Energy Transfer Equity, L.P. (ETE) — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016; filed May 6, 2016. The filing is for Energy Transfer Equity, L.P. and its consolidated subsidiaries, including ETP and Sunoco LP—not a filing by an entity identified as “Energy Transfer LP.”
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $7.682 billion | $10.380 billion |
| Operating income | $701 million | $617 million |
| Net income | $336 million | $221 million |
| Net income attributable to partners | $312 million | $284 million |
| Limited partner earnings per unit | $0.30 | $0.26 |
| Segment Adjusted EBITDA | $1.578 billion | $1.395 billion |
| Cash from operating activities | $985 million | $575 million |
| Capital expenditures | $1.948 billion | $2.158 billion |
| Cash and cash equivalents | $807 million at quarter-end | $606 million at Dec. 31, 2015 |
| Consolidated debt | $38.331 billion | $36.968 billion at Dec. 31, 2015 |
Operating margin was approximately 9.1% of revenue, compared with 5.9% a year earlier; net margin was approximately 4.4%, versus 2.1%. These comparisons reflect substantial changes in consolidated businesses and revenue mix, so they should not be read as purely like-for-like performance. Operating cash flow less capital expenditures was negative approximately $963 million. Current assets were $5.584 billion and current liabilities $5.691 billion. The filing reports $930 million of current debt maturities, up from $131 million at year-end. Credit-facility covenants were satisfied at March 31.
Changes versus prior year and key transactions
- Revenue fell about 26%, largely reflecting lower reported sales and changes in the businesses consolidated, including the transfer of retail operations. Crude sales declined to $1.209 billion from $2.208 billion and refined-product sales to $2.539 billion from $3.656 billion.
- Operating income and net income increased despite lower revenue. Segment Adjusted EBITDA rose $183 million: ETP increased $46 million, Sunoco LP increased $31 million, and Lake Charles LNG decreased $5 million; prior-year adjustments and eliminations also changed.
- Management attributed ETP-segment improvement to Sunoco Logistics crude and NGL operations and higher liquids transportation volumes. A $60 million benefit from LIFO inventory accounting in crude operations was expected to reverse in future periods. Lower commodity prices pressured ETP midstream non-fee margins.
- In March, ETP transferred its remaining 68.42% interest in Sunoco, LLC and all of the legacy Sunoco retail business to Sunoco LP for $2.23 billion in stated transaction value, consisting of $2.20 billion cash and 5.7 million Sunoco LP units. Sunoco LP funded part of the transaction with a $2.035 billion term loan.
- ETE issued 329.3 million Series A Convertible Preferred Units to participating unitholders. The plan limits or redirects distributions on participating units and provides for expected conversion into common units at the end of the plan period, expected May 2018.
Outlook, risks, and contingencies
- Williams merger uncertainty: ETE disclosed a substantial risk the proposed WMB merger would not close because counsel could not provide the required tax opinion concerning Section 721 treatment. ETE was seeking an IRS ruling and discussing alternatives with WMB; completion remained subject to other approvals and conditions.
- Merger economics and financing: ETE and WMB revised their estimated reasonably probable annual commercial synergies to $126 million by 2020, versus more than $2 billion originally anticipated. If completed, ETE expected to incur $6.05 billion of additional debt and assume about $4.2 billion of WMB debt. The filing warned of potential credit-rating, refinancing, and borrowing-cost pressure.
- Litigation: WMB sued over the convertible-unit issuance and sought, among other relief, to unwind it; ETE disputed the claims. Related unitholder litigation also challenged the issuance. The Enterprise appeal concerned a judgment in ETP’s favor of $536 million, but no amount was recorded pending completion of the appeal. The filing said potential MTBE litigation losses beyond accrued amounts could not be estimated.
- Capital spending: ETP forecast 2016 direct growth capital expenditures of $2.665–$2.875 billion and maintenance spending of $315–$345 million. Sunoco LP forecast growth spending of $390–$420 million and maintenance spending of $100–$110 million.
- Distribution: ETE announced a quarterly distribution of $0.285 per common unit, or $1.14 annualized. Management also described possible post-merger incentive distribution relinquishments that could result in no ETE common-unit distributions for two years if the merger closed; these were not presented as a finalized action.
- Environmental liabilities accrued were $333 million at March 31, down from $368 million at year-end. Total accruals for other contingent obligations were approximately $59 million; possible losses beyond recorded accruals could not be estimated. A FERC audit of Trunkline began in March.
- The filing provided no general consolidated earnings guidance. Forward-looking statements were subject to commodity-price, operating, regulatory, litigation, financing, and transaction risks.
Important facts for investors to verify
- Confirm the intended issuer: this 10-Q is for Energy Transfer Equity, L.P. (ETE), despite the request naming Energy Transfer LP.
- Track whether the WMB merger’s tax-opinion condition and other closing conditions are met, and review subsequent merger and litigation disclosures.
- Assess debt maturities, floating-rate exposure, liquidity, and the availability and cost of refinancing; the filing disclosed $9.08 billion of floating-rate debt.
- Separate recurring operating performance from business transfers, LIFO effects, commodity-price movements, and changes in consolidation or segment presentation.
- Monitor capital spending, operating cash generation versus investment needs, distribution sustainability, and any proposed incentive-distribution waivers.