Business context and reporting period
Energy Transfer LP (ET), a U.S. midstream energy partnership, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Results include the December 2019 SemGroup acquisition; SemGroup assets were contributed to subsidiary ETO during the first half of 2020. Amounts below are in millions of dollars unless stated otherwise.
Financial and operating performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $9,955 | $13,495 | $28,920 | $40,493 |
| Operating income | $244 | $1,856 | $1,641 | $5,541 |
| Net income (loss) | $(401) | $1,187 | $(693) | $3,514 |
| Net income (loss) attributable to partners | $(782) | $858 | $(1,284) | $2,545 |
| Basic and diluted loss per limited partner unit | $(0.29) | $0.33 | $(0.48) | $0.97 |
| Adjusted EBITDA (non-GAAP) | $2,866 | $2,812 | $7,939 | $8,372 |
Q3 revenue declined about 26%, while Adjusted EBITDA increased about 2%. For the first nine months, revenue fell about 29% and Adjusted EBITDA fell about 5%. Revenue declines reflected lower commodity prices and reduced demand and volumes, especially in crude and refined products. Adjusted EBITDA includes acquisition contributions and segment-specific factors; it is a non-GAAP measure and should not be viewed as a substitute for GAAP earnings or cash flow.
Q3 operating results included $1,474 of impairment losses, compared with $12 a year earlier. Nine-month impairment losses were $2,803 versus $62. Separately, ET recorded a $129 impairment of its White Cliffs investment in Q3. Higher depreciation also reflected acquired and recently placed-in-service assets. Operating income was approximately 2.5% of revenue in Q3, versus 13.8% in Q3 2019, substantially affected by impairments.
Segment trends were mixed: Q3 Adjusted EBITDA rose in midstream ($530, up $119) and NGL and refined products transportation and services ($762, up $95), but declined in crude oil transportation and services ($631, down $95), intrastate transportation and storage ($203, down $32), and interstate transportation and storage ($425, down $17). Midstream’s increase included $103 from restructuring and assignment of gathering and processing contracts, including recognition of $75 in deferred revenue received in prior periods. NGL and refined products benefited from higher marketing optimization gains and throughput, while lower demand weighed on crude, refined products and other activities.
Cash flow, debt and liquidity
For the nine months, operating cash flow was $5,455, down from $5,966. Investing activities used $3,861, including $4,030 of cash capital expenditures; financing activities used $1,610. Cash and equivalents were $275 at September 30, compared with $291 at year-end 2019.
Total debt was $51,445, versus $51,054 at year-end 2019; long-term debt, less current maturities, was $51,424. The ETO $2 billion term loan was fully drawn. Its $5 billion revolving facility had $3,231 outstanding, including $1,630 of commercial paper, and $1,650 available after letters of credit. Sunoco LP reported $1,410 of revolving availability; USAC reported $412 of available borrowing capacity subject to covenant compliance. ET reported compliance with debt covenants and a 4.24x leverage ratio under its revolving-credit covenant. Management said it had ample liquidity and no immediate liquidity concerns. A separate ETO 364-day facility, with no borrowings, matured November 27, 2020.
Cash distributions paid to ET partners totaled $2,397 during the nine months. On October 26, ET announced a Q3 distribution of $0.1525 per unit, or $0.61 annualized, a 50% reduction from the prior quarter, with the stated intent to use the cash savings to reduce debt.
Outlook, risks and unusual items
- COVID-19 and markets: Management said operations continued without significant disruption, but warned that reduced energy demand, low oil prices, production shut-ins, lower pipeline volumes and customer financial stress could continue to affect results. It cut its 2020 growth-capital budget by a total of $700 and planned operating expenses by about $500.
- Capital spending: ET’s 2020 growth-capital estimate, excluding Sunoco LP and USAC, was $3,185–$3,395, with maintenance capital of $520–$560. The filing also describes capital spending plans for Sunoco LP and USAC.
- Lake Charles LNG: Shell withdrew from the proposed liquefaction project. ET intends to assess alternatives, including a smaller project, and said a final investment decision depends on market conditions, capital costs, third-party equity and satisfactory long-term offtake commitments.
- Dakota Access Pipeline: The shutdown order was stayed, and the company expected the pipeline to continue operating during appeals. However, the easement had been vacated, the Army Corps had described the crossing as an encroachment on federal land, and further proceedings could result in an injunction or operational disruption. ET said the outcome and impact were uncertain.
- Other legal and regulatory exposure: The filing discusses MTBE claims, pipeline-related investigations and litigation, the Williams merger litigation, and a Panhandle rate proceeding. Accrued contingent obligations were about $86; additional reasonably possible losses were estimated up to $80 where estimable, with no accrual recorded for those amounts. Environmental liabilities totaled $298. ET noted that some potential exposures cannot be estimated.
- Accounting and valuation: ET changed its accounting for certain crude-oil pipeline linefill and tank-bottom volumes, reclassifying them from inventory to non-current assets. The change increased nine-month 2020 net income by $265, or $0.10 per limited partner unit. Goodwill impairment testing relies on forecasts and assumptions that could produce materially different valuations.
- Regulatory rates: FERC policy and proceedings concerning income-tax allowances, return on equity and pipeline rate methodologies may affect future regulated revenues; the impact was uncertain.
Most important facts for investors to verify
- Whether demand, volumes and operating results recover, and whether the Q3 Adjusted EBITDA improvement persists without the contract restructuring and deferred-revenue recognition.
- Whether the reduced distribution and planned capital-spending cuts translate into sustained debt reduction; monitor debt, leverage, facility availability and refinancing needs.
- Developments in Dakota Access litigation and the status of its easement and continued operating authority.
- Progress, funding, partners and offtake commitments for Lake Charles LNG, and whether further impairments are required.
- Potential outcomes and financial effects of major legal, environmental and FERC proceedings, including exposures not currently estimable.