Energy Transfer Equity, L.P. — Q1 2014 Form 10-Q
Filing identity: The supplied filing is for Energy Transfer Equity, L.P. (ETE), not an entity titled Energy Transfer LP. It reports consolidated results including Energy Transfer Partners (ETP), Regency, and, from January 1, 2014, Trunkline LNG. Period: three months ended March 31, 2014; unaudited. Dollar amounts below are in millions unless noted.
Business context and key financial results
ETE’s businesses span natural gas transportation and midstream services, NGLs, crude and refined products logistics, retail marketing, and investments in energy partnerships. Results include major acquisitions and portfolio changes during the quarter.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $13,080 | $11,179 | +17% |
| Operating income | $710 | $531 | +34% |
| Income from continuing operations | $424 | $300 | +41% |
| Net income | $448 | $322 | +39% |
| Net income attributable to partners | $168 | $90 | +87% |
| Basic/diluted net income per limited partner unit | $0.30 | $0.16 | Up $0.14 |
| Segment Adjusted EBITDA | $1,375 | $1,052 | +31% |
| Operating cash flow | $829 | $330 | +$499 |
| Capital expenditures | $942 | $761 | +$181 |
Revenue growth was led by crude sales, NGL sales, and gathering, transportation and other fees. ETP Segment Adjusted EBITDA increased $250 to $1,206; Regency increased $85 to $205; Trunkline LNG was $48 versus $45; Corporate and Other was a $26 loss versus a $6 loss. ETP benefited from stronger retail and NGL margins and higher volumes, while Sunoco Logistics’ crude acquisition and marketing margin declined. Regency’s improvement reflected higher South and West Texas volumes and $15 of contribution from the PVR and Hoover acquisitions.
Balance sheet, debt, liquidity and distributions
At March 31, 2014, cash and cash equivalents were $1,010, total assets $57,769, and total equity $19,958. Current assets of $7,516 were below current liabilities of $8,091. Consolidated debt was $26,293, up from $23,199 at December 31, 2013; $1,388 was classified as current maturities. Management reported compliance with credit agreement covenants.
Operating cash flow was $829, investing cash outflow was $801, and financing cash inflow was $392 in the consolidated cash flow statement; cash increased $420 to $1,010. Capital expenditures exceeded operating cash flow by $113. The MD&A describes financing cash flow as a $392 outflow, which conflicts with the financial statement’s $392 inflow and should be checked against the original filing.
ETE Parent Company-only cash was $16 and long-term debt was $3,150, in addition to $520 outstanding on its revolver; $280 was available under that facility at quarter-end. The filing emphasizes that Parent Company assets are not available to satisfy subsidiary obligations. ETE declared a quarterly distribution of $0.35875 per unit, up from $0.34625 for the preceding quarter.
Material changes, outlook and management commentary
- Regency acquired PVR on March 21 for stated consideration of approximately $5.7 billion, including $1.8 billion of assumed debt, and acquired Hoover subsidiaries on February 3 for $293. PVR and Hoover contributed only partial-quarter results. Preliminary purchase accounting remained subject to evaluation.
- ETE acquired Trunkline LNG from ETP in exchange for redemption of 18.7 million ETP units; the transaction was effective January 1. It generated $85 of incremental tax expense because it was treated as a sale for tax purposes. ETP also agreed to provide management services for annual fees of $75 in 2014 and 2015.
- ETE recognized a $70 gain on the sale of AmeriGas units. The filing reports 12.9 million AmeriGas units remaining at quarter-end.
- ETE repurchased 8.1 million common units for $366 during the quarter; repurchases from January through April totaled approximately $750.
- For 2014, ETP projected growth capital expenditures of $2,745–$2,945 and maintenance capital expenditures of $285–$340. Regency expected $1,220 of growth and $90 of maintenance capital expenditures, with funding expected from operations, borrowings, and debt or equity issuance. No consolidated earnings guidance is provided in the supplied filing text.
- Pending transactions disclosed after quarter-end included ETP’s proposed approximately $1.8 billion Susser Holdings acquisition, expected to close in Q3 subject to approvals, and Regency’s approximately $1.3 billion Eagle Rock midstream acquisition, awaiting FTC antitrust approval.
- ETE filed for FERC authorization for the Trunkline LNG liquefaction and export project; it requested a decision by April 1, 2015. Management cautioned that interim results may not indicate full-year results, citing seasonality, maintenance, and commodity-price and differential effects.
Risks, contingencies and unusual items
- In a construction-contract dispute involving Regency Marcellus, a jury awarded the plaintiff approximately $24 and found against Regency on its counterclaims. The plaintiff may also seek approximately $10 in interest and attorneys’ fees; Regency filed post-trial pleadings and was considering an appeal.
- Sunoco faced seven MTBE groundwater-contamination cases. Management said an adverse determination could significantly affect results in the period incurred, but did not expect one to materially affect consolidated financial position. The filing also notes a possible additional state action.
- Environmental liabilities were $411 at quarter-end, versus $403 at year-end. The filing describes ongoing remediation and regulatory matters and cautions that future compliance, pipeline integrity, and environmental costs are difficult to estimate.
- Commodity and interest-rate exposures can affect earnings and cash flows. ETE reported $3.72 billion of floating-rate debt; a hypothetical 100-basis-point increase would raise annual interest expense by $37, before considering other effects.
- Five lawsuits challenging the PVR merger were subject to an agreement in principle to settle, with court approval and other conditions required. Two lawsuits also challenged the proposed Eagle Rock transaction.
Important facts for investors to verify
- Confirm the issuer is ETE, rather than Energy Transfer LP, and review the consolidated versus Parent Company-only figures separately.
- Reconcile the MD&A’s stated financing cash outflow with the cash flow statement’s reported financing inflow.
- Assess acquisition financing, purchase-price allocations, integration progress, and the completion and funding of the pending Eagle Rock and Susser transactions.
- Track the Regency Marcellus jury award and appeal, MTBE litigation, environmental obligations, and other contingencies.
- Evaluate planned capital spending against operating cash flow, debt growth, liquidity availability, and distribution requirements.