Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended March 31, 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 has no independent operating activities; its cash flow is derived from distributions received from ETP.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $1,629.97 million | $2,639.25 million |
| Operating Income | $356.10 million | $367.93 million |
| Net Income | $279.75 million | $267.16 million |
| Net Income Attributable to Partners | $151.54 million | $126.71 million |
| Diluted EPS (Limited Partner) | $0.68 | $0.57 |
| Operating Cash Flow | $317.83 million | $254.90 million |
| Total Debt (Gross) | $7,204.11 million | $7,235.59 million |
| Cash and Cash Equivalents | $106.44 million | $56.56 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately $1.01 billion (38%) compared to Q1 2008. This was driven primarily by lower natural gas and NGL prices, which reduced revenues in the Midstream and Intrastate segments.
- Net Income Increase: Despite lower revenues, Net Income increased by $12.59 million. This was largely due to a $41.69 million improvement in "Gains (losses) on non-hedged interest rate derivatives" (a gain of $10.05 million in 2009 vs. a loss of $31.64 million in 2008) and a $10.54 million increase in the Allowance for Equity Funds Used During Construction (AFUDC).
- Segment Performance:
- Retail Propane: Operating income increased significantly by $57.11 million to $164.07 million, driven by the ability to maintain selling prices despite lower wholesale costs and favorable mark-to-market accounting on financial instruments.
- Intrastate Transportation: Operating income decreased by $44.13 million due to lower fuel retention revenues caused by the drop in natural gas prices.
- Midstream: Operating income decreased by $27.25 million due to lower processing margins.
- Inventory Write-down: The company recorded a non-cash lower of cost or market adjustment of $44.6 million for natural gas inventory in Q1 2009.
Guidance, Outlook, and Risks
- Liquidity and Capital Markets: Management has taken steps to preserve liquidity, including reducing discretionary capital expenditures. In April 2009 (subsequent to the period end), ETP completed a $1.0 billion senior notes offering and a $352.4 million equity offering. Pro forma available capacity under debt facilities and cash on hand was approximately $2.32 billion as of March 31, 2009.
- Capital Expenditures: ETP expects to spend between $595.0 million and $655.0 million on growth capital expenditures in the last nine months of 2009, excluding joint venture contributions. Additional capital contributions of $545.0 million to $585.0 million are expected for the Midcontinent Express (MEP) and Fayetteville Express (FEP) pipelines.
- Distributions: ETE declared a quarterly distribution of $0.525 per Common Unit ($2.10 annualized) for Q1 2009, an increase of $0.06 per unit on an annualized basis. ETP declared a distribution of $0.89375 per unit ($3.575 annualized).
- Regulatory and Legal Risks:
- FERC Investigation: ETP is subject to an ongoing FERC investigation regarding alleged market manipulation in the Houston Ship Channel. While Oasis pipeline claims were settled in February 2009 with no penalties, market manipulation claims remain pending with potential penalties and disgorgement totaling approximately $184.4 million if the FERC pursues all claims.
- Class Action Litigation: Several class action lawsuits regarding price manipulation and antitrust violations were dismissed in March 2009, though plaintiffs have filed motions for reconsideration or leave to amend.
- Market Risk: The company faces exposure to commodity price volatility and interest rate fluctuations. A hypothetical 100 basis point increase in interest rates would result in an $80.8 million annual increase in interest expense.
Investor Verification Checklist
- Debt Refinancing: Verify the status of the April 2009 debt and equity offerings and their impact on leverage ratios and interest coverage.
- FERC Outcome: Monitor the resolution of the FERC market manipulation investigation, specifically the potential for civil penalties and disgorgement of profits.
- Joint Venture Funding: Confirm the ability to fund the required capital contributions for the MEP and FEP pipeline projects without accessing capital markets.
- Commodity Price Sensitivity: Assess the impact of continued low natural gas prices on the Midstream and Intrastate segments' fuel retention revenues.
- Inventory Valuation: Review future quarters for additional lower of cost or market write-downs on natural gas and NGL inventories.