Edited December 16, 2015 at 1:07pm following conversation with ETE executive team.
The Securities and Exchange Commission performs a vital function when it comes to truth in reporting, helping investors sort through what’s true and what’s not. The Form 10-K (annual) and Form 10-Q (quarter) can be used to compare what a company’s reported, actual net leverage is to what management says it is – in their presentation slide deck or on some of the more popular business channels. Investors in midstream equities have long been “pitched” the idea that leverage is contained, but from our perspective, it is not. Bondholders deserve to know the actual, reported net leverage of companies in the midstream space because they won’t hear it from management, at least it seems.
Let’s take Kinder Morgan (KMI), as an example. In its slide deck presentations and in most communications, the midstream giant notes that its leverage as measured by net debt to EBITDA is under 6 times. However, a close examination of the company’s Form 10-K and Form 10-Q suggests that such a measure is far from reality. Through the first nine months of the year, Kinder Morgan has generated ~$2.7 billion in operating income and ~$1.73 billion in depreciation and amortization, amounting to roughly ~$4.43 billion in EBITDA through the first nine months of the year. Generously, let’s annualize that measure to arrive at annualized reported EBITDA of ~$5.9 billion. At the end of 2014, Kinder Morgan had total short and long-term debt of $43 billion and at the end of the third quarter of 2015, it registered total short and long-term debt of $44.6 billion. Kinder Morgan’s cash is negligible.
Kinder Morgan is more than 7.6x leveraged on the basis of its total short and long-term debt load at the end of the third quarter, relative to its annualized EBITDA mark for this year. If we were to back out the company’s loss on impairments and dispositions of assets, we could assume ~$6.54 billion in annualized EBITDA, but that’s quite the optimistic case, in our view, in light of still-collapsing energy-resource pricing. Importantly, even if we give credit for these “one-time items,” which may end up recurring in nature, Kinder Morgan is still 6.8x leveraged ($44.6/$6.54). We understand that the executive team and the credit rating agencies are doing some non-GAAP “massaging” with the numbers, but bondholders should know the truth. We encourage all stakeholders to look at the data that we are looking at in Kinder Morgan’s Form 10-Q, which can be downloaded here (pdf).
The situation with Energy Transfer Equity is even worse. We were letting this issue go to rest, until we noticed that Energy Transfer Equity had stated emphatically that its measure of net debt to EBITDA was 4.5x, a level it believes to be “sacrosanct.” We were in disbelief. The SEC requires that companies disclose their financials for a reason, and we pay very close attention to what’s submitted in the 10-K and 10-Q far and above what we see in slide deck presentations or hear on television. In the nine months ended September 30, Energy Transfer Equity’s operating income was $2.16 billion, while depreciation and amortization was $1.53 billion, good for $3.69 billion in EBITDA, or $4.92 billion in EBITDA on an annualized basis.
The company noted short and long-term debt of $36.3 billion and cash and cash equivalents of $1 billion, resulting in a net debt position of $35.3 billion. Please download its 10-Q here (pdf). By our calculations, Energy Transfer Equity is nearly 7.2x leveraged ($35.3/$4.92). Say what you will just how far the company should be rated in “junk status,” but we think there may be a large number of investors that believe Energy Transfer Equity is ~4.5x leveraged. This just simply isn’t true, in our view. The SEC filings tell a completely different story. [A subsequent conversation with the executive team confirmed that even after a number of adjustments, ETE is at least more than 6x leveraged.]
We encourage management teams in the midstream space to disclose actual, reported measures of leverage and non-GAAP free cash flow, as measured by cash flow from operations less all capital spending. The degree of “misinformation,” in our view, has become egregious. Investors should continue to use a wide variety of information in the investment-decision making process, but the SEC filings are a great place to find the most accurate and unbiased information.
Kinder Morgan is ~6.8x leveraged. Energy Transfer Equity is nearly 7.2x leveraged, and this is before its tie-up with Williams Co (WMB). Please be careful out there. The bondholders will eventually care when they get a hint of the recent SEC filings. There’s too much non-GAAP “massaging” going on.
Pasted below is the link to the video that implies Energy Transfer Equity’s leverage is 4.5x:
http://video.cnbc.com/gallery/?video=3000464044
Please stick to the SEC filings. They are there to protect investors.