Energy Transfer LP quarterly report, Q2 FY2014

Business context and reporting period

Unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The registrant is Energy Transfer Equity, L.P. (ETE), not Energy Transfer Partners, L.P. (ETP); consolidated results include ETP, Regency, and, from January 1, 2014, Trunkline LNG. Dollar amounts below are in millions unless stated otherwise.

Financial performance

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Revenue	$14,143	$12,063	$27,223	$23,242
Operating income	$773	$644	$1,483	$1,175
Net income	$500	$338	$948	$660
Net income attributable to partners	$164	$127	$332	$217
Net income per limited partner unit, diluted	$0.30	$0.23	$0.60	$0.39
Segment Adjusted EBITDA	$1,440	$1,163	$2,815	$2,215

• Q2 revenue increased 17%, operating income 20%, and net income attributable to partners 29% year over year. Six-month partner income rose 53%.
• Segment Adjusted EBITDA increased 24% in Q2 and 27% for the six-month period. ETP and Regency were the principal growth contributors; Regency’s results benefited from the PVR and Hoover acquisitions and organic volume growth.
• Reported revenue includes substantial commodity sales and retail excise taxes; revenue growth should be assessed alongside margins and segment results. ETP reported gross margin of $1,393 in Q2, up $71, and Regency reported $350, up $156.
• Q2 results included a $93 gain on AmeriGas unit sales. Six-month results included $163 of such gains and $66 of income from discontinued operations. The Trunkline LNG transaction generated $87 of incremental income tax expense for the six months.

Cash flow, debt and liquidity

• Six-month operating cash flow was $1,895, compared with $1,127 a year earlier. Investing used $1,668, including $2,137 of capital expenditures; financing provided $417. Cash increased to $1,234 from $590 at year-end 2013.
• Consolidated debt was $27,197 at June 30, versus $23,199 at December 31, 2013; $1,346 was classified as current maturities. Current assets of $7,652 were below current liabilities of $8,222.
• Available revolving capacity included $800 at the Parent Company, no borrowings on ETP’s $2.5 billion facility, and approximately $622 at Regency after letters of credit. The Partnership and subsidiaries reported compliance with credit-agreement covenants.
• Cash distributions paid to ETE partners were $391 in the first half; the $1 billion unit repurchase program was completed in May. ETE declared a quarterly distribution of $0.38 per unit for Q2, or $1.52 annualized.

Material changes, outlook and management commentary

• Regency acquired PVR on March 21 for consideration reported at $5.7 billion, including assumed debt, and Hoover in February for $293 million. On July 1, after quarter-end, Regency acquired Eagle Rock’s midstream business for $1.3 billion, including assumed notes.
• ETP’s proposed Susser Holdings acquisition was valued at approximately $1.8 billion and was expected to close in Q3 2014, subject to shareholder approval.
• ETP estimated 2014 growth capital expenditures of $3.33–$3.66 billion and maintenance capital expenditures of $280–$335 million. Regency expected $1.25 billion of growth and $90 million of maintenance capital expenditures.
• ETP approved a proposed Bakken-to-Patoka crude pipeline, estimated at $4.8–$5.0 billion and up to 570,000 barrels per day, with service targeted by end-2016. Its proposed ET Rover gas pipeline was estimated at $3.8–$4.4 billion, with 2.95 Bcf/d of commitments against 3.25 Bcf/d design capacity; phased service was targeted for 2016–2017. These are project estimates, not completed investments.
• Trunkline LNG sought FERC approvals for a proposed liquefaction and export project, with approval requested by April 1, 2015. ETE also agreed to provide ETP incremental management fees of $75 annually for 2014 and 2015 related to Trunkline LNG services and project development.

Risks, contingencies and unusual items

• Commodity-price and derivative movements can create earnings volatility; management noted that the impact depends on market spreads and timing. A hypothetical 100-basis-point interest-rate increase would raise annual interest expense by $35 on $3.54 billion of floating-rate debt.
• Environmental liabilities accrued were $400 at June 30. The filing cites continuing remediation and regulatory exposure, including possible future pipeline integrity and emissions-control costs that management could not estimate.
• Sunoco’s MTBE groundwater litigation presents a reasonably possible loss, but the Partnership could not estimate losses beyond amounts accrued. Five putative lawsuits challenging the PVR merger were subject to a proposed settlement process; separate Eagle Rock acquisition lawsuits sought rescission and damages.
• A jury had assessed approximately $24 plus interest and penalties against Regency in the ULS construction dispute; the parties settled in June on confidential terms, which management said would not materially adversely affect Regency’s business or financial position.
• Forward-looking statements are subject to risks and uncertainties. Management said there were no material changes to the previously disclosed risk factors and no material changes in market-risk exposures since year-end.

Important facts for investors to verify

• Confirm the correct issuer and security: this filing reports ETE consolidated results, which include controlled subsidiaries and noncontrolling interests.
• Review acquisition financing, purchase-price allocations, integration effects, and the post-quarter Eagle Rock transaction and Susser closing status.
• Track debt growth, current maturities, available borrowing capacity, covenant compliance, and funding needs for the announced capital program.
• Assess recurring operating performance separately from AmeriGas sale gains, discontinued operations, acquisition effects, derivative marks, and the Trunkline-related tax charge.
• Monitor FERC approvals, project costs and commitments, environmental exposures, and the outcomes or settlement status of disclosed litigation.