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ETP > SEC Filings for ETP > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for ENERGY TRANSFER PARTNERS, L.P.

Form 10-Q for ENERGY TRANSFER PARTNERS, L.P.


8-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Tabular dollar and unit amounts, except per unit data, are in millions)
The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with (i) our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q; (ii) our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 27, 2014; and (iii) our management's discussion and analysis of financial condition and results of operations included in our 2013 Form 10-K. This discussion includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed in "Part I - Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013.
References to "we," "us," "our," the "Partnership" and "ETP" shall mean Energy Transfer Partners, L.P. and its subsidiaries.
OVERVIEW
The primary activities and operating subsidiaries through which we conduct those activities are as follows:
Natural gas operations, including the following:

natural gas midstream and intrastate transportation and storage through La Grange Acquisition, L.P., which we refer to as ETC OLP; and

interstate natural gas transportation and storage through ET Interstate and Panhandle. ET Interstate is the parent company of Transwestern, ETC FEP, ETC Tiger and CrossCountry. Panhandle is the parent company of the Trunkline and Sea Robin transmission systems.

NGL transportation, storage and fractionation services primarily through Lone Star.

Refined product and crude oil operations, including the following:

refined product and crude oil transportation through Sunoco Logistics; and

retail marketing of gasoline and middle distillates through Sunoco and MACS.

RECENT DEVELOPMENTS
Sale of AmeriGas Common Units
In January 2014, we sold 9.2 million AmeriGas common units for net proceeds of $381 million. Net proceeds from this sale were used to repay borrowings under the ETP Credit Facility and for general partnership purposes. Panhandle Merger
On January 10, 2014, Panhandle consummated a merger with Southern Union, the indirect parent of Panhandle, and PEPL Holdings, the sole limited partner of Panhandle, pursuant to which each of Southern Union and PEPL Holdings were merged with and into Panhandle (the "Panhandle Merger"), with Panhandle surviving the Panhandle Merger. In connection with the Panhandle Merger, Panhandle assumed Southern Union's obligations under its 7.6% Senior Notes due 2024, 8.25% Senior Notes due 2029 and the Junior Subordinated Notes due 2066. At the time of the Panhandle Merger, Southern Union did not have operations of its own, other than its ownership of Panhandle and noncontrolling interests in PEI Power II, LLC, Regency (31.4 million common units and 6.3 million Class F Units), and ETP (2.2 million Common Units). In connection with the Panhandle Merger, Panhandle also assumed PEPL Holdings' guarantee of $600 million of Regency senior notes.
Trunkline LNG Transaction
On February 19, 2014, ETE and ETP completed the transfer to ETE of Trunkline LNG, the entity that owns a LNG regasification facility in Lake Charles, Louisiana, from ETP in exchange for the redemption by ETP of 18.7 million ETP Common Units held by ETE (the "Trunkline LNG Transaction"). This transaction was effective as of January 1, 2014.
Susser Holdings Merger
On April 27, 2014, ETP entered into a definitive merger agreement whereby ETP plans to acquire Susser Holdings Corporation ("Susser Holdings") in a unit and cash transaction for total consideration valued at approximately $1.8 billion (the "Susser Merger"). By acquiring Susser Holdings, ETP will own the general partner interest and the incentive distribution rights in Susser Petroleum Partners LP ("Susser Petroleum"), approximately 11 million Susser Petroleum common units (representing approximately 50.2%


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of Susser Petroleum's outstanding units), and Susser Holdings' existing retail operations, consisting of 630 convenience store locations. The Susser Merger is expected to close in the third quarter of 2014, subject to approval of the shareholders of Susser Holdings and customary regulatory approvals. Quarterly Cash Distribution Increase
In April 2014, ETP announced that its Board of Directors approved an increase in its quarterly distribution to $0.935 per unit ($3.74 annualized) on ETP Common Units for the quarter ended March 31, 2014, representing an increase of $0.06 per Common Unit on an annualized basis compared to the fourth quarter of 2013.

Results of Operations
Consolidated Results
                                                Three Months Ended March 31,
                                                  2014                  2013             Change
Segment Adjusted EBITDA:
Intrastate transportation and storage      $          177         $          132     $          45
Interstate transportation and storage                 300                    297                 3
Midstream                                             126                     87                39
NGL transportation and services                       128                     80                48
Investment in Sunoco Logistics                        208                    236               (28 )
Retail marketing                                      109                     37                72
All other                                             158                     87                71
Total                                               1,206                    956               250
Depreciation and amortization                        (266 )                 (260 )              (6 )
Interest expense, net of interest
capitalized                                          (219 )                 (211 )              (8 )
Gain on sale of AmeriGas common units                  70                      -                70
Gains (losses) on interest rate
derivatives                                            (2 )                    7                (9 )
Non-cash unit-based compensation expense              (14 )                  (14 )               -
Unrealized gains (losses) on commodity
risk management activities                            (29 )                   19               (48 )
LIFO valuation adjustments                             14                     38               (24 )
Adjusted EBITDA related to discontinued
operations                                            (27 )                  (40 )              13
Adjusted EBITDA related to unconsolidated
affiliates                                           (196 )                 (165 )             (31 )
Equity in earnings of unconsolidated
affiliates                                             79                     72                 7
Other, net                                             (3 )                    3                (6 )
Income from continuing operations before
income tax expense                                    613                    405               208
Income tax expense from continuing
operations                                           (146 )                   (3 )            (143 )
Income from continuing operations                     467                    402                65
Income from discontinued operations                    24                     22                 2
Net income                                 $          491         $          424     $          67

See the detailed discussion of Segment Adjusted EBITDA below. Gain on Sale of AmeriGas Common Units. In January 2014, the Partnership recognized a gain on the sale of 9.2 million AmeriGas common units that were originally received in connection with the contribution of our propane business to AmeriGas in 2012. As of March 31, 2014, the Partnership held 12.9 million AmeriGas common units.
Unrealized Gains (Losses) on Commodity Risk Management Activities. See discussion of the unrealized gains (losses) on commodity risk management activities included in "Segment Operating Results" below.


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LIFO Valuation Adjustments. LIFO valuation reserve adjustments were recorded during the three months ended March 31, 2014 and 2013, respectively, for the inventory associated with Sunoco's retail marketing operations as a result of commodity price changes between periods.
Adjusted EBITDA Related to Discontinued Operations. Amounts for the three months ended March 31, 2014 related to a marketing business that was sold effective April 1, 2014. Amounts for the three months ended March 31, 2013 related to Southern Union's local distribution operations.
Adjusted EBITDA Related to Unconsolidated Affiliates and Equity in Earnings of Unconsolidated Affiliates. See additional information in "Supplemental Information on Unconsolidated Affiliates" and "Segment Operating Results" below. Other, net. Includes amortization of regulatory assets and other income and expense amounts.
Income Tax Expense from Continuing Operations. The increase in the effective tax rate for the three months ended March 31, 2014 was primarily due to the Trunkline LNG Transaction (see Note 2). The Trunkline LNG Transaction, which was treated as a sale for tax purposes, resulted in $85 million of incremental income tax expense.


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Supplemental Information on Unconsolidated Affiliates The following table presents financial information related to unconsolidated affiliates:

                                                Three Months Ended March 31,
                                                  2014                  2013             Change
Equity in earnings (losses) of
unconsolidated affiliates:
AmeriGas                                   $           34         $           63     $         (29 )
Citrus                                                 18                     14                 4
FEP                                                    14                     13                 1
Regency                                                (7 )                    -                (7 )
PES                                                    17                    (22 )              39
Other                                                   3                      4                (1 )
Total equity in earnings of unconsolidated
affiliates                                 $           79         $           72     $           7

Proportionate share of interest,
depreciation, amortization, non-cash items
and taxes:
AmeriGas                                   $           17         $           34     $         (17 )
Citrus                                                 50                     48                 2
FEP                                                     5                      5                 -
Regency                                                34                      -                34
PES                                                     6                      1                 5
Other                                                   5                      5                 -
Total proportionate share of interest,
depreciation, amortization, non-cash items
and taxes                                  $          117         $           93     $          24

Adjusted EBITDA related to unconsolidated
affiliates:
AmeriGas                                   $           51         $           97     $         (46 )
Citrus                                                 68                     62                 6
FEP                                                    19                     18                 1
Regency                                                27                      -                27
PES                                                    23                    (21 )              44
Other                                                   8                      9                (1 )
Total Adjusted EBITDA related to
unconsolidated affiliates                  $          196         $          165     $          31

Distributions received from unconsolidated
affiliates:
AmeriGas                                   $           11         $           24     $         (13 )
Citrus                                                 34                     24                10
FEP                                                    16                     17                (1 )
Regency                                                15                      -                15
PES                                                     -                     25               (25 )
Other                                                   5                      5                 -
Total distributions received from
unconsolidated affiliates                  $           81         $           95     $         (14 )

Segment Operating Results
Our reportable segments are discussed below. "All other" includes our compression operations, our investment in AmeriGas, Southern Union's local distribution operations, our approximate 33% non-operating interest in PES, our investment in Regency and our natural gas marketing operations.


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For the three months ended March 31, 2013, certain costs previously reported as selling, general and administrative expenses were reclassified to operating expenses to conform to the current year presentation. These costs include support functions such as engineering, environmental services, maintenance and reliability, pipeline integrity, procurement and technical services. We evaluate segment performance based on Segment Adjusted EBITDA, which we believe is an important performance measure of the core profitability of our operations. This measure represents the basis of our internal financial reporting and is one of the performance measures used by senior management in deciding how to allocate capital resources among business segments. The tables below identify the components of Segment Adjusted EBITDA, which is calculated as follows:
Gross margin, operating expenses, and selling, general and administrative. These amounts represent the amounts included in our consolidated financial statements that are attributable to each segment.

Unrealized gains or losses on commodity risk management activities and LIFO valuation adjustments. These are the unrealized amounts that are included in cost of products sold to calculate gross margin. These amounts are not included in Segment Adjusted EBITDA; therefore, the unrealized losses are added back and the unrealized gains are subtracted to calculate the segment measure.

Non-cash compensation expense. These amounts represent the total non-cash compensation recorded in operating expenses and selling, general and administrative expenses. This expense is not included in Segment Adjusted EBITDA and therefore is added back to calculate the segment measure.

Adjusted EBITDA related to unconsolidated affiliates. These amounts represent our proportionate share of the Adjusted EBITDA of our unconsolidated affiliates. Amounts reflected are calculated consistently with our definition of Adjusted EBITDA.

Detailed descriptions of our business and segments are included in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 27, 2014.

Intrastate Transportation and Storage
                                                Three Months Ended March 31,
                                                  2014                  2013              Change
Natural gas transported (MMBtu/d)               9,399,267              9,733,480            (334,213 )
Revenues                                   $          934         $          684     $           250
Cost of products sold                                 734                    490                 244
Gross margin                                          200                    194                   6
Unrealized (gains) losses on commodity
risk management activities                             27                    (12 )                39
Operating expenses, excluding non-cash
compensation expense                                  (42 )                  (42 )                 -
Selling, general and administrative
expenses, excluding non-cash compensation
expense                                                (7 )                   (8 )                 1
Adjusted EBITDA related to unconsolidated
affiliates                                             (1 )                    -                  (1 )
Segment Adjusted EBITDA                    $          177         $          132     $            45

Volumes. Transported volumes decreased slightly for the three months ended March 31, 2014 compared to the same period last year as a more favorable pricing environment helped to offset reductions due to the cessation of certain long-term transportation contracts. The average spot price at the Houston Ship Channel for the three months ended March 31, 2014 increased to $5.08/MMBtu from $3.43/MMBtu for the same period in 2013, while the average basis differential between West Texas and the Houston Ship Channel increased to $0.064/MMBtu in 2014 from $0.012/MMBtu in 2013.


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Gross Margin. The components of our intrastate transportation and storage segment gross margin were as follows:

                                       Three Months Ended March 31,
                                              2014                    2013     Change
Transportation fees            $           117                       $ 129    $  (12 )
Natural gas sales and other                 41                          27        14
Retained fuel revenues                      30                          23         7
Storage margin, including fees              12                          15        (3 )
Total gross margin             $           200                       $ 194    $    6

Intrastate transportation and storage gross margin increased for the three months ended March 31, 2014 compared to the same period last year due to the net impact of the following:
Transportation fees. Transportation fees decreased primarily due to lower volumes resulting from the cessation of certain long-term transportation contracts.

Natural gas sales and other. Margin from natural gas sales and other includes purchased natural gas for transport and sale, derivatives used to hedge transportation activities, gains and losses on derivatives used to hedge net retained fuel, and the margin from gas sales, processing and gathering fees on our Houston pipeline system. Margin from natural gas sales and other increased $14 million primarily due to opportunities from the commodity price volatility created by the cold winter season.

Retained fuel revenues. Retained fuel revenues include gross volumes retained as a fee at the current market price; the cost of consumed fuel is included in operating expenses. Retention revenue increased $7 million primarily due to higher average natural gas spot prices as noted above. The increase in retained fuel revenue was partially offset by a reduction due to lower volumes of retention gas sold.

Storage margin was comprised of the following:

                                                  Three Months Ended March 31,
                                                   2014                    2013               Change
Withdrawals from storage natural gas
inventory (MMBtu)                               37,891,036                37,320,557            570,479
Realized margin on natural gas inventory
transactions                               $            34           $            (3 )   $           37
Fair value inventory adjustments                       (11 )                      20                (31 )
Unrealized losses on derivatives                       (18 )                      (9 )               (9 )
Margin recognized on natural gas
inventory, including related derivatives                 5                         8                 (3 )
Revenues from fee-based storage                          7                         7                  -
Total storage margin                       $            12           $            15     $           (3 )

The decrease of $3 million in storage margin for the three months ended March 31, 2014 compared to the same period last year was principally driven by a decline in the spreads between the spot and forward prices on natural gas we own in the Bammel storage facility.
Unrealized (Gains) Losses on Commodity Risk Management Activities. Unrealized gains and losses on commodity risk management activities reflect the net impact from storage and non-storage derivatives, as well as fair value adjustments to inventory. We experienced a decrease of $39 million in the margin from unrealized gains and losses on commodity risk management activities for the three months ended March 31, 2014 as compared to the same period last year. For the three months ended March 31, 2014, the unrealized losses from commodity risk management activities of $27 million included $16 million in losses from storage and non-storage related derivatives and $11 million in losses on the fair value adjustment to storage gas inventory. Unrealized losses from storage related activities were offset by realized margin on natural gas inventory transactions as illustrated in the storage margin table above. For the three months ended March 31, 2013, unrealized gains of $12 million included fair value adjustment to storage gas inventory of $20 million partially offset by unrealized losses on storage and non-storage related derivatives of $8 million.


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Interstate Transportation and Storage
                                                Three Months Ended March 31,
                                                  2014                  2013              Change
Natural gas transported (MMBtu/d)               7,315,078              7,033,804            281,274
Natural gas sold (MMBtu/d)                         15,783                 16,768               (985 )
Revenues                                   $          298         $          324     $          (26 )
Operating expenses, excluding non-cash
compensation, amortization and accretion
expenses                                              (71 )                  (78 )                7
Selling, general and administrative
expenses, excluding non-cash compensation,
amortization and accretion expenses                   (14 )                  (29 )               15
Adjusted EBITDA related to unconsolidated
affiliates                                             87                     80                  7
Segment Adjusted EBITDA                    $          300         $          297     $            3

Volumes. For the three months ended March 31, 2014 compared to the same period last year, transported volumes increased due to higher volumes transported on the Panhandle and Trunkline pipelines as a result of increased demand due to the colder weather experienced in the 2014 period compared to the 2013 period. These increases were partially offset by lower volumes transported on the Transwestern pipeline due to a customer outage on the west end of the pipeline and lower volumes transported on the Tiger pipeline due to declines in supply. Transported volumes on the Sea Robin pipeline also decreased as a result of a system outage as well as declines in production.
Revenues. Interstate transportation and storage revenues decreased for the three months ended March 31, 2014 compared to the same period last year primarily due to the deconsolidation of Trunkline LNG effective January 1, 2014. Revenues for Trunkline LNG were $53 million for the three months ended March 31, 2013. This decrease was partially offset by an increase in revenues of $27 million primarily as a result of higher customer demand driven by colder weather. Operating Expenses, Excluding Non-Cash Compensation, Amortization and Accretion Expenses. Interstate transportation and storage operating expenses decreased for the three months ended March 31, 2014 compared to the same period last year primarily due to lower utility costs on the Transwestern pipeline and the deconsolidation of Trunkline LNG effective January 1, 2014.
Selling, General and Administrative Expenses, Excluding Non-Cash Compensation, Amortization and Accretion Expenses. Interstate transportation and storage selling, general and administrative expenses decreased for the three months ended March 31, 2014 compared to the same period last year primarily due to decreases in employee-related costs of $7 million, professional fees of $4 million and the deconsolidation of Trunkline LNG effective January 1, 2014. The decrease in employee-related costs was realized primarily through the successful integration of Southern Union's transportation and storage operations. Adjusted EBITDA Related to Unconsolidated Affiliates. Adjusted EBITDA related to unconsolidated affiliates increased for the three months ended March 31, 2014 compared to the same period last year primarily due to increased earnings from Citrus as a result of higher throughput.


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Midstream
                                                Three Months Ended March 31,
                                                  2014                  2013              Change
Gathered volumes (MMBtu/d):
ETP legacy assets                               2,558,851              2,334,283            224,568
Southern Union gathering and processing(1)              -                480,339           (480,339 )
NGLs produced (Bbls/d):
ETP legacy assets                                 136,818                 96,775             40,043
Southern Union gathering and processing(1)              -                 39,681            (39,681 )
Equity NGLs produced (Bbls/d):
ETP legacy assets                                  12,106                  9,744              2,362
Southern Union gathering and processing(1)              -                  7,206             (7,206 )
Revenues                                   $          653         $          600     $           53
Cost of products sold                                 493                    437                 56
Gross margin                                          160                    163                 (3 )
Operating expenses, excluding non-cash
compensation expense                                  (28 )                  (57 )               29
Selling, general and administrative
expenses, excluding non-cash compensation
expense                                                (6 )                  (19 )               13
Segment Adjusted EBITDA                    $          126         $           87     $           39
. . .
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