Energy Transfer Equity, L.P. — Form 10-Q summary
Business context and reporting period
This filing is for the quarter and nine months ended September 30, 2011. The registrant is Energy Transfer Equity, L.P. (ETE); its consolidated results include controlled subsidiaries Energy Transfer Partners, L.P. (ETP) and Regency Energy Partners LP (Regency). ETE’s principal assets are its partnership, general-partner and incentive-distribution-right interests in ETP and Regency. Results are not fully comparable with 2010: ETE began consolidating Regency after acquiring control on May 26, 2010, and ETP acquired the Lone Star NGL business in May 2011.
Financial performance and position
Amounts below are in U.S. dollars; balance-sheet comparisons are September 30, 2011 versus December 31, 2010.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $2.098 billion | $1.588 billion | $6.062 billion | $4.822 billion |
| Gross margin | $744.8 million | $592.7 million | $2.243 billion | $1.762 billion |
| Operating income | $270.0 million | $202.1 million | $894.8 million | $720.2 million |
| Net income (loss) | $60.7 million | $(4.8) million | $366.4 million | $178.8 million |
| Net income (loss) attributable to partners | $69.1 million | $(15.3) million | $224.0 million | $116.7 million |
| Basic and diluted earnings (loss) per ETE limited partner unit | $0.31 | $(0.07) | $1.00 | $0.52 |
Q3 revenue rose about 32% and operating income about 34% year over year. Nine-month revenue rose about 26% and operating income about 24%. The Q3 difference between consolidated net income and income attributable to partners reflects a net loss attributable to noncontrolling interests.
- Cash flow: Nine-month operating cash flow was $1.103 billion, compared with $927.7 million in 2010. Capital expenditures were $1.232 billion; cash used in investing activities was $3.336 billion, including $1.971 billion for acquisitions. Financing activities provided $2.314 billion. Cash and cash equivalents ended the period at $167.7 million, versus $86.3 million at year-end 2010.
- Debt and liquidity: Consolidated debt was $11.677 billion, up from $9.381 billion at year-end; $424.1 million was classified as current maturities. The balance sheet reported $1.433 billion of current assets and $1.804 billion of current liabilities. At quarter-end, ETP had approximately $1.4 billion available on its revolver and Regency approximately $435 million; ETE had no borrowings on its $200 million revolver. ETP’s revolver was amended after quarter-end, extending maturity to October 2016 and increasing permitted borrowing capacity to $2.5 billion.
- Distributions: ETE declared a quarterly distribution of $0.625 per unit for the quarter ended September 30, payable November 18, 2011. Nine-month distributions to ETE partners were $404.8 million.
Material changes versus the prior comparable period
- Revenue and operating income increased, with growth in pipeline transportation, midstream operations and Regency’s gathering and processing business. ETP’s Tiger pipeline expansion and Lone Star, acquired in May, added to results; Lone Star contributed $65.4 million of ETP gross margin in Q3.
- Regency’s nine-month results include a much longer consolidation period in 2011 than in 2010, which began only after the May 26, 2010 acquisition. Reported year-over-year growth therefore reflects both operating performance and changes in consolidation scope.
- Interest expense increased for the nine-month period, partly reflecting debt issued by ETP and Regency. Q3 included $68.5 million of losses on non-hedged interest-rate derivatives, principally unrealized losses on ETP forward-starting swaps as forward rates fell.
- Investing cash outflow rose substantially, principally because of the $1.98 billion LDH/Lone Star acquisition. Consolidated debt increased by approximately $2.30 billion from year-end.
Outlook, management commentary, risks and unusual items
- Pending Southern Union transaction: ETE agreed to acquire Southern Union Company in a transaction valued at approximately $9.4 billion, including $5.7 billion in cash and ETE units and $3.7 billion of existing debt. ETE had a conditional $3.7 billion bridge facility and expected the transaction to close in Q1 2012, subject to shareholder, regulatory and other conditions. The filing reported subsequent progress on certain approvals and registration, but the merger had not closed as of the filing.
- Related Citrus transaction: At closing, ETP anticipated acquiring a 50% interest in Citrus Corp., owner of the Florida Gas Transmission system, for approximately $2.0 billion. ETE agreed to relinquish about $220 million in ETP incentive distributions over 16 quarters following closing. Completion depended on the Southern Union merger and other conditions.
- Propane business agreement: In October 2011, ETP agreed to contribute its propane operations to AmeriGas for approximately $2.9 billion in cash, AmeriGas units and assumed liabilities. Closing was expected in late 2011 or early 2012, subject to customary conditions. The business was not classified as discontinued operations because ETP expected continuing involvement through its investment.
- Capital plans: ETP and Regency projected substantial growth spending, including Lone Star projects. ETP estimated 2012 growth capital expenditures of $600–$750 million for midstream and intrastate transportation and storage, and $700–$750 million for NGL transportation and services. Regency estimated 2012 growth capital spending of $630–$680 million. Management expected to use operating cash flow, debt and equity financing to fund requirements; these are estimates, not earnings guidance.
- Other developments: ETP completed a 400 MMcf/d Tiger pipeline expansion in August 2011 and began collecting demand fees on that capacity. ETP also announced a fee-based gathering, processing and transportation project with estimated construction cost of $360 million. Lone Star’s planned West Texas Gateway NGL pipeline was estimated to cost $917 million and was expected to enter service in 2013.
- Legal and regulatory exposure: ETP initiated litigation against Enterprise Products Partners and Enbridge concerning a disputed crude-oil pipeline joint venture. The outcome was uncertain. The filing also describes potential costs from environmental and pipeline-safety regulation, including emissions controls and integrity work; future costs for some matters could not be estimated. Accrued environmental liabilities were $12.6 million at September 30.
- Market and financing risks: Commodity prices, interest rates, counterparty credit and derivative regulation may affect earnings and liquidity. Management noted that proposed or future derivatives rules could increase collateral needs, costs or exposure to less creditworthy counterparties. A hypothetical 100-basis-point interest-rate change was estimated to affect annual interest expense by $10.2 million on floating-rate debt, and swap fair value and earnings by approximately $81.5 million.
- Contingencies and controls: Accruals for identified legal and regulatory contingencies were approximately $13.3 million; outcomes could require additional payments. Management reported disclosure controls were effective as of September 30, 2011, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the final terms, financing, regulatory approvals, closing status and integration effects of the Southern Union and Citrus transactions.
- Track the AmeriGas propane transaction, including its closing conditions, proceeds, unit consideration and any continuing support obligations.
- Assess whether growth spending, acquisitions and distributions can be funded without materially increasing debt or equity issuance.
- Review the composition and maturity profile of debt, covenant compliance, revolver availability and the terms of ETE’s bridge financing if drawn.
- Evaluate how much reported growth reflects acquired businesses and consolidation timing versus underlying comparable operations.
- Monitor derivative-related earnings volatility, environmental and pipeline compliance costs, and the outcome of the crude-oil pipeline litigation.