Why High Leverage Might Not Be a Big Concern for ETE

Total outstanding debt

Energy Transfer Partners’ (ETP) total outstanding debt continued to grow during the second quarter of 2018 despite some recent debt reduction measures including asset sales. This rising debt is due to the partnership’s high capital spending targets for the year. ETP has spent $2.2 billion on organic projects during the first six months of this year. ETP ended Q2 with a total outstanding debt of $33.9 billion, which represents a 2.4% increase compared to the total outstanding debt by the end of 2017. At the same time, Energy Transfer Equity (ETE) reported total outstanding debt of $44.6 billion at the consolidated level.

Why High Leverage Might Not Be a Big Concern for ETE

Leverage position

Energy Transfer Partners’ leverage position has improved over the recent quarter despite an increase in total debt. This is due to the partnership’s strong EBITDA growth. Based on the limited partnership’s TTM adjusted EBITDA and total outstanding debt, the net-debt-to-EBITDA was ~4.4x at the end of the second quarter, which is within the industry standards.

The leverage position is expected to improve significantly from here with the recent announcement of the simplification transaction. The cash savings following the completion of the transaction could be used mainly for funding the partnership’s growth capex. On the other hand, ETE is expecting to keep its distribution unchanged for a few quarters, which would likely bring down the leverage of the combined entity.

According to Thomas E. Long, ETP’s CFO, the transaction allows the company to “continue pursuing accretive growth capital projects and strategic M&A transactions. It also increases retained cash to accelerate deleveraging. Following the merger, we are expecting a DCF coverage ratio of 1.6x to 1.9x, which equates to about $2.5 billion to $3 billion of annual retained cash. This greatly reduces our external, common, or preferred equity funding needs going forward.”

ETP’s peers Kinder Morgan (KMI) and Williams Companies (WMB) could see a similar improvement in their balance sheet. For details on KMI’s leverage position in Q2, read How Was Kinder Morgan’s Second-Quarter Leverage?

In the next article, we’ll look at an update on Energy Transfer Partners’ major organic projects.