Energy Transfer Equity, L.P. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The registrant is Energy Transfer Equity, L.P. (ETE), not Energy Transfer Partners, L.P. (ETP); ETE’s consolidated results include ETP, Sunoco LP and Lake Charles LNG. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $11,882 | $9,661 |
| Operating income | $1,100 | $757 |
| Income from continuing operations | $726 | $330 |
| Net income | $489 | $319 |
| Net income attributable to partners | $363 | $239 |
| Basic net income per limited partner unit | $0.31 | $0.22 |
| Segment Adjusted EBITDA | $2,002 | $1,577 |
| Cash provided by operating activities | $2,139 | $771 |
| Capital expenditures | $1,737 | $1,408 |
At March 31, cash and cash equivalents were $547; total debt was $42,188, down from $44,084 at December 31, 2017. Current assets were $6,593 and current liabilities $7,261. ETE’s own revolving facility had $873 borrowed and $627 available; ETP’s revolving facility had $2,756 outstanding and $1,090 available; Sunoco LP’s $1.5 billion revolver was undrawn. The Partnership reported compliance with its credit covenants.
Interest expense was $466, versus $473 a year earlier. ETP segment Adjusted EBITDA rose to $1,881 from $1,445; Sunoco LP segment Adjusted EBITDA declined to $109 from $155. ETP’s quarterly distribution was $0.565 per unit, ETE’s was $0.305 per common unit, and Sunoco LP’s was $0.8255 per unit.
Material changes versus the prior period
- Revenue increased 23% and operating income increased 45%. ETP’s Bakken pipeline, the partial operation of Rover, higher crude transportation volumes and margins, and growth in NGL and refined-products activity contributed to stronger ETP results.
- Sunoco LP sold approximately 1,030 company-operated retail fuel outlets to 7-Eleven for $3.2 billion in January. Retail divestment results are reported as discontinued operations; the quarter included a $237 loss from discontinued operations, including a $173 income-tax expense. The sale also materially affected reported cash flows and balance-sheet comparisons.
- Operating cash flow increased substantially, while investing activities used $1,701, compared with $244 provided in Q1 2017. The prior-year period included $2.0 billion of proceeds from selling a Bakken Pipeline interest; Q1 2018 cash from discontinued-operation investing activities included $3,214.
- Comparisons require care: ETE adopted the revenue-recognition standard (ASC 606) in 2018 using the modified retrospective method, so 2017 was not restated. The filing says adoption changed revenue and expense presentation, with little net effect on reported 2018 totals from the disclosed line-item reclassifications. ETE also retrospectively changed certain inventory costing from LIFO to weighted-average cost in 2017.
Outlook, developments and risks
- ETP forecast 2018 growth capital expenditures of $4,425–$4,725 and maintenance capital expenditures of $480–$525. Sunoco LP expected approximately $90 of growth and $40 of maintenance capital expenditures. The filing does not provide consolidated earnings guidance.
- After quarter-end, ETE acquired the USAC general partner and common units; ETP contributed CDM and CDM E&T to USAC for cash and units. ETE expected to consolidate USAC beginning in April; initial purchase accounting was incomplete when the filing was issued.
- ETP and Satellite Petrochemical agreed to develop an ethane export terminal joint venture, with commercial service anticipated in Q4 2020, subject to Chinese government approval. ETP also announced a joint venture to resume service on the Old Ocean natural gas pipeline and an expansion of the North Texas pipeline.
- FERC proposals following federal tax-law changes could reduce rates on certain cost-of-service pipelines; the eventual effect was uncertain. Management also noted uncertainty around FERC’s review of natural-gas pipeline certification policies.
- Material legal and environmental exposures include continuing Dakota Access litigation and remand review; challenges affecting Bayou Bridge construction; Pennsylvania proceedings and construction issues concerning Mariner East; Ohio claims related to Rover construction; and MTBE litigation. The filing states that possible losses beyond accrued amounts generally could not be estimated. Environmental liabilities accrued were $380 at March 31.
- Other unusual items include $106 of debt-extinguishment losses, $87 of unrealized losses on commodity risk-management activities in the EBITDA reconciliation, and $52 of gains on interest-rate derivatives. Commodity-price and interest-rate movements can cause earnings volatility; $7.95 billion of floating-rate debt was outstanding, with a hypothetical 100-basis-point rate increase estimated to raise annual interest expense by up to $80.
Important facts for investors to verify
- How much of the revenue and cash-flow growth reflects operating improvement versus the 7-Eleven divestiture, discontinued-operation presentation and ASC 606 gross-versus-net presentation changes.
- Whether ETP’s large 2018 growth-capital program can be funded while managing debt, distributions and project execution.
- The eventual FERC treatment of pipeline tax allowances and rates, and the resulting effects on regulated revenue and distributions.
- Developments, potential costs and schedule effects from Dakota Access, Bayou Bridge, Mariner East, Rover and other disclosed litigation and environmental matters.
- ETE parent-company liquidity separately from consolidated liquidity: the filing says subsidiary assets are not available to satisfy ETE parent obligations, and parent-only cash was $1.