Energy Transfer LP — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless stated otherwise, financial amounts are in millions of dollars. Energy Transfer is a diversified midstream partnership; results include its operating subsidiary ETO and consolidated Sunoco LP and USAC. The October 2018 merger substantially changed the unit count, so year-over-year per-unit comparisons are not directly comparable in scale.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $13,495 | $14,514 | $40,493 | $40,514 |
| Operating income | $1,830 | $1,703 | $5,576 | $3,929 |
| Net income | $1,161 | $1,391 | $3,549 | $2,513 |
| Net income attributable to partners | $832 | $371 | $2,580 | $1,077 |
| Consolidated Adjusted EBITDA (non-GAAP) | $2,786 | $2,577 | $8,407 | $6,841 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $5,966 | $5,295 |
- Q3 revenue fell about 7%, while operating income rose about 7% and Adjusted EBITDA rose 8%. Total net income declined about 17%; partner-attributable net income increased, in part reflecting a lower share attributable to noncontrolling interests.
- Nine-month revenue was essentially flat. Operating income increased about 42% and Adjusted EBITDA about 23% year over year.
- Q3 diluted income per limited partner unit was $0.32, unchanged year over year; nine-month diluted income per unit was $0.98 versus $0.94. The post-merger unit count increased substantially.
- Q3 interest expense was $579, versus $535; nine-month expense was $1,747, versus $1,511. Q3 included a $175 loss on interest-rate derivatives, compared with a $45 gain in Q3 2018.
Liquidity, debt and capital
- At September 30, cash was $211, total debt was $46,854 and long-term debt, net of current maturities, was $46,840. Total debt was $46,028 at December 31, 2018. Total assets were $91,856 and total equity was $32,042.
- Nine-month operating cash flow of $5,966 funded $4,181 of cash capital expenditures; investing cash outflow was $4,423. Financing cash outflow was $1,751, including $2,300 of distributions to partners and $1,270 to noncontrolling interests. Cash declined by $208 to $211.
- ETO’s $5 billion revolving facility had $2,608 outstanding, including $2,150 of commercial paper, and $2,320 available after letters of credit; the weighted-average rate was 2.77%. Sunoco LP reported $1,340 of revolver availability; USAC reported $410 of available borrowing capacity subject to covenants. The partnership and subsidiaries reported compliance with credit-agreement covenants.
- Management’s 2019 ETO capital-expenditure outlook was $3,925–$4,075 for growth and $565–$605 for maintenance. ETO expected approximately $4 billion of 2020 growth capex, excluding Sunoco LP, USAC and SemGroup-related spending. Sunoco LP and USAC provided separate 2019 capex plans in the filing.
- The quarterly ET common-unit distribution remained $0.305 per unit, or $1.22 annualized; the September-quarter payment was scheduled for November 19, 2019.
Drivers, changes and outlook
- Management attributed EBITDA growth primarily to new assets entering service, acquisitions and higher demand on existing systems. For the nine-month period, cited contributors included Rover, Mariner East 2, new fractionators, Permian throughput growth and the Bakken pipeline.
- Q3 segment EBITDA increased in NGL and refined-products transportation and services ($169), crude oil transportation and services ($18), and intrastate transportation and storage ($14). Midstream declined $23 and Sunoco LP declined $16. Midstream fee-based margin grew, but lower commodity prices pressured non-fee-based margin.
- The company agreed in September to acquire SemGroup in a cash-and-unit transaction valued at approximately $5 billion, including assumed debt. Closing was expected in late 2019 or early 2020, subject to stockholder and regulatory approvals. Integration, execution and anticipated-benefit risks are disclosed.
- On October 17, after quarter-end, ETO entered into a $2 billion, three-year unsecured term-loan facility. No specific consolidated earnings guidance was provided in the supplied filing text.
Risks, contingencies and unusual items
- PES, in which the partnership held an approximately 7.4% non-operating interest and had commercial relationships, filed for Chapter 11 after a refinery explosion and fire. PES defaulted on a $75 million note payable to a partnership subsidiary; collectability was undetermined. Sunoco LP had arranged alternative fuel supplies and did not anticipate a material business impact.
- Environmental, permitting and legal matters include ongoing Dakota Access litigation, Pennsylvania investigations and proceedings involving pipeline construction and the 2018 Revolution pipeline release. The company stated that potential exposure in several matters could not be estimated; accrued environmental liabilities were $322 at September 30. The filing also describes MTBE claims and other litigation.
- Panhandle’s FERC rate cases were consolidated, with a hearing scheduled for 2020 and an initial decision expected in early 2021. Rate outcomes may affect future regulated transportation revenue. Southwest Gas and Sea Robin settlements were approved after quarter-end and were not expected to materially affect revenue.
- A $12 goodwill impairment was recorded for Southwest Gas in Q3 due primarily to lower projected storage revenues and cash flows. Nine-month impairment losses also included $47 for Sunoco LP’s Fulton ethanol plant assets and $3 for USAC compression equipment.
- Adoption of lease accounting on January 1, 2019 added approximately $888 of right-of-use assets and lease liabilities; management said adoption materially affected the balance sheet but not reported earnings or cash flows.
Most important facts for investors to verify
- Whether SemGroup closed on the expected terms and timing, and the resulting debt, unit dilution, integration costs and benefits.
- Debt trajectory, refinancing needs, interest costs and revolver availability, particularly as capital spending and distributions continue.
- Whether EBITDA growth converts into sustained operating cash flow after capital expenditures and distributions.
- Developments in PES note recovery and commercial exposure, Dakota Access and Pennsylvania pipeline proceedings, environmental obligations and other unestimable contingencies.
- FERC rate-case outcomes and their effect on pipeline revenue, alongside the durability of volume growth and commodity-sensitive margins.