ET

Business Context and Reporting Period

Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-Q (Unaudited)
Period Ended: November 30, 2006
Business Overview: ETE operates through subsidiary partnerships engaged in midstream natural gas transportation, storage, processing, and retail/wholesale propane distribution. The Parent Company's primary cash flow source is distributions from its ownership in Energy Transfer Partners, L.P. (ETP).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased by approximately $1.03 billion (42.5%) compared to the prior year. This was primarily driven by lower natural gas prices and reduced trading revenues in the midstream segment, which benefited from hurricane-related volatility in the prior year.
• Propane Growth: Retail propane revenues increased by $103.9 million, driven by the acquisition of Titan Energy Partners in June 2006 and colder weather conditions (12.2% colder than the prior year).
• Debt Expansion: Total debt increased significantly due to the Parent Company's acquisition of Class G Units in ETP and the assumption of debt related to the Transwestern Pipeline acquisition. Long-term debt rose from $3.2 billion to $4.5 billion.
• Operating Cash Flow Improvement: Operating cash flow turned positive at $85.9 million, compared to a use of $35.1 million in the prior year, largely due to changes in working capital and inventory management.
• Minority Interest Reduction: Minority interest expense decreased by $59.1 million, primarily because ETE increased its ownership stake in ETP from approximately 33% to 46%, capturing more income previously allocated to minority partners.

Guidance, Outlook, and Risks

• Acquisitions and Expansion:
  • Transwestern Pipeline: Finalized the acquisition of 100% of Transwestern Pipeline on December 1, 2006, adding 2,500 miles of interstate pipeline. This is expected to be immediately accretive.
  • Midcontinent Express Pipeline (MEP): Announced a 50/50 joint venture with Kinder Morgan for a 500-mile pipeline with an initial capacity of 1.4 Bcf/day, expected in service by February 2009.
  • Barnett Shale: Purchased a gathering system in North Texas for $32 million to expand capacity in the Barnett Shale area.
• Outlook: Management expects increasing operating results based on contracted capacity and expansion plans. However, continued warmer-than-normal weather could negatively impact propane volumes.
• Risks and Contingencies:
  • Regulatory: The Transwestern acquisition subjects the company to FERC regulation, introducing risks related to rate-making and right-of-way access on Tribal lands.
  • Market Volatility: Earnings remain sensitive to natural gas and propane price fluctuations. The company uses derivatives to hedge, but trading activities can introduce volatility.
  • Legal: Ongoing regulatory inquiries regarding natural gas market disruptions during late 2005 hurricanes; management has accrued an estimated settlement amount.

Investor Verification Checklist

• Debt Servicing Capacity: Verify the ability to service the increased debt load ($4.5 billion total) given the decline in operating income and reliance on ETP distributions.
• Transwestern Integration: Monitor the integration of Transwestern Pipeline and the impact of FERC regulations on its profitability and rate structures.
• Weather Sensitivity: Assess the impact of weather patterns on the retail propane segment, which accounts for a significant portion of seasonal operating income.
• Derivative Exposure: Review the fair value of commodity and interest rate derivatives, as mark-to-market adjustments significantly impact reported earnings.
• Ownership Structure: Confirm the implications of the increased ownership in ETP (46%) on future distribution flows and minority interest allocations.