Energy Transfer Equity, L.P. — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014; filed March 2, 2015. This is an annual filing, not a standalone fourth-quarter report. Energy Transfer Equity, L.P. (ETE; NYSE: ETE) is a publicly traded partnership whose consolidated results include Energy Transfer Partners (ETP), Regency, Sunoco Logistics, Sunoco LP and other subsidiaries. Figures below are U.S. dollars; consolidated results include noncontrolling interests.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 | Change / context |
|---|---|---|---|
| Revenue | $55.691 billion | $48.335 billion | Up 15.2%; acquisitions and increased product sales contributed. |
| Gross margin | $7.302 billion | $5.781 billion | Revenue less cost of products sold. |
| Operating income | $2.470 billion | $1.551 billion | Up 59.3%; derived operating margin was approximately 4.4%. |
| Income from continuing operations | $1.060 billion | $282 million | Includes $357 million of income tax expense. |
| Net income | $1.124 billion | $315 million | $633 million attributable to partners; $629 million was limited partners’ interest. |
| Net income per limited partner unit | $1.16 basic; $1.15 diluted | $0.35 basic and diluted | Amounts reflect the January 2014 two-for-one unit split. |
| Operating cash flow | $3.175 billion | $2.419 billion | Net income was supplemented by non-cash expenses and other adjustments. |
| Investing cash flow | $(6.795) billion | $(2.347) billion | Included $5.381 billion of capital expenditures and $2.367 billion of acquisition payments, partly offset by asset-sale proceeds. |
| Financing cash flow | $3.877 billion | $146 million | Included borrowing, subsidiary unit offerings, distributions and ETE’s $1.0 billion unit repurchase. |
| Consolidated debt | $30.661 billion | $23.199 billion | Excludes joint-venture debt; $1.008 billion was current maturities. |
| Cash and current liquidity | $847 million cash; $6.153 billion current assets | $590 million cash; $6.536 billion current assets | Current liabilities were $6.782 billion; current ratio approximately 0.91. |
| ETE distributions per unit | $1.60 for the year; $0.45 for Q4 | $1.33 for the year; $0.3463 for Q4 | Quarterly rate rose during 2014. Distributions are not guaranteed. |
Segment Adjusted EBITDA, a non-GAAP measure, was $5.840 billion versus $4.367 billion. ETP contributed $4.829 billion, Regency $1.172 billion and Lake Charles LNG $195 million; Corporate and Other was $(97) million before adjustments and eliminations. The filing reports approximately $5.89 billion of consolidated variable-rate debt.
Material changes versus the prior year
- Revenue and Adjusted EBITDA increased, substantially reflecting expanded operations and acquisitions. ETP retail marketing gross margin rose with the Susser and MACS businesses and favorable fuel margins; liquids transportation and services benefited from increased volumes and fractionation capacity. Regency’s results included the PVR, Eagle Rock and Hoover acquisitions.
- Consolidated debt rose by approximately $7.462 billion. Regency assumed or issued substantial debt in connection with acquisitions; growth projects and acquisitions also drove higher capital spending and depreciation.
- Reported net income increased from $315 million to $1.124 billion, but comparisons are affected by the prior-year $689 million Lake Charles LNG goodwill impairment and 2014’s $370 million Regency Permian goodwill impairment, among other items.
- ETE repurchased approximately $1.0 billion of its common units during 2014. Subsidiaries also issued units to fund acquisitions and growth.
- ETE acquired Lake Charles LNG from ETP effective January 1, 2014, in exchange for ETP’s redemption of 18.7 million ETP units. ETP agreed to pay ETP $75 million annually for management services in 2014 and 2015.
Outlook, risks and unusual items
- 2015 investment plans: ETP projected $6.250–$7.065 billion of total growth capital expenditures and $360–$440 million of maintenance expenditures. Regency expected $1.6 billion of growth and $100 million of maintenance capital expenditures. These are subsidiary forecasts, not consolidated ETE guidance.
- Projects and transactions: ETP and Regency expected the Regency merger to close in Q2 2015, subject to unitholder approval and other conditions. A separate Bakken pipeline transaction was expected to close in March 2015. The proposed Lake Charles LNG export project was subject to final investment decisions, financing and regulatory approvals; management anticipated FID in 2016 and first-train service in late 2019.
- Q4 volatility: ETE reported a fourth-quarter net loss of $294 million. Full-year inventory valuation adjustments were $473 million, with $456 million of unfavorable Q4 impact reported primarily in Sunoco Logistics and retail marketing; the quarter also included Regency’s $370 million goodwill impairment. These charges were largely non-cash.
- Commodity exposure: ETE noted that falling commodity prices contributed to the Regency Permian impairment and could pressure producer activity, volumes, margins, customer credit and asset values. Crude oil margin weakness also affected Sunoco Logistics. Derivatives reduce some exposures but can create earnings volatility and may not fully offset underlying risks.
- Debt and funding: Significant debt, acquisition funding needs, variable interest rates, capital-market access, covenant limits and large planned capital programs could constrain distributions and financial flexibility. ETE’s cash flow depends heavily on distributions from ETP and Regency; the filing states that distributions are not assured.
- Legal and regulatory matters: Sunoco faced five MTBE groundwater cases; management said an adverse decision could materially affect results in the period but did not expect a material effect on consolidated financial position. Potential losses beyond accrued amounts could not be estimated. ETP’s $536 million judgment against Enterprise was under appeal and had not been recorded. PHMSA had issued Panhandle a proposed safety order concerning pipeline integrity and was investigating reported incidents.
- Environmental exposure: Accrued environmental liabilities were $401 million at year-end, including $363 million for Sunoco remediation activities. ETE also reported $267 million of cash and investments in its captive insurance company. New or stricter environmental, emissions and pipeline-safety requirements could increase costs.
- Reporting scope: Management concluded controls were effective, but excluded Susser and Eagle Rock’s acquired midstream business from ETE’s internal-control assessment while integration continued.
Key facts for investors to verify
- Whether operating cash flow and subsidiary distributions can support ETE’s growing debt, planned capital spending and unit distributions.
- The amount and terms of debt, refinancing needs, variable-rate exposure and remaining credit-facility availability across ETE and its subsidiaries.
- Acquisition-related contribution to revenue and Adjusted EBITDA, including the final purchase accounting and integration results for Susser, PVR and Eagle Rock.
- Actual costs, financing, approvals and schedule for the Lake Charles LNG export project and major pipeline developments.
- Resolution and potential financial impact of the MTBE litigation, Enterprise appeal, Panhandle pipeline safety investigation and environmental obligations.
- Completion and terms of the proposed Regency merger and Bakken pipeline transaction, including their effects on distributions, debt and ownership interests.