Business context and reporting period
Energy Transfer Equity, L.P. (ETE) filed this unaudited Form 10-Q for the three months ended March 31, 2015. The consolidated results include ETP, Regency and Lake Charles LNG, so they are not results for ETP alone. ETE is a diversified energy partnership with natural gas and liquids pipelines and midstream operations, fuel distribution and retail businesses, and LNG assets.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 or comparison |
|---|---|---|
| Revenue | $10.380 billion | $13.080 billion |
| Operating income | $617 million; 5.9% margin | $710 million; 5.4% margin |
| Net income | $221 million | $448 million |
| Net income attributable to partners | $284 million | $168 million |
| Limited partners’ income per unit | $0.52 basic and diluted | $0.30 basic and diluted |
| Segment Adjusted EBITDA | $1.395 billion | $1.375 billion |
| Cash from operations | $575 million | $829 million |
| Capital expenditures | $2.158 billion, before construction contributions | $942 million |
| Cash and cash equivalents | $1.863 billion at March 31 | $847 million at December 31, 2014 |
| Consolidated debt | $33.427 billion at March 31 | $30.661 billion at December 31, 2014 |
| Current assets / current liabilities | $6.789 billion / $5.327 billion | $6.153 billion / $6.782 billion at December 31, 2014 |
Q1 financing activities provided $3.026 billion, while investing activities used $2.585 billion; cash increased by $1.016 billion during the quarter. The filing reports $6.94 billion of floating-rate debt; a 100-basis-point rate increase would raise annual interest expense by an estimated $69 million, before considering hedges. ETE’s quarterly distribution was increased to $0.49 per unit, or $1.96 annualized, for the quarter ended March 31.
Material changes versus the prior period
- Revenue declined 21%, largely reflecting lower sales values and volumes in commodity-linked businesses; gathering, transportation and other fees increased to $1.046 billion from $872 million.
- Operating income fell 13%, but operating margin improved to 5.9% from 5.4%. Segment Adjusted EBITDA rose modestly, with Regency up $77 million to $282 million and ETP down $57 million to $1.149 billion.
- Net income fell by $227 million. Q1 2014 included a $70 million AmeriGas unit-sale gain and $24 million from discontinued operations; it also included $85 million of tax expense tied to the Lake Charles LNG transaction. Q1 2015 included $14 million of favorable state tax adjustments.
- Cash from operations decreased $254 million, while capital spending more than doubled, principally reflecting growth investment. Consolidated debt rose $2.766 billion from year-end.
- Interest expense increased to $371 million from $315 million; unrealized interest-rate derivative losses increased to $77 million from $2 million.
Outlook, transactions, risks and unusual items
- ETE provided no consolidated earnings guidance. ETP’s 2015 capital expenditure outlook, including Regency’s expected spending, was $8.18–$8.88 billion for growth and $440–$535 million for maintenance.
- After quarter-end, on April 30, ETP completed its merger with Regency. Regency common and Class F units converted into 0.4124 ETP common units each; ETE agreed to reduce incentive distributions by $320 million over five years. ETP also borrowed $1.5 billion to help repay Regency’s credit facility.
- Other post-quarter developments included Sunoco LP’s approximately $816 million purchase of a 31.58% interest in Sunoco, LLC, and plans for a $450 million Lone Star fractionator expected to begin operating by December 2016.
- Management described significant growth investment and reliance on debt, equity issuance and operating cash to fund projects. Commodity prices, interest rates, regulatory actions, weather, project execution and acquisition integration may affect results and cash flows. Commodity trading and derivatives can create significant period-to-period earnings volatility.
- Contingencies include MTBE groundwater litigation, for which a possible loss is acknowledged but cannot be estimated beyond accrued amounts; environmental liabilities of $388 million; and an appeal of an ETP judgment against Enterprise. No judgment proceeds were recorded pending appeal. Sunoco also reserved the full $92 million increase in its disputed tax refund claims.
- ETE and its subsidiaries reported compliance with credit covenants at March 31. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting entity and scope: this filing is for ETE and consolidates ETP and Regency, rather than reporting ETP alone.
- Assess whether operating cash flow can support the substantial 2015 growth-capital program, distributions and debt service, and track debt and available credit after the Regency merger.
- Review the merger’s unit dilution, ETE’s incentive-distribution reductions and the impact of post-quarter transactions on future cash flows.
- Monitor commodity and interest-rate exposures, including the disclosed floating-rate debt sensitivity and derivative-related earnings volatility.
- Follow the Enterprise appeal, MTBE cases, environmental obligations and Sunoco tax refund litigation; the filing says certain possible losses cannot be estimated.