Energy Transfer LP (formerly Energy Transfer Equity, L.P.) — Q3 2018 Form 10-Q
Business context and reporting period
The unaudited filing covers the quarter and nine months ended September 30, 2018. The consolidated partnership included ETP, Sunoco LP, Lake Charles LNG and, from April 2, 2018, USA Compression Partners (USAC). On October 19, 2018, ETE completed its merger with ETP, changed its name to Energy Transfer LP, and began trading as ET. These post-quarter events materially changed the partnership structure.
Key financial metrics
Amounts are in millions of dollars, except per-unit data. Comparative 2017 results are as adjusted where indicated.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $14,514 | $9,984 | $40,514 | $29,072 |
| Operating income | $1,703 | $931 | $3,929 | $2,431 |
| Net income | $1,391 | $758 | $2,513 | $1,198 |
| Net income attributable to partners | $371 | $252 | $1,077 | $703 |
| Income from continuing operations per limited partner unit, diluted | $0.32 | $0.22 | $0.94 | $0.62 |
| Segment Adjusted EBITDA | $2,577 | $1,949 | $6,841 | $5,243 |
Q3 operating margin was approximately 11.7%, compared with 9.3% a year earlier, calculated as operating income divided by revenue. Segment Adjusted EBITDA is a non-GAAP measure; the filing reconciles it to continuing-operations income before tax.
- Cash flow: Nine-month cash from operating activities was $5,295, versus $3,410. Investing activities used $4,763; capital expenditures were $5,175 before construction contributions. Financing activities used $3,208. Cash and equivalents were $398 at September 30.
- Debt and liquidity: Total debt carrying amount was $44,772, including $2,655 of current maturities; long-term debt was $42,117. Current assets of $7,527 were below current liabilities of $10,219. ETP’s revolver had $2,060 available after letters of credit; Sunoco LP had $999 available and USAC $578. The partnership and subsidiaries reported compliance with credit covenants at quarter-end.
- Distributions: The parent declared $0.305 per unit for the September quarter, or $1.22 annualized. Nine-month cash distributions to partners were $886; subsidiary distributions to noncontrolling interests were $2,742.
Material changes versus the prior comparable period
- Revenue and operating income increased substantially. Management cited higher throughput and volumes, new or expanded assets, pipeline optimization and more favorable crude oil market differentials. ETP Segment Adjusted EBITDA increased $545 in Q3 and $1,487 for the nine-month period.
- Key contributions included Rover Pipeline service, growth in Permian activity, the Bakken pipeline, and commissioning ETP’s fifth fractionator in July 2018. USAC added $90 of Q3 and $185 of nine-month Segment Adjusted EBITDA from its April acquisition/consolidation date; these periods are not comparable with 2017.
- Sunoco LP’s January 2018 sale of approximately 1,030 retail fuel outlets to 7-Eleven for $3.2 billion shifted the retail divestment to discontinued operations. Sunoco LP’s nine-month Segment Adjusted EBITDA fell $117, principally reflecting the absence of divested retail operations, partly offset by higher fuel gross profit. A one-time approximately $25 fuel-supplier settlement benefited 2018 fuel gross profit.
- Interest expense rose to $535 in Q3 from $490, and to $1,511 for nine months from $1,440, reflecting debt issuance and USAC consolidation, partly offset by lower Sunoco LP borrowing costs. Nine-month results also included $106 of debt-extinguishment losses.
- Comparisons are affected by the April USAC consolidation, the retail divestiture and accounting presentation changes. The 2017 inventory-costing change was applied retrospectively; 2017 results were not restated for the 2018 revenue-recognition standard.
Outlook, commentary, risks and unusual items
- ETP’s 2018 capital expenditure outlook was $4.50–$4.70 billion for growth and $485–$525 million for maintenance. Sunoco LP expected approximately $65 million of growth and $30 million of maintenance capital spending. USAC budgeted $190–$200 million for expansion and approximately $30 million for maintenance; it had $126 million of binding compression-unit and parts commitments.
- Projects included the planned Permian Gulf Coast crude pipeline, expected in service in mid-2020, and the Orbit ethane export terminal, targeted for commercial service in Q4 2020 subject to Chinese government approval. These are forward-looking plans, not assured outcomes.
- FERC policy and rulemaking concerning tax allowances and tax-law changes could affect rates on cost-of-service natural-gas transportation. Management said the impact was unknown; rate reductions, if any, depend on pipeline-specific reviews and proceedings.
- Significant legal, regulatory and environmental exposures include Dakota Access litigation, Mariner East permitting and construction matters, MTBE contamination claims, Rover-related claims, and other pipeline and merger litigation. The filing states that excess losses beyond accrued amounts could not be estimated for certain matters. Environmental liabilities accrued were $390 at September 30, 2018; a $12.6 million Pennsylvania penalty related to Mariner East was agreed in February 2018.
- Sunoco, Inc.’s tax-refund litigation was affirmed against it by the Federal Circuit on November 1, 2018; the company was considering further review. A $530 million reserve had previously been established for the refund claims.
- Q3 included a $52 income tax benefit, including $113 of deferred benefit adjustments from a state tax-rate reduction. Commodity and interest-rate derivative marks can make reported earnings volatile. Management reported no material change in primary market-risk exposures.
- The partnership adopted ASC 606 in 2018. It reduced nine-month reported revenue by $537 and cost of products sold by $540 relative to balances without adoption, with other expense and balance-sheet effects; therefore, reported revenue growth is not fully comparable.
Important facts for investors to verify
- Post-merger capital structure, unit count, debt allocation and the effect of the October 2018 ETE-ETP merger and name change.
- Whether operating cash flow can support the planned capital program, debt service and distributions, particularly given the working-capital deficit and substantial debt.
- Actual project timing, spending and returns for growth assets, including Rover, Permian Gulf Coast and Orbit.
- Developments in FERC rate proceedings and significant pipeline, environmental, tax and merger-related litigation and contingencies.
- Underlying earnings and cash generation excluding commodity derivative volatility, divestiture effects, acquisition effects and accounting-presentation changes.