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ETP > SEC Filings for ETP > Form 10-Q on 7-Aug-2014All Recent SEC Filings

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

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


7-Aug-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
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% 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. Sale of AmeriGas Common Units
In January 2014, June 2014 and August 2014, we sold 9.2 million, 8.5 million and 1.2 million AmeriGas common units, respectively, for net proceeds of $381 million, $377 million and $55 million, respectively. Net proceeds from these sales were used to repay borrowings under the ETP Credit Facility and for general partnership purposes. Subsequent to the August 2014 sale, the Partnership's remaining interest in AmeriGas common units consisted of 3.1 million units held by a wholly-owned captive insurance company. Pipeline Construction Projects
In June 2014, ETP announced that our Board of Directors approved the construction of an approximately 1,100 mile pipeline to transport crude oil supply from strategic receipt points in the Bakken/Three Forks production area in North Dakota to Patoka, Illinois, where the pipeline will interconnect with ETP's existing Trunkline Pipeline, which is being converted from natural gas service to crude oil transportation service. ETP currently expects to build the pipeline to a capacity as high as 570,000 Bbls/d based on binding commitments received to date and ongoing discussions with a number of key potential shippers. The pipeline is expected to be in service by the end of 2016 with an estimated cost of approximately $4.8 billion to $5.0 billion. It is expected that ETE and ETP will initially own 60% and 40%, respectively, of the pipeline project and that, based on discussions with potential third party shippers on the pipeline regarding equity interests of up to 49% in the pipeline project, the ultimate ownership interests


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of ETE and ETP in the project may be reduced. In any event, it is expected that ETP or Sunoco Logistics will be the construction manager during construction of the pipeline project and will be the operator of the pipeline following the completion of construction.
In June 2014, ETP also announced that our Board of Directors approved the construction of an approximately 820 mile pipeline ("ET Rover") to transport natural gas from the prolific Marcellus and Utica Shale areas to numerous market regions in the United States and Canada. To date, ETP has secured 2.95 Bcf/d of binding, fee-based commitments under predominantly 20 year agreements, representing 91% of the 3.25 Bcf/d total design capacity, and is still evaluating additional bids that were received in the open season. The project is fully subscribed to the Dawn, Ontario hub at 1.3 Bcf/d, with the balance of capacity commitments delivered to interconnects with other pipelines in the Midwest. The project cost is estimated to be $3.8 billion to $4.4 billion and is expected to be in service to Defiance, Ohio by December 2016 and to Dawn, Ontario by July 2017. ETP has granted options to third party shippers to acquire up to 49% of the equity interests in the pipeline project. ETP will be the construction manager for the pipeline project and the operator of the pipeline following completion of construction.
Quarterly Cash Distribution Increase
In July 2014, ETP announced that its Board of Directors approved an increase in its quarterly distribution to $0.955 per unit ($3.82 annualized) on ETP Common Units for the quarter ended June 30, 2014, representing an increase of $0.08 per Common Unit on an annualized basis compared to the first quarter of 2014.


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Results of Operations
Consolidated Results
                            Three Months Ended                             Six Months Ended
                                 June 30,                                      June 30,
                           2014             2013          Change          2014           2013          Change
Segment Adjusted
EBITDA:
Intrastate
transportation and
storage                $      110       $      112     $       (2 )   $      287     $      244     $       43
Interstate
transportation and
storage                       265              361            (96 )          565            658            (93 )
Midstream                     157              127             30            283            214             69
NGL transportation and
services                      141               77             64            269            157            112
Investment in Sunoco
Logistics                     280              244             36            488            480              8
Retail marketing              136               97             39            245            134            111
All other                      80               51             29            238            138            100
Total                       1,169            1,069            100          2,375          2,025            350
Depreciation and
amortization                 (268 )           (251 )          (17 )         (534 )         (511 )          (23 )
Interest expense, net
of interest
capitalized                  (217 )           (211 )           (6 )         (436 )         (422 )          (14 )
Gain on sale of
AmeriGas common units          93                -             93            163              -            163
Gains (losses) on
interest rate
derivatives                   (46 )             39            (85 )          (48 )           46            (94 )
Non-cash unit-based
compensation expense          (13 )            (10 )           (3 )          (27 )          (24 )           (3 )
Unrealized gains
(losses) on commodity
risk management
activities                     (1 )             18            (19 )          (30 )           37            (67 )
LIFO valuation
adjustments                    20              (22 )           42             34             16             18
Adjusted EBITDA
related to
discontinued
operations                      -              (23 )           23            (27 )          (63 )           36
Adjusted EBITDA
related to
unconsolidated
affiliates                   (170 )           (158 )          (12 )         (366 )         (323 )          (43 )
Equity in earnings of
unconsolidated
affiliates                     57               37             20            136            109             27
Other, net                    (15 )              5            (20 )          (18 )            8            (26 )
Income from continuing
operations before
income tax expense            609              493            116          1,222            898            324
Income tax expense
from continuing
operations                    (70 )            (89 )           19           (216 )          (92 )         (124 )
Income from continuing
operations                    539              404            135          1,006            806            200
Income from
discontinued
operations                     42                9             33             66             31             35
Net income             $      581       $      413     $      168     $    1,072     $      837     $      235

See the detailed discussion of Segment Adjusted EBITDA below.
Depreciation and Amortization. Depreciation and amortization expense increased for the three and six months ended June 30, 2014 compared to the same periods last year primarily due to additional depreciation from assets recently placed in service.
Gain on Sale of AmeriGas Common Units. In January 2014 and June 2014, the Partnership recognized a gain on the sale of 9.2 million and 8.5 million AmeriGas common units, respectively, that were originally received in connection with the contribution of our propane business to AmeriGas in 2012. As of June 30, 2014, the Partnership held 4.4 million AmeriGas common units. Gains (Losses) on Interest Rate Derivatives. Losses on interest rate derivatives during the three and six months ended June 30, 2014 resulted from decreases in forward interest rates, which caused our forward-starting swaps to decrease in value. Conversely,


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increases in forward interest rates resulted in gains on interest rate derivatives during the three and six months ended June 30, 2013. 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.
LIFO Valuation Adjustments. LIFO valuation reserve adjustments were recorded during the three and six months ended June 30, 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 six months ended June 30, 2014 related to a marketing business that was sold effective April 1, 2014. Amounts for the three and six months ended June 30, 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. Income tax expense is based on the earnings of our taxable subsidiaries. In addition, the six months ended June 30, 2014 included the impact of the Trunkline LNG Transaction, which was treated as a sale for tax purposes, resulting in $87 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                              Six Months Ended
                                 June 30,                                       June 30,
                           2014             2013          Change          2014            2013          Change
Equity in earnings
(losses) of
unconsolidated
affiliates:
AmeriGas               $       (8 )     $      (20 )   $       12     $       26       $      43     $      (17 )
Citrus                         26               24              2             44              38              6
FEP                            13               14             (1 )           27              27              -
Regency                         1                2             (1 )           (6 )             2             (8 )
PES                            18               13              5             35              (9 )           44
Other                           7                4              3             10               8              2
Total equity in
earnings of
unconsolidated
affiliates             $       57       $       37     $       20     $      136       $     109     $       27

Proportionate share of
interest,
depreciation,
amortization, non-cash
items and taxes:
AmeriGas               $       13       $       36     $      (23 )   $       30       $      70     $      (40 )
Citrus                         55               55              -            105             103              2
FEP                             5                5              -             10              10              -
Regency                        24               14             10             58              14             44
PES                             7                5              2             13               6              7
Other                           9                6              3             14              11              3
Total proportionate
share of interest,
depreciation,
amortization, non-cash
items and taxes        $      113       $      121     $       (8 )   $      230       $     214     $       16

Adjusted EBITDA
related to
unconsolidated
affiliates:
AmeriGas               $        5       $       16     $      (11 )   $       56       $     113     $      (57 )
Citrus                         81               79              2            149             141              8
FEP                            18               19             (1 )           37              37              -
Regency                        25               16              9             52              16             36
PES                            25               18              7             48              (3 )           51
Other                          16               10              6             24              19              5
Total Adjusted EBITDA
related to
unconsolidated
affiliates             $      170       $      158     $       12     $      366       $     323     $       43

Distributions received
from unconsolidated
affiliates:
AmeriGas               $       11       $       24     $      (13 )   $       22       $      48     $      (26 )
Citrus                         41               39              2             75              63             12
FEP                            16               16              -             32              33             (1 )
Regency                        15               15              -             30              15             15
PES                             -                -              -              -              25            (25 )
Other                           9                8              1             14              13              1
Total distributions
received from
unconsolidated
affiliates             $       92       $      102     $      (10 )   $      173       $     197     $      (24 )


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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. For the three and six months ended June 30, 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                                  Six Months Ended
                                    June 30,                                           June 30,
                              2014             2013            Change            2014            2013            Change
Natural gas transported
(MMBtu/d)                  9,069,215         9,654,524         (585,309 )      9,299,177       9,682,789         (383,612 )
Revenues                 $       712       $       623     $         89     $      1,646     $     1,307     $        339
Cost of products sold            551               447              104            1,285             937              348
Gross margin                     161               176              (15 )            361             370               (9 )
Unrealized (gains)
losses on commodity risk
management activities             (3 )             (12 )              9               24             (24 )             48
Operating expenses,
excluding non-cash
compensation expense             (43 )             (47 )              4              (85 )           (89 )              4
Selling, general and
administrative expenses,
excluding non-cash
compensation expense              (5 )              (5 )              -              (12 )           (13 )              1
Adjusted EBITDA related
to unconsolidated
affiliates                         -                 -                -               (1 )             -               (1 )
Segment Adjusted EBITDA  $       110       $       112     $         (2 )   $        287     $       244     $         43

Volumes. Transported volumes decreased for the three and six months ended June 30, 2014 compared to the same periods last year primarily due to the reduction of volumes under certain long-term transportation contracts offset by increased volumes due to a more favorable pricing environment.


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

                           Three Months Ended                           Six Months Ended
                                June 30,                                    June 30,
                           2014          2013          Change          2014          2013          Change
Transportation fees    $      114     $     124     $      (10 )   $      231     $     253     $      (22 )
Natural gas sales and
other                          17            19             (2 )           58            46             12
Retained fuel revenues         26            26              -             56            49              7
Storage margin,
including fees                  4             7             (3 )           16            22             (6 )
Total gross margin     $      161     $     176     $      (15 )   $      361     $     370     $       (9 )

Intrastate transportation and storage gross margin decreased for the three months ended June 30, 2014 compared to the same period last year due to the following:
Transportation fees. Transportation fees decreased primarily due to the reduction of volumes under 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 decreased primarily due to operational gas loss in the current period.

For the six months ended June 30, 2014 compared to the same period last year, intrastate transportation and storage gross margin decreased due to the following:
Transportation fees. Transportation fees decreased primarily due to the reduction of volumes under certain long-term transportation contracts.

Natural gas sales and other. Margin from natural gas sales and other increased primarily due to opportunities from the commodity price volatility created by the cold winter season during the first quarter of 2014.

Retained fuel revenues. Retention revenue increased primarily due to higher average natural gas spot prices. The average spot price at the Houston Ship Channel location for the six months ended June 30, 2014 was $4.81/MMBtu, an increase of $1.09/MMBtu compared to the same period last year.

Storage margin was comprised of the following:

                            Three Months Ended                                 Six Months Ended
                                 June 30,                                          June 30,
                           2014             2013          Change           2014               2013             Change
Withdrawals from
storage natural gas
inventory (MMBtu)               -                -              -       37,806,832          11,953,718       25,853,114
Realized margin on
natural gas inventory
transactions           $       (6 )     $      (11 )   $        5     $         28       $         (14 )   $         42
Fair value inventory
adjustments                     -              (15 )           15              (11 )                 5              (16 )
Unrealized gains
(losses) on
derivatives                     4               26            (22 )            (14 )                17              (31 )
Margin recognized on
natural gas inventory,
including related
derivatives                    (2 )              -             (2 )              3                   8               (5 )
Revenues from
fee-based storage               6                7             (1 )             13                  14               (1 )
Total storage margin   $        4       $        7     $       (3 )   $         16       $          22     $         (6 )

For the three and six months ended June 30, 2014 compared to the same periods last year, the decreases in storage margin were principally driven by a less favorable storage environment leading to a decline in the spreads between the spot and forward prices on natural gas we own in the Bammel storage facility.


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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 decreases of $9 million and $48 million, respectively, in the margin from unrealized gains and losses on commodity risk management activities for the three and six months ended June 30, 2014 compared to the same periods last year.
For the three months ended June 30, 2014, unrealized gains from commodity risk management activities of $3 million consisted of losses from storage and non-storage related derivatives. For the three months ended June 30, 2013, unrealized gains of $12 million included unrealized gains on storage and non-storage related derivatives of $26 million, offset by losses from the fair value adjustments to storage gas inventory of $15 million.
For the six months ended June 30, 2014, unrealized losses on commodity risk management activities of $24 million included $13 million of losses from storage and non-storage related derivatives, as well as $11 million in losses from mark-to-market of physical storage gas during the period. 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 six months ended June 30, 2013, unrealized gains of $24 million included unrealized gains on storage and non-storage related derivatives of $19 million and fair value adjustments to physical storage gas of $5 million. Operating Expenses, Excluding Non-Cash Compensation Expense. Intrastate transportation and storage operating expenses decreased for the three and six months ended June 30, 2014 compared to the same periods last year primarily due to decreases in ad valorem taxes driven by the settlement of lower valuations with local taxing authorities during the current period. Interstate Transportation and Storage . . .

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