Energy Transfer LP — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone quarterly filing; Q4 figures below are from its unaudited quarterly table. Amounts are in U.S. dollars unless noted.
Business context
Energy Transfer is a publicly traded master limited partnership with extensive natural gas, NGL, crude oil and refined-products pipelines, storage and terminals, plus fuel distribution and compression businesses through subsidiaries and investments. Substantially all parent-company cash flow depends on distributions from ETO and its subsidiaries, including Sunoco LP and USAC.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $54.213 billion | $54.087 billion |
| Operating income | $7.277 billion | $5.348 billion |
| Net income | $4.899 billion | $3.365 billion |
| Net income attributable to partners | $3.592 billion | $1.694 billion |
| Continuing-operations earnings per limited partner unit | $1.37 basic; $1.36 diluted | $1.17 basic; $1.16 diluted |
| Segment Adjusted EBITDA | $11.214 billion | $9.510 billion |
| Cash from operating activities | $8.003 billion | $7.506 billion |
| Cash used in investing activities | $6.934 billion | $7.075 billion |
| Capital expenditures recorded | $5.268 billion | $5.630 billion |
| Long-term debt, net of current maturities | $51.028 billion | $43.373 billion |
Revenue was nearly flat year over year, while operating income rose about 36%. Operating margin, calculated as operating income divided by revenue, was approximately 13.4%, versus 9.9% in 2018. Net income included $195 million of income-tax expense, compared with $4 million in 2018; ET is generally a pass-through partnership, but certain corporate subsidiaries pay income tax. Segment Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
For Q4 2019, revenue was $13.720 billion, operating income $1.701 billion, net income $1.350 billion, and basic/diluted earnings per unit $0.38. The common-unit distribution remained $0.305 per quarter, or $1.22 annualized.
At December 31, 2019, cash and cash equivalents were $291 million and total consolidated debt was $51.054 billion, excluding unconsolidated joint-venture debt. ET reported $7.97 billion of floating-rate debt; a 100-basis-point rate increase was estimated to raise annual interest expense by up to $80 million. ETO reported $1.71 billion of available capacity across its credit facilities, while Sunoco LP had $1.33 billion and USAC $1.20 billion available. The filing says the group was in compliance with debt covenants; ETO’s leverage ratio under its credit agreements was 4.04x against a stated 5.0x limit, generally expandable to 5.5x for specified acquisitions.
Material changes versus prior periods
- Segment Adjusted EBITDA rose $1.704 billion, or 18%, primarily from new assets, acquisitions and stronger throughput. The largest segment increases were NGL/refined-products transportation and services (+$687 million) and crude-oil transportation and services (+$642 million). Midstream EBITDA declined $25 million, principally reflecting lower commodity-related margins and higher operating costs.
- Crude and NGL transportation volumes benefited from higher Permian production, Mariner East 2, Bayou Bridge Phase II and other expansions. Interstate gas transportation volumes increased with Rover and additional contracted volumes.
- Interest expense increased $276 million to $2.331 billion, primarily due to higher debt balances at ETO and subsidiaries. Debt rose about $5.0 billion from year-end 2018.
- Impairment losses fell to $74 million from $431 million in 2018. 2019 items included $21 million of goodwill impairments, a $47 million Sunoco LP ethanol-plant write-down and $6 million of idle-compressor impairments. The prior-year figure included a $378 million midstream goodwill impairment.
- ET completed its SemGroup acquisition on December 5, 2019. The preliminary allocation included $3.914 billion of property, plant and equipment, $460 million of intangible assets and $265 million of goodwill. Certain acquired assets were contributed to ETO in early 2020, so the 2019 results include only a short post-acquisition period.
Outlook, risks and unusual items
- Management anticipated continued earnings growth in 2020 from completed projects and the project backlog, and targeted a minimum distribution coverage ratio of 1.50x. These are forward-looking expectations, not guarantees.
- ETO forecast 2020 growth capital expenditures of $3.920–$4.130 billion and maintenance capital expenditures of $645–$685 million, excluding capital expenditures for Sunoco LP and USAC. Sunoco LP separately expected $130 million of growth and $45 million of maintenance spending; USAC expected $110–$120 million of expansion and about $32 million of maintenance spending.
- Growth plans included the proposed 16.45-million-tonne-per-year Lake Charles LNG export project, for which final EPC bids were expected in Q2 2020, and the 75-mile Ted Collins crude pipeline, planned for service in 2021. Lake Charles depends on construction economics, financing, approvals and long-term LNG offtake contracts; it was not presented as a completed or fully committed project.
- Material exposures include high leverage and refinancing needs, interest-rate and commodity volatility, producer/customer credit risk, regulatory rate proceedings, pipeline integrity and safety requirements, environmental liabilities, and project execution and permitting risks. The filing reported $320 million of environmental accruals at year-end.
- The Revolution pipeline incident resulted in a January 2020 settlement: a $28.6 million civil penalty and a $2 million community environmental project; related Pennsylvania permit restrictions were lifted. Separate investigations remained pending.
- The Williams litigation’s $10 billion lost-value claim was foreclosed by the Delaware Supreme Court ruling, but a $410 million termination-fee claim remained pending, with trial scheduled for June 2020. MTBE cases remained unresolved, and ET said it could not estimate possible losses beyond accruals.
- PES, in which ET held an approximately 7.4% non-operating interest, entered bankruptcy after a 2019 refinery fire. PES had defaulted on a $75 million note payable to an ET subsidiary; collectability was uncertain. The effect of rejected commercial contracts was also unclear.
- The filing reports an unqualified audit opinion and effective internal controls; however, SemGroup was excluded from the year-end internal-control assessment while integration was underway. The 2019 financial statements also adopted the new lease accounting standard, adding lease right-of-use assets and liabilities to the balance sheet.
Most important facts for investors to verify
- Whether operating cash flow and distribution coverage support the $0.305 quarterly distribution amid high growth spending and debt service.
- Debt maturities, post-year-end refinancing, remaining facility availability, leverage and exposure to floating rates; the filing’s January 2020 refinancing transactions should be assessed separately from year-end balances.
- Whether SemGroup delivers expected earnings and synergies, and how final purchase accounting and integration affect reported results and controls.
- Progress, funding, offtake commitments and approvals for Lake Charles LNG and other major projects, including actual costs and in-service timing.
- Developments in the Williams, MTBE, PES, Dakota Access and pipeline-related proceedings, and whether environmental or other contingency estimates change.