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Energy Transfer Equity (NYSE: ETE) is a behemoth in the energy infrastructure space. However, as the company has grown, it has become increasingly complex, which makes it tougher for some investors to understand what it owns and how it makes money. For visual learners, the following three charts should help to demystify the complexity.
The Energy Transfer Equity family: Understanding the relationships
The best way to understand Energy Transfer Equity's corporate structure is to see the big picture of how the company and its various entities relate to each other:
Source: Energy Transfer Equity Investor Presentation.
As that chart shows, Energy Transfer Equity is in a sense the parent company to four subordinate entities: Energy Transfer LNG, Sunoco LP (NYSE: SUN), Energy Transfer Partners (NYSE: ETP), and Sunoco Logistics Partners (NYSE: SXL). That said, it has a different ownership relationship which each entity. For example, it owns 100% of Energy Transfer LNG, which is a natural gas import facility and a future LNG export facility. As a result, it directly collects 100% of the profits earned by that entity. Meanwhile, it has varying ownership interests in the three publicly traded MLPs. Moreover, one of the MLPs (Energy Transfer Partners) has ownership interests in the other two. However, what is most important to understand is that each ownership interest entitles Energy Transfer Equity to an underlying cash flow stream.
Following the money trail
This next chart shows what those various streams mean for Energy Transfer Equity's bottom line.
Source: Energy Transfer Equity investor presentation. Chart by author. Note: In millions of dollars.
That chart makes one thing abundantly clear: Energy Transfer Equity derives the bulk of its income from its ownership interest in Energy Transfer Partners, withincentive distribution rights (IDRs) providing the bulk of its earnings. In fact, through the first six months of this year, $543 million of its $846 million in revenue came from that one entity, which is 64% of the total.
At first glance, that might seem odd, given that Energy Transfer Equity has a larger ownership stake in Lake Charles LNG and owns a greater percentage of Sunoco LP's units. However, the reason Energy Transfer Partners supplies more cash flow to its parent is that it generates substantially more distributable cash flow than its fellow affiliates. Last quarter, for example, it produced $774 million in distributable cash flow, compared to $92 million at Sunoco LP and $44 million at Lake Charles. The reason its higher cash flow matters is due to the IDRs, which give the owner an increasing share of the underlying MLP's growing stream of distributable cash flow. So, because Energy Transfer Partners generates the most cash flow, it supplies its parent company with more IDRs.
The other thing that is important to understand about Energy Transfer Equity is that it collects a significant portion of the cash flow generated by its MLPs. For example, while Energy Transfer Partners produced $774 million in distributable cash flow last quarter, it distributed only $527 million to its public unitholders. It sent the rest (and then some) up to Energy Transfer Equity via four distinct revenue streams:
Source: Energy Transfer Equity investor presentation. Chart by author.
Overall, the partnership paid a net $323 million, or 38% of its total cash distributions, to the parent company. To put that into perspective, Energy Transfer Equity owns only 1% of Energy Transfer Partners' outstanding units, and yet it gets paid roughly 38% of its cash flow due primarily to those lucrative IDRs. Further, that share would have been 45% if the company did not relinquish a substantial portion of its IDRs to support Energy Transfer Partners' growth program.
Energy Transfer Equity is much more complicated than the average general partner MLP. That said, at its core, it is a holding company for ownership stakes in four other entities, with the bulk of its earnings coming from IDRs at its namesake MLP. Those IDRs are critical because they give it an outsize share of the cash flow generated by its MLPs.
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