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.
|Energy Transfer L.P.--Credit Ratio Calculations|
|Actual||Forecast 2019 Estimate||Revised|
|Reported EBITDA (1)||9,510||11,214||11,052||11,125||11,330||10,700||10,875|
|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 ||(1,234)||(2,637)||(2,666)||(2,510)||(2,505)||(2,325)||(2,310)|
|Plus distributions from:|
|Unconolidated affiliates (2)||407||415||435||410||460||465||365|
|Non-wholly owned subsidiaries ||609||1,371||1,361||1,350||1,245||1,170||1,475|
|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 ||46,028||51,022||50,300||41,175||
|SUN debt ||(2,984)||(3,621)||(3,728)|
|USAC debt ||(1,759)||(1,870)||(1,933)|
|63.6% of DAPL debt||(1,592)||(1,592)||(1,592)|
|Junior subordinated adjustment ||(300)||(300)||(300)||(300)||(300)||(300)||(300)|
|S&P Global Ratings' operating lease adjustment ||441||997||910||
|S&P Global Ratings' asset retirement obligation adjustment ||153||195||195||195||195||195||195|
|50% of equity hybrids (preferreds A-E) ||1,194||1,587||1,598||
|S&P Global Ratings' adjusted debt||41,181||46,418||45,450||43,630||45,910||46,855||46,905|
|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).
|Energy Transfer L.P.--Adjusted EBITDA Of Unconsolidated Affiliates|
|Q1 2020||2019||Q4 2019||Q3 2019||Q2 2019||Q1 2019|
|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).
|Energy Transfer L.P.--Distributions Received From Unconsolidated Affiliates|
|Q1 2020||2019||Q4 2019||Q3 2019||Q2 2019||Q1 2019|
|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.|
|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|
|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.
- Energy Transfer L.P. Outlook Revised To Negative From Stable On Weaker Demand, Growth Prospects; 'BBB-' Rating Affirmed, May 12, 2020
This report does not constitute a rating action.
|Primary Credit Analyst:||Michael V Grande, New York (1) 212-438-2242;|
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