parent Company distributions received from ETP and Sunoco LP totaled $1.46 billion in 2016, but ETE has agreed to relinquish $626 million of incentive distributions in 2017, with $720 million relinquished over the second half of 2016 through 2017.
- The ETP and Sunoco Logistics unit-for-unit merger (ETP unitholders get 1.5 Sunoco Logistics units) is expected to close in April 2017 and would issue about 827 million Sunoco Logistics units.
- ETE faces significant litigation: WMB seeks a $410 million termination fee plus up to $10 billion in damages, while ETE seeks a $1.48 billion termination fee; the Delaware Supreme Court appeal is pending.
- Early 2017 capital actions include a $580 million ETE common unit private placement, the $2.00 billion Bakken Pipeline equity sale to MarEn closing in February 2017, and a $2.2 billion 2024 term loan refinancing at the Parent Company.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Energy Transfer LP kept $0.03.
- Revenue$31.79B100.0%
- Cost of revenue−$23.69B74.5%
- Gross profit$8.10B25.5%
- Operating costs−$6.25B19.7%
- Operating income$1.85B5.8%
- Interest, other & tax−$856.0M2.7%
- Net income$995.0M3.1%
Where FY2016 revenue went
$31.79B- Cost of revenue: $23.69B, 75% of revenue
- Other operating costs: $5.59B, 18% of revenue
- Net income: $995.0M, 3.1% of revenue
- SG&A: $656.0M, 2.1% of revenue
- Interest, other & tax: $856.0M, 2.7% of revenue
Kept 3.1% as net incomeNet income $995.0M · 3.1%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 24, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $31.79B$36.10B | −11.9% |
| Cost of Revenue | $23.69B$28.67B | −17.4% |
| Gross Profit | $8.10B$7.43B | +9.0% |
| SG&A Expenses | $656.00M$548.00M | +19.7% |
| Operating Expenses | $29.94B$33.81B | −11.4% |
| Operating Income | $1.85B$2.29B | −19.1% |
| Interest Expense | $1.80B$1.62B | +11.2% |
| Net Income | $995.00M$1.19B | −16.3% |
05—Questions
Frequently Asked Questions
Why did ETE's net income fall so sharply in 2016 if segment EBITDA was stable?
The decline was driven mainly by non-cash charges: $1.49 billion of impairment losses, including goodwill write-downs at ETP's interstate and midstream units and Sunoco LP, plus a $308 million impairment of the MEP investment. These were partly offset by a $273 million favorable inventory valuation adjustment. Segment Adjusted EBITDA, which excludes such items, was roughly unchanged at about $6.0 billion.
How safe are ETE's distributions to unitholders?
ETE paid $1.14 per unit in 2016 (up from $1.08), and its quarterly distribution was held at $0.285. Distributions depend on cash from ETP and Sunoco LP, so they are exposed to those partnerships' payouts. ETE's distribution policy requires it to pay out all available cash, and it has little ability to accumulate reserves. ETE's incentive distribution relinquishments and the Sunoco Logistics merger will change the cash flow mix.
How much debt does ETE carry and what are the main leverage risks?
Consolidated debt was about $43.8 billion at year-end 2016, up from $37.0 billion. Roughly $11.6 billion bears floating rates, so a 100 basis point rise would add about $109 million of annual interest expense. Covenants include a Parent Company leverage cap of 6.0x (up to 7.0x during acquisitions) and an ETP leverage cap of 5.0x (up to 5.5x during acquisitions). Credit rating downgrades could raise borrowing costs and require collateral posting.
What are the biggest pending risks for investors?
The main risks are the WMB litigation, which could cost ETE up to $10 billion in damages (or yield a $1.48 billion fee), the pending ETP-Sunoco Logistics merger and its effect on distribution flows, the Dakota Access pipeline protests and lawsuits that could delay revenue, and the FERC quorum loss, which could hold up new pipeline certificates. Environmental and PHMSA pipeline safety rules could also raise costs.
06—Continue