Energy Transfer LP — 2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2018; it is an annual report, not a standalone fourth-quarter filing. Energy Transfer is a U.S. energy infrastructure partnership operating natural gas, NGL, crude oil and refined-products pipelines and storage, midstream assets, fuel distribution, and compression services. Its results include subsidiaries and investments such as ETO, Sunoco LP and USAC.
In October 2018, Energy Transfer completed the merger of ETO into ET in a unit-for-unit exchange. The transaction simplified the partnership structure and brought Sunoco LP and USAC under ETO. Other notable developments included Sunoco LP’s $3.2 billion sale of approximately 1,030 retail fuel outlets, Rover’s progression to full commercial operation, and Mariner East 2 beginning service.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $54.1 billion | $40.5 billion |
| Operating income | $5.35 billion | $2.72 billion |
| Income from continuing operations | $3.63 billion | $2.54 billion |
| Net income | $3.37 billion | $2.37 billion |
| Cash provided by operating activities | $7.51 billion | $4.43 billion |
| Total segment Adjusted EBITDA | $9.51 billion | $7.32 billion |
Annual net income included a $265 million loss from discontinued operations. Basic and diluted continuing-operations income per limited partner unit were $1.17 and $1.16, respectively. The quarterly common-unit distribution was $0.305 throughout 2018, or $1.22 for the year.
Operating cash flow rose by about 69%; capital expenditures were $7.41 billion on a cash-flow basis. Cash used in investing activities was $7.08 billion, and cash used in financing activities was $3.08 billion. Year-end cash and equivalents were $419 million. Current assets were $6.75 billion and current liabilities $9.31 billion; current maturities of debt were $2.66 billion.
Consolidated debt was $46.03 billion, excluding unconsolidated joint-venture debt; stand-alone parent-company debt was approximately $5.52 billion. About $9.76 billion of consolidated debt bore variable rates. The company reported compliance with debt covenants and an ETO leverage ratio of 3.38x under its credit agreement. The filing reports $2.50 billion of Bakken project debt due in August 2019. At year-end, disclosed available capacity included $1.24 billion under ETO’s five-year facility, $792 million under Sunoco LP’s revolver and $550 million under USAC’s facility; ETO also had no borrowings on its $1 billion 364-day facility. The filing gives a different ETO availability figure elsewhere, so the precise aggregate liquidity figure should be verified.
The filing does not present a single consolidated gross-margin percentage. Operating income was approximately 9.9% of revenue; segment Adjusted EBITDA was approximately 17.6% of revenue. These are calculated ratios, and Adjusted EBITDA is a non-GAAP measure.
Material changes versus comparable periods
- Revenue increased 33% and total segment Adjusted EBITDA increased 30% year over year. Growth reflected higher throughput and new assets, including the Bakken pipeline’s first full year and Rover ramp-up, as well as higher Permian activity and the consolidation of USAC and RIGS.
- Crude oil transportation and services Adjusted EBITDA increased $951 million to $2.33 billion; interstate transportation and storage rose $406 million to $1.68 billion, mainly reflecting Rover. NGL and refined-products transportation and services rose $338 million to $1.98 billion.
- Sunoco LP segment Adjusted EBITDA declined $94 million to $638 million, primarily because of the retail divestiture. USAC contributed $289 million of segment Adjusted EBITDA from its consolidation date, April 2, 2018.
- Fourth-quarter revenue was $13.57 billion versus $11.45 billion in fourth-quarter 2017. Operating income was $1.42 billion versus $289 million; continuing-operations income was $852 million versus $1.16 billion. Fourth-quarter 2018 included $431 million of impairment losses, while the prior-year quarter included $1.04 billion of impairment losses and a major tax benefit.
- 2017 income benefited from a $1.81 billion deferred tax benefit following the U.S. corporate tax-rate reduction. 2018 recorded $4 million of income tax expense. This tax-driven comparison materially affects reported earnings growth.
Outlook, risks and unusual items
Management targeted a minimum distribution coverage ratio of 1.50x and anticipated significant 2019 earnings growth from the project backlog. For 2019, ETO forecast growth capital expenditures of $4.85–$5.23 billion and maintenance capital expenditures of $520–$560 million. Sunoco LP expected approximately $90 million of growth and $45 million of maintenance capital spending; USAC expected $140–$150 million of expansion and about $25 million of maintenance spending. These plans rely on access to financing and timely project execution.
Key projects and commercial plans included the Permian Gulf Coast crude pipeline, targeted for mid-2020; Orbit Gulf Coast ethane export facilities, targeted for fourth-quarter 2020 subject to approvals; and expansions of the Red Bluff and Lone Star Express systems. Lake Charles LNG export development remained dependent on long-term offtake contracts, financing, approvals and FERC schedule extensions.
- Regulatory and construction exposure: FERC initiated reviews of Panhandle and Southwest Gas Storage rates. FERC policy and tax-law changes could reduce certain cost-of-service pipeline rates. Pennsylvania’s permit hold following the September 2018 Revolution Pipeline release and fire could affect future project approvals; investigations and restoration matters remained ongoing.
- Legal and environmental contingencies: The filing records $337 million of environmental accruals. Sunoco faced six MTBE groundwater cases; possible losses beyond accrued amounts could not be estimated. The Williams litigation’s $10 billion damages claim was foreclosed, but a $410 million termination-fee claim remained pending, with trial scheduled for May 2019.
- Pipeline disputes and incidents: Dakota Access litigation continued, although the pipeline remained operating subject to court-imposed monitoring and response-planning conditions. Rover faced Ohio environmental claims, including approximately $2.6 million in proposed penalties. The Revolution release caused evacuations but no reported injuries; investigations and compliance actions continued.
- Financial and operating risks: High debt, variable-rate exposure, substantial capital spending, refinancing needs, commodity and basis volatility, counterparty credit risk, and reliance on distributions from subsidiaries could affect liquidity and distributions. Management cautioned that distributions are not guaranteed.
- Other unusual items: Fourth-quarter 2018 included a $378 million Northeast midstream goodwill impairment, attributed mainly to delays in third-party takeaway capacity; Sunoco LP also recorded a $30 million impairment of contractual rights. The company adopted ASC 606 in 2018; prior periods were not restated, limiting direct comparability of some revenue classifications.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective at year-end.
Important facts for investors to verify
- Confirm actual distribution coverage and cash available for distribution against management’s 1.50x target, including the effects of subsidiary-level distributions and preferred obligations.
- Reconcile reported revolver availability across the filing and confirm refinancing or repayment of the $2.50 billion Bakken facility due in 2019 and other near-term maturities.
- Track whether forecast growth projects meet cost, schedule, regulatory approval and customer-commitment assumptions, particularly the Pennsylvania projects and 2020 expansions.
- Review FERC rate proceedings and the ultimate effect of tax-policy changes on regulated pipeline revenues.
- Monitor developments in the Revolution incident, Dakota Access, Mariner East, Rover and environmental litigation, including any costs beyond recorded accruals.
- Separate recurring operating growth from merger effects, newly consolidated businesses, asset sales, discontinued operations, impairments and the 2017 tax benefit when assessing trends.