Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and nine months ended May 31, 2007
Overview: ETE is a Delaware limited partnership whose operations are conducted through its subsidiary, Energy Transfer Partners, L.P. (ETP), and ETP's operating partnerships. The business is segmented into Midstream, Intrastate Transportation and Storage, Interstate Transportation (primarily Transwestern), and Retail/Wholesale Propane. The reporting period reflects significant growth driven by the December 2006 acquisition of Transwestern Pipeline and the Titan propane acquisition in June 2006.
Key Financial Metrics
| Metric (Nine Months Ended May 31, 2007) | Value (in thousands) |
|---|---|
| Total Revenues | $5,165,711 |
| Net Income | $267,489 |
| Limited Partners' Interest in Net Income | $266,601 |
| Operating Cash Flow | $599,528 |
| Capital Expenditures | $(799,245) |
| Total Debt (Long-term + Current) | $5,038,136 |
| Cash and Cash Equivalents | $104,717 |
| Basic Net Income per Unit | $1.34 |
Material Changes vs. Prior Period
- Revenue: Total revenues for the nine months ended May 31, 2007, decreased by $1.12 billion (17.8%) compared to the same period in 2006. This decline is primarily attributed to lower natural gas prices and reduced trading revenues compared to the hurricane-impacted period in 2006, partially offset by volume increases from the Transwestern acquisition.
- Net Income: Net income increased significantly by $160.2 million (149%) to $267.5 million. This growth was driven by increased equity in earnings from affiliates (due to higher ownership in ETP and ETP's performance) and reduced minority interest expense.
- Operating Income: Consolidated operating income rose by $135.2 million (26.7%) to $642.2 million, reflecting the contribution of Transwestern and improved margins in the intrastate transportation segment.
- Debt: Long-term debt increased substantially from $3.21 billion to $5.00 billion due to debt assumed in the Transwestern acquisition and borrowings to finance the purchase of ETP Class G Units.
- Assets: Total assets grew from $5.92 billion to $8.07 billion, driven by the addition of Transwestern's property, plant, and equipment.
Guidance, Outlook, and Risks
- Outlook: Management expects increasing operating results from natural gas operations based on contracted capacity and expansion projects. Propane volumes are expected to increase due to the Titan acquisition, though warmer-than-normal weather is noted as a negative factor for volumes.
- Capital Projects: Significant projects include the Midcontinent Express Pipeline (MEP) joint venture with Kinder Morgan (expected in service Feb 2009) and the Phoenix Expansion project for Transwestern (expected in service late 2008).
- Regulatory Risks: Transwestern is subject to FERC regulation regarding rates and service terms. The company is currently under investigation by the FERC and CFTC regarding trading activities during the fall 2005 hurricanes. Management believes a negotiated settlement payment will be required but cannot predict the final amount.
- Competition: Increased risk of competition with affiliates of the General Partner following the acquisition of a 34.9% interest in the General Partner by Enterprise GP Holdings, L.P. in May 2007.
- Tax Termination Risk: The company notes that transfers of Common Units are approaching the 50% threshold which would result in a termination of the partnership for federal income tax purposes, potentially affecting taxable income allocations.
Investor Verification Checklist
- Transwestern Integration: Verify the progress of integrating Transwestern's internal controls and the finalization of purchase price allocations, which are currently preliminary.
- Regulatory Settlement: Monitor the status of the FERC and CFTC investigations regarding 2005 trading activities and the potential magnitude of any settlement payments.
- Debt Covenants: Review compliance with debt covenants, particularly given the significant increase in leverage following the Transwestern acquisition and Class G Unit purchase.
- Weather Sensitivity: Assess the impact of weather patterns on propane sales volumes, as the business is highly seasonal and weather-dependent.
- Partnership Termination: Track the volume of Common Unit transfers to determine if the 50% threshold for tax termination is exceeded, which would alter tax reporting for unitholders.