Energy Transfer LP quarterly report, Q2 FY2015

Business context and reporting period

Energy Transfer Equity, L.P. (ETE) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015; amounts below are U.S. dollars. The filing covers ETE and consolidated subsidiaries, including Energy Transfer Partners (ETP), Sunoco Logistics and Lake Charles LNG. Note: the request identifies Energy Transfer LP, but the registrant in this filing is Energy Transfer Equity, L.P.

Key financial results

MetricThree months ended June 30, 2015Six months ended June 30, 2015
Revenue$11.594 billion$21.974 billion
Operating income$896 million$1.513 billion
Net income$772 million$993 million
Net income attributable to partners$298 million$582 million
Limited partners’ net income per unit$0.28$0.54
Segment Adjusted EBITDA$1.512 billion$2.904 billion

For the six months, operating cash flow was $1.113 billion, capital expenditures were $4.181 billion, and cash used in investing activities was $4.673 billion. Cash and cash equivalents were $1.623 billion at June 30. Consolidated debt was $34.810 billion, including $15 million current maturities; the parent revolving facility had $1.27 billion available, and the ETP revolver had no borrowings. Total current assets were $7.237 billion versus current liabilities of $5.238 billion.

Material changes versus prior comparable periods

  • Second-quarter revenue fell 18% year over year, while six-month revenue fell 19%; lower natural gas, NGL, crude and refined-product sales were major contributors. These changes reflect revenue-sensitive product sales and do not by themselves indicate comparable declines in operating performance.
  • Second-quarter net income attributable to partners rose to $298 million from $164 million; six-month partner-attributable net income increased to $582 million from $332 million. Continuing-operations income per limited partner unit was $0.28 for Q2 and $0.54 for six months, compared with $0.15 and $0.29, respectively.
  • Segment Adjusted EBITDA increased to $1.512 billion for Q2 from $1.440 billion and to $2.904 billion for six months from $2.815 billion. ETP gross margin increased by $466 million for Q2 and $720 million for six months; management cited retail acquisitions, including Susser, higher Sunoco Logistics margins and volumes, and growth in midstream and liquids operations.
  • Six-month operating cash flow declined to $1.113 billion from $1.895 billion, principally reflecting an $886 million net use of cash from operating asset and liability changes. Capital expenditures nearly doubled from $2.137 billion to $4.181 billion.
  • Debt rose from $30.661 billion at year-end 2014 to $34.810 billion. The increase accompanied acquisition and growth investment, and was funded in part through debt and subsidiary equity issuances.

Outlook, management commentary, risks and unusual items

  • ETP projected 2015 capital expenditures of $8.060–$8.710 billion for growth and $465–$555 million for maintenance. The filing provides no consolidated earnings or cash-flow guidance.
  • ETE announced a proposal to merge with Williams Companies (WMB); the filing said success and final terms were uncertain and any transaction would require approvals and satisfaction of closing conditions.
  • ETP completed its acquisition of Regency on April 30, 2015. ETE agreed to reduce incentive distributions by $320 million over five years, including $80 million in the first year and $60 million annually for the next four years.
  • After quarter-end, Sunoco LP acquired Susser for a stated transaction value of $1.93 billion, and ETE agreed to acquire Sunoco LP’s general partner and IDRs from ETP in exchange for ETP unit repurchases; the transaction was expected to close in August 2015. ETE also announced a quarterly distribution of $0.265 per unit, post-split, equivalent to $1.06 annualized.
  • Quarterly earnings included a $127 million gain on interest-rate derivatives, which are not designated as accounting hedges, and a $56 million income-tax benefit. Commodity-related unrealized losses and inventory valuation effects also affected reported results. Adjusted EBITDA is a non-GAAP measure.
  • Contingencies include MTBE groundwater litigation, for which possible losses beyond accrued amounts could not be estimated, and environmental liabilities of $383 million. A $536 million judgment for ETP in litigation with Enterprise was not recorded because the appeal remained pending. Regency merger-related lawsuits were at preliminary stages. The filing states that credit-agreement covenants were met at June 30.
  • Management cited commodity-price volatility, interest-rate exposure, working-capital swings, regulatory requirements, environmental and pipeline-safety costs, litigation, and acquisition integration as risks. It reported no material change in primary market-risk exposures from year-end 2014.

Important facts for investors to verify

  1. Confirm the intended issuer: this filing is for Energy Transfer Equity, L.P., not an entity named Energy Transfer LP.
  2. Assess the cash conversion and funding burden: operating cash flow was below capital expenditures, with substantial reliance on borrowing and subsidiary equity issuance.
  3. Review debt at both parent and subsidiary levels, floating-rate exposure, facility availability, and the effect of planned growth spending and distributions.
  4. Track completion and financial implications of the proposed WMB transaction and the post-quarter Sunoco LP transactions.
  5. Monitor the unresolved legal and environmental matters, especially MTBE claims and the Enterprise appeal; disclosed possible losses are not fully estimable.
  6. Distinguish recurring operating performance from derivative gains and losses, inventory valuation adjustments, tax effects, and non-GAAP Adjusted EBITDA.