Energy Transfer LP quarterly report, Q1 FY2020

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Energy Transfer LP — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020. Unaudited. Energy Transfer is a diversified midstream partnership operating natural gas, NGL, refined-products and crude-oil pipelines, storage, processing and related businesses. Results include the effects of the December 2019 SemGroup acquisition.

Financial performance and liquidity

  • Revenue: $11.63 billion, down 11% from $13.12 billion in Q1 2019. Lower refined-products, NGL and natural-gas sales were partly offset by higher transportation fees and crude sales.
  • Profitability: Operating income fell to $61 million from $1.87 billion. Net loss was $964 million versus net income of $1.12 billion; loss attributable to partners was $855 million, or $0.32 per limited partner unit, compared with income of $808 million, or $0.31 per unit.
  • Adjusted EBITDA: $2.64 billion, down $100 million, or 4%. Management cited a $240 million year-over-year adverse swing from crude, NGL and refined-products inventory valuation adjustments; acquisitions and newly placed-in-service assets contributed about $138 million in additional EBITDA.
  • Cash flow: Operating cash flow was $1.82 billion, essentially unchanged year over year. Investing cash outflow was $1.56 billion, including $1.62 billion of cash capital expenditures; financing cash outflow was $354 million. Cash declined to $196 million from $291 million at year-end. Operating cash flow less stated cash capital expenditures was approximately $195 million.
  • Debt and liquidity: Total debt was $50.33 billion, down from $51.05 billion at December 31, 2019. Current maturities were $33 million. ET’s consolidated subsidiaries reported $2.97 billion available on ETO’s revolving facility, $1.23 billion on Sunoco LP’s facility and $186 million of USAC capacity subject to covenant compliance. The partnership and subsidiaries reported compliance with debt covenants. Management said liquidity was ample for immediate needs; parent-company assets are not available to satisfy subsidiary obligations.
  • Distributions and capital spending: ET declared a quarterly distribution of $0.305 per unit ($1.22 annualized). Management’s 2020 estimates, excluding Sunoco LP and USAC, were $3.385–$3.645 billion of growth and $550–$590 million of maintenance capital expenditures. Sunoco LP and USAC also had separate spending plans.

Material changes and unusual items

  • Goodwill impairment: The partnership recorded $1.325 billion of non-cash goodwill impairment, versus $50 million in Q1 2019. Impairments reflected COVID-19, falling commodity prices, lower market capitalization and reduced projected demand and cash flows; the charge included $619 million at USAC. Management identified about $1.2 billion of remaining goodwill as at significant risk if low commodity prices or market demand persist.
  • Inventory accounting: ET retrospectively changed the accounting for crude-oil pipeline linefill and tank bottoms, reclassifying them from inventory to non-current assets. Management said the policy change increased Q1 2020 net income by approximately $265 million, or $0.10 per unit. The reported net loss therefore includes this benefit.
  • Other earnings pressures: Q1 included $329 million of losses on interest-rate derivatives and $62 million of debt-extinguishment losses. Interest expense was $602 million, up from $590 million.
  • Segment movements: Adjusted EBITDA increased in NGL and refined-products transportation and services ($663 million versus $612 million) and Sunoco LP ($209 million versus $153 million). It declined in crude oil transportation and services ($591 million versus $744 million) and interstate transportation and storage ($404 million versus $456 million).
  • Financing: In January, ETO issued $4.5 billion of senior notes, using proceeds in part to redeem near-term notes. Subsidiaries also issued $1.58 billion of preferred units. Consolidated debt decreased by $764 million during the quarter.

Outlook, risks and contingencies

  • Management warned that COVID-19, reduced energy demand, geopolitical disruption and low oil prices could reduce U.S. production, transported volumes and midstream utilization. Operations had continued largely uninterrupted through the filing date, but the duration and severity of impacts were uncertain.
  • ET said it cut its already reduced 2020 growth-capital budget by $400 million and planned operating-expense reductions of $200–$250 million, with further cuts possible. It cited uncertainty around counterparties seeking force majeure relief, renegotiating or terminating contracts, or entering bankruptcy.
  • Shell withdrew its proposed equity participation in the Lake Charles LNG liquefaction project. ET intended to continue evaluating the project, potentially at a smaller scale, but said proceeding would depend on market conditions, capital needs, partners and long-term offtake commitments.
  • The Dakota Access Pipeline litigation was remanded to the Army Corps of Engineers for an environmental impact statement; the court was considering whether operations should be suspended during further review. ET said the outcome and impact could not be determined.
  • Other notable exposures include PES’s bankruptcy and default on a $75 million note receivable, whose collectability ET could not determine; the Revolution pipeline incident settlement of a $28.6 million civil penalty plus a $2 million environmental project; and environmental liabilities of $313 million. ET disclosed up to $80 million of reasonably possible losses for certain contingencies beyond recorded accruals, while stating it could not estimate other excess losses.

Key facts for investors to verify

  • Whether COVID-19, oil-market conditions and customer credit deterioration materially reduce volumes, fees, collections or contract payments.
  • Whether liquidity and subsidiary distributions can support debt service, planned capital expenditures and the $0.305 quarterly common-unit distribution; consider that Q1 operating cash flow less stated cash capital expenditures was about $195 million.
  • The assumptions underlying the $1.325 billion goodwill charge and the potential impairment of the approximately $1.2 billion of goodwill identified as at risk.
  • Progress on capital-spending and operating-cost reductions, and whether the Lake Charles LNG project secures partners and offtake commitments.
  • Developments in Dakota Access, Pennsylvania pipeline investigations and litigation, PES bankruptcy and other environmental or legal contingencies.