Business context and reporting period
Energy Transfer LP (NYSE: ET) is a diversified U.S. energy partnership with natural gas and liquids transportation, storage and midstream businesses, plus investments in Sunoco LP and USA Compression Partners (USAC). This unaudited Form 10-Q covers the quarter and six months ended June 30, 2019; comparisons are with 2018. The October 2018 merger of Energy Transfer Partners into ET and other changes in consolidation affect comparability.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $13.877B | $14.118B | $26.998B | $26.000B |
| Operating income | $1.819B | $1.126B | $3.746B | $2.226B |
| Net income | $1.208B | $633M | $2.388B | $1.122B |
| Net income attributable to partners | $878M | $355M | $1.748B | $718M |
| Basic earnings per limited partner unit | $0.33 | $0.31 | $0.67 | $0.62 |
| Adjusted EBITDA | $2.824B | $2.262B | $5.621B | $4.264B |
| Operating cash flow | Not provided for the quarter | $3.894B | $3.162B |
Operating margin was approximately 13.1% in Q2 2019 versus 8.0% a year earlier, and 13.9% for the first half versus 8.6%. Interest expense was $578M in Q2 and $1.168B for the first half. Q2 interest-rate derivative losses were $122M; first-half losses were $196M.
At June 30, 2019, total assets were $90.812B, cash was $445M, current assets were $7.198B and current liabilities were $6.429B. Total debt was $46.506B, compared with $46.028B at December 31, 2018. Debt fair value was $49.93B. ETO had $2.56B available under its main revolving facility; Sunoco LP had $1.38B available under its revolver. ET reported compliance with credit-agreement covenants. The Parent Company itself held only $1M cash; its cash flows depend principally on distributions from subsidiaries, and parent-company assets are not available to satisfy subsidiary obligations.
Six-month capital expenditures, excluding allowance for equity funds used during construction, were $2.818B before $41M of contributions in aid of construction. Environmental liabilities were $324M. ET declared a Q2 distribution of $0.305 per common unit, or $1.22 annualized.
Material changes versus the prior comparable period
- Q2 revenue declined about 2%, while first-half revenue increased about 4%. Higher gathering, transportation and other fees partly offset lower refined-product, NGL and natural-gas sales.
- Adjusted EBITDA rose 25% in Q2 and 32% for the first half. Growth reflected higher crude volumes, the Rover pipeline reaching full service, and Mariner East 2 and new fractionation capacity contributing to NGL and refined-products results. The crude-oil and NGL/refined-products segments were major contributors.
- Operating income and earnings increased substantially, although higher depreciation and interest expense offset part of the operating improvement. First-half results included $50M of impairments, primarily at Sunoco LP’s Fulton ethanol plant, and USAC compression equipment.
- Operating cash flow increased $732M year over year for the first half. Investing cash outflow was $2.942B; financing cash outflow was $926M. Distributions to ET partners were $1.549B, versus $532M in the prior-year period.
- Debt was refinanced and shifted toward subsidiaries: ET repaid its $1.22B term loan; ETO issued notes and exchanged about 97% of ET’s senior notes; and Bakken project debt was refinanced with notes. Consolidated debt nevertheless increased modestly from year-end.
Outlook, commentary, risks and unusual items
- Management’s 2019 capital expenditure estimates for ETO were $4.6B–$4.8B for growth and $570M–$610M for maintenance. Sunoco LP expected about $100M growth and $40M maintenance spending; USAC budgeted $140M–$150M expansion and about $25M maintenance spending. These are estimates, not earnings guidance.
- Management’s stated strategy is to grow distributable cash flow through pipeline and liquids infrastructure expansion and strategic opportunities. The filing does not provide a clear forecast of earnings, cash flow or distribution growth.
- Philadelphia Energy Solutions (PES), in which ET held an approximately 7.4% non-operating interest, filed for Chapter 11 after a refinery fire and intended to temporarily cease operations. PES defaulted on a $75M note payable to an ET subsidiary; ET had not recorded a valuation allowance because collectability could not yet be determined. The effect on commercial contracts and related revenue was unknown.
- Environmental, safety and legal matters include litigation challenging Dakota Access Pipeline permits, Pennsylvania investigations and permit disputes concerning pipeline construction, and environmental claims. ET stated that the potential outcomes of several matters could not be estimated; it could not assure that Dakota Access operations would not be halted. General contingent-obligation accruals were approximately $54M, and environmental liabilities were $324M.
- ETC Sunoco is pursuing approximately $530M of tax refunds in litigation; a reserve for the full amount had been established, and the outcome remained uncertain. FERC reviews and rate proceedings could also affect revenues from certain regulated pipelines.
- Adoption of lease accounting on January 1, 2019 added approximately $888M of right-of-use assets and lease liabilities at adoption. Management said the change materially affected the balance sheet but not reported earnings or cash flows.
Important facts for investors to verify
- Whether EBITDA growth converts into distributable cash flow after interest, capital spending, working capital and subsidiary distributions; the filing does not provide a clear distributable-cash-flow figure.
- Debt maturities, refinancing needs, interest costs and the extent to which subsidiary cash is available to the Parent Company.
- Delivery and funding of the large 2019 growth-capital program, and whether new capacity produces expected volumes and returns.
- Collectability of the PES note and any further effects of the refinery bankruptcy on ET’s investment, contracts or supply arrangements.
- Developments in Dakota Access, Pennsylvania pipeline, environmental and other litigation, including potential costs or operating restrictions beyond recorded accruals.
- Outcome of the $530M tax-refund case and FERC rate proceedings that may affect regulated-pipeline revenue.