Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Nine months ended September 30, 2008 (Calendar Year transition)
Business Overview: ETE is a master limited partnership engaged in natural gas midstream, intrastate and interstate transportation, storage, and retail propane operations. Operations are conducted primarily through its subsidiary, Energy Transfer Partners, L.P. (ETP). The company changed its fiscal year-end to the calendar year effective January 1, 2008.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2008 | Nine Months Ended Aug 31, 2007 |
|---|---|---|
| Total Revenues | $7,498,686 | $5,403,592 |
| Operating Income | $846,133 | $706,248 |
| Net Income | $352,478 | $288,319 |
| Net Income (Limited Partners) | $351,387 | $287,416 |
| Diluted EPS (Limited Partners) | $1.57 | $1.30 |
| Cash Flow from Operations | $696,554 | $668,561 |
| Cash Flow from Investing | ($1,467,412) | ($942,832) |
| Cash Flow from Financing | $1,340,433 | $102,947 |
| Total Debt (Long-term + Current) | $7,227,401 | $5,917,174 |
| Cash and Cash Equivalents | $626,132 | $56,557 |
Note: All figures in thousands of dollars unless otherwise noted.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by approximately $2.1 billion (39%) compared to the prior nine-month period. This was driven by higher natural gas prices, increased volumes in intrastate transportation, and the inclusion of the Canyon Gathering System acquisition.
- Operating Income: Operating income rose by $139.9 million (20%), primarily due to increased gross margins in the Midstream and Intrastate segments, offset by losses in the Retail Propane segment.
- Capital Expenditures: Cash used in investing activities increased significantly to $1.47 billion, reflecting $1.49 billion in capital expenditures (net of contributions in aid of construction) and $62 million in acquisitions.
- Debt Levels: Total debt increased by approximately $1.3 billion to $7.23 billion, funded by new senior notes issuances and credit facility borrowings to support growth projects.
- Trading Activities: The company ceased speculative trading of financial derivatives in July 2008. Trading activities resulted in net losses of $26.2 million for the nine months ended September 30, 2008, compared to net gains of $2.2 million in the prior period.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Liquidity Strategy: Management is preserving liquidity due to constrained capital markets. Discretionary capital expenditures have been reduced, and the cash distribution rate was maintained at the prior quarter's level ($0.48 per unit).
- Financing: The company expects to fund growth capital expenditures through cash from operations and existing credit facilities. It does not expect to access capital markets until mid-to-late 2009, unless the ETP Enogex Partners transaction is consummated, which could accelerate financing needs to early 2010.
- Joint Ventures:
- ETP Enogex Partners: Entered into an agreement with OGE Energy Corp. to form a 50/50 joint venture. Completion is contingent on securing $2.2 billion in debt financing.
- Fayetteville Express Pipeline: Entered into a 50/50 joint venture with Kinder Morgan for a $1.3 billion pipeline project expected to be in service by late 2010/early 2011.
Risks and Contingencies
- FERC/CFTC Investigations: The company faces ongoing investigations by the FERC and CFTC regarding alleged market manipulation of natural gas prices (Houston Ship Channel, Waha, and Permian Hubs).
- FERC: Seeking approximately $167.6 million in disgorgement and penalties (potentially rising to $200 million with additional claims). Hearings are scheduled for late 2008/2009.
- CFTC: Settled for $10.0 million in March 2008.
- Third-Party Litigation: Multiple class actions and private suits are pending seeking unspecified damages related to alleged price manipulation.
- Market Conditions: Declining natural gas prices and credit market tightening may reduce customer drilling activity, potentially lowering transportation volumes. The company notes that while fee-based revenue provides stability, volume-based revenue could be adversely affected.
- Environmental Liabilities: Accruals of $13.3 million exist for environmental remediation, primarily related to PCBs and historical site contamination. Future costs related to new regulations (e.g., SPCC program) are not currently estimable.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial covenants given the $7.2 billion debt load and potential market volatility.
- Regulatory Resolution: Monitor the status of FERC hearings and potential penalties, which could materially impact cash flow and liquidity.
- Capital Market Access: Assess the company's ability to secure the $2.2 billion financing required for the ETP Enogex Partners joint venture in the current credit environment.
- Customer Credit Risk: Evaluate the creditworthiness of exploration and production customers, as reduced drilling activity could impact volume-based revenues.
- Propane Margins: Review the impact of unrealized losses on financial instruments ($18.4 million for the nine months) on the Retail Propane segment's profitability.