Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE), a Delaware limited partnership trading on the NYSE under ticker "ETE".
Reporting Period: Fiscal year ended December 31, 2008.
Structure: ETE operates primarily through its subsidiary, Energy Transfer Partners, L.P. (ETP). ETE's only cash-generating assets are its direct and indirect investments in ETP (approximately 62.5 million Common Units, 2% General Partner interest, and 100% of Incentive Distribution Rights).
Operations: The company operates in four primary segments: Natural Gas Midstream, Intrastate Transportation and Storage, Interstate Transportation, and Retail Propane. Significant 2008 achievements included the completion of over 400 miles of large-diameter pipeline and the initiation of construction on the Midcontinent Express and Texas Independence pipelines.
Key Financial Metrics
| Metric | Year Ended Dec 31, 2008 | Year Ended Aug 31, 2007 |
|---|---|---|
| Total Revenues | $9.29 billion | $6.79 billion |
| Gross Margin | $2.36 billion | $1.71 billion |
| Operating Income | $1.10 billion | $809.3 million |
| Net Income | $375.0 million | $319.4 million |
| Cash Flow from Operations | $823.8 million | $754.5 million |
| Capital Expenditures (Total) | $2.15 billion | $1.18 billion |
| Consolidated Debt | $7.24 billion | $5.66 billion (ETP only) |
| Liquidity (Cash + Available Credit) | $1.42 billion | N/A |
Note: ETE reported a net loss on non-hedged interest rate derivatives of $128.4 million in 2008, significantly impacting net income despite strong operating performance.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by $2.50 billion (36.8%) compared to the prior fiscal year, driven by higher volumes in natural gas operations and increased propane selling prices.
- Operating Income: Operating income rose by $289.6 million (35.8%), primarily due to the Intrastate Transportation and Storage segment, which saw a $230.3 million increase driven by higher transport volumes and fuel retention revenue.
- Debt Levels: Consolidated debt increased significantly to fund growth capital expenditures and acquisitions. ETE had approximately $7.24 billion in consolidated debt as of December 31, 2008.
- Derivative Losses: The company ceased speculative trading activities in July 2008. However, the year included a $128.4 million loss on non-hedged interest rate derivatives, compared to a $29.1 million gain in the prior period.
- Propane Segment: While retail propane gallons sold decreased slightly due to customer conservation and warmer weather in some regions, gross margins improved due to the company's ability to pass on wholesale price increases.
Guidance, Outlook, and Risks
Outlook and Capital Needs
Management expects to fund 2009 growth capital expenditures (estimated between $740 million and $820 million for intrastate and interstate operations, excluding joint ventures) through cash flow from operations, debt issuances, and equity offerings. ETP successfully raised $600 million in senior notes in December 2008 and $225.9 million in equity in January 2009.
Key Risks and Contingencies
- FERC Investigation: The Federal Energy Regulatory Commission (FERC) is pursuing legal action regarding alleged market manipulation in the Houston Ship Channel and Waha/Permian Hubs. FERC seeks approximately $70.1 million in disgorgement and $97.5 million in civil penalties. A settlement regarding Oasis pipeline claims was approved by FERC in February 2009, but market manipulation claims remain pending.
- Commodity Price Volatility: Profits in midstream and propane segments are sensitive to natural gas and NGL price spreads. A decline in natural gas prices has led to reduced drilling activity by customers, potentially affecting future throughput volumes.
- Capital Market Constraints: Deteriorating credit markets may limit the availability or increase the cost of financing for future expansion projects.
- Interest Rate Risk: The company has significant exposure to variable interest rates ($2.48 billion outstanding), though it utilizes interest rate swaps to mitigate this risk.
Investor Verification Checklist
- FERC Litigation Status: Verify the final outcome of the FERC market manipulation proceedings and the potential impact of penalties or disgorgement on future cash flows.
- Debt Covenants: Confirm continued compliance with financial covenants (leverage ratio, interest coverage) given the high debt load and potential for further market volatility.
- Customer Credit Risk: Assess the creditworthiness of major natural gas producers and shippers, as reduced drilling activity due to low commodity prices may increase default risk.
- Derivative Exposure: Review the current status of non-hedged interest rate derivatives and the potential for future mark-to-market losses.
- Capital Expenditure Execution: Monitor the completion timeline and cost of major pipeline projects (Midcontinent Express, Texas Independence, Fayetteville Express) to ensure they generate expected returns.