Energy Transfer Equity, L.P. (ETE) — Form 10-Q Summary
Reporting period: Three months ended March 31, 2017. The filing is by Energy Transfer Equity, L.P., whose consolidated results include ETP, Sunoco LP and Lake Charles LNG; it is not a standalone report for the post-merger Energy Transfer Partners, L.P. The report was signed May 4, 2017.
Key financial results
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $11.247 billion | $7.695 billion; up 46% |
| Operating income | $725 million | $701 million |
| Net income | $290 million | $336 million |
| Net income attributable to partners | $239 million | $312 million |
| Limited partner earnings per unit | $0.22 basic; $0.21 diluted | $0.30 basic and diluted |
| Segment Adjusted EBITDA | $1.546 billion | $1.521 billion; up $25 million |
| Cash from operations | $893 million | $985 million |
| Capital expenditures | $1.450 billion | $1.948 billion |
| Cash and cash equivalents | $370 million at March 31 | $483 million at December 31, 2016 |
| Consolidated debt | $42.975 billion | $43.802 billion at December 31, 2016 |
Revenue growth substantially exceeded operating-income growth, while net income and earnings per unit declined. Interest expense rose $59 million to $486 million, depreciation and amortization increased $99 million to $661 million, and the quarter included a $25 million debt-extinguishment loss. Income-tax expense was $35 million, versus a $55 million benefit in Q1 2016.
Operating cash flow less reported capital expenditures was approximately negative $557 million. Investing activities generated $203 million, primarily reflecting $2.0 billion of proceeds from the Bakken Pipeline interest sale; financing activities used $1.209 billion. Current assets were $6.514 billion and current liabilities $6.218 billion at quarter-end. The Parent Company’s $1.5 billion revolver had $1.149 billion drawn and $351 million available.
Material changes and transactions
- In April 2017, ETP and Sunoco Logistics completed their merger. ETP common unitholders received 1.5 Sunoco Logistics units per ETP unit; the combined company subsequently operated under the Energy Transfer Partners, L.P. name.
- In February, the Bakken Pipeline entities sold a 49% interest for $2.0 billion. ETP continued consolidating Dakota Access and ETCO; the sale generated a $1.26 billion deemed contribution allocated to noncontrolling interest.
- ETE’s Segment Adjusted EBITDA was nearly flat year over year. ETP segment EBITDA was $1.414 billion versus $1.412 billion; Sunoco LP was $155 million versus $159 million; Lake Charles LNG was $44 million in both periods.
- ETE issued 32.2 million common units in a private placement for approximately $580 million and used approximately $568 million to purchase newly issued ETP units. ETP also issued $1.5 billion of senior notes in January, using net proceeds largely to refinance debt.
- On April 6, 2017, Sunoco LP agreed to sell approximately 1,100 operated retail fuel outlets and related assets to 7-Eleven for $3.3 billion. Closing was expected in the second half of 2017, subject to conditions; this was a subsequent event, not a completed Q1 transaction.
Outlook, risks and contingencies
- The filing provides no consolidated earnings or revenue guidance. Sunoco LP expected 2017 growth capital spending of approximately $200 million and maintenance capital spending of approximately $90 million.
- Management attributed ETP operating improvements to higher liquids and midstream volumes, expansion projects and favorable market conditions. Offsets included weaker interstate pipeline results, lower demand or renegotiated contracts, and unfavorable Sunoco Logistics LIFO inventory timing. Management expected the LIFO timing effect to reverse in future periods as prices fall or inventory is liquidated.
- ETE agreed to relinquish future incentive distributions from the post-merger partnership, including $499 million for the remainder of 2017, $153 million in 2018 and $128 million in 2019. This affects future cash receipts available to ETE.
- Sunoco LP’s 7-Eleven sale faced completion, regulatory, financing and purchase-price risks. The agreement required Sunoco LP to address specified senior-note covenants and obtain credit-facility waivers; failure to satisfy conditions could prevent closing.
- Material litigation and regulatory exposures included Dakota Access-related tribal and environmental claims, MTBE groundwater cases, merger-related unitholder suits, the Williams/ETE dispute, and other proceedings. The filing states that possible losses beyond accruals generally could not be estimated. Accrued environmental liabilities were $353 million; other disclosed contingent-obligation accruals were approximately $94 million.
- Dakota Access construction was complete, but the Partnership could not assure that pending litigation would not affect operations. A FERC audit of Trunkline remained ongoing. Commodity trading and derivative positions can cause significant period-to-period earnings volatility.
- At March 31, the Partnership reported $8.62 billion of floating-rate debt; a hypothetical 100-basis-point rate increase could raise annual interest expense by up to $86 million. The Partnership and subsidiaries reported compliance with credit-agreement covenants at quarter-end.
Most important facts for investors to verify
- Confirm the reporting entity and post-merger structure: this Q1 filing reports ETE consolidated results before the April ETP–Sunoco Logistics merger.
- Assess whether operating cash generation can support capital spending, debt service and distributions, given Q1 operating cash flow below capital expenditures.
- Review debt maturities, floating-rate exposure, revolver availability and the effects of refinancing and merger-related financing.
- Track the completion, proceeds and debt or covenant implications of the $3.3 billion 7-Eleven transaction, including any purchase-price adjustments.
- Monitor the effect of incentive-distribution relinquishments and post-merger distribution arrangements on ETE’s recurring cash receipts.
- Follow litigation, environmental liabilities, regulatory proceedings and Dakota Access operating risks; several potential losses were not estimable in the filing.