Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended November 30, 2007
Key Corporate Action: The Partnership amended its partnership agreement effective November 9, 2007, to change its fiscal year-end from August 31 to December 31. Consequently, the next full fiscal year begins January 1, 2008.
Key Financial Metrics
| Metric | Nov 30, 2007 | Nov 30, 2006 |
|---|---|---|
| Total Revenues | $1,628,072 | $1,388,445 |
| Operating Income | $217,325 | $103,088 |
| Net Income | $51,464 | $31,041 |
| Net Income (Limited Partners) | $51,305 | $30,896 |
| Diluted EPS (Limited Partner) | $0.23 | $0.20 |
| Cash Flow from Operations | $97,262 | $85,936 |
| Total Debt (Short-term + Long-term) | $6,045,036 | $5,245,739* |
| Cash and Equivalents | $53,527 | $77,350 |
*Note: Prior period debt figures are derived from the balance sheet comparison; the 2006 period did not include Transwestern debt until December 2006.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by $239.6 million (17.3%) primarily due to the inclusion of the Transwestern interstate transportation segment (acquired Dec 2006) and the Canyon Gathering System acquisition (Oct 2007).
- Operating Income: Operating income more than doubled to $217.3 million, driven by a $57.0 million increase in Intrastate Transportation and Storage operating income and the addition of $24.0 million from Interstate Transportation.
- Acquisitions: On October 5, 2007, ETP acquired the Canyon Gathering System for approximately $305.2 million, financed by a new $310 million term loan.
- Interest Expense: Increased by $9.3 million to $77.9 million due to higher borrowings for growth capital expenditures and acquisitions, partially offset by changes in hedge accounting treatment.
- Other Income/Expense: Significant net loss of $37.0 million compared to a gain of $1.5 million in the prior year. This was driven by $29.0 million in losses on non-hedged interest rate swaps and $7.8 million in liquidated damages related to registration rights agreements.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Capital Allocation
- Capital Expenditures: Management expects to expend approximately $950 million on growth capital expenditures and $790 million on interstate segment construction in the next calendar year. Maintenance capex is estimated at $70 million for intrastate/interstate and $35 million for propane.
- Distributions: Due to the fiscal year change, the next distribution will cover a four-month transition period ending December 31, 2007. Management recommended a special four-month distribution of $0.55 per unit for ETE.
Risks and Contingencies
- FERC/CFTC Investigations: The FERC issued an Order to Show Cause alleging market manipulation in the Houston Ship Channel (2003-2005), seeking $70.1 million in disgorgement and $97.5 million in penalties. The CFTC filed a related lawsuit. Third-party class actions are also pending. The company intends to contest these vigorously but notes potential material adverse impacts if penalties are assessed.
- Regulatory Matters: Transwestern received FERC approval for the Phoenix project (260 miles of pipeline) but faces rehearing requests. The Midcontinent Express Pipeline (MEP) project is pending FERC approval.
- Environmental: Accruals of $16.1 million exist for environmental liabilities. Ongoing remediation is required for PCBs at Transwestern compressor sites.
Unusual Items
- Liquidated Damages: Recorded $7.8 million expense for liquidated damages under registration rights agreements because the shelf registration statement was not declared effective within the required timeframe.
- Gain on Disposal: Recognized a $13.1 million gain on the sale of a 60% interest in a Canadian wholesale fuel business.
Investor Verification Checklist
- Regulatory Exposure: Verify the status of the FERC/CFTC market manipulation proceedings and the potential financial impact of the $167.6 million in sought penalties/disgorgement.
- Debt Structure: Confirm the repayment status of the $310 million ETP Term Loan Facility used for the Canyon acquisition (noted as paid in full in December 2007 via equity offering).
- Fiscal Year Transition: Review the impact of the fiscal year-end change from August 31 to December 31 on future quarterly comparability and distribution timing.
- Derivative Valuation: Assess the sensitivity of financial results to commodity price fluctuations given the significant volume of non-trading and trading derivatives ($40.5M+ MMBtu notional in basis swaps alone).
- Capital Expenditure Execution: Monitor the ability to fund the projected $1.74 billion in combined growth and maintenance capital expenditures for the upcoming year.