Energy Transfer Partners (NYSE: ETP) reported earnings after the market closed on Wednesday. Analysts were expecting earnings of $0.30 per unit and revenue ranging from a high of $2.87 billion to a low of $1.22 billion. Energy Transfer recorded a loss of $0.33 and revenue of $1.4 billion, but these numbers don't tell the whole story, so let's take a closer look.
What went right
Energy Transfer Partners' distributable cash flow continues to increase. The partnership recorded $275.2 million in discounted cash flow during the second quarter this year, and that number improved to $339.5 million this quarter. It was a $73.4 million increase over the third quarter of 2011.
Interstate transportation was Energy Transfer's best-performing business segment this quarter. Adjusted EBITDA doubled year over year on the back of increased demand and ETP's stake in the Fayetteville Express Pipeline and the Citrus Pipeline systems. This segment is a great example of ETP's recent push to diversify geographically. FEP and Citrus are two systems outside Texas that have reaped significant dividends for Energy Transfer.
Energy Transfer's NGL Transportation and Services segment increased EBITDA 19% over last year to $36 million. NGL transportation volumes were up as two new pipelines came into service, and increased production from the Eagle Ford shale increased volumes on existing lines. Overall NGL volumes were up 31% compared with the third quarter of 2011. Fractionation volumes were down, however, largely because one facility in Louisiana was affected by refinery closures during Hurricane Isaac.
ETP's Midstream unit increased its fee-based margin by $20 million. This increase in reliable income is a great sign for the partnership; however, non-fee-based margins dropped 18% because of lower volumes and lower realized prices for NGLs. This disparity thrusts the importance of fee-based income into the spotlight, and ETP is working steadily to improve that situation. Overall, adjusted EBITDA for Energy Transfer's midstream segment was up slightly over last year to $105 million.
What went wrong
With so many segments showing year-over-year improvement, that means whatever went wrong for ETP this quarter went really wrong. That brings us to the performance of the Intrastate Transportation and Storage segment.
Natural gas producers have pulled back, and the impact is quite visible at Energy Transfer. Volumes dropped almost 1.2 billion cubic feet per day compared with last year, to 9.9 Bcf per day. As a result, adjusted EBITDA fell 29% to $121 million. The one upside, as management noted in the conference call, is that volumes are flat when compared to the second quarter of this year, indicating producers are through reacting to the low price of gas.
Two more items of note
CEO Kelcy Warren is committed to continuing to operate the 4,900 gas stations and convenience stores that ETP acquired when it bought Sunoco. In ETP's earnings post-mortem, Warren cites the well-run nature of the retail operation and its ability to generate stable cash flows as reasons to stick with it in the long term. He goes on to acknowledge that Energy Transfer doesn't have the know-how to manage those assets, but the Sunoco managers that have since come on board at ETP do, and so the business will remain in good hands, and possibly grow strategically.
Speaking of strategic growth, Energy Transfer spent $583 million in the third quarter. Most of the funds were dedicated to the Midstream and NGL segments. Remember the Midstream unit is where ETP is targeting that increase in fee-based margins, and the NGL segment is booming because of production in the Eagle Ford, making both units smart targets for allocating funds.
Energy Transfer rounds out the third-quarter earnings reporting for the major midstream companies. Kinder Morgan (NYSE:KMI), Enterprise Products Partners (NYSE:EPD), and Plains All American Pipeline (NASDAQ:PAA) were all affected a little bit by commodity prices, but none of them really took it on the chin the way ETP did. The partnership really got punished at the hands of natural gas this quarter, but as the partnership increases the percentage of gross margin coming from fee-based contracts, quarters like this one will be old news. Distributable cash flow continues to rise, which really lends itself to the idea that ETP is poised to return to distribution increases soon.