Energy Transfer LP — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Energy Transfer is a diversified midstream partnership operating natural gas, NGL, refined-products and crude-oil pipelines, storage and related businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $7,338 | $13,877 | $18,965 | $26,998 |
| Operating income | $1,336 | $1,820 | $1,397 | $3,685 |
| Net income (loss) | $672 | $1,209 | $(292) | $2,327 |
| Net income (loss) attributable to partners | $353 | $879 | $(502) | $1,687 |
| Limited-partner earnings per unit, basic and diluted | $0.13 | $0.33 | $(0.19) | $0.64 |
| Consolidated Adjusted EBITDA | $2,438 | $2,825 | $5,073 | $5,560 |
| Cash from operating activities | — | $3,135 | $3,894 |
- Revenue fell about 47% in Q2 and 30% in the first half, driven substantially by lower commodity-related sales. Adjusted EBITDA declined 14% and 9%, respectively; management attributed the decreases mainly to lower volumes and market prices, partly offset by approximately $150 million of Q2 and $290 million of first-half EBITDA from acquisitions and assets placed in service.
- Q2 segment EBITDA was mixed: crude-oil transportation and services declined $233 million year over year; intrastate transportation and storage declined $103 million; NGL and refined-products transportation and services increased $30 million; and Sunoco LP increased $30 million. First-half crude-oil segment EBITDA fell $386 million.
- First-half net loss included $1.329 billion of impairment losses, primarily goodwill impairments recognized in Q1. Interest expense was $1.181 billion for the half, compared with $1.168 billion in 2019.
- Operating cash flow was $3.135 billion; cash used in investing was $2.763 billion, including $2.892 billion of cash capital expenditures. Cash used in financing was $508 million. Cash and cash equivalents were $155 million at June 30.
Balance sheet, debt and liquidity
- Total assets were $95.907 billion, versus $98.973 billion at year-end 2019. Total debt was $51.285 billion, compared with $51.054 billion; long-term debt less current maturities was $51.251 billion. Debt fair value was estimated at $52.99 billion.
- Current assets were $5.156 billion and current liabilities $5.003 billion. The ETO revolving facility had $1.90 billion available after borrowings and letters of credit; Sunoco LP reported $1.33 billion of facility availability. USAC reported $151 million of available borrowing capacity subject to covenant compliance. Management said liquidity was ample and it did not anticipate immediate liquidity concerns.
- Floating-rate debt was $6.78 billion. The filing estimates that a 100-basis-point rate increase could raise annual interest expense by up to $68 million, subject to interest-rate floors.
- ET declared a Q2 distribution of $0.305 per common unit, or $1.22 annualized, unchanged from the prior quarters shown. The filing reported compliance with debt covenants as of June 30.
Material developments and outlook
- COVID-19 and markets: Operations continued without significant disruption reported to date, but the pandemic and related restrictions reduced demand and affected earnings and cash flow. Management cited possible production shut-ins, lower pipeline volumes and utilization, weak commodity prices, customer credit deterioration and contract rejection in bankruptcy as risks.
- Spending: Management said it cut its already reduced 2020 growth-capital budget by a further $600 million and planned approximately $400 million of operating-expense reductions. The filing’s 2020 capital-expenditure outlook, excluding Sunoco LP and USAC, was $3.31–$3.52 billion growth and $540–$580 million maintenance. Management described long-term demand for midstream services as supported by their essential nature, while noting near-term uncertainty.
- Lake Charles LNG: Shell declined to pursue a proposed equity interest in the liquefaction project. ET planned to evaluate alternatives, including reducing the project from three trains to two, and said a final investment decision would depend on market conditions, capital costs, partners and acceptable long-term offtake commitments.
- Goodwill and accounting: First-half impairments included $483 million for midstream, $183 million for Lake Charles LNG regasification, $619 million for USAC and $40 million in other operations. Of $3.868 billion of remaining goodwill, approximately $1.2 billion was in reporting units with estimated fair value less than 20% above carrying value; management said this amount was at significant risk of impairment if prices or demand remained low. A revised crude-oil accounting policy reclassified certain pipeline linefill and tank-bottom barrels as non-current assets and increased first-half net income by $265 million, or $0.10 per limited-partner unit.
- Dakota Access Pipeline: As of the filing, the Court of Appeals had stayed the shutdown-and-emptying requirement, so no court order then prevented continued operation. However, the easement had been vacated, the environmental-impact-statement process remained, and the Army Corps of Engineers was to determine whether its regulations required oil to stop flowing. ET could not predict the litigation’s outcome or impact.
- Other contingencies: ET reserved the remaining $63 million of a PES note after receiving $12 million in June. Environmental liabilities were $304 million. Accrued litigation and other contingent obligations were approximately $92 million; the filing also disclosed up to $80 million of estimated possible losses for certain unaccrued matters. The company stated it could not estimate additional exposure for some cases.
Most important facts for investors to verify
- Developments in the Dakota Access easement, Army Corps review and related appeals, and the resulting effect on operations.
- Whether COVID-19-related demand, production shut-ins, commodity prices and customer credit conditions continue to affect segment volumes, margins and cash generation.
- Goodwill impairment assumptions and whether the approximately $1.2 billion identified as at risk requires further write-downs.
- Liquidity availability and covenant compliance across ET and subsidiaries, debt refinancing needs, and the capacity to fund capital spending and distributions.
- Progress on Lake Charles LNG financing, partners and offtake commitments, along with exposure to PES, environmental matters and other litigation.