Energy Transfer Equity (ETE +0.32%) has grown its distribution for 13 straight quarters. It's a trend the company doesn't expect will end in 2016, with it projecting to grow its payout by a 21% compound annual rate from 2015 through 2017. Here's why the company expects to raise its payout in 2016.
Its income streams will grow in 2016
One of the biggest drivers of Energy Transfer Equity's ability to grow its distribution in 2016 is the growth in the number of income streams flowing into the company once Williams Companies (WMB +0.82%) and Williams Partners (NYSE: WPZ) are brought into the fold. As the slide below shows, the addition of Williams Companies to its portfolio will bring in two very large income streams in the form of distributions from its ownership of Williams Partners' common units as wells as incentive distribution rights and general partner distributions:
Image source: Energy Transfer Equity investor presentation.
The addition of these income streams alone are expected to immediately boost Energy Transfer Equity's cash flow on a per unit basis. In other words, the Williams merger provides a foundation for dividend growth in 2016.
The income from those income streams will grow in 2016
On top of that, Energy Transfer Equity will also benefit from the overall growth of cash flowing out of its income streams in 2016. As this next slide notes, all three of its other MLPs are projected to grow their distributions strongly over the next two years:
Image s ource: Energy Transfer Equity investor presentation.
Not only is its namesake MLP Energy Transfer Partners (ETP +0.00%) projected to grow its payout by 8%, but other affiliated MLPs such as Sunoco LP (SUN 0.45%) are projected to deliver strong double-digit distribution growth. This feeds more income into Energy Transfer Equity because it receives the higher distributions from the units of each entity it owns. Furthermore, by owning the general partner and incentive distribution rights in Energy Transfer Partners and Sunoco LP, it will see its income from these streams rise because of how these rights are structured. It's also worth pointing out that the Sunoco LP general partner and incentive distribution rights are recent additions to Energy Transfer Equity after it acquired both in a deal with Energy Transfer Partners late last year.
The other thing to keep in mind is that this growth is backed by new assets delivering more cash flow and not mere projections of what the company hopes to deliver. Sunoco LP, for example, recently acquired the fuel distribution and retail marketing assets of Energy Transfer Partners in a number of drop-down transactions last year. These assets provide Sunoco with more cash flow to grow its distribution. Meanwhile, Energy Transfer Partners is using the cash it received from Sunoco to help fund its $10 billion project backlog, which is expected to graduate a number of projects in 2016 including the Orla Plant, Bayou Bridge segment 1, and Lone Star Frac IV. Once these projects come online, they will drive strong cash flow growth for Energy Transfer, which should enable both entities to raise their distributions.
Investor takeaway
There's currently a lot of noise in the market that Energy Transfer Equity might need to reduce its distribution due to the current market turmoil. While that is always a possibility, that's not the company's current thinking. Instead, it's planning for robust distribution growth in 2016 because the number of its income streams will rise due to the addition of Williams while the amount of income flowing out of its income streams is expected to grow due to new assets coming online. That combination makes a distribution increase a pretty good bet.
