Business context and reporting period
This filing is Energy Transfer Equity, L.P. (ETE), not a standalone Energy Transfer LP filing. It is the Form 10-K for the fiscal year ended December 31, 2011; the figures below are annual, not Q4-only. ETE is a holding partnership whose cash generation principally depends on its interests in Energy Transfer Partners (ETP) and Regency Energy Partners, including general-partner interests and incentive distribution rights. ETE consolidated Regency beginning May 26, 2010, limiting year-over-year comparability.
Key financial metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $8.241 billion | $6.598 billion |
| Gross margin | $3.058 billion; 37.1% of revenue | $2.487 billion; 37.7% |
| Operating income | $1.235 billion; 15.0% of revenue | $1.037 billion; 15.7% |
| Net income | $528.2 million | $336.6 million |
| Net income attributable to partners | $309.8 million | $192.8 million |
| Basic / diluted net income per unit | $1.39 / $1.38 | $0.86 / $0.86 |
| Cash from operating activities | $1.377 billion | $1.087 billion |
| Cash used in investing activities | $3.873 billion | $1.830 billion |
| Cash from financing activities | $2.536 billion | $761.0 million |
| Year-end cash and cash equivalents | $126.3 million | $86.3 million |
| Consolidated debt | $11.371 billion | $9.381 billion |
| Total assets / total equity | $20.897 billion / $7.389 billion | $17.379 billion / $6.248 billion |
Year-end current assets were $1.455 billion versus current liabilities of $1.841 billion (current ratio about 0.79). ETP reported approximately $2.16 billion of available revolving capacity and Regency approximately $549 million; ETE’s parent-level facility had $128.5 million available. These facilities and assets are at different entities and are not necessarily interchangeable. ETE-only cash was $18.5 million.
Material changes versus the prior comparable period
- Revenue rose about 24.9% and net income about 57.0%; however, Regency was consolidated for a full year in 2011 but only from May 26 in 2010.
- ETP growth reflected the Tiger pipeline and its expansion, higher midstream volumes and fees, favorable NGL prices, and the May 2011 acquisition of LDH through Lone Star. Lone Star contributed $178.8 million of ETP gross margin from acquisition through year-end.
- Interest expense increased to $739.8 million from $624.9 million, reflecting higher debt, including ETP’s May 2011 note issuance. Non-hedged interest-rate derivative losses were $77.8 million, versus $52.4 million in 2010.
- Investing outflows increased, including $1.81 billion of capital expenditures and $1.97 billion paid for acquisitions, principally Lone Star. Financing included a $2.00 billion consolidated net increase in debt and $1.90 billion of subsidiary equity proceeds.
- ETE distributions increased to $2.44 per common unit for 2011 from $2.16 in 2010. The December 2011-quarter distribution, declared in January 2012, was $0.625 per unit, or $2.50 annualized.
Outlook, commentary, risks and unusual items
- ETE expected to complete its Southern Union Company (SUG) acquisition in the first quarter of 2012. The announced transaction was valued at approximately $9.4 billion, including $5.7 billion in cash and ETE units and $3.7 billion of SUG debt. Management expected accretion, greater geographic diversity, more fee-based revenue and operational synergies; these are expectations, not guaranteed outcomes.
- ETP’s related Citrus transaction was expected to bring SUG’s 50% interest in Citrus Corp., owner of Florida Gas Transmission, to ETP for approximately $1.895 billion cash and $105 million in ETP units. ETE agreed to relinquish about $220 million of ETP incentive distributions over 16 quarters. A dispute with El Paso over a claimed right of first refusal was in litigation, with trial scheduled for April 2012.
- ETP, Regency and Lone Star expected aggregate 2012 growth capital expenditures of $2.6–$2.9 billion, compared with $1.8 billion in 2011. ETP separately estimated 2012 growth spending of $800–$900 million for midstream/intrastate operations and $1.3–$1.5 billion for NGL operations; Regency estimated $335 million for operating segments and $385–$435 million of joint-venture contributions, plus maintenance spending. These estimates overlap in part and should not be added together without checking scope.
- In January 2012 ETP contributed its propane business to AmeriGas for $1.46 billion cash and about 29.6 million AmeriGas units; AmeriGas assumed about $71 million of HOLP debt. ETP also provided contingent residual support tied to $1.5 billion of AmeriGas intercompany debt. ETP’s 2012 notes issuance was conditioned on completion of the Citrus acquisition, with a 101% redemption obligation if specified conditions were not met by April 17, 2012.
- Key risks include leverage and refinancing needs, the ability of ETP and Regency to sustain distributions, commodity-price and basis exposure, customer and producer concentration, project execution and funding, regulatory changes, pipeline integrity and environmental obligations, and counterparty performance. A 100-basis-point rate increase was estimated to raise annual interest expense by $7.2 million on floating-rate debt.
- Environmental accruals were $13.7 million at year-end, including $5.7 million for Transwestern remediation expected to continue through 2025. Litigation and contingency accruals were approximately $18.2 million. Management stated it was in compliance with debt covenants at year-end.
- Grant Thornton issued an unqualified opinion on the consolidated financial statements and internal controls. The 2011 internal-control assessment excluded newly acquired Lone Star Holdings, which represented $2.21 billion of assets and $361.5 million of third-party revenue from May 2 through year-end.
Most important facts for investors to verify
- Whether the SUG and Citrus transactions closed on schedule, their final funding mix and terms, and the outcome of the El Paso litigation.
- How much of the reported growth in revenue, earnings and cash flow reflects acquisitions and consolidation timing rather than organic performance.
- Whether projected 2012 capital spending is funded without excessive additional debt or equity dilution, and whether projects achieve expected returns.
- Debt maturities, covenant headroom, actual available liquidity by legal entity, and ETP’s contingent AmeriGas support obligation.
- Distribution coverage and the sustainability of ETE’s, ETP’s and Regency’s distributions amid capital needs and debt service.
- Commodity derivative exposures, margin-call liquidity requirements, and the effect of market-price changes on earnings and cash flow.
- Actual costs and any changes in scope for pipeline integrity work, environmental remediation and other legal contingencies.