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In This List
COMMENTS

Credit FAQ: A Look At Calculating Financial Ratios For Energy Transfer L.P. And The Impact Of The DAPL Shutdown On Leverage

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Credit FAQ: A Look At Calculating Financial Ratios For Energy Transfer L.P. And The Impact Of The DAPL Shutdown On Leverage

Investor inquiries were swift after S&P Global Ratings' decision on May 12, 2020, to affirm its 'BBB-' issuer credit rating on Energy Transfer L.P. and revise the outlook to negative from stable. One of the most frequently asked questions we received was "How do you calculate the partnership's ratios and what adjustments do you make?" We are providing greater transparency on our analytical approach to Energy Transfer's financial ratios. Additionally, our goal is to help explain our view of the credit in light of the ongoing economic weakness in the U.S. energy sector broadly and the July 6 decision by the U.S. District Court for the District of Columbia that the Dakota Access Pipeline (DAPL) must be shut down pending a full Environmental Impact Statement by the U.S. Army Corps of Engineers.

Frequently Asked Questions

What is your analytical approach to Energy Transfer's credit quality?

We assess Energy Transfer's (ET) credit quality generally on a deconsolidated cash basis. This means that we aggregate ET's stand-alone EBITDA from wholly owned assets and only include the distributions from controlled subsidiaries like Sunoco L.P. (SUN) and USA Compression Partners L.P. (USAC), as well as partially owned joint-ventures, with the notable exception of DAPL. We believe the cash basis EBITDA provides a better picture of the credit quality and what noteholders can expect in the partnership's future performance. We proportionally consolidate DAPL's debt and EBITDA based on ET's 36.37% ownership interest. We proportionally consolidate DAPL because, in our opinion, the pipeline is a strategic asset for ET, and is closely associated with the company's reputation as its operator. We choose not to consolidate ET's other joint-venture assets because they contribute less to consolidated cash flow or in our view could be sold. We view SUN and USAC as nonstrategic to ET because although ET controls both companies through its general partner interest, these subsidiaries operate in different core business lines than ET with generally very little overlap, and could be sold.

How do you calculate the credit ratios?

We analyze the reported numbers by starting with the consolidated EBITDA that ET reports each quarter. We've looked at fiscal year-ends 2018 and 2019, and the last 12 months ended March 31, 2020 (see table 1). We also show our forecast for 2019 (from December 2018), our 2020 forecast pro forma for the SemGroup Corp. acquisition, and a revised 2020 and 2021 forecast from April 2020. The debt to EBITDA ratio for 2019 is higher than our forecast due primarily to the added SemGroup debt. The ET consolidated ratios are the financials from the 10-K filing with S&P Global Ratings' adjustments for comparative purposes.

Table 1

Energy Transfer L.P.--Credit Ratio Calculations
Actual Forecast 2019 Estimate Revised
2018 2019 LTM 3/31/2020 2019 2020 2020 2021
Reported EBITDA (1) 9,510 11,214 11,052 11,125 11,330 10,700 10,875
Less:
SUN EBITDA (1) (638) (665) (721) (645) (670) (640) (700)
USAC EBITDA (1) (321) (420) (424) (400) (430) (400) (420)
Adjusted EBITDA - unconsolidated affiliates (2) (655) (626) (634) (625) (665) (665) (625)
Adjusted EBITDA - Non-wholly owned subsidiaries [3] (1,234) (2,637) (2,666) (2,510) (2,505) (2,325) (2,310)
6,663 6,866 6,607 6,945 7,060 6,670 6,820
Plus distributions from:
SUN (4) 166 165 165 165 165 175 175
USAC (4) 73 90 93 90 95 95 95
Unconolidated affiliates (2) 407 415 435 410 460 465 365
Non-wholly owned subsidiaries [3] 609 1,371 1,361 1,350 1,245 1,170 1,475
1,255 2,041 2,054 2,015 1,965 1,905 2,110
Unadjusted EBITDA (cash basis) 7,918 8,907 8,661 8,960 9,025 8,575 8,930
S&P Global Ratings' operating lease adjustment 109 117 118 120 120 120 120
S&P Global Ratings' adjusted EBITDA 8,027 9,024 8,779 9,080 9,145 8,695 9,050
Reported Debt [5] 46,028 51,022 50,300 41,175

43,455

44,400 43,750
Less:
SUN debt [5] (2,984) (3,621) (3,728)
USAC debt [5] (1,759) (1,870) (1,933)
63.6% of DAPL debt (1,592) (1,592) (1,592)
Junior subordinated adjustment [6] (300) (300) (300) (300) (300) (300) (300)
S&P Global Ratings' operating lease adjustment [7] 441 997 910

960

960 960 910
S&P Global Ratings' asset retirement obligation adjustment [8] 153 195 195 195 195 195 195
50% of equity hybrids (preferreds A-E) [9] 1,194 1,587 1,598

1,600

1,600 1,600 2,350
S&P Global Ratings' adjusted debt 41,181 46,418 45,450 43,630 45,910 46,855 46,905
Cash 377 262 176 250 250 250 150
Net debt/EBITDA 5.09x 5.12x 5.16x 4.78x 5.00x 5.36x 5.17x
ET consolidated (S&P Global Ratings-adjusted) 5.10x 4.79x 4.96x
Temporary DAPL shutdown (12 months) 5.46x 5.29x
(1) Company reported numbers, press releases. (2) Includes Citrus LLC, Fayetteville Express Pipeline, Midcontinent Express Pipeline, White Cliffs Pipeline, and other joint ventures. (3) Includes ET's ownership the Bakken Pipeline, Bayou Bridge, Ohio River System, and Permian Express. (4) Taken from the supplemental information section of the press release, reconciliation of net income to adjusted EBITDA and distributable cash flow. (5) Company reports. (6) $600 million floating-rate junior subordinated notes due Nov. 1, 2066, that receive 50% equity credit. (7) Footnotes in 10-K, reported numbers in 10-Q. (8) Tax-adjusted ARO, from 10-K. (9) 10-K, Energy Transfer Operating L.P., 50% of preferred equity.

The ET cash EBITDA build is relatively straightforward. We begin with ET consolidated EBITDA and subtract reported EBITDA from SUN and USAC. We then remove total EBITDA from unconsolidated affiliates like Citrus LLC and other pipelines as well as non-wholly owned subsidiaries like the Bakken Pipeline, Bayou Bridge, and Permian Express. This supplemental information is disclosed each quarter in ET's earnings press release (see tables 2 and 4, respectively).

Table 2

Energy Transfer L.P.--Adjusted EBITDA Of Unconsolidated Affiliates
Q1 2020 2019 Q4 2019 Q3 2019 Q2 2019 Q1 2019
Citrus 79 342 82 92 87 81
FEP 19 75 19 19 18 19
MEP 8 60 8 13 20 19
White Cliffs 14 - - - - -
Other 34 149 47 37 38 27
Total 154 626 156 161 163 146
Source: Company quarterly press release.

We add back the cash distributions received from SUN and USAC, as well as unconsolidated affiliates and non-wholly owned subsidiaries (see tables 3 and 4).

Table 3

Energy Transfer L.P.--Distributions Received From Unconsolidated Affiliates
Q1 2020 2019 Q4 2019 Q3 2019 Q2 2019 Q1 2019
Citrus 49 178 50 54 39 35
FEP 18 73 20 20 16 17
MEP 11 36 3 7 15 11
White Cliffs 13 - - - - -
Other 19 101 21 22 42 16
Total 110 388

94

103 112

79

Distributable cash flow 113 415 108 107 107 93
Note: The difference between distributions received and distributable cash flow is generally related to funding requirements at affiliates and tax implications. Source: Company quarterly press release.

Table 4

Energy Transfer L.P.--Reconciliation Of Adjusted EBITDA With Distributable Cash Flow
Q1 2020 2019 Q4 2019 Q3 2019 Q2 2019 Q1 2019
Adjusted EBITDA--non-wholly owned subsidiaries (100%) 646 2,637 642 683 695 617
ET's proportionate share of adjusted EBITDA 335 1,435 335 378 380 342
Distributable cash flow--non-wholly owned subsidiaries (100%) 608 2,484 601 647 657 579
ET's proportionate share--distributable cash flow 318 1,371 315 364 364 328
Non-wholly owned subsidiary: ET percentage ownership
Bakken Pipeline 36.4%
Bayou Bridge 60.0%
Ohio River System 75.0%
Permian Express Partners 87.7%
Source: S&P Global Ratings and company data.

For total debt, we subtract SUN and USAC debt, and include the proportional share of DAPL debt that ET owns. We also subtract 50% of ET's $600 million junior subordinated notes that mature in 2066, which receives 50% equity credit under our hybrid criteria. Add-backs include our adjustments for operating and financial leases and asset retirement obligations, and 50% of ET's preferred series A though series E.

Assumptions from our base-case forecasts include:

  • Rounded estimates for EBITDA and debt numbers;
  • About a $630 million consolidated EBITDA decline from prior company guidance and a $450 million cash basis EBITDA decline from our prior forecast;
  • Projected total capital spending is unchanged at about $3.5 billion for 2020 and between $2.1 billion to $2.5 billion in 2021;
  • Forecast preferred and common distributions held flat at about $3.7 billion in 2020 and 2021; and
  • No asset sales or preferred issuance in 2020;
  • About a $1.5 billion preferred issuance to refinance $1.4 billion of maturing debt in 2021.
Has your view on ET's credit quality changed since the U.S. District Court for the District of Columbia's DAPL decision? Has your timetable changed?

To put it simply, no. Our decision to revise our rating outlook on ET to negative was based on the partnership's higher-than-expected leverage prior to the court's decision to shut down DAPL. The possibility of a DAPL shutdown and its impact on ET's balance sheet is not enough to change our view to take a more severe rating action at this time. We estimate that a 12-month shutdown of DAPL starting Aug. 5, 2020, assuming no change in contracts or capacity, would add about 10 basis points to ET's total leverage ratio. While clearly not a credit positive, it is also not significant enough to change our view.

How long will you wait before you make a decision on the rating?

There is no strict timetable set for a decision on our rating on ET. Negative outlooks for investment-grade companies typically do not go beyond a two-year timeline. We've stated that we expect to see ET take meaningful steps to reduce financial leverage over the next 12 months. We believe the partnership has enough tools at its disposal to improve its balance sheet, including asset sales, reducing capital spending, expense reduction, issuing preferred securities, and cutting the dividend.

We believe 2020 will continue to present challenges for ET and its peers in the midstream industry, and that executing on a deleveraging plan will take time. We also think the company's strategy will continue to evolve, particularly with the possibility of a changing political and economic landscape in 2021. We are monitoring ET's credit profile and will continue our due diligence through the rest of 2020 and into 2021. A key factor for us will be the progress the ET makes during the next several quarters. We are exercising patience while we continue our ongoing discussions with the management team.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Michael V Grande, New York (1) 212-438-2242;
michael.grande@spglobal.com

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