Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2009
Overview: ETE is a master limited partnership whose operations are conducted primarily through its subsidiary, Energy Transfer Partners, L.P. (ETP). The business focuses on 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 (Six Months Ended June 30, 2009) | Value (in thousands) |
|---|---|
| Total Revenues | $2,781,664 |
| Net Income | $421,508 |
| Net Income Attributable to Partners | $255,911 |
| Net Income Per Limited Partner Unit (Diluted) | $1.14 |
| Operating Cash Flow | $653,488 |
| Capital Expenditures | $512,534 |
| Total Debt (Long-term + Current) | $7,309,730 |
| Cash and Cash Equivalents | $114,361 |
| Available Credit Capacity | ~$2.32 billion (ETP: $1.94B; Parent: $377.5M) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately 47% ($2.51 billion) compared to the six months ended June 30, 2008. This was driven by a significant drop in natural gas and NGL prices, which reduced volumes transported and sold in the midstream and intrastate segments.
- Net Income Stability: Despite the revenue drop, consolidated net income remained relatively stable, decreasing only slightly by $12.5 million (3%) to $421.5 million. This was largely due to a corresponding decrease in the cost of products sold and a significant gain of $59.96 million on non-hedged interest rate derivatives.
- Segment Performance:
- Intrastate Transportation: Operating income decreased by $23.6 million due to lower fuel retention margins caused by falling natural gas prices, partially offset by higher transportation fees from increased volumes.
- Midstream: Operating income decreased significantly by $64.5 million due to less favorable processing conditions and lower commodity prices.
- Retail Propane: Operating income increased by $67.2 million to $168.6 million, driven by the ability to maintain selling prices despite lower wholesale costs and favorable mark-to-market accounting adjustments.
- Capital Expenditures: Capital expenditures decreased by approximately 48% ($466 million) compared to the prior year, reflecting a strategic reduction in discretionary spending to preserve liquidity.
Guidance, Outlook, and Risks
- Liquidity Strategy: Management has taken steps to preserve liquidity, including reducing discretionary capital expenditures. The company expects to fund growth capital expenditures and working capital needs through existing cash, operating cash flows, and available credit facilities without accessing capital markets until the latter half of 2010.
- Capital Requirements: ETP expects to spend between $100 million and $120 million on midstream/intrastate growth and $140 million to $160 million on interstate growth in the second half of 2009. Significant capital contributions are also expected for joint ventures: $320 million to $340 million for Midcontinent Express Pipeline (MEP) and $160 million to $180 million for Fayetteville Express Pipeline (FEP).
- Market Risks: The company faces exposure to volatile natural gas and NGL prices. Lower commodity prices have led to reduced drilling activity by customers, which may further reduce transportation volumes. Credit risk for customers is also elevated due to economic conditions.
- Legal and Regulatory:
- FERC Investigation: The FERC is investigating alleged market manipulation by ETP regarding natural gas trading activities between 2003 and 2005. The company is vigorously contesting these claims. Potential penalties and disgorgement could exceed $181.9 million.
- Settlements: A settlement regarding the Oasis pipeline was approved by the FERC in February 2009, resulting in no civil penalties or payments.
- Distributions: ETE declared a quarterly distribution of $0.535 per unit ($2.14 annualized) for the second quarter of 2009. ETP declared a distribution of $0.89375 per unit ($3.575 annualized).
Investor Verification Checklist
- Joint Venture Funding: Verify the status of financing for the MEP and FEP projects, as the company expects to make significant capital contributions ($480M - $520M combined) in the second half of 2009 if project-level financing is not secured.
- FERC Litigation Outcome: Monitor the progress of the FERC market manipulation investigation and related third-party lawsuits, as a negative outcome could result in substantial cash outflows and reputational damage.
- Commodity Price Sensitivity: Assess the impact of continued low natural gas prices on customer drilling activity and subsequent transportation volumes, which are a key revenue driver for the intrastate and interstate segments.
- Debt Covenants: Confirm continued compliance with debt covenants, particularly given the high leverage and the reliance on credit facilities to fund capital projects.
- Propane Margin Sustainability: Evaluate whether the strong margins in the retail propane segment can be sustained if wholesale propane prices rise or if customer demand weakens further due to economic conditions.