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Energy Transfer Equity’s High Leverage Is a Major Concern

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Energy Transfer Equity’s outstanding debt

In the last part, we looked at Energy Transfer Equity’s (ETE) recent operating performance. In this part, we’ll analyze its balance sheet position.

Energy Transfer Equity and its subsidiaries’ total outstanding debt by the end of fiscal 3Q15 was $36.3 billion. Energy Transfer Equity and its subsidiaries issued ~$19.8 billion of debt in the first nine months of 2015. At the same time, they repaid ~$12.0 billion of debt.

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Energy Transfer Equity’s net debt-to-EBITDA

Based on analysts’ calculations, Energy Transfer Equity’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) was 8.2x at the end of the third quarter. Energy Transfer Equity and its subsidiaries can’t afford additional debt borrowing, with its existing high leverage, for funding growth capital projects. Energy Transfer Equity’s peers, Williams Companies (WMB), Kinder Morgan (KMI), and Spectra Energy (SE) have net debt-to-EBITDA multiples of 7.4x, 7.2x, and 5.2x, respectively. Spectra Energy holds the general partner of Spectra Energy Partners (SEP). Energy Transfer Equity forms 0.64% of the Guggenheim Raymond James SB-1 Equity ETF (RYJ)

EBITDA-to-interest expense

Energy Transfer Equity’s EBITDA-to-interest expense ratio stood at 2.5x at the end of fiscal 3Q15. The ratio indicates a company’s ability to service its interest expense. Currently, the ratio is below its last 12-quarter average of 2.7x. The fall in the ratio can be attributed to greater debt growth versus EBITDA growth.

Means of financing

With existing high leverage and distribution yield, Energy Transfer Equity and its subsidiaries can’t depend upon equity or debt markets to fund their capital program. These companies have to look for alternate means of financing like an asset dropdown or sale.

On November 16, Energy Transfer Partners (ETP) announced a dropdown of its remaining wholesale fuel and retail marketing assets to Sunoco LP (SUN). The transaction is valued at $2.2 billion. According to a press release, “For ETP, this transaction is expected to be breakeven to distributable cash flow for 2016 and beyond and significantly reduces the amount of equity funding for ETP’s 2016 capital program.”

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