01—Abstract
Summary
Summary of the 10-K filed February 22, 2019. Cited figures are marked; the original filing is the authoritative source.
Energy Transfer LP (NYSE: ET) closed 2018 as a much larger, more diversified midstream and energy company following the October 2018 Energy Transfer Merger, in which it absorbed its former subsidiary Energy Transfer Partners (ETO) in a unit-for-unit exchange.
Consolidated revenue rose to $54.1 billiona from $40.5 billion, operating income nearly doubled to $5.3 billion from $2.7 billion, and net income attributable to partners rose to $1.69 billion from $954 million. Segment Adjusted EBITDA grew to $9.5 billion from $7.3 billion, led by crude oil transportation (up $951 million, driven by the Bakken and Permian pipelines), interstate transportation (Rover pipeline), NGL services, and the newly consolidated USAC compression business. Results were partly offset by $431 million of impairments (including $378 million of Northeast midstream goodwill), and the year also reflected a $1.8 billion deferred tax benefit recognized in 2017 that did not recur.
The balance sheet is heavily levered, with total consolidated debt of about $46.0 billionb and a stand-alone Parent Company debt of about $5.5 billion. Management reports a consolidated leverage ratio of 3.38x under its credit agreements and states it is in compliance with all debt covenants. Liquidity includes $419 million of cash and roughly $2.2 billion of available ETO revolver capacity.
In January 2019, ETO issued $4.0 billionc of senior notes, using proceeds to retire ET's term loan and to redeem near-term maturities. The Parent Company's cash flow depends almost entirely on distributions from ETO, and the quarterly distribution was raised to $0.3050 per unit (about $1.22 for 2018).
Key investor watch items include the Parent Company's dependence on ETO and its subsidiaries, a large pending litigation exposure from Williams (a $410 milliond termination fee claim, trial set for May 2019), environmental and regulatory matters in Pennsylvania related to Mariner East and Revolution pipeline construction, and FERC rate reviews of Panhandle and Southwest Gas Storage following the 2018 tax-allowance policy change. Growth remains capital intensive, with 2019 capital expenditure guidance of roughly $4.9 to $5.2 billion in growth spending, centered on NGL fractionation, Lone Star expansion, and midstream projects.
02—Key points
Key Highlights
- Revenue increased 33% to $54.1 billion and operating income rose 97% to $5.3 billion, reflecting the Energy Transfer Merger, the consolidation of USAC and RIGS, and strong crude oil and interstate volumes.
- Total Segment Adjusted EBITDA reached $9.5 billion, up from $7.3 billion, with crude oil transportation ($2.3 billion) and NGL and refined products ($2.0 billion) as the largest contributors.
- Net income attributable to partners was $1.69 billion, while basic income from continuing operations per limited partner unit rose to $1.17 from $0.86.
- Consolidated debt totaled $46.0 billion with a reported leverage ratio of 3.38x; the company states it was in compliance with all covenants at year-end 2018.
- The quarterly distribution was increased to $0.3050 per unit (annualized about $1.22), and management targets a minimum distribution coverage ratio of 1.50x.
- Impairment losses of $431 million in 2018, primarily a $378 million goodwill write-down in Northeast midstream, reflect delays in third-party takeaway capacity.
- Significant 2019 catalysts include the Lone Star Express expansion, a seventh Mont Belvieu fractionator, the Permian Gulf Coast pipeline project, and the Williams termination-fee litigation (trial set for May 2019).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Energy Transfer LP kept $0.03.
- Revenue$54.09B100.0%
- Cost of revenue−$41.60B76.9%
- Gross profit$12.48B23.1%
- Operating costs−$7.08B13.1%
- Operating income$5.40B10.0%
- Interest, other & tax−$3.65B6.8%
- Net income$1.75B3.2%
Where FY2018 revenue went
$54.09B- Cost of revenue: $41.60B, 77% of revenue
- Net income: $1.75B, 3.2% of revenue
- SG&A: $702.0M, 1.3% of revenue
- Other operating costs: $6.38B, 12% of revenue
- Interest, other & tax: $3.65B, 6.8% of revenue
Kept 3.2% as net incomeNet income $1.75B · 3.2%SG&A $702.0M · 1.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 22, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $54.09B$40.52B | +33.5% |
| Cost of Revenue | $41.60B$30.97B | +34.4% |
| Gross Profit | $12.48B$9.56B | +30.6% |
| SG&A Expenses | $702.00M$599.00M | +17.2% |
| Operating Expenses | $48.68B$37.80B | +28.8% |
| Operating Income | $5.40B$2.72B | +98.6% |
| Interest Expense | $2.06B$1.92B | +6.9% |
| Net Income | $1.75B$954.00M | +83.3% |
05—Questions
Frequently Asked Questions
How did the Energy Transfer Merger change the company's structure and investor economics?
In October 2018, ET merged its subsidiary ETO into a wholly owned ET subsidiary in a unit-for-unit exchange, with ETO unitholders receiving 1.28 ET common units per ETO unit. The IDRs and general partner interest in ETO were converted into ETO common units, and ET's interests in Sunoco LP, USAC, and Lake Charles LNG were contributed to ETO. Post-merger, substantially all of ET's cash flow comes from distributions from ETO, so ET unitholders now effectively own a single consolidated entity with simplified governance and a larger equity base of about 2.62 billion common units.
Is the distribution sustainable, and what could reduce it?
The distribution has been raised in most recent quarters and is currently $0.3050 per unit. Distributions depend on cash received from ETO, which in turn depends on its subsidiaries' results. Risks include a sustained drop in commodity prices or volumes, higher interest costs on roughly $9.8 billion of floating-rate debt (about $98 million of annual exposure per 100 basis points), credit rating downgrades that raise borrowing costs, and the ability to refinance maturities. Management states the partnership is required to distribute 100% of Available Cash, and it has broad discretion to set reserves that can reduce cash available for distribution.
What are the most significant legal and regulatory exposures?
The most material is the Williams litigation, where Williams seeks a $410 million termination fee and ET counterclaims for a $1.48 billion fee, with trial set for May 2019. Environmental and permitting actions in Pennsylvania (Mariner East 2, Revolution pipeline compliance order, and a PADEP permit hold) and the Dakota Access litigation also carry risk of delays or penalties. On the regulatory side, FERC is reviewing Panhandle and Southwest Gas Storage rates, and the March 2018 FERC policy eliminating income tax allowances for MLP pipelines could lower cost-of-service rates. Management believes none of these will be materially adverse, but outcomes are uncertain.
How leveraged is the company, and how much liquidity is available?
Consolidated debt was $46.0 billion at year-end 2018, of which about $5.5 billion sits at the Parent Company. Management reports a 3.38x leverage ratio under its ETO credit facility covenants, which permit up to 5.0x (5.5x during acquisitions). Liquidity at year-end included $419 million of cash and about $2.24 billion of undrawn ETO credit facility capacity, plus Sunoco LP and USAC facilities. In January 2019 ETO issued $4.0 billion of new senior notes to repay ET's term loan and near-term maturities, which reduces refinancing risk for 2019, although the Bakken credit facility of $2.5 billion matures in August 2019.
What drove the earnings improvement in 2018, and what should investors watch for in 2019?
Crude oil segment Adjusted EBITDA rose $951 million, driven by the Bakken pipeline entering service in mid-2017 and higher Permian throughput, and NGL segment EBITDA rose $338 million on Permian volumes and the fifth Mont Belvieu fractionator. Interstate segment EBITDA rose $406 million largely from the Rover pipeline. Watch for 2019 growth from the Mont Belvieu seventh fractionator (expected Q1 2020), the Lone Star Express expansion (expected Q4 2020), Rover full-service ramp, and the Permian Gulf Coast pipeline. Growth capital spending of $4.9 to $5.2 billion is substantial, so returns on these projects and the timing of in-service dates will be key to whether the stated earnings growth is realized.
06—Continue