Energy Transfer Equity, L.P. (ETE) — FY2016 Form 10-K
Filing identity and period: The supplied filing is for Energy Transfer Equity, L.P. (NYSE: ETE), rather than an entity named Energy Transfer LP. It covers the fiscal year ended December 31, 2016; fourth-quarter figures are identified separately below. ETE is a holding partnership whose cash flows depend principally on distributions from subsidiaries and affiliates, including ETP and Sunoco LP.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $37.504 billion | $42.126 billion |
| Operating income | $1.499 billion | $2.399 billion |
| Net income, consolidated | $41 million | $1.093 billion |
| Net income attributable to partners | $995 million | $1.189 billion |
| Basic / diluted income per limited partner unit | $0.94 / $0.92 | $1.11 / $1.11 |
| Segment Adjusted EBITDA, non-GAAP | $6.007 billion | $5.935 billion |
| Cash provided by operating activities | $3.417 billion | $3.068 billion |
- Consolidated net income was only $41 million because it includes a $954 million net loss attributable to noncontrolling interests; income attributable to ETE partners was $995 million. Do not confuse these measures.
- Fourth-quarter 2016 revenue was $10.803 billion, operating loss was $726 million, and consolidated net loss was $760 million. The quarter included substantial impairment charges.
- Reported consolidated operating margin, calculated as operating income divided by revenue, was approximately 4.0%, versus 5.7% in 2015. Revenue mix and the transfer of retail operations affect comparability.
- Cash used in investing activities was $9.467 billion, including $8.092 billion of capital expenditures and $1.570 billion of net cash paid for acquisitions. Cash provided by financing activities was $5.927 billion.
- At year-end, cash and cash equivalents were $483 million; current assets were $6.985 billion and current liabilities $7.277 billion. Consolidated debt was $43.802 billion, versus $36.968 billion a year earlier; long-term debt less current maturities was $42.608 billion. Parent Company stand-alone debt was approximately $6.36 billion. Parent-only assets are not available to satisfy subsidiary obligations.
- About $11.60 billion of consolidated debt carried variable interest rates. Management estimated that a 100-basis-point rate increase could raise annual interest expense by up to $109 million.
- ETE declared distributions of $0.285 per common unit per quarter throughout 2016 ($1.14 for the year). The filing cautions that distributions are not guaranteed. ETE had also agreed to relinquish substantial future incentive distributions.
Material changes versus the prior year
- Revenue declined 11% and operating income declined 38%. Management cited lower volumes in several gathering regions, weaker pipeline revenues and the transfer of retail marketing operations from ETP to Sunoco LP. ETP’s liquids transportation and services and Sunoco Logistics operations partly offset these pressures.
- Segment Adjusted EBITDA increased modestly, from $5.935 billion to $6.007 billion, despite lower results at ETP, Sunoco LP and Lake Charles LNG. This non-GAAP measure is not equivalent to net income or cash available for distributions.
- FY2016 included $1.487 billion of operating impairment losses: $1.312 billion of goodwill impairments, $143 million of property, plant and equipment impairments, and $32 million of intangible-asset impairment. A separate $308 million non-cash impairment was recorded on the MEP equity investment. The impairments reflected weaker projected cash flows and changed market assumptions.
- ETE consolidated the legacy Sunoco retail business for only part of 2016 before transferring it to Sunoco LP; the transaction was effective January 1, 2016 and included $2.20 billion in cash and 5.7 million Sunoco LP units. This and other changes in consolidation scope make reported revenue comparisons less like-for-like.
- ETP acquired a controlling interest in PennTex for approximately $627 million in units and cash. Sunoco Logistics acquired a West Texas crude-oil business from Vitol for approximately $760 million plus working capital.
Outlook, risks and unusual items
- Capital plans: ETP forecast 2017 partnership-level growth capital funding of $2.755–$2.915 billion and maintenance capital of $325–$365 million, after $600 million of project-level non-recourse financing. Sunoco LP expected approximately $200 million of growth and $90 million of maintenance capital spending.
- Pending ETP–Sunoco Logistics merger: Announced in November 2016, the proposed unit-for-unit merger would give ETP unitholders 1.5 Sunoco Logistics units per ETP unit. Closing was expected in April 2017, subject to approvals and other conditions. Seven putative unitholder lawsuits challenged the merger disclosures and process; the outcome was uncertain.
- Dakota Access: Protests and tribal lawsuits had caused construction disruption and could cause further delay or costs. The Army issued the Lake Oahe easement in January 2017; ETP expected the final pipeline portion to be completed in March or April, barring legal delays. A delay could defer project revenue.
- Williams litigation: Following termination of the proposed Williams merger, Williams sought a $410 million termination fee and damages of up to $10 billion; ETE counterclaimed for a $1.48 billion termination fee and additional damages. Appeals and other proceedings remained unresolved.
- Lake Charles LNG: Shell had delayed a final investment decision on the proposed 16.2-million-ton-per-year export project. Construction depended on both parties’ affirmative investment decisions, financing, approvals and project economics; management described potential first-train service around 2022 if the project proceeded.
- Environmental and other contingencies: Environmental liabilities accrued were $385 million at year-end, including remediation obligations and legacy sites. ETE said additional losses could arise; the amount beyond recorded accruals was not clearly quantifiable for several matters. MTBE litigation remained pending, with a New Jersey settlement in principle reported in early 2017.
- Other risks: High leverage and refinancing needs, floating-rate exposure, commodity and counterparty risk, regulatory rate and pipeline-safety changes, construction and permitting delays, and the ability of subsidiaries to sustain distributions could affect liquidity and unit distributions. Management reported compliance with debt covenants at December 31, 2016. The financial-statement audit opinion was unqualified, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Confirm the distinction between ETE consolidated net income ($41 million), income attributable to partners ($995 million), and the impact of noncontrolling interests.
- Review the composition, maturity schedule and covenant headroom of the $43.802 billion consolidated debt, including refinancing needs and variable-rate exposure.
- Assess whether operating cash flow and subsidiary distributions can support planned capital spending, debt service and ETE’s declared distributions.
- Track merger approvals, litigation and final exchange terms, as well as the effect of the transaction on distributions and ETE’s incentive-distribution income.
- Monitor Dakota Access completion, utilization and legal developments, and the realization of expected project cash flows.
- Evaluate impairment assumptions and potential further write-downs, along with environmental reserves and the outcomes of the Williams, MTBE and other legal matters.