Energy Transfer LP quarterly report, Q2 FY2013

Business context and reporting period

Energy Transfer Equity, L.P. (ETE) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. ETE’s consolidated results include Energy Transfer Partners (ETP), Regency Energy Partners and their subsidiaries, spanning natural gas and NGL gathering, processing, transportation and storage, plus crude and refined-products logistics and retail marketing. Comparisons with 2012 are substantially affected by acquisitions and portfolio changes, including Southern Union and Sunoco; the periods are not directly comparable.

Financial performance and position

• Q2 diluted net income per limited partner unit was $0.45, versus $0.19; six-month diluted earnings per unit were $0.77, versus $0.86.
• Six-month operating cash flow was $1.127 billion, compared with $425 million. Capital expenditures were $1.504 billion, making operating cash flow less capital expenditures negative $377 million.
• At June 30, cash was $621 million; total assets were $50.143 billion; current assets and current liabilities were $6.153 billion and $6.125 billion, respectively.
• Consolidated debt was $22.759 billion, up from $22.053 billion at year-end 2012. Current maturities were $899 million. ETP’s revolver had $1.49 billion available and Regency’s had approximately $652 million available, after letters of credit. The Partnership reported compliance with credit covenants.
• ETE’s quarterly distribution rate increased from $0.635 for the December 2012 quarter to $0.655 for the June 2013 quarter. ETP’s rate remained $0.89375 per unit for the reported quarters.

Material changes versus the prior comparable period

• Revenue and EBITDA increased sharply, primarily reflecting acquired Sunoco Logistics and retail marketing operations, rather than solely organic growth. Sunoco Logistics contributed $288 million of Q2 gross margin and retail marketing contributed $204 million.
• Q2 net income rose year over year, while six-month net income fell. The 2012 six-month comparison included a $1.057 billion gain on deconsolidation of ETP’s propane business; 2013 did not. Six-month interest expense increased to $615 million from $495 million, and income tax expense increased to $87 million from $7 million, in part because of acquired taxable corporate subsidiaries.
• April transactions reshaped the portfolio: ETP acquired ETE’s remaining 60% interest in Holdco for approximately 49.5 million ETP units and $1.40 billion cash, less $68 million of closing adjustments, taking ETP’s ownership to 100%. Southern Union also contributed SUGS to Regency, receiving units and cash consideration.
• Debt rose despite refinancing and repayment activity. ETE repaid $1.10 billion of its term loan using proceeds from the Holdco transaction; subsidiary debt issuance and borrowings also supported acquisitions and investment.

Outlook, management commentary, risks and unusual items

• For 2013, ETP projected growth capital expenditures of $1.67–$1.77 billion and maintenance capital expenditures of $360–$435 million. Regency expected $800 million of growth and $45 million of maintenance capital expenditures. Management expected ETP to use operating cash and its revolver to fund planned spending and working capital, while retaining the option to issue debt or equity.
• Management’s stated strategy is to grow distributable cash flow through infrastructure expansion and strategic acquisitions. Results and available cash remain exposed to commodity prices, demand, weather, operating performance, financing needs and acquisition integration. Management noted that interim results may not indicate full-year performance.
• After quarter-end, ETP sold 7.5 million AmeriGas units for $346 million net proceeds, used to repay revolver borrowings. Also after quarter-end, ETP, ETE and ETE Holdings agreed to a proposed Class H unit exchange involving cancellation of 50.2 million ETP common units and additional distributions totaling $329 million over 15 quarters; the transaction remained subject to customary closing conditions.
• After quarter-end, the Department of Energy conditionally authorized exports of up to 2.0 Bcf/d of LNG to non-free-trade-agreement countries from the Lake Charles facility.
• ETE had agreed to provide contingent residual support for $1.55 billion of AmeriGas senior notes. The filing reported $200 million of accrued environmental liabilities and described possible additional regulatory and remediation costs that could not be estimated. It also disclosed ongoing MTBE litigation and lawsuits following a February 2013 gas explosion in Kansas City; the Partnership said it could not estimate its exposure in the explosion matter.
• ETE redeemed its preferred units for $340 million in total payments. Commodity and interest-rate derivative fair values can introduce earnings volatility; management reported no material change in primary market-risk exposures. No material changes to the prior annual-report risk factors were reported, and disclosure controls were assessed as effective.

Investor facts to verify

• Separate acquisition-driven revenue and EBITDA growth from comparable operating performance, and review segment results and the effect of acquired Sunoco operations.
• Reconcile cash from operations against the elevated capital program, distributions, debt maturities and expected funding sources.
• Review debt by subsidiary, revolving-credit availability, interest-rate exposure and the terms and effects of the Holdco acquisition and related incentive-distribution concessions.
• Track the Class H transaction and its distribution obligations, as well as any subsequent changes in the LNG export authorization or project plans.
• Monitor the AmeriGas note support, environmental liabilities, explosion-related litigation, MTBE claims and other contingencies for changes in estimated exposure.