Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and six months ended February 28, 2006
Overview: ETE is a Delaware limited partnership that completed its Initial Public Offering (IPO) in February 2006. The Partnership has no separate operating activities; its operations are conducted through its subsidiary, Energy Transfer Partners, L.P. (ETP), which manages midstream natural gas transportation/storage and retail/wholesale propane businesses.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended Feb 28, 2006 | Six Months Ended Feb 28, 2005 |
|---|---|---|
| Total Revenues | $4,866,436 | $2,304,042 |
| Operating Income | $391,579 | $159,478 |
| Net Income | $64,036 | $53,227 |
| Net Cash Provided by Operating Activities | $332,360 | $112,222 |
| Long-Term Debt (less current maturities) | $1,894,985 | $2,275,965 |
| Cash and Cash Equivalents | $33,866 | $33,459 |
| Net Income Per Limited Partner Unit (Diluted) | $0.53 | $0.40 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by approximately 111% ($2.56 billion) compared to the prior six-month period. This was driven by the full inclusion of the HPL System acquisition (completed Jan 2005), increased natural gas volumes, and higher commodity prices (average NYMEX price rose from $6.57 to $11.30 per MMBtu).
- Operating Income: Operating income more than doubled to $391.6 million, primarily due to increased margins in the transportation and storage segment and favorable price movements on derivative positions.
- Compensation Expense: Selling, general, and administrative expenses increased significantly ($87.7 million) due to a one-time non-cash compensation expense of $52.9 million recorded for the issuance of Class B Units to management in conjunction with the IPO.
- Debt Refinancing: The Partnership repaid its $600 million Goldman Term Loan using IPO proceeds and a new $500 million revolving credit facility. This resulted in a $5.1 million loss on extinguishment of debt.
- Discontinued Operations: The prior period included income from the Elk City System (discontinued operations), which was sold in April 2005. No discontinued operations were reported in the current period.
Guidance, Outlook, and Risks
- Outlook: Management expects margins in the transportation and storage segment to decrease in the third fiscal quarter due to seasonal injection of natural gas into storage facilities. Conversely, margins are expected to be higher during the winter heating season (November–March).
- Capital Expenditures: ETP expects to expend approximately $315 million on growth capital expenditures (new pipelines/plants) and $20 million on maintenance capital expenditures during the current fiscal year.
- Dividends: ETE declared a cash distribution of $0.20 per share for the quarter ended February 28, 2006 (prorated to $0.0578 per unit for the post-IPO period). ETP increased its quarterly distribution to $0.5875 per unit.
- Risks:
- Commodity Price Volatility: Results are sensitive to natural gas and propane prices. The company uses derivatives to hedge, but discontinuation of hedge accounting (due to unseasonably warm weather affecting forecasted sales) resulted in the recognition of $84.7 million in previously deferred gains.
- Weather Dependence: Propane sales are highly seasonal and dependent on heating degree days. Warmer-than-normal weather in the current period reduced propane volumes.
- Interest Rate Risk: The Partnership has significant variable-rate debt ($498.2 million unhedged). A 100 basis point increase in rates would increase annual interest expense by approximately $5.0 million.
Investor Verification Checklist
- IPO Impact: Verify the allocation of IPO proceeds ($474.7 million net) used for debt repayment, unit redemptions, and the purchase of additional ETP units.
- Derivative Accounting: Review the $84.7 million gain recognized from the discontinuation of hedge accounting related to Bammel storage facilities and its impact on reported earnings.
- Debt Covenants: Confirm compliance with financial covenants in the new $500 million ETE Credit Facility and the $900 million ETP Revolving Credit Facility.
- Minority Interest: Analyze the significant minority interest expense ($223.1 million for six months), which represents income allocated to unitholders of ETP not owned by ETE.
- Seasonality: Assess the impact of the warm winter weather on propane segment volumes and the expected seasonal decline in storage margins for the upcoming quarter.