Business context and reporting period
Unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. Important entity distinction: the filing is for Energy Transfer Equity, L.P. (ETE), not a registrant named Energy Transfer LP. Consolidated results include ETP, Regency, Lake Charles LNG and subsidiaries, spanning midstream, pipelines, logistics and retail fuel businesses.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $14.99 billion | $12.49 billion | $42.21 billion | $35.73 billion |
| Operating income | $822 million | $529 million | $2.31 billion | $1.70 billion |
| Net income | $470 million | $356 million | $1.42 billion | $1.02 billion |
| Net income attributable to partners | $188 million | $151 million | $520 million | $368 million |
| Basic net income per limited partner unit | $0.35 | $0.27 | $0.95 | $0.65 |
| Segment Adjusted EBITDA | $1.47 billion | $1.05 billion | $4.29 billion | $3.26 billion |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $2.51 billion | $1.85 billion |
Q3 operating margin was approximately 5.5%, versus 4.2% a year earlier. Revenue growth largely reflects acquisitions and increased activity; sales and cost of products sold are substantial, particularly in retail and commodity-related operations.
Liquidity, debt and cash flow
- At September 30, cash was $1.11 billion and current assets were $8.04 billion, compared with current liabilities of $8.43 billion (current ratio approximately 0.95).
- Consolidated debt was $29.85 billion, including $1.35 billion of current maturities, versus $23.20 billion at year-end 2013. Debt fair value was reported at $31.23 billion.
- Nine-month operating cash flow of $2.51 billion was more than offset by $3.71 billion of capital expenditures; investing cash use was $4.57 billion. Financing cash flow was positive $2.59 billion, including borrowings, equity issuance and the $1.00 billion unit repurchase.
- ETE and subsidiaries reported compliance with credit-agreement covenants. The Parent Company had $800 million drawn and $400 million available on its revolving facility; Regency had approximately $786 million available, net of letters of credit.
Material changes and notable items
- ETE acquired Lake Charles LNG from ETP in February; Regency acquired Hoover, PVR and Eagle Rock’s midstream business; and ETP completed the approximately $1.8 billion Susser merger in August. These transactions materially expanded the consolidated asset base and contributed to year-over-year growth.
- Regency’s PVR and Eagle Rock acquisitions and other transactions contributed substantially to higher Regency results. Segment Adjusted EBITDA rose to $344 million in Q3 from $172 million; ETP’s increased to $1.17 billion from $942 million.
- Q3 interest expense increased to $356 million from $298 million, reflecting acquisition-related and other debt. Depreciation and amortization also rose, partly due to acquired and newly commissioned assets.
- Nine-month tax expense included $87 million of incremental expense from the Lake Charles LNG transaction, treated as a sale for tax purposes. Q3 included a $14 million AmeriGas unit-sale gain; the nine-month gain was $177 million.
- ETE repurchased approximately $1 billion of its common units. The announced quarterly ETE distribution for Q3 was $0.415 per unit, or $1.66 annualized.
Outlook, risks and contingencies
- Management projected ETP 2014 capital expenditures of $4.09–$4.53 billion for growth and $305–$360 million for maintenance; Regency expected $1.10 billion of growth and $80 million of maintenance spending.
- Post-quarter announcements included planned gas-processing plants, a third Lone Star fractionator, Dakota Access and Energy Transfer Crude Oil pipeline joint ventures, and Rover pipeline capacity fully subscribed under long-term contracts. These are plans and are subject to execution, approvals and other risks.
- Sunoco LP’s planned Aloha Petroleum acquisition had an approximately $240 million base price and was expected to close in Q4, subject to conditions. The Lake Charles LNG export project required FERC approvals.
- Commodity prices and derivative mark-to-market changes can create earnings volatility. A 100-basis-point rate change was estimated to affect annual interest expense by $51 million on $5.12 billion of floating-rate debt.
- Environmental liabilities accrued were $394 million. Sunoco’s MTBE litigation could result in losses, but management said it could not estimate a loss range beyond accrued amounts. Other litigation and regulatory matters also remain; aggregate accruals for specified contingent obligations were $42 million.
- Management cautioned that interim results may not indicate full-year performance. It reported effective disclosure controls; evaluations of acquired businesses’ internal controls were ongoing.
Important facts for investors to verify
- Confirm the intended issuer: this filing is ETE, and its consolidated statements include controlled partnerships and subsidiaries.
- Assess how acquisition-driven earnings growth compares with organic growth, integration costs, acquired debt and future capital needs.
- Review debt maturity and refinancing exposure, floating-rate sensitivity, and the extent to which subsidiary liquidity is available to ETE itself.
- Reconcile operating cash generation with capital spending, distributions, unit repurchases and planned growth projects.
- Track resolution or updated estimates for MTBE, environmental, acquisition-related and regulatory exposures, and approvals for announced projects.