Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2009
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 independent operating activities; its cash flow is derived from distributions received from ETP.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Balance Sheet (Sep 30, 2009) |
|---|---|---|---|
| Total Revenues | $1,129.8 million | $3,911.5 million | - |
| Operating Income | $173.5 million | $744.6 million | - |
| Net Income (Consolidated) | $34.3 million | $455.8 million | - |
| Net Income Attributable to Partners | $47.0 million | $302.9 million | - |
| Diluted EPS (Limited Partner) | $0.21 | $1.35 | - |
| Cash Flow from Operations | - | $721.4 million | - |
| Cash and Cash Equivalents | - | - | $50.2 million |
| Total Debt (Long-term + Current) | - | - | $7,786.3 million |
| Available Credit Capacity | - | - | ~$1.83 billion (Parent + ETP) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 48% for the three months and 48% for the nine months compared to the prior year periods. This was driven primarily by lower natural gas and NGL prices and reduced volumes transported due to customer drilling cutbacks.
- Operating Income: Operating income fell 32% for the quarter and 12% for the nine months. The decline was most significant in the Intrastate Transportation and Storage segment due to lower fuel retention margins and storage margins.
- Net Income: Consolidated net income dropped 81% for the quarter and 26% for the nine months. A significant factor was a $35.6 million loss on non-hedged interest rate derivatives in the quarter, compared to a $9.2 million loss in the prior year quarter.
- Segment Performance:
- Intrastate: Operating income decreased $120.1 million (quarter) and $143.7 million (nine months) due to lower natural gas prices impacting fuel retention and storage margins.
- Interstate: Operating income increased $7.9 million (quarter) and $10.3 million (nine months) driven by the completion of the Phoenix pipeline expansion.
- Retail Propane: Operating income improved significantly, turning from a loss of $39.7 million to a loss of $16.6 million in the quarter, and increasing from $61.7 million to $152.1 million for the nine months, aided by lower propane costs and favorable marketing activity.
Guidance, Outlook, and Risks
- Liquidity and Capital Resources: Management expects to fund growth capital expenditures and working capital needs through cash from operations and existing credit facilities without accessing capital markets until the latter half of 2010. ETP raised approximately $2.4 billion in debt and equity proceeds since December 2008.
- Capital Expenditures: ETP expects to spend between $30 million and $40 million on growth capex in the last quarter of 2009. Significant future contributions are anticipated for the Midcontinent Express (MEP) and Fayetteville Express (FEP) pipeline joint ventures.
- FERC Settlement: ETP entered into a settlement agreement with the FERC regarding market manipulation allegations. The agreement requires a $5 million payment to the federal government and the establishment of a $25 million fund for third-party claims. ETP increased its accrual for these matters to $30.0 million as of September 30, 2009.
- Market Risks: The company faces exposure to commodity price volatility (natural gas, NGLs, propane) and interest rate fluctuations. While derivatives are used to hedge these risks, non-hedged interest rate swaps resulted in significant unrealized losses in the current period due to falling LIBOR rates.
- Outlook: Management notes that lower natural gas prices have led to reduced drilling activity and shut-ins by producers, which negatively impacts transportation volumes. However, fee-based revenue is expected to increase as recent pipeline expansions come online.
- FERC Settlement Impact: Verify the final cash outflow from the $30 million accrual, specifically the portion allocated to third-party claims versus the federal payment.
- Joint Venture Funding: Monitor the status of the Fayetteville Express Pipeline (FEP) credit facility. If it does not close as anticipated, ETE may need to make additional capital contributions of up to $140 million in late 2009.
- Interest Rate Derivatives: Review the valuation and potential future losses on non-hedged interest rate swaps, which caused a $35.6 million loss in Q3 2009.
- Commodity Price Sensitivity: Assess the impact of continued low natural gas prices on fuel retention revenues and the potential for further customer production shut-ins.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly given the high leverage ratio and the recent increase in debt levels to fund growth projects.