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How ETE’s Distribution Coverage Trended in 2018

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ETE’s 4Q17 distributable cash flows  

Energy Transfer Equity (ETE) reported distributable cash flows of $263 million in 4Q17 compared to $299 million in the same quarter in the prior year, a YoY decline of 12.0%. The decline was mainly due to the IDR (incentive distribution rights) subsidies from ETE to Energy Transfer Partners (ETP).

IDRs entitle ETE to a higher share of incremental cash flows, which results in higher cost of equity capital at the limited partnership. Plains All American Partners (PAA), Buckeye Partners (BPL), and Williams Partners (WPZ) are among the MLPs that have simplified their capital structure through the removal of IDRs.

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ETE’s 4Q17 distribution coverage

ETE ended 4Q17 with a distribution coverage of 0.99x, which is significantly below the coverage ratio of 1.19x during the same time period of last year. The decline in GP’s distribution coverage was mainly due to lower distributable cash flows.

However, ETE’s coverage is expected to improve in the coming quarters with the cancellation of IDR subsidies to ETP and distribution growth at ETP. According to ETE’s 4Q17 earnings release, “These incentive distribution waivers, the majority of which were originally provided to support ETP’s funding of its growth capital projects, are scheduled to reduce significantly as ETP’s projects are completed and volumes ramp up in the near term.”

On the other hand, the removal of IDR subsidies is expected to impact ETP’s distributable cash flows, partially offsetting contributions from upcoming organic projects and projects placed into service.

In the next article, we’ll analyze Energy Transfer Partners’ segment-wise operating performance.

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