Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-Q (Unaudited)
Period Ended: November 30, 2006
Business Overview: ETE operates through subsidiary partnerships engaged in midstream natural gas transportation, storage, processing, and retail/wholesale propane distribution. The Parent Company's primary cash flow source is distributions from its ownership in Energy Transfer Partners, L.P. (ETP).
Key Financial Metrics
| Metric (in thousands) | Nov 30, 2006 | Nov 30, 2005 |
|---|---|---|
| Total Revenues | $1,388,445 | $2,416,620 |
| Operating Income | $103,088 | $167,866 |
| Net Income | $31,041 | $39,601 |
| Net Income per Limited Partner Unit (Diluted) | $0.20 | $0.29 |
| Cash Flow from Operating Activities | $85,936 | $(35,131) |
| Total Assets | $7,365,394 | $5,924,141 |
| Total Debt (Long-term + Current) | $4,515,532 | $3,246,253 |
| Cash and Cash Equivalents | $248,674 | $26,204 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately $1.03 billion (42.5%) compared to the prior year. This was primarily driven by lower natural gas prices and reduced trading revenues in the midstream segment, which benefited from hurricane-related volatility in the prior year.
- Propane Growth: Retail propane revenues increased by $103.9 million, driven by the acquisition of Titan Energy Partners in June 2006 and colder weather conditions (12.2% colder than the prior year).
- Debt Expansion: Total debt increased significantly due to the Parent Company's acquisition of Class G Units in ETP and the assumption of debt related to the Transwestern Pipeline acquisition. Long-term debt rose from $3.2 billion to $4.5 billion.
- Operating Cash Flow Improvement: Operating cash flow turned positive at $85.9 million, compared to a use of $35.1 million in the prior year, largely due to changes in working capital and inventory management.
- Minority Interest Reduction: Minority interest expense decreased by $59.1 million, primarily because ETE increased its ownership stake in ETP from approximately 33% to 46%, capturing more income previously allocated to minority partners.
Guidance, Outlook, and Risks
- Acquisitions and Expansion:
- Transwestern Pipeline: Finalized the acquisition of 100% of Transwestern Pipeline on December 1, 2006, adding 2,500 miles of interstate pipeline. This is expected to be immediately accretive.
- Midcontinent Express Pipeline (MEP): Announced a 50/50 joint venture with Kinder Morgan for a 500-mile pipeline with an initial capacity of 1.4 Bcf/day, expected in service by February 2009.
- Barnett Shale: Purchased a gathering system in North Texas for $32 million to expand capacity in the Barnett Shale area.
- Outlook: Management expects increasing operating results based on contracted capacity and expansion plans. However, continued warmer-than-normal weather could negatively impact propane volumes.
- Risks and Contingencies:
- Regulatory: The Transwestern acquisition subjects the company to FERC regulation, introducing risks related to rate-making and right-of-way access on Tribal lands.
- Market Volatility: Earnings remain sensitive to natural gas and propane price fluctuations. The company uses derivatives to hedge, but trading activities can introduce volatility.
- Legal: Ongoing regulatory inquiries regarding natural gas market disruptions during late 2005 hurricanes; management has accrued an estimated settlement amount.
Investor Verification Checklist
- Debt Servicing Capacity: Verify the ability to service the increased debt load ($4.5 billion total) given the decline in operating income and reliance on ETP distributions.
- Transwestern Integration: Monitor the integration of Transwestern Pipeline and the impact of FERC regulations on its profitability and rate structures.
- Weather Sensitivity: Assess the impact of weather patterns on the retail propane segment, which accounts for a significant portion of seasonal operating income.
- Derivative Exposure: Review the fair value of commodity and interest rate derivatives, as mark-to-market adjustments significantly impact reported earnings.
- Ownership Structure: Confirm the implications of the increased ownership in ETP (46%) on future distribution flows and minority interest allocations.