Energy Transfer Equity (NYSE:ETE) reported a significant increase in distributable cash flow during the second quarter due to its relationship with Energy Transfer Partners (NYSE:ETP). Not only did its namesake master limited partnership report strong results thanks to recently completed expansion projects, but Energy Transfer Equity benefited from being able to withdraw some of the support it provided the partnership during the heavy spending portion of its expansion phase. That strong showing from the MLP bodes well for Energy Transfer Equity's future since it's in the process of acquiring that entity.

Drilling down into the results

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Distributable cash flow (DCF)

$407 million

$240 million

69.6%

Distributions to partners

$354 million

$251 million

41%

Distribution coverage ratio

1.15 times

0.96 times

19.8%

Data source: Energy Transfer Equity.

Energy Transfer Equity's cash flow surged entirely due to its stake in Energy Transfer Partners. While the company's recent investment in USA Compression Partners (NYSE:USAC) added $11 million of incremental income during the quarter, the sale of a portion of its investment in Sunoco LP (NYSE:SUN) completely offset that gain. Meanwhile, cash flow from the company's Lake Charles LNG facility was flat versus the year-ago period.

Two factors drove the big increase in income from Energy Transfer Partners. First, the MLP paid out a larger portion of the management fees due to its parent as a result of a step down in support. On top of that, Energy Transfer Partners' expansion projects grew its cash flow and distributions, which entitled Energy Transfer Equity to a larger share of the profits.

Overall, the MLP delivered growth nearly across the board:

A chart showing Energy Transfer Partners' earnings by segment in the second quarter of 2018 and 2017.

Data source: Energy Transfer Partners. Chart by author.

The biggest growth driver was the crude oil segment where earnings rocketed 140% due in large part to the Bakken pipeline, which entered service in last year's second quarter. Profitability in the interstate gas pipeline segment, too, jumped 26% thanks in part to the Rover Pipeline, which recently started partial service. The company also benefited from higher volumes across many of its intrastate gas pipelines as well as on its natural gas liquids (NGLs) systems.

The only segment that didn't grow earnings year over year was the "all other" segment, which among other things, houses its investment in Sunoco LP as well as its compression business, which it sold to USA Compression Partners earlier this year. The sale of that business, as well as a portion of its ownership interest in Sunoco LP, contributed to the decline.

Oil pipelines over a sunset.

Image source: Getty Images.

A look at what's ahead

Energy Transfer Equity is undergoing a major transformation by acquiring its namesake MLP. That deal will help simplify its structure by combining these two entities and eliminating the costly management fees. It will also improve the combined company's financial flexibility because it will retain more internally generated cash flow to help finance expansion projects. In fact, the company anticipates that it will hold on to $2.5 billion-$3 billion in cash each year to invest in growth projects after paying its distribution, which implies a distribution coverage ratio of 1.6 to 1.9 times. The companies anticipate that the deal will close in the fourth quarter of this year.

While Energy Transfer is winding down a major expansion phase this year, it does still have a few noteworthy projects underway to drive growth in 2019 and beyond. The company anticipates that its Mariner East 2X project will enter service by the middle of next year along with the second phase of the Red Bluff Express Pipeline and another fractionator, which splits NGLs into its various streams like ethane and propane. It also has three projects underway for 2020, including two export terminals. These expansions set Energy Transfer up for solid growth in the coming years, providing further support for the company's 6.6%-yielding distribution, which it could start increasing again after closing the acquisition of its MLP.

Starting to look intriguing

Energy Transfer Equity has worked hard to improve the financial strength of its franchise over the past few years. That's evident in not only the company's second-quarter results but those of its namesake MLP. In the meantime, its fortunes should continue to improve as it takes the necessary steps to merge with Energy Transfer Partners to create one single and stronger entity. That deal is one of the many factors that make Energy Transfer a company that income investors should watch closely.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.