ET

Business Context and Reporting Period

Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2010
Business Overview: ETE operates primarily through its subsidiary, Energy Transfer Partners, L.P. (ETP), engaging in natural gas midstream, intrastate and interstate transportation, storage, and retail propane operations. The Parent Company (ETE) has no separate operating activities and relies on distributions from ETP for cash flow.

Key Financial Metrics

Note: All figures in thousands of dollars unless otherwise specified.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $242.0 million (14.8%) driven by higher natural gas and NGL prices and increased volumes in the midstream segment.
• Net Income Decline: Net income decreased by $75.7 million (27.0%). This was primarily due to a $24.5 million swing in gains/losses on non-hedged interest rate derivatives (from a $10.1M gain in 2009 to a $14.4M loss in 2010) and a $19.1 million decrease in the Allowance for Equity Funds Used During Construction (AFUDC).
• Operating Income: Operating income decreased by $17.2 million. While the Midstream segment saw a significant operating income increase of $27.2 million due to favorable NGL pricing, the Retail Propane segment declined by $37.3 million due to the absence of unrealized gains on financial instruments that benefited the prior year.
• Liquidity: Cash and cash equivalents increased significantly to $384.4 million from $68.3 million, supported by $504.5 million in net proceeds from ETP equity offerings and strong operating cash flows.

Guidance, Outlook, and Risks

Capital Expenditure Outlook

Management expects to spend the following for the remainder of 2010:

• Growth CapEx: $180M–$200M (Midstream/Intrastate), $820M–$890M (Interstate), and $20M–$30M (Retail Propane).
• Maintenance CapEx: $70M–$90M.
• Joint Venture Contributions: $100M–$120M.

Distributions

ETE declared a quarterly distribution of $0.54 per Common Unit ($2.16 annualized). ETP declared a quarterly distribution of $0.89375 per Common Unit ($3.575 annualized).

Risks and Contingencies

• Legal Proceedings: ETP settled FERC market manipulation claims in September 2009, establishing a $25.0 million fund for third-party claims. Several related class-action lawsuits remain pending in federal and state courts. Management expects the after-tax cash impact to be less than $30.0 million.
• Market Risk: Significant exposure to natural gas and NGL price volatility, managed through extensive derivative hedging programs. A hypothetical 10% change in commodity prices could materially impact fair values of derivatives.
• Interest Rate Risk: ETE has $1.58 billion in variable rate debt, largely swapped to fixed. A 100 basis point change in interest rates would impact consolidated interest expense by approximately $19.8 million annually.

Investor Verification Checklist

• Derivative Accounting Impact: Verify the specific impact of mark-to-market accounting on the Retail Propane and Intrastate segments, as unrealized gains/losses significantly distorted year-over-year comparisons.
• Interest Rate Derivatives: Confirm the status of non-hedged interest rate swaps and the potential for future volatility in earnings due to floating rate index changes.
• Legal Settlement Fund: Monitor the allocation of the $25.0 million FERC settlement fund and the status of pending third-party litigation to assess potential additional liabilities.
• Capital Funding: Review the utilization of the $1.94 billion available under the ETP Credit Facility and the success of ongoing equity distribution programs to fund the aggressive $1.1B+ capital expenditure plan for the remainder of 2010.
• Parent Company vs. Consolidated: Distinguish between the Parent Company's stand-alone financials (which rely entirely on ETP distributions) and the consolidated results which include ETP's operating assets.