Energy Transfer LP — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018 unless stated otherwise. Energy Transfer is a diversified energy partnership with pipeline, storage, midstream, NGL, refined-products, crude-oil, Sunoco LP and USAC operations. Comparability is affected by the October 2018 merger with ETO, USAC consolidation beginning April 2018, and the prior-year retail business reported as discontinued operations.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $13.12 billion | $11.88 billion | Up 10.4% |
| Operating income | $1.93 billion | $1.10 billion | Up 75.2%; operating margin was 14.7%, versus 9.3% |
| Net income | $1.18 billion | $489 million | Prior period included a $237 million after-tax discontinued-operations loss |
| Net income attributable to partners | $870 million | $363 million | Limited partners’ interest was $869 million, versus $341 million |
| Net income per limited partner unit | $0.33 | $0.31 | Continuing-operations diluted earnings were $0.33 versus $0.32 |
| Segment Adjusted EBITDA | $2.80 billion | $2.00 billion | Up $795 million, or about 40%; non-GAAP measure |
| Cash from operating activities | $1.82 billion | $2.14 billion | Down $324 million; working-capital changes were a significant factor |
| Capital expenditures | $1.15 billion | $1.74 billion | Cash-flow statement basis, excluding allowance for equity funds used during construction |
| Cash and cash equivalents | $529 million | $419 million at Dec. 31, 2018 | Quarter-end cash increased by $110 million |
| Total debt | $46.53 billion | $46.03 billion at Dec. 31, 2018 | Up about $502 million; debt fair value was $48.52 billion |
Margins and drivers: Total segment margin increased to $3.71 billion from $2.64 billion. Segment Adjusted EBITDA gains were led by crude oil transportation and services (+$342 million), NGL and refined-products transportation and services (+$161 million), interstate transportation and storage (+$90 million), and the newly consolidated USAC segment ($101 million). Higher volumes and capacity utilization, including Rover and Mariner East 2 activity, contributed; lower NGL and gas prices weighed on midstream results.
Liquidity, debt and distributions
- Current assets were $7.13 billion and current liabilities $6.70 billion at quarter-end. Cash was $529 million; the ETO revolving facility had $3.15 billion available, Sunoco LP’s facility $1.34 billion, and USAC reported $493 million of available borrowing capacity subject to covenants.
- During the quarter, ETO issued $4.0 billion of senior notes and exchanged about $4.21 billion of ET notes for ETO notes, while ET repaid and terminated its $1.22 billion term loan. Bakken, Sunoco LP and USAC also issued notes to refinance credit-facility borrowings. The partnership reported compliance with credit-agreement covenants.
- ET declared a quarterly distribution of $0.305 per common unit, or $1.22 annualized, unchanged from the preceding quarter. Cash distributions to partners were $800 million during Q1.
- ETO’s 2019 capital-spending outlook was $4.825–$5.200 billion for growth and $525–$565 million for maintenance. Sunoco LP expected about $90 million growth and $45 million maintenance spending; USAC budgeted $140–$150 million expansion and about $25 million maintenance spending.
Material changes and unusual items
- The ETO merger and consolidation of USAC materially changed the reporting perimeter and segment presentation; USAC contributed $101 million of segment Adjusted EBITDA in Q1 2019, with no comparable consolidated segment amount in Q1 2018.
- Q1 2019 included $50 million of impairment charges, primarily a $47 million write-down of Sunoco LP’s Fulton, New York ethanol plant assets held for sale, plus $3 million related to USAC compression equipment.
- Interest expense rose to $590 million from $466 million, reflecting added debt, higher floating-rate costs, lower capitalized interest and USAC consolidation. Interest-rate derivative losses were $74 million, compared with gains of $52 million a year earlier.
- Adoption of lease accounting on January 1, 2019 added approximately $888 million of right-of-use assets and lease liabilities at transition. It materially affected the balance sheet but did not affect reported earnings or cash flows.
- Operating cash flow was lower despite higher net income, in part because the working-capital movement was a $341 million use of cash, versus a $757 million source in Q1 2018.
Outlook, risks and contingencies
- The filing provides capital-expenditure budgets but no specific consolidated earnings or Adjusted EBITDA guidance. Management’s stated objective is to grow distributable cash flow through expansion and strategic investments; results and distributions depend on subsidiary cash generation and other conditions.
- Rate proceedings could affect regulated pipeline revenues. FERC initiated reviews of Panhandle and Southwest Gas Storage rates, with initial decisions expected in Q1 2020. The ultimate effect of FERC policy and tax-law changes on cost-of-service rates remains uncertain.
- Significant legal and regulatory matters include challenges to Dakota Access permits, Pennsylvania proceedings and permit restrictions involving Mariner East and the Revolution pipeline, environmental claims concerning Rover, and other pipeline-related investigations. The company said outcomes and potential impacts are uncertain; certain matters cannot be estimated.
- Environmental liabilities were $337 million at March 31, 2019. Accrued litigation and other contingent obligations were approximately $43 million. The filing says possible losses above recorded amounts generally cannot be estimated.
- Sunoco tax litigation could produce approximately $530 million of refunds if ultimately successful, but the full amount is reserved because of uncertainty. The MTBE cases also carry reasonably possible loss exposure that the company could not estimate beyond accrued amounts.
- Commodity-price and interest-rate volatility, counterparty performance, regulation, operational incidents, environmental compliance and the high capital-spending program are important risks. Management reported no material change in primary market-risk exposures and said disclosure controls were effective.
Important facts for investors to verify
- How much of the EBITDA and revenue growth reflects organic volume and project ramp-up versus merger-related consolidation and changed reporting scope.
- Whether operating cash flow and distributable cash flow can support the distribution, debt service and planned growth capital spending over the full year.
- Debt maturity, refinancing and interest-cost implications following the substantial note issuance and ET-to-ETO debt exchange.
- Current status and potential financial or operating consequences of Dakota Access, Mariner East, Revolution, Rover and FERC rate proceedings.
- Progress and proceeds from the Fulton ethanol plant sale, and developments in the $530 million tax-refund litigation and other unquantified contingencies.