Energy Transfer Equity, L.P. (ETE) — Q2 2010 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2010. ETE is a publicly traded partnership whose principal assets are interests in Energy Transfer Partners (ETP) and, following the May 26, 2010 Regency Transactions, Regency Energy Partners. Regency is consolidated only from the acquisition date, limiting comparability with 2009.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $1.369 billion | $1.152 billion | $3.241 billion | $2.782 billion |
| Gross margin | $524 million | $526 million | $1.171 billion | $1.197 billion |
| Operating income | $179 million | $215 million | $518 million | $571 million |
| Consolidated net income (loss) | ($20 million) | $142 million | $184 million | $422 million |
| Limited partners’ net income per unit | $0.09 | $0.47 | $0.59 | $1.14 |
| Cash from operating activities | Not presented quarterly | $802 million | $653 million |
Q2 revenue rose about 19%, but gross margin was nearly flat and operating income fell about 17%. The six-month revenue increase was about 16%, while operating income declined about 9%. ETP reported lower intrastate transportation margins, reflecting lower transported volumes and less favorable West/East Texas basis differentials. Q2 consolidated loss included a $52.6 million non-cash impairment of ETP’s MEP investment and volatile interest-rate derivative results. Despite the consolidated loss, net income attributable to ETE partners was $19.3 million in Q2, versus $104.4 million a year earlier.
Six-month investing cash outflow was $786 million, including $629 million of capital expenditures; financing cash flow was approximately breakeven, versus $244 million provided in 2009. Cash and equivalents were $84 million at June 30. Current assets of $1.085 billion compared with current liabilities of $1.183 billion. These consolidated figures include subsidiary cash and obligations, which are not necessarily available to the parent company.
Total debt, including current maturities, was about $8.95 billion at June 30, versus $7.79 billion at December 31, 2009; the increase principally reflects Regency’s consolidation. The filing reports $2.3 billion of variable-rate debt and states all debt covenants were met. ETP had approximately $1.95 billion available on its revolver; Regency had approximately $227 million available; ETE’s revolving facility had $365.5 million available. ETE’s standalone liquidity and cash flows depend principally on distributions from ETP and Regency.
Material changes and transactions
- ETE completed the Regency Transactions on May 26, acquiring Regency’s general partner and incentive distribution rights, approximately 26.3 million Regency common units, and control of Regency. ETE issued 3 million Series A convertible preferred units with a $300 million liquidation preference as part of the transaction.
- ETE’s consolidated balance sheet expanded to $16.36 billion in assets from $12.16 billion at year-end. Goodwill increased by $761.9 million, primarily from Regency.
- During the first half, ETP acquired a Haynesville gathering company for approximately $150 million in cash. After quarter-end, Regency announced the sale of East Texas assets for approximately $70 million and agreed to acquire Zephyr Gas Services for approximately $185 million.
- ETE declared a Q2 distribution of $0.54 per common unit, or $2.16 annualized. ETP declared $0.89375 per common unit and Regency declared $0.445 per common unit for the quarter.
Outlook, risks, and unusual items
- ETP estimated remaining-2010 capital spending of $200–220 million for midstream/intrastate projects, $550–610 million for interstate projects, $15–25 million for propane, and $40–55 million for maintenance, plus $20–30 million of joint-venture contributions. Regency expected approximately $245 million of 2010 organic growth capital expenditures and $46.9 million of remaining-2010 capital contributions.
- Management cited lower ETP transportation volumes and basis differentials as pressures. The filing also identifies uncertainty from commodity prices, interest rates, weather and propane demand, customer and producer activity, construction costs and execution, access to capital, regulation, environmental obligations, and acquisition integration. No formal consolidated earnings guidance is provided.
- ETE had a $300 million Series A preferred-unit obligation, carrying a preferential quarterly cash distribution of $2 per unit. The units are scheduled to convert after four years under specified terms; ETE has certain redemption options.
- ETP’s 2009 FERC settlement resolved the agency’s claims without an admission of wrongdoing and required a $5 million payment and a $25 million fund for third-party claims. Some related litigation remained; the filing cautions that ultimate payments could exceed the fund. Certain class-action claims had been dismissed on appeal, while another appeal was pending.
- ETP guaranteed 50% of borrowings under the Fayetteville Express Pipeline facility: its contingent obligation was $331.5 million at June 30. ETP also retained a 50% guarantee of MEP facility obligations through February 2011, with Regency agreeing to indemnify ETP for related costs.
- Management warned that new derivatives regulation could increase collateral and trading costs or constrain hedging. Pipeline integrity, environmental, and evolving emissions requirements may also increase costs. Disclosure controls were deemed effective; Regency control integration was still under evaluation.
Key facts for investors to verify
- How much of revenue and cash flow growth reflects the Regency consolidation versus underlying organic performance, and what Regency contributes on a full-period basis.
- The drivers and potential recurrence of the $52.6 million MEP impairment, derivative losses, and other acquisition-related accounting effects.
- Debt maturities, revolver availability, variable-rate exposure, and the parent company’s ability to service obligations from subsidiary distributions.
- Whether planned capital spending and pipeline projects deliver expected returns while supporting distributions.
- Updates on remaining FERC-related litigation, environmental exposures, and contingent guarantees.