01—Abstract
Summary
Summary of the 10-K filed February 23, 2018. Cited figures are marked; the original filing is the authoritative source.
Energy Transfer Equity, L.P.
(NYSE: ETE) reported a strong 2017 with consolidated Segment Adjusted EBITDA of $7.32 billiona, up from $6.14 billion in 2016, driven mainly by Energy Transfer Partners (ETP), whose segment EBITDA rose to $6.71 billion. Total revenues grew to $40.5 billion and operating income to $2.71 billion. Net income reached $2.37 billion, but this was flattered by a $1.81 billion non-cash deferred tax benefit from the Tax Cuts and Jobs Act's reduction of the federal corporate rate to 21%.
Income from continuing operations before tax was only $710 millionb, after $1.04 billion of impairment losses, mostly goodwill impairments at ETP and Sunoco LP. Leverage and liquidity remain the central investor concern. Consolidated debt was about $44.1 billion at year-end, with roughly $9.86 billion floating-rate, and the Parent Company alone carried about $6.7 billion.
Cash from operations was $4.43 billionc against $8.4 billion of capital expenditures, so growth spending depended on debt and equity issuance, including ETE's $580 million January 2017 unit placement and ETP's $2.28 billion of unit proceeds. Management reports covenant compliance, and ETP's leverage ratio was 3.96x against a 5.0x limit. For unitholders, distributions are sourced almost entirely from ETP and Sunoco LP, and ETE's incentive distribution rights carry high sharing levels of 48% and 50%.
The quarterly distribution rose to $0.3050d per unit for Q4 2017, and ETE has agreed to relinquish incentive distributions of $153 million in 2018 and $128 million in 2019. The filing also flags sizable legal and regulatory exposure, including the Williams merger litigation seeking a $410 million termination fee, the Dakota Access pipeline litigation, Mariner East permitting disputes, and MTBE claims. Subsequent events include Sunoco LP's sale of about 1,030 retail sites to 7-Eleven for $3.3 billion and the pending CDM contribution to USA Compression for about $1.7 billion.
02—Key points
Key Highlights
- Segment Adjusted EBITDA rose 19% to $7.32 billion (2016: $6.14 billion), led by ETP's $6.71 billion, up from $5.73 billion.
- Net income of $2.37 billion includes a $1.81 billion one-time deferred tax benefit from the 2017 tax reform, so pre-tax income from continuing operations was only $710 million.
- Goodwill and asset impairments totaled about $1.04 billion in 2017, including $793 million at ETP and $102 million at Sunoco LP from continuing operations.
- Consolidated debt was $44.1 billion at year-end 2017, with $9.86 billion floating-rate; the Parent Company's stand-alone debt was $6.7 billion.
- Operating cash flow of $4.43 billion covered only about half of $8.4 billion in capital expenditures, so growth was funded with new debt and equity.
- The Sunoco LP retail divestiture to 7-Eleven ($3.3 billion) and the CDM contribution to USAC ($1.7 billion) are major pending or completed portfolio transactions in early 2018.
- The quarterly ETE distribution increased to $0.3050 per unit for Q4 2017, and incentive distributions to ETE are scheduled to be relinquished at $153 million in 2018 and $128 million in 2019.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2017, Energy Transfer LP kept $0.02.
- Revenue$40.52B100.0%
- Cost of revenue−$30.97B76.4%
- Gross profit$9.56B23.6%
- Operating costs−$6.84B16.9%
- Operating income$2.72B6.7%
- Interest, other & tax−$1.77B4.4%
- Net income$954.0M2.4%
Where FY2017 revenue went
$40.52B- Cost of revenue: $30.97B, 76% of revenue
- Other operating costs: $6.24B, 15% of revenue
- Net income: $954.0M, 2.4% of revenue
- SG&A: $599.0M, 1.5% of revenue
- Interest, other & tax: $1.77B, 4.4% of revenue
Kept 2.4% as net incomeNet income $954.0M · 2.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 23, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $40.52B$31.79B | +27.5% |
| Cost of Revenue | $30.97B$23.69B | +30.7% |
| Gross Profit | $9.56B$8.10B | +18.0% |
| SG&A Expenses | $599.00M$656.00M | −8.7% |
| Operating Expenses | $37.80B$29.94B | +26.3% |
| Operating Income | $2.72B$1.85B | +47.0% |
| Interest Expense | $1.92B$1.80B | +6.5% |
| Net Income | $954.00M$995.00M | −4.1% |
05—Questions
Frequently Asked Questions
Why did net income rise so sharply in 2017 when operating performance was more modest?
Most of the increase reflects a $1.81 billion non-cash deferred tax benefit recorded in December 2017 after the federal corporate tax rate fell from 35% to 21%. Income from continuing operations before tax was only $710 million, compared with $204 million in 2016, and operating income was $2.71 billion. Investors should treat the tax benefit as non-recurring when judging underlying earnings power.
How leveraged is Energy Transfer Equity, and is the debt manageable?
Consolidated debt was about $44.1 billion at December 31, 2017, and the Parent Company carried about $6.7 billion of its own debt. ETP's leverage ratio was 3.96x against a 5.0x covenant limit. The company reports compliance with all covenants, but about $9.86 billion of debt is floating-rate, so a 100-basis-point rate rise would raise annual interest expense by up to $98 million.
How secure are ETE's distributions to unitholders?
ETE's cash flow depends almost entirely on distributions from ETP and Sunoco LP. Its incentive distribution rights carry sharing levels of 48% and 50%, so ETE gains disproportionately when those partnerships grow distributions, but a cut at ETP or Sunoco LP would reduce ETE's payouts more than proportionally. ETE has also agreed to relinquish $153 million of incentive distributions in 2018, and cash distributions are not guaranteed.
What are the most significant legal and regulatory risks disclosed?
The most prominent items are the Williams merger litigation (Williams seeks a $410 million termination fee; ETE counterclaims for $1.48 billion), the Dakota Access pipeline lawsuits brought by several Sioux tribes, and the Mariner East 2 permitting dispute that led to a $12.6 million Pennsylvania civil penalty. The MTBE groundwater cases against Sunoco, Inc. are also pending, and the company says a loss there would likely not be materially adverse to consolidated financial position.
06—Continue