Energy Transfer Equity, L.P. (ETE) — FY 2017 Form 10-K
Filing identity: The supplied filing is for Energy Transfer Equity, L.P. (NYSE: ETE), not Energy Transfer LP as stated in the request. It reports the fiscal year ended December 31, 2017; fourth-quarter figures are noted separately where available. ETE is a holding partnership whose principal cash flows come from ETP, Sunoco LP and Lake Charles LNG.
Financial performance
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Revenue | $40.52 billion | $31.79 billion | Up 27%; acquisitions, higher commodity-related sales and new assets contributed. |
| Operating income | $2.71 billion | $1.84 billion | Up 47%; includes $1.04 billion of impairment losses in both years. |
| Net income | $2.37 billion | $0 | 2017 includes a $1.83 billion income-tax benefit, principally from the Tax Cuts and Jobs Act. 2016 included a $462 million discontinued-operations loss. |
| Net income attributable to partners | $954 million | $995 million | Down about 4%; limited partners’ interest was $915 million versus $983 million. |
| Basic / diluted income from continuing operations per unit | $0.86 / $0.84 | $0.95 / $0.93 | Down year over year. |
| Adjusted EBITDA | $7.32 billion | $6.14 billion | Up $1.19 billion, or 19%; non-GAAP measure defined by the Partnership. |
| Cash from operating activities | $4.43 billion | $3.32 billion | Up 33%. |
| Cash used in investing activities | $5.61 billion | $8.98 billion | Includes $8.44 billion of capital expenditures, partly offset by $2.00 billion from the Bakken interest sale and $1.48 billion from the Rover interest transaction. |
| Debt | $44.08 billion consolidated; $6.70 billion parent-only | $43.80 billion consolidated | Consolidated debt rose modestly; joint-venture debt is excluded from the reported total. |
| Cash and liquidity | $336 million cash; $7.90 billion current assets and $7.90 billion current liabilities | $467 million cash | Current assets include $3.31 billion held for sale. ETP reported $2.51 billion available under its credit facilities; ETE parent revolver availability was $312 million. |
Calculated operating margin was approximately 6.7% in 2017 versus 5.8% in 2016. The fourth quarter recorded revenue of $11.45 billion, operating income of $285 million and net income of $1.17 billion; the quarter’s net income benefited materially from the tax-related deferred benefit, while impairments weighed on operating income.
Business developments and changes versus 2016
- ETP’s and Sunoco Logistics’ April 2017 merger combined their operations in a unit-for-unit transaction; ETP unitholders received 1.5 Sunoco Logistics units per ETP unit. This makes some year-over-year comparisons affected by changes in the business and reporting structure.
- ETP’s Segment Adjusted EBITDA rose $979 million to $6.71 billion. Growth included higher midstream margins, increased NGL volumes and ramp-up of the Bakken Pipeline, which entered service in June 2017. ETP’s interstate transportation and storage and “all other” results declined.
- Sunoco LP Segment Adjusted EBITDA increased $67 million to $732 million, while segment margin fell $48 million. The Partnership attributed the EBITDA increase principally to wholesale fuel margins and lower general and administrative costs.
- ETE issued 32.2 million common units for approximately $580 million in January 2017 and used most proceeds to buy newly issued ETP units. ETP also issued units and preferred units and entered new revolving credit facilities.
- In February, ETP sold a 49% interest in an entity holding interests in the Dakota Access and ETCO pipelines for $2.00 billion. In October, it sold Blackstone a 49.9% interest in Rover Holdco, receiving reimbursement of its share of construction costs and other amounts.
- ETE common-unit distributions increased during 2017 from $0.285 to $0.305 per quarter; total distributions for the year were $1.17 per unit versus $1.14 in 2016. Distributions are not guaranteed.
Outlook, risks and unusual items
- Capital spending: ETP forecast 2018 growth capital expenditures of $4.35–$4.65 billion and maintenance spending of $480–$525 million. It expected to use operating cash and credit facilities, with potential debt or equity issuance. These are ETP estimates, not a formal ETE earnings forecast.
- Sunoco LP retail sale: After year-end, Sunoco LP completed a $3.3 billion sale of approximately 1,030 operated retail fuel outlets to 7-Eleven. It also arranged for a commission agent to operate about 207 additional sites. Proceeds and a $2.2 billion notes offering were used for debt repayment and other transactions, including redemption of preferred units and a repurchase of ETP-held Sunoco LP units.
- Impairments: ETE recorded $1.04 billion of impairment losses in 2017, including ETP goodwill impairments and a $127 million Sea Robin asset impairment. ETP also impaired its investments in FEP by $141 million and HPC by $172 million. The filing cites weaker projected cash flows, customer bankruptcy and lower expected contract rates or volumes among the drivers.
- Tax and accounting: The December 2017 tax law change reduced the corporate tax rate and generated a $1.81 billion deferred tax benefit at ETE. ETP changed certain inventory costing from LIFO to weighted-average cost, retrospectively adjusting prior periods. The change reduced reported 2016 and 2015 operating income by $41 million and $32 million, respectively.
- Debt and interest exposure: About $9.86 billion of consolidated debt carried variable rates; a 100-basis-point increase was estimated to raise annual interest expense by up to $98 million. ETP reported a 3.96-to-1 leverage ratio under its credit agreement and was in covenant compliance at year-end.
- Litigation and regulatory matters: Dakota Access remained subject to tribal litigation and court-ordered monitoring, spill-response planning and reporting; management could not assure continued operation. Pennsylvania imposed a $12.6 million penalty in February 2018 in connection with Mariner East 2/2X construction compliance, with restart subject to agreed conditions. Other matters include MTBE claims, the BP pipeline-rate dispute (an initial administrative recommendation included $13 million in damages), the reversed $536 million Enterprise judgment under further appeal, and Williams litigation seeking a $410 million termination fee; the claimed up-to-$10 billion lost-merger damages were foreclosed by the Delaware Supreme Court ruling.
- Environmental exposure: Accrued environmental liabilities were $372 million at year-end, versus $344 million in 2016. Pipeline safety, permitting, environmental regulation, weather, commodity prices, counterparty credit, financing access and high leverage are among the disclosed risks.
- Project uncertainty: The Lake Charles LNG export project remained under feasibility study; proceeding depends on long-term offtake contracts, construction and financing economics, and regulatory approvals. No final investment decision was disclosed.
Important facts for investors to verify
- Confirm the intended issuer: the filing is ETE, while the request names Energy Transfer LP. Distinguish ETE parent-only figures from consolidated ETE and subsidiary ETP figures.
- Reconcile the $2.37 billion reported net income with the $1.81 billion tax benefit, impairment charges and $954 million attributable to partners; assess recurring earnings separately.
- Review debt maturities, variable-rate exposure, covenant headroom, refinancing plans and the funding plan for ETP’s 2018 growth program.
- Track proceeds and debt reduction from the 7-Eleven transaction, the resulting Sunoco LP operating profile, and the pending CDM contribution to USA Compression.
- Monitor Dakota Access and Mariner East legal, permitting and operating developments, as well as the outcomes of the Williams, Enterprise, BP and MTBE matters.
- Assess the sustainability of distributions, ETE’s reliance on subsidiary cash distributions and incentive distribution rights, and the dilutive effect of unit issuances and convertible preferred units.