Energy Transfer Equity, L.P. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless noted. ETE is a partnership whose consolidated results include controlled subsidiaries Energy Transfer Partners (ETP) and Regency. Comparisons are affected by Regency being consolidated only from May 26, 2010.
Business context and reporting period
ETE’s principal assets are its general partner interests, incentive distribution rights and common units in ETP and Regency. ETP operates pipelines, storage, midstream and retail propane businesses; Regency provides natural gas and NGL gathering, processing, compression and transportation services. ETE reported 222,972,708 common units outstanding at August 2, 2011.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,974.9 | $1,362.5 | $3,964.0 | $3,234.5 |
| Gross margin | $710.8 | $522.1 | $1,498.4 | $1,169.2 |
| Operating income | $260.6 | $179.3 | $624.8 | $518.2 |
| Net income (loss) | $106.7 | $(20.5) | $305.7 | $183.6 |
| Net income attributable to partners | $66.3 | $19.3 | $154.9 | $132.0 |
| Basic net income per limited partner unit | $0.30 | $0.09 | $0.69 | $0.59 |
- Gross margin was approximately 36.0% of revenue in Q2 2011 versus 38.3% a year earlier, and 37.8% for the first half versus 36.1%. Operating margin was approximately 13.2% in Q2 2011 and 15.8% for the first half.
- For the first half, operating cash flow was $698.3 million, down from $801.9 million. Investing used $2.745 billion, including $1.949 billion net cash for acquisitions and $794.2 million of capital expenditures. Financing provided $2.108 billion.
- Cash and cash equivalents were $148.5 million at June 30, 2011. Total debt was $11.147 billion, up from $9.381 billion at year-end 2010; fair value of debt was $12.02 billion. Current assets were $1.399 billion and current liabilities were $1.259 billion.
- At quarter-end, ETP had $1.81 billion available on its revolving facility and Regency had approximately $559 million available. ETE’s $200 million parent revolving facility had no borrowings. The partnerships reported compliance with their credit covenants.
Material changes versus prior comparable periods
- Q2 revenue increased about 45% and first-half revenue about 23%; results include new Regency and Lone Star activity and reflect higher natural gas revenue. Comparisons with 2010 are not fully like-for-like because Regency was consolidated for only part of the 2010 periods.
- Q2 net income improved from a loss to profit. The prior-year quarter included a $52.6 million impairment of an affiliate investment; the 2011 quarter had no such charge. First-half net income rose, while partner-attributable income and per-unit earnings increased more modestly.
- Operating income increased, but interest expense also rose: $181.5 million versus $129.0 million in Q2 and $349.4 million versus $250.7 million for the first half. The filing attributes the increase primarily to additional debt and acquisition financing.
- Cash from operations declined despite higher net income, principally because 2010 benefited from a much larger positive working-capital change. Debt rose as the group funded acquisitions and capital investment.
Outlook, transactions, risks and unusual items
- On May 2, 2011, an ETP-Regency joint venture acquired LDH Energy Asset Holdings for approximately $1.97 billion, creating Lone Star NGL LLC. ETE cited expanded NGL storage, fractionation and transportation capabilities and expected additional fee-based revenue. Purchase accounting remained preliminary.
- After quarter-end, ETE amended its proposed Southern Union Company acquisition. The transaction was valued at approximately $9.4 billion, including $5.7 billion in cash and ETE units and $3.7 billion of existing debt. Management expected closing in Q1 2012, subject to shareholder, regulatory and other conditions; the HSR waiting period expired July 28, 2011. The filing describes committed bridge financing of up to $3.7 billion and risks if financing or closing conditions are not met.
- Contingent on the Southern Union transaction, ETP expected to acquire Southern Union’s 50% interest in Citrus Corp., owner of Florida Gas Transmission, for about $2.0 billion ($1.895 billion cash and $105 million in ETP units). ETE agreed to relinquish approximately $220 million of ETP incentive distributions over 16 quarters following closing.
- Management estimated remaining-2011 ETP growth capital spending of $630–$660 million across business lines, plus $60–$70 million of maintenance capital and $190–$210 million of joint-venture contributions. Regency forecast 2011 growth capital spending of approximately $345 million and maintenance spending of approximately $17 million. These are estimates, not guarantees.
- Additional announced projects included a Lone Star fractionator expected in service in early 2013 and an NGL pipeline targeted for Q1 2013; Regency’s Eagle Ford gathering expansion was expected to cost approximately $450 million over about three years. ETP’s Tiger Pipeline expansion entered service August 1, 2011.
- ETE’s quarterly distribution rate rose from $0.540 for the December 2010 quarter to $0.560 for March 2011 and $0.625 for June 2011. The June-quarter distribution was payable August 19, 2011.
- Risks include substantial debt and financing needs, integration and completion risks for the proposed acquisitions, commodity-price and interest-rate exposure, counterparty risk, environmental and pipeline-safety regulation, and litigation. Environmental accruals were $12.8 million for ETP at June 30; broader contingent-obligation accruals were approximately $10.7 million. ETP also disclosed a $484.3 million contingent guarantee of FEP borrowings at quarter-end; in July, FEP refinanced and ETP did not guarantee the replacement facilities.
- Management cautioned that interim results may not indicate full-year performance because of seasonality, maintenance activity and commodity-price effects on derivatives. Mark-to-market derivative gains and losses can affect reported earnings; the filing also identifies uncertainty about future derivatives regulation and possible liquidity effects.
Important facts for investors to verify
- Whether the Southern Union and Citrus transactions closed, their final consideration and financing mix, and any resulting dilution, debt or distribution effects.
- Final Lone Star purchase-price allocation and whether its expected fee-based contributions and project returns materialized.
- Debt maturities, available borrowing capacity, covenant headroom and the effect of planned capital spending on leverage and liquidity.
- Cash generation and distribution coverage at ETE, ETP and Regency, particularly given lower first-half operating cash flow and rising distributions.
- Exposure to commodity derivatives, environmental obligations, pipeline integrity costs, regulatory changes and outstanding litigation or transaction-related claims.