Energy Transfer LP — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Energy Transfer is a diversified U.S. midstream partnership operating natural gas, NGL, refined products and crude oil transportation, storage and related businesses. Financial amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $18,320 | $25,945 | $37,315 | $46,436 |
| Operating income | $1,835 | $2,113 | $3,897 | $3,959 |
| Net income | $1,233 | $1,622 | $2,680 | $3,109 |
| Net income attributable to common unitholders | $797 | $1,220 | $1,800 | $2,382 |
| Basic income per common unit | $0.25 | $0.40 | $0.58 | $0.77 |
| Adjusted EBITDA | $3,122 | $3,228 | $6,555 | $6,568 |
- Cash flow: Six-month operating cash flow was $5,886, up from $4,724. Investing used $2,691, including $1,729 of cash capital expenditures and $930 paid for Lotus Midstream. Financing used $3,122. Cash ended at $330.
- Capital investment: The filing’s 2023 outlook for Energy Transfer’s proportionate share of growth capital, excluding Sunoco LP and USAC, is $1.9–$2.1 billion; maintenance capital is $740–$790 million. The partnership expects growth capital of $2–$3 billion annually in future periods.
- Debt and liquidity: Total debt was $48,131 at June 30, including $3,459 of current maturities; long-term debt was $44,672. Cash was $330. Energy Transfer’s revolving facility had $2,360 available; Sunoco LP had $503 available, and USAC had $328 of borrowing capacity subject to covenants. The partnership reported compliance with debt covenants and a 3.33x leverage ratio under its main credit-facility covenant.
- Interest exposure: Floating-rate debt was $4.95 billion. A hypothetical 100-basis-point rate increase would raise annual interest expense by up to $50 million, before considering rate floors and other effects.
- Distributions: Energy Transfer announced a Q2 common-unit distribution of $0.31 per unit, or $1.24 annualized.
Changes versus the prior comparable period
- Q2 revenue declined by $7,625, while net income fell by $389 and common-unit income by $423. Management attributed lower operating income primarily to unfavorable natural gas and NGL prices in midstream and higher operating expenses. Higher interest expense and lower gains on interest-rate derivatives also weighed on net income.
- Q2 Adjusted EBITDA decreased $106; first-half Adjusted EBITDA was nearly unchanged, down $13. Midstream Adjusted EBITDA fell $324 in Q2 and $490 for the first half, mainly because of weaker commodity prices. Growth in interstate transportation, NGL and refined-products services, crude transportation, Sunoco LP and USAC partly offset that decline.
- First-half operating cash flow increased despite lower net income, supported in part by a favorable $887 net change in operating assets and liabilities, compared with an unfavorable $731 change in the prior-year period.
- Debt declined modestly from $48,262 at year-end 2022 to $48,131. However, current maturities increased to $3,459, including $1.0 billion of Bakken Pipeline notes due April 2024.
Outlook, developments and risks
- Acquisitions: Energy Transfer acquired Lotus Midstream on May 2 for approximately $1.50 billion, funded with $930 million cash and 44.5 million newly issued common units. The acquisition added a Permian Basin crude midstream platform. Sunoco LP acquired 16 terminals for $111 million; Sunoco LP expects the deal to be accretive in its first year.
- Regulatory and operating risks: The EPA Good Neighbor Plan could require retrofitting or replacing approximately 240 pipeline-compression engines. Compliance costs are not yet clear, and legal challenges and stays create uncertainty. The filing warns that implementation could require substantial capital and operating expenditures.
- Pipeline matters: Dakota Access continues operating while the Army Corps of Engineers prepares an environmental impact statement; the agency delayed the draft statement and has not provided a revised timeline. FERC proceedings include proposed penalties of $20 million in the Rover Stoneman House matter and $40 million in the Tuscarawas matter; the partnership disputes the allegations, and the Tuscarawas contractor has agreed to indemnify it for related losses.
- Contingencies: Accrued contingent obligations were approximately $245 million. For matters where additional losses can be reasonably estimated, the stated range of additional losses is up to approximately $800 million. The filing says some other matters cannot be estimated. A $601 million judgment in the Williams litigation, plus post-judgment interest, was under appeal; Delaware Supreme Court oral argument occurred in July 2023. In the Cline class action, the company paid approximately $161 million to stop collection efforts while continuing its appeal.
- Other unusual items: Q2 included $57 million of unfavorable Sunoco LP inventory valuation adjustments due to lower fuel prices. NGL and refined-products marketing margin included a $51 million write-down of hedged inventory, which the partnership expects to be offset by hedge gains in future periods.
- Management cautions that results depend on commodity prices and demand, pipeline volumes, regulation, project execution, counterparties, financing access, weather and legal proceedings. The filing provides no full-year earnings or Adjusted EBITDA guidance.
Investor verification priorities
- Verify the drivers and persistence of midstream’s commodity-price-related EBITDA decline, and whether fee-based growth can offset it.
- Review the maturity and refinancing plan for 2024 debt, especially the $1.0 billion Bakken notes, alongside available revolver capacity and interest-rate exposure.
- Track the EPA rule’s legal status, likely compliance costs and timing for the estimated 240 engines.
- Monitor developments and potential exposure in the Williams, Cline, Dakota Access and FERC matters; compare outcomes with accruals and disclosed possible losses.
- Assess acquisition integration, unit dilution from the Lotus transaction, capital spending against the stated ranges, and cash generation relative to distributions.