Energy Transfer LP — Q3 2022 Form 10-Q
Business context and reporting period. Energy Transfer is a diversified U.S. midstream partnership with natural gas, NGL, refined products, crude oil, storage and related operations. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with the same 2021 periods. Amounts below are in U.S. dollars unless stated otherwise.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $22.94 billion | $16.66 billion | $69.38 billion | $48.76 billion |
| Operating income | $1.97 billion | $1.44 billion | $5.93 billion | $7.10 billion |
| Net income | $1.32 billion | $907 million | $4.43 billion | $5.46 billion |
| Net income attributable to partners | $1.01 billion | $635 million | $3.60 billion | $4.55 billion |
| Common-unit earnings per unit | $0.29 | $0.20 | $1.06 | $1.61 |
| Consolidated Adjusted EBITDA (non-GAAP) | $3.09 billion | $2.58 billion | $9.66 billion | $10.24 billion |
| Cash provided by operating activities | Not stated separately in the supplied filing text | Not stated separately in the supplied filing text | $7.71 billion | $9.42 billion |
Q3 operating margin was approximately 8.6% in both years; net margin was approximately 5.8% versus 5.4%. These calculated ratios use reported GAAP results and revenue. Nine-month operating cash flow exceeded net income, but was down year over year.
Liquidity, debt and capital spending
- At September 30, 2022, cash was $326 million and total debt was $47.42 billion, compared with $49.70 billion at December 31, 2021. Debt fair value was estimated at $43.27 billion.
- Energy Transfer’s $5.0 billion revolving facility had $2.65 billion drawn, including $825 million of commercial paper, and $2.32 billion available after letters of credit. Sunoco LP reported $789 million available under its facility; USAC reported $982 million of facility availability, with $287 million of borrowing capacity subject to covenants.
- The partnership and subsidiaries were in compliance with debt covenants; the revolving-facility leverage ratio was 3.35x. Floating-rate debt was $4.79 billion; a 100-basis-point increase was estimated to raise annual interest expense by up to $48 million.
- Nine-month investing cash outflow was $3.08 billion, including $2.49 billion of capital expenditures and acquisition spending. Management’s 2022 capital-expenditure outlook, excluding Sunoco LP and USAC, was $1.80–$2.10 billion growth and $615–$665 million maintenance.
- Financing activities used $4.65 billion in the first nine months, including $2.12 billion of partner distributions. The Q3 common-unit distribution was declared at $0.265 per unit, or $1.06 annualized.
Material changes versus prior periods
- Q3 Adjusted EBITDA increased 20%, mainly reflecting the Enable acquisition, which contributed reported margin of $395 million in midstream and $137 million in interstate transportation and storage, plus favorable natural gas and NGL prices.
- Nine-month Adjusted EBITDA declined 6%. Management attributed the principal comparison effect to Winter Storm Uri gains in 2021: intrastate segment Adjusted EBITDA was $2.25 billion lower, including decreases of $1.52 billion in realized storage margin and $744 million in realized natural gas sales. Midstream growth, including Enable and stronger commodity prices, partly offset this.
- Revenue rose sharply, substantially reflecting higher product prices and acquisition-related volumes. Revenue growth therefore did not translate proportionately into earnings growth.
- Energy Transfer acquired Woodford Express for approximately $485 million in September; acquired Spindletop for approximately $325 million in March; and Sunoco LP acquired a transmix and terminal facility for $252 million in April. The partnership sold its 51% Energy Transfer Canada interest in August for $302 million cash.
Outlook, commentary and risks
- Management gave capital-spending ranges and announced the $0.265 quarterly common-unit distribution; the supplied filing text does not provide a broader earnings or cash-flow forecast.
- 2022 results include a $300 million Energy Transfer Canada asset impairment recorded in March and an $85 million loss on deconsolidation at sale in August. Q3 also included USAC compression-equipment impairment. Commodity derivative and inventory valuation effects can make reported results volatile.
- Legal contingencies are significant: accrued contingent losses were approximately $343 million at quarter-end. For certain matters where additional losses were reasonably estimable, the disclosed range was up to approximately $750 million beyond accrued amounts.
- A Delaware court entered a final judgment of approximately $601 million plus 3.5% post-judgment interest in the Williams litigation; Energy Transfer defendants appealed in October 2022. In the Cline class action, the company reported ongoing efforts to contest a judgment and collection proceedings; a request to deposit $161 million with the court was pending.
- Dakota Access continued operating pending completion of an environmental impact statement; the draft was expected in spring 2023, subject to delay. Other material matters include proposed FERC penalties involving Rover, environmental and pipeline proceedings, and ongoing rate cases.
- Management cited exposure to commodity prices, interest rates, inflation, volumes, regulation, permitting, operational and environmental events, litigation, counterparty performance, capital-market access and acquisition integration. The filing reported no material change in principal market-risk exposures and no material change in risk factors from the 2021 Form 10-K.
Most important facts for investors to verify
- How much of reported growth reflects durable fee-based volumes and acquisitions versus commodity prices, trading and other volatile items.
- Whether operating cash flow can support planned capital spending, debt service and the increased common-unit distribution.
- Debt refinancing needs and sensitivity to higher rates, including the $4.79 billion floating-rate exposure and available credit capacity.
- Developments in the Williams and Cline matters, the potential range and timing of other contingent losses, and whether recorded reserves remain adequate.
- Dakota Access permitting and other regulatory outcomes, plus execution and integration of recent acquisitions.