Business Context and Reporting Period
This is Energy Transfer Equity, L.P.’s (ETE) Form 10-K for the fiscal year ended December 31, 2015, filed February 29, 2016. Although the request identifies Energy Transfer LP, the registrant in the filing is ETE, a publicly traded partnership whose principal cash flows depend on distributions from Energy Transfer Partners, L.P. (ETP), Sunoco LP, Sunoco Logistics and Lake Charles LNG. The filing covers the full year; fourth-quarter results are highlighted separately below.
ETE operates a diversified energy infrastructure and fuel-distribution group, including natural gas gathering, processing, storage and transportation; NGL and crude oil pipelines and terminals; refined-products logistics; retail and wholesale fuel; and an LNG import terminal. Its parent-company assets are not available to satisfy subsidiary obligations.
Financial Performance and Position
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $42.126 billion | $55.691 billion |
| Operating income | $2.399 billion | $2.470 billion |
| Net income | $1.093 billion | $1.124 billion |
| Net income attributable to partners | $1.189 billion | $633 million |
| Income from continuing operations per limited partner unit, diluted | $1.11 | $0.57 |
| Segment Adjusted EBITDA | $5.935 billion | $5.840 billion |
| Cash provided by operating activities | $3.068 billion | $3.175 billion |
| Cash used in investing activities | $10.094 billion | $6.795 billion |
| Capital expenditures | $9.386 billion | $5.381 billion |
Revenue less cost of products sold was $8.117 billion, compared with $7.277 billion in 2014; operating margin was approximately 5.7% versus 4.4%. Segment Adjusted EBITDA is a non-GAAP measure defined by the Partnership and should not be treated as net income or cash available for distributions.
At year-end, ETE reported cash and cash equivalents of $606 million, current assets of $5.410 billion, current liabilities of $4.910 billion, total assets of $71.189 billion and total equity of $23.598 billion. Consolidated debt was $36.968 billion, up from $30.485 billion; the filing also reports approximately $7.0 billion of debt at the parent-company level. Parent-only cash was $1 million, underscoring its reliance on subsidiary distributions and financing.
ETE declared distributions of $1.08 per common unit for 2015, compared with $0.80 in 2014. The fourth-quarter rate was $0.285 per unit, unchanged from the third quarter. Distributions are not guaranteed.
Fourth-Quarter Snapshot
ETE reported fourth-quarter revenue of $9.536 billion, operating income of $236 million and a net loss of $138 million. The quarter included $339 million of impairment losses and a $171 million unfavorable non-cash inventory valuation effect. For comparison, fourth-quarter 2014 revenue was $13.481 billion and net loss was $294 million, with $370 million of impairment losses and a $456 million unfavorable inventory valuation effect.
Material Changes Versus 2014
- Revenue declined by $13.565 billion, while operating income fell by $71 million and net income by $31 million. Lower commodity prices and changes in the mix and consolidation of businesses affected reported sales; high-volume product sales make revenue comparisons especially sensitive to prices.
- Segment Adjusted EBITDA increased by $95 million. Higher contributions from Sunoco Logistics and ETP liquids transportation and services were offset by weaker retail fuel margins, lower non-fee-based midstream margins and lower results from interstate and intrastate transportation and storage.
- Operating cash flow decreased by $107 million. Investing outflows rose substantially, principally reflecting capital expenditures, including $7.68 billion of ETP growth capital expenditures.
- Debt increased by $6.483 billion. ETE and subsidiaries issued debt and equity to support acquisitions, growth projects and other financing needs; ETE also repurchased approximately $1.06 billion of its common units.
- ETE acquired Sunoco LP’s general partner and IDRs from ETP effective July 1, deconsolidating Sunoco LP at ETP and consolidating it directly at ETE. ETP also completed its merger with Regency in April, and ETP transferred Susser to Sunoco LP in July. These transactions, and segment consolidation changes, affect year-over-year comparability.
Outlook, Transactions, Risks and Unusual Items
- Pending Williams transaction: ETE agreed to acquire The Williams Companies (WMB) through ETC, with closing anticipated in the first half of 2016, subject to stockholder, regulatory and other conditions. The contemplated consideration includes cash and ETC shares. ETE arranged a $6.05 billion, 364-day secured term-loan commitment, with a capped interest rate of 5.50%; it also expects to assume approximately $4.2 billion of WMB debt. The filing warns of increased leverage, refinancing and credit-rating risks. ETE estimated that debt from the transaction and related expected transactions could increase consolidated debt by $32.1 billion.
- Sunoco retail transfer: ETP agreed to contribute its remaining Sunoco, LLC interest and legacy retail business to Sunoco LP for $2.23 billion of stated consideration, including $2.03 billion cash and 5.7 million Sunoco LP units. The deal was expected to close in March 2016; Sunoco LP was expected to incur approximately $2.0 billion of additional debt.
- Capital plans: ETP forecast 2016 direct growth capital expenditures of $4.075–$4.285 billion and maintenance expenditures of $330–$360 million. Sunoco LP expected growth expenditures of $390–$420 million and maintenance expenditures of $100–$110 million. These are forecasts, not commitments.
- Growth projects: ETP expected the Trans-Pecos and Comanche Trail pipelines, with estimated combined cost of approximately $1.3 billion, to enter service in the first quarter of 2017. Lake Charles LNG received FERC approval in December 2015; final investment decisions were expected in 2016, with first exports anticipated roughly four years after a positive decision. Financing, permits and partner decisions remained material conditions.
- Commodity and market exposure: Low natural gas, NGL and crude prices pressured certain margins, inventories and customers. ETE identified producer credit deterioration, counterparty performance, throughput and demand, derivatives volatility, capital-market access and interest rates as risks. Approximately $7.09 billion of consolidated debt bore variable rates; a hypothetical 100-basis-point increase was estimated to raise annual interest expense by up to $49 million.
- Impairments and environmental matters: 2015 impairments included $99 million of goodwill at Transwestern, $106 million at Lone Star Refinery Services, $110 million of fixed assets and $24 million of intangibles. Environmental liabilities accrued were approximately $367 million at year-end. Sunoco faced six MTBE-related cases; management said additional loss beyond amounts accrued could not be estimated. ETP’s $536 million judgment against Enterprise Products remained on appeal and was not recorded pending completion of the appeal process.
- Other contingencies: ETE disclosed two federal lawsuits challenging the pending WMB merger. The filing also describes regulatory, pipeline-integrity and environmental compliance risks, including potential future costs from proposed safety and emissions rules. Management stated that ETE was in compliance with its debt covenants at year-end.
Most Important Facts for Investors to Verify
- Confirm the reporting entity: this filing is for Energy Transfer Equity, L.P. (ETE), not a standalone filing for Energy Transfer Partners, L.P. or a company named Energy Transfer LP.
- Review the actual status, financing, terms and closing conditions of the WMB merger, and assess the implications of the projected increase in debt and potential ratings changes.
- Reconcile the $36.968 billion consolidated debt figure with parent-only debt, subsidiary debt, maturities, covenant headroom and available revolving-credit capacity.
- Check the sustainability of subsidiary cash distributions and ETE’s $1.08 annual distribution per unit against operating cash flow, growth spending, debt service and the partnership’s reserve policy.
- Assess whether commodity-price-sensitive margins, impairment assumptions, environmental accruals and unresolved legal matters have changed since the filing.