Energy Transfer Equity, L.P. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. The filing is by Energy Transfer Equity, L.P. (ETE), the publicly traded partnership that owns interests in Energy Transfer Partners, L.P. (ETP) and Regency Energy Partners LP (Regency). Unless noted, financial figures below are consolidated and in U.S. dollars; statement amounts are in millions.
Business context and material changes
- ETE owns ETP and, since May 26, 2010, controls and consolidates Regency. ETP’s businesses include natural gas transportation, gathering, processing, storage and retail propane; Regency provides natural gas and NGL midstream services.
- The May 2010 Regency transactions materially changed the business and reporting perimeter. ETE acquired Regency’s general partner and incentive distribution rights, and about 19% of Regency’s common units. ETE also transferred its MEP interest to Regency. Regency’s results are included from the acquisition date, so reported year-over-year comparisons are not like-for-like.
- ETE reported two segments: investment in ETP and investment in Regency. Regency contributed $295.1 million of external revenue and $7.8 million of net income in Q3 2010; the prior-year period had no Regency contribution.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $1,587.8 | $1,129.8 | $4,822.3 | $3,911.5 |
| Gross margin | $592.7 | $451.7 | $1,761.9 | $1,648.2 |
| Operating income | $202.1 | $173.5 | $720.2 | $744.6 |
| Net income (loss) | $(4.8) | $34.3 | $178.8 | $455.8 |
| Net income (loss) attributable to partners | $(15.3) | $47.0 | $116.7 | $302.9 |
| Basic earnings (loss) per ETE limited partner unit | $(0.07) | $0.21 | $0.52 | $1.35 |
- Q3 revenue increased about 41%; gross margin rose about 31% and operating income about 16%. Gross margin as a share of revenue was approximately 37.3%, versus 40.0% a year earlier. Management cited Regency’s consolidation, higher ETP transportation fees and improved storage margins as contributors.
- Despite higher Q3 operating income, ETE recorded a net loss. Net interest expense increased to $209.9 million from $120.1 million, and non-hedged interest-rate derivative losses were $32.0 million. Nine-month operating income declined about 3%, while net income fell substantially year over year.
- Nine-month net income included a $52.6 million non-cash impairment charge on ETP’s MEP investment associated with its transfer in the Regency transactions. Interest-rate swap terminations also materially affected results and cash: ETE paid $168.6 million to terminate swaps, including $66.4 million of realized losses on hedged swaps recorded in interest expense. ETP received $26.5 million from terminating swaps.
- Cash provided by operating activities was $927.7 million for the nine months, up from $721.4 million. Investing activities used $1,397.7 million, including $1,125.1 million of capital expenditures and $323.7 million of net cash acquisition outflows. Financing activities provided $489.8 million. Cash at period-end was $88.1 million, versus $68.3 million at December 31, 2009.
Debt, liquidity and distributions
- Consolidated debt was $8.84 billion at September 30, 2010, compared with $7.79 billion at year-end 2009. Long-term debt, net of current maturities, was $8.80 billion. The filing reports debt fair value of $9.86 billion. Total current assets were $1.10 billion and current liabilities $1.03 billion.
- In September, ETE issued $1.8 billion of 7.5% senior notes due 2020. Net proceeds of approximately $1.77 billion were used to repay its prior term loan and revolving borrowings, pay swap termination costs and for general partnership purposes. ETE had no borrowings on its new $200 million revolving facility at quarter-end.
- ETP had no borrowings on its $2.0 billion revolving facility, with approximately $1.98 billion available after letters of credit. Regency had $375 million drawn on its revolving facility and approximately $509 million available. Management reported that ETE, ETP and Regency were in compliance with their debt covenants.
- ETE declared a Q3 distribution of $0.54 per common unit ($2.16 annualized), unchanged from the prior quarters shown. ETP declared $0.89375 per common unit ($3.575 annualized); Regency declared $0.445 per common unit ($1.78 annualized).
Outlook, risks and contingencies
- Management expected ETP to spend in the fourth quarter of 2010: $75–$125 million on midstream and intrastate growth, $200–$270 million on interstate growth, $10–$20 million on propane growth, and $25–$40 million on maintenance. ETP’s 2011 estimates were $100–$200 million, $180–$225 million, $25–$35 million and $120–$140 million, respectively.
- Regency expected approximately $116 million of growth capital expenditures in Q4 2010, excluding its share of HPC and MEP spending, and approximately $46.9 million of joint-venture capital contributions. Regency had not publicly announced its 2011 capital expenditure expectations.
- Projects included the Tiger pipeline, with initial service expected in Q4 2010 subject to regulatory approvals, and the Fayetteville Express pipeline, which began interim service in October and was expected to be fully operational in December 2010. The filing describes additional expansion plans and permits as subject to approvals.
- Key risks include variability in subsidiary distributions and operating cash flows; commodity prices, basis differentials, weather and throughput; access to capital; construction, permitting and integration risks; counterparty credit; and regulatory, environmental and litigation exposure. The filing warns that new Dodd-Frank derivatives rules could increase collateral and compliance costs, affect liquidity and reduce hedge availability; the effects were uncertain.
- ETP’s prior FERC market-manipulation matter was settled in 2009 without findings or admission of liability: ETP paid $5 million and established a $25 million fund for related third-party claims. The filing also discusses environmental remediation obligations, including approximately $12.3 million of environmental accruals, and ongoing pipeline integrity work. ETP guaranteed 50% of FEP’s $847 million facility borrowings, a contingent obligation of $423.5 million at quarter-end; its 50% guarantee exposure for MEP borrowings and letters of credit was $41.1 million and $16.6 million, respectively.
- After quarter-end, Regency closed a $600 million offering of 6.875% notes due 2018 and accepted approximately $271.1 million of its 2013 notes in a tender offer. ETE also disclosed that Enterprise GP Holdings’ proposed merger could increase the likelihood of a tax termination of ETE’s partnership if ownership-transfer thresholds are met.
Most important facts for investors to verify
- Assess year-over-year performance on a comparable basis, including Regency’s partial-period consolidation and the pro forma results disclosed in the filing.
- Review the drivers of the Q3 net loss and nine-month earnings decline, particularly interest expense, swap accounting and the MEP impairment.
- Evaluate debt service, refinancing needs, available facility capacity, covenant headroom and the impact of subsidiary-level obligations and guarantees on ETE’s cash available for distributions.
- Track execution, spending and regulatory milestones for the Tiger and Fayetteville Express pipelines and other announced growth projects.
- Monitor distribution coverage and the extent to which ETE depends on cash distributions from ETP and Regency, which are subject to operating results and reserve decisions.
- Follow developments in litigation, environmental remediation, derivatives regulation and the potential tax consequences of the Enterprise GP Holdings transaction.