Energy Transfer Equity, L.P. (ETE) — Form 10-Q Summary
Filing identity: The supplied filing is for Energy Transfer Equity, L.P. (ETE), not an entity identified as Energy Transfer LP. ETE’s consolidated results include ETP, Sunoco LP and Lake Charles LNG. Reporting period ended September 30, 2016; filed November 9, 2016. Unless noted, amounts are U.S. dollars.
Business context and reporting period
ETE is a master limited partnership whose principal cash sources include investments in ETP and Sunoco LP, including general partner and incentive distribution rights, and Lake Charles LNG. Results reflect the transfer of ETP’s remaining retail business to Sunoco LP in March 2016 and other changes in consolidation, which affect year-over-year comparisons.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $9.675bn | $10.616bn | $26.701bn | $32.590bn |
| Operating income | $697m | $650m | $2.225bn | $2.163bn |
| Net income | $41m | $238m | $801m | $1.231bn |
| Net income attributable to partners | $209m | $293m | $762m | $875m |
| Basic income per limited partner unit | $0.20 | $0.28 | $0.72 | $0.81 |
| Segment Adjusted EBITDA | $1.504bn | $1.500bn | $4.467bn | $4.403bn |
Operating margin was approximately 7.2% in Q3 2016 versus 6.1% a year earlier. Net income attributable to partners exceeded consolidated net income in Q3 because of losses attributable to noncontrolling interests.
- Cash flow, nine months: Operating cash flow was $2.390bn, versus $2.146bn. Investing cash outflow was $6.443bn, including $6.123bn in capital expenditures. Financing cash inflow was $3.919bn. Cash declined by $134m to $472m.
- Balance sheet, September 30: Total assets were $76.839bn; current assets $6.467bn and current liabilities $7.042bn. Consolidated debt carrying value was $41.241bn, including $1.221bn of current maturities. Total equity was $23.190bn, including a partners’ deficit of $1.703bn.
- Debt and liquidity: The Parent Company had $885m drawn and $615m available under its $1.5bn revolving facility. The filing reports $9.14bn of floating-rate debt; a 100-basis-point rate increase was estimated to raise annual interest expense by up to $91m. ETE and its subsidiaries reported compliance with credit-agreement covenants.
- Distributions: ETE declared $0.285 per common unit for Q3, or $1.14 annualized. ETP’s quarterly rate was $1.055 per unit.
Material changes versus the prior comparable period
- Q3 revenue fell 8.9%; nine-month revenue fell 18.1%. Revenue and cost of products sold were affected by lower sales activity and the transfer of retail operations, so reported revenue changes do not alone indicate comparable underlying performance.
- Q3 net income fell $197m, while nine-month net income fell $430m. Interest expense and depreciation increased, and Q3 included a $308m non-cash impairment of ETP’s investment in Midcontinent Express Pipeline (MEP).
- Segment Adjusted EBITDA was nearly flat in Q3 and increased 1.5% for the nine months. ETP segment EBITDA declined, partly offset by stronger liquids transportation and services results; Sunoco LP segment EBITDA also declined.
- Operating cash flow increased despite lower net income, primarily reflecting smaller working-capital cash outflows than in the prior-year period.
- Consolidated debt increased from $36.968bn at December 31, 2015 to $41.241bn at September 30, 2016. The company funded substantial capital spending through borrowing and subsidiary equity issuance.
Outlook, commentary, risks and unusual items
- Capital spending outlook: ETP expected 2016 direct growth capital expenditures of $2.740bn–$2.900bn and maintenance spending of $275m–$310m; it expected approximately $1.9bn of direct growth spending in 2017, net of anticipated asset-level financing. Sunoco LP forecast 2016 growth spending of $360m–$380m and maintenance spending of $100m–$110m. These are subsidiary forecasts; the filing provides no consolidated earnings guidance.
- Incentive distribution relinquishments: ETE agreed to relinquish $720m of ETP incentive distributions from Q2 2016 through Q4 2017, including $85m for Q3 2016, and agreed to a perpetual $33m annual waiver in connection with the PennTex acquisition.
- WMB merger litigation: ETE terminated the merger after the required tax opinion could not be delivered. WMB appealed and amended its claims to seek a $410m termination fee and up to $10bn in additional damages; ETE counterclaimed for a $1.48bn termination fee and other damages. Outcomes and exposure were uncertain.
- Dakota Access Pipeline: Protests, tribal litigation and the outstanding Lake Oahe easement could delay construction and revenue. Management believed the easement would be granted in a timely manner but gave no assurance.
- Other contingencies: MTBE groundwater litigation could result in a loss, but ETE could not estimate any loss beyond accrued amounts. Environmental liabilities totaled $362m. The Mont Belvieu terminal release and ongoing regulatory matters were under investigation or discussion.
- Other transactions: The filing reported a planned $2bn sale of a 49% interest in Bakken Pipeline Investments, a November 2016 PennTex acquisition for approximately $640m, and Sunoco Logistics’ November 2016 Vitol acquisition for $760m plus working capital. These occurred after quarter-end or remained subject to closing conditions, as applicable.
Important facts for investors to verify
- Confirm the correct issuer and security: this filing covers Energy Transfer Equity, L.P. and consolidated subsidiaries.
- Track the WMB appeal and litigation claims, including the potentially large but disputed damages sought by both sides.
- Monitor Dakota Access permitting, easement and protest developments, and their effect on project timing, cost and expected cash flows.
- Assess debt growth, interest-rate exposure, upcoming maturities and whether operating cash flow can support capital needs and distributions.
- Review the MEP impairment assumptions and the performance of ETP liquids operations and Sunoco LP after the retail-business transfer.
- Check subsequent filings for the completion and financing effects of the Bakken sale, PennTex and Vitol transactions, and the realization of forecast capital spending.