Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Overview: ETE is a publicly traded Delaware limited partnership operating primarily through its subsidiary, Energy Transfer Partners, L.P. (ETP). The company operates in four main segments: Intrastate Transportation and Storage, Interstate Transportation, Midstream (gathering, processing, treating), and Retail Propane. ETE's primary cash source is distributions received from ETP.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | 2009 Value | 2008 Value |
|---|---|---|
| Total Revenues | $5.42 billion | $9.29 billion |
| Operating Income | $1.11 billion | $1.10 billion |
| Net Income | $697.9 million | $679.8 million |
| Cash Flow from Operations | $723.5 million | $1.14 billion |
| Total Debt (Long-term + Current) | $7.79 billion | $7.24 billion |
| Capital Expenditures (Growth) | $530.3 million | $1.92 billion |
| Capital Expenditures (Maintenance) | $102.7 million | $141.0 million |
| Distributions Paid to Partners | $470.7 million | $435.9 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately $3.88 billion (42%) compared to 2008. This was primarily driven by a significant drop in natural gas commodity prices and lower volumes sold in the Intrastate and Midstream segments.
- Stable Operating Income: Despite the revenue drop, operating income remained relatively flat, increasing slightly by $11.5 million. This stability was achieved through reduced operating expenses and lower costs of products sold, which mirrored the decline in commodity prices.
- Segment Performance:
- Intrastate Transportation: Operating income decreased by $91.6 million due to lower fuel retention margins caused by falling natural gas prices.
- Retail Propane: Operating income increased significantly by $114.7 million. This was driven by a rapid decline in wholesale propane costs that outpaced the decline in retail selling prices, improving gross margins.
- Interstate Transportation: Operating income increased by $13.6 million, aided by the completion of the Phoenix lateral pipeline.
- Debt Levels: Consolidated debt increased by approximately $556 million to $7.79 billion, reflecting borrowings used to fund growth capital expenditures and joint venture contributions.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- 2010 Capital Expenditures: The company expects to spend between $1.2 billion and $1.3 billion on growth capital expenditures in 2010.
- Liquidity: Management believes it has sufficient liquidity to fund announced growth projects and working capital needs through the end of 2010, utilizing cash on hand, operating cash flows, and available credit facilities.
- Distributions: ETE increased its quarterly distribution per unit in 2009. Future distribution increases depend on ETP's ability to issue additional units or increase its own distribution rate.
Key Risks and Contingencies:
- FERC Settlement: ETP settled claims with the FERC regarding alleged market manipulation. The settlement required a $5.0 million payment to the government and the establishment of a $25.0 million fund for third-party claims. While the fund is established, the final liability for third-party claims remains uncertain.
- Commodity Price Volatility: Profitability in the Midstream and Intrastate segments remains sensitive to natural gas and NGL price spreads. Lower prices reduce margins on retained fuel and percentage-of-proceeds contracts.
- Regulatory & Environmental: The company faces ongoing regulatory scrutiny regarding pipeline safety, rate regulation (FERC), and environmental compliance (including potential greenhouse gas regulations).
- Weather Dependence: The Retail Propane segment is highly seasonal and sensitive to weather conditions; warmer winters reduce demand and profitability.
Investor Verification Checklist
- Debt Covenants: Verify compliance with leverage ratios (currently 5.0 to 1 under the ETP Credit Facility) given the high debt load of $7.79 billion.
- FERC Fund Status: Monitor the allocation and sufficiency of the $25.0 million fund established for third-party claims related to the FERC settlement.
- Capital Project Execution: Track the completion and commissioning of major projects (Fayetteville Express, Tiger Pipeline) to ensure they generate expected cash flows to service debt.
- Commodity Hedging: Review the effectiveness of hedging strategies in 2010, as the company noted increased hedging of natural gas price risk in late 2009.
- Propane Margins: Assess the sustainability of the improved propane margins in 2009, which were partly driven by the rapid decline in wholesale costs relative to retail prices.