Energy Transfer Equity, L.P. (ETE) — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2017. The supplied filing is for Energy Transfer Equity, L.P., the parent partnership, and its consolidated subsidiaries—not a standalone filing by Energy Transfer, LP. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and significant developments
ETE’s consolidated businesses include Energy Transfer Partners (ETP), Sunoco LP, Lake Charles LNG, and corporate operations. In April 2017, Sunoco Logistics acquired the former Energy Transfer Partners, L.P. in a unit-for-unit merger; the combined entity took the name Energy Transfer Partners, L.P., while Energy Transfer, LP became its wholly owned subsidiary.
- ETE sold a 49% interest in the Bakken Pipeline holding company for $2.0 billion and continued consolidating the pipeline businesses.
- Sunoco LP agreed to sell approximately 1,112 operated retail fuel outlets and related assets to 7-Eleven for $3.3 billion; closing was expected in the fourth quarter of 2017. Approximately 208 additional Stripes sites were being marketed separately.
- ETP acquired the remaining publicly held PennTex common units in June.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $8,935 | $7,415 | $18,163 | $13,522 |
| Operating income | $788 | $805 | $1,520 | $1,500 |
| Income from continuing operations | $373 | $409 | $677 | $748 |
| Net income | $117 | $424 | $407 | $760 |
| Net income attributable to partners | $212 | $241 | $451 | $553 |
| Segment Adjusted EBITDA | $1,771 | $1,442 | $3,317 | $2,963 |
| Cash from operating activities | Not presented by quarter | Not presented by quarter | $1,430 | $1,380 |
Q2 diluted continuing-operations income per limited partner unit was $0.19, versus $0.23 a year earlier. Revenue increased substantially, while operating income and continuing-operations income declined. Segment Adjusted EBITDA rose, led by ETP and Sunoco LP. The filing attributes ETP improvement to stronger midstream and crude-oil results, including higher volumes and prices; weak spreads and mild weather weighed on certain interstate pipelines. Revenue growth also reflects the enlarged and changed consolidated business following transactions.
Six-month investing cash outflow was $1,528, compared with $3,501 in 2016; capital expenditures were $2,870 versus $3,723. Financing cash outflow was $81, compared with $2,126 of inflow in the prior-year period. Cash and cash equivalents were $375 at June 30, 2017, down from $463 at year-end 2016.
Debt, liquidity, and distributions
- Consolidated debt carrying amount was $44,454 at June 30, 2017, up from $43,802 at December 31, 2016; $1,370 was current maturities. The filing reports debt fair value of $46.14 billion.
- ETE’s $1.5 billion revolving facility had $1.20 billion outstanding and $298 million available. Other disclosed facility availability included $655 million for Sunoco LP’s revolver. ETP’s $2.5 billion Bakken facility was fully drawn.
- Management reported compliance with credit-agreement covenants at June 30. The filing identifies $8.77 billion of floating-rate debt; a 100-basis-point rate change was estimated to affect annual interest expense by up to $88 million.
- ETE declared a $0.285 quarterly distribution per common unit for Q2, or $1.14 annualized. ETE had agreed to relinquish specified ETP incentive distributions, including $336 million for the remainder of 2017.
Outlook, unusual items, and risks
- Retail disposition and impairment: Sunoco LP classified the continental U.S. retail convenience-store business as discontinued operations and assets held for sale. A $320 million goodwill impairment was recorded in connection with the sale classification. Q2 discontinued operations reported a $256 million net loss, including $323 million of “other, net” expense. The 7-Eleven transaction remained subject to closing, and the sale of other sites was not assured.
- Other one-time and comparative effects: Income tax expense included approximately $77 million of additional expense from state tax-rate and apportionment changes following the merger. The six-month results also included a $25 million debt-extinguishment loss. Results were affected by inventory valuation changes and commodity-derivative gains and losses.
- Capital plans: Sunoco LP expected full-year 2017 growth capital spending of approximately $150 million and maintenance capital spending of approximately $90 million. ETP announced a Rover pipeline contribution transaction expected to provide approximately $1.57 billion for a 49.9% interest in the holding company owning 65% of Rover; it was expected to close in October 2017, subject to customary conditions. No consolidated earnings or distribution guidance was provided in the supplied filing text.
- Project and environmental exposure: Rover construction faced regulatory and environmental issues, including suspended horizontal directional drilling at certain sites and a West Virginia cease-and-desist order. The company said it anticipated avoiding material construction delays, but timing remained uncertain. Pennsylvania drilling restrictions and a settlement also required reassessment of planned drills.
- Litigation: Dakota Access faced continuing tribal litigation and a court remand for further USACE analysis; the court was to consider whether operations could continue during review. The filing said the outcome could not be assured. Other material matters included an adverse appellate ruling against ETP in its Enterprise litigation, a BP/FERC pipeline-proration dispute with an administrative judge recommending remedies including $13 million in damages, and Williams’ remaining $410 million termination-fee claim. The Partnership stated it could not estimate possible losses beyond accrued amounts for various contingencies.
- Other risks: A FERC audit of Trunkline was ongoing. Environmental liabilities accrued were $351 million at June 30, 2017. Management cautioned that commodity-market volatility, interest rates, regulation, project execution, litigation, and environmental compliance could affect results and cash flows.
Most important facts for investors to verify
- Confirm the reporting entity: this is ETE’s consolidated 10-Q, not a standalone Energy Transfer, LP report; assess the effects of the April merger on comparability.
- Track completion and proceeds from the $3.3 billion 7-Eleven sale, the disposition of remaining retail sites, and any retained liabilities.
- Assess the sustainability of higher Segment Adjusted EBITDA against declining continuing-operations income, higher interest expense, and substantial debt.
- Monitor liquidity, floating-rate exposure, upcoming maturities, and the effect of incentive-distribution relinquishments on parent cash receipts.
- Follow Dakota Access, Rover, Mariner East, BP/FERC, Enterprise, and Williams proceedings for changes in operating status, project timing, or potential liabilities.