Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-Q (Unaudited Quarterly Report)
Reporting Period: Three and six months ended February 28, 2007
Business Overview: ETE is a Delaware limited partnership whose operations are conducted through its subsidiary, Energy Transfer Partners, L.P. (ETP). The company operates in four primary segments: Midstream (gathering, processing, and marketing), Intrastate Transportation and Storage, Interstate Transportation (via the Transwestern acquisition), and Retail/Wholesale Propane. ETE's primary cash flow source is distributions from its ownership interests in ETP.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended Feb 28, 2007 | Six Months Ended Feb 28, 2006 |
|---|---|---|
| Total Revenues | $3,450,925 | $4,866,436 |
| Operating Income | $454,938 | $391,579 |
| Net Income | $178,396 | $64,036 |
| Net Income Attributable to Limited Partners | $177,784 | $63,644 |
| Diluted EPS (Limited Partner) | $0.95 | $0.53 |
| Cash Flow from Operating Activities | $444,025 | $332,360 |
| Capital Expenditures | $(542,930) | $(255,101) |
| Total Debt (Long-term + Current) | $4,955,212 | $3,246,253 |
| Cash and Cash Equivalents | $90,073 | $26,204 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately $1.4 billion (29%) compared to the prior year. This was primarily driven by lower natural gas prices and reduced trading gains compared to the hurricane-impacted period in 2006, partially offset by volume increases from the Transwestern and Titan acquisitions.
- Profitability Surge: Despite lower revenues, Net Income increased by 179% ($114 million). This was driven by a significant reduction in minority interest expense (due to ETE increasing its ownership of ETP from ~31% to ~46%) and higher operating income from the Transwestern acquisition.
- Balance Sheet Expansion: Total assets increased from $5.9 billion to $7.8 billion, and long-term debt increased by approximately $1.7 billion. These changes reflect the December 2006 acquisition of Transwestern (interstate pipeline) and the November 2006 acquisition of additional ETP Class G units.
- Segment Performance:
- Interstate Transportation: New segment contributing $58 million in revenue and $34 million in operating income (absent in 2006).
- Retail Propane: Operating income increased by $51 million due to the Titan acquisition and colder weather.
- Midstream: Operating income decreased by $64 million due to lower trading revenues and marketing margins.
Guidance, Outlook, and Risks
- Outlook: Management expects increasing operating results from natural gas operations based on contracted capacity and expansion plans. Propane volumes are expected to increase due to the Titan acquisition, though warmer weather could negatively impact volumes. The company plans to continue its active propane acquisition strategy.
- Capital Projects: The 42-inch pipeline project was completed in March 2007, adding over 1 Bcf of capacity. Construction on the Southeast Bossier 42-inch Expansion is expected to begin in summer 2007. The Midcontinent Express Pipeline (MEP) joint venture is expected to be in service by February 2009.
- Regulatory Risks: Transwestern is subject to FERC regulation. A rate case settlement was filed in March 2007; if approved, it will establish revised base tariff rates. There are risks regarding the recovery of costs for right-of-way grants on Tribal lands and potential FERC challenges to tariff rates.
- Legal and Environmental: The company is involved in various litigation matters, including royalty qui tam litigation (dismissed against Transwestern) and investigations by FERC/CFTC regarding trading activities during the 2005 hurricanes. Environmental remediation costs are accrued, with a total estimated future cost of $13.1 million for Transwestern PCB remediation.
- Subsequent Events: On March 2, 2007, ETE issued 5.0 million Common Units for net proceeds of approximately $160 million to repay indebtedness.
Investor Verification Checklist
- Acquisition Integration: Verify the successful integration of Transwestern and Titan operations and the realization of projected synergies.
- Debt Servicing: Monitor the company's ability to service the significantly increased debt load ($4.95 billion total) resulting from the Transwestern and Class G unit acquisitions.
- FERC Rate Case: Confirm the final approval of the Transwestern rate case settlement and its impact on future revenue stability.
- Commodity Hedging: Review the effectiveness of hedging strategies given the volatility in natural gas and propane prices and the impact on trading revenues.
- Weather Sensitivity: Assess the impact of weather patterns on propane sales volumes, which are highly seasonal and weather-dependent.