Energy Transfer Equity, L.P. (ETE) — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018; filed August 9, 2018. This filing is for Energy Transfer Equity, L.P. and its consolidated subsidiaries, including ETP, Sunoco LP, Lake Charles LNG and, from April 2018, USAC.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $14.12 billion | $9.43 billion | $26.00 billion | $19.09 billion |
| Operating income | $1.13 billion | $743 million | $2.23 billion | $1.50 billion |
| Income from continuing operations | $659 million | $314 million | $1.39 billion | $644 million |
| Net income | $633 million | $121 million | $1.12 billion | $440 million |
| Net income attributable to partners | $355 million | $212 million | $718 million | $451 million |
| Limited partner net income per unit, diluted | $0.31 | $0.18 | $0.62 | $0.39 |
| Segment Adjusted EBITDA | $2.26 billion | $1.72 billion | $4.26 billion | $3.29 billion |
| Cash from operating activities | Not presented quarterly | Not presented quarterly | $3.16 billion | $1.46 billion |
Q2 operating margin was approximately 8.0%, versus 7.9% a year earlier; net margin was approximately 4.5%, versus 1.3%. These are simple calculations from reported revenue and income. Segment Adjusted EBITDA is a non-GAAP measure defined by the Partnership.
- Cash and liquidity: Cash was $519 million at June 30, 2018, compared with $336 million at year-end 2017. Current assets of $7.59 billion were slightly below current liabilities of $7.64 billion.
- Debt: Consolidated debt was $44.63 billion, compared with $44.08 billion at December 31, 2017. The Partnership reported $7.78 billion of floating-rate debt; a 100-basis-point rate increase could raise annual interest expense by up to $78 million. Credit-agreement covenants were satisfied at quarter-end.
- Cash flows and investment: First-half investing used $3.14 billion, including $3.54 billion of capital expenditures before construction contributions. Financing used $2.58 billion. Cash flow from discontinued operations was $2.74 billion, largely reflecting the retail divestment.
Material changes and drivers
- ETP Segment Adjusted EBITDA rose $506 million in Q2 and $942 million in the first half. Growth reflected the Bakken pipeline, partial Rover service, higher crude oil throughput and marketing margins, and stronger NGL volumes and activity. Commodity prices, pipeline optimization and derivative results also affected reported performance.
- Sunoco LP Segment Adjusted EBITDA fell $80 million in Q2 and $126 million in the first half, principally due to the sale of most company-operated retail sites to 7-Eleven in January 2018 and conversion of 207 sites to a commission-agent model. Higher fuel distribution margins partly offset the decline.
- ETE acquired control of USAC on April 2 and consolidated its results from that date; USAC contributed $95 million of Segment Adjusted EBITDA through June. ETP also acquired the remaining 50.01% of HPC, bringing RIGS into consolidation.
- First-half operating cash flow more than doubled year over year. The filing attributes the increase to higher net income and working-capital movements; net changes in operating assets and liabilities provided $357 million, compared with a $582 million use in 2017.
- Comparisons are affected by Sunoco LP’s retail divestment, USAC and HPC consolidation, and accounting presentation. ETE adopted ASC 606 in 2018 using the modified retrospective method, so 2017 revenue was not restated. The weighted-average inventory-cost change was applied retrospectively to prior periods.
Outlook, transactions and risks
- Capital spending: ETP expected 2018 growth capital expenditures of $4.5–$4.8 billion and maintenance spending of $475–$520 million. Sunoco LP expected approximately $65 million growth and $30 million maintenance capital spending. USAC expected $190–$210 million expansion and approximately $30 million maintenance spending; it had $122 million of binding equipment and parts commitments.
- Merger: In August 2018, ETE and ETP announced a proposed merger. ETP unitholders other than ETE and affiliates would receive 1.28 ETE common units per ETP unit, and ETE’s ETP incentive distribution rights would be cancelled. Closing was expected in Q4 2018, subject to approval by a majority of unaffiliated ETP unitholders and other conditions. This is a subsequent event, not a completed quarter-end transaction.
- Distributions: ETE declared $0.305 per common unit for Q2 2018, or $1.22 annualized. Management cautioned that distributions are not guaranteed and depend on cash generated and distributed by subsidiaries, debt obligations, capital needs and other factors.
- Regulatory and legal matters: FERC policy and rulemaking following federal tax changes could affect rates on certain cost-of-service pipelines; the potential impact was not yet known. Mariner East construction in West Whiteland Township had been suspended under a PUC order and was permitted to resume in certain areas in August after required submissions and approvals. Dakota Access, Rover, MTBE, merger-related and other litigation remained ongoing. Environmental liabilities accrued were $403 million at June 30; the filing said losses beyond accruals could not currently be estimated.
- Unusual items: Q2 included a $265 million unrealized loss on commodity risk-management activities in the reconciliation to continuing pretax income; first-half unrealized losses were $352 million. First-half results also included $106 million of debt-extinguishment losses and a $263 million loss from discontinued operations. Management cited higher interest expense, partly offset by lower Sunoco LP interest expense.
Key facts for investors to verify
- Whether operating cash flow and Segment Adjusted EBITDA growth translate into durable distributable cash after capital spending, interest and subsidiary distributions.
- Debt maturities, refinancing needs and the effect of floating rates; also confirm available borrowing capacity at each subsidiary.
- The operational and financial effects of the 7-Eleven transaction, USAC and HPC consolidation, and the proposed ETE–ETP merger, including approvals, exchange value and closing conditions.
- Any FERC rate changes and developments in Mariner East, Dakota Access, Rover and other litigation or environmental matters, including potential costs beyond recorded accruals.
- The comparability of reported revenue and earnings across periods given ASC 606 adoption, acquisitions and discontinued operations.