Business Context and Reporting Period
Company: Energy Transfer Equity, L.P. (ETE) / Energy Transfer Partners, L.P. (ETP)
Filing Type: Form 8-K (Current Report)
Date: December 18, 2008
Context: This filing supplements risk factors previously disclosed in the 2007 Form 10-K and the Q3 2008 Form 10-Q. The report addresses significant uncertainties regarding a proposed joint venture with OGE, the impact of deteriorating credit markets on financing, and ongoing regulatory and legal proceedings involving the Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC).
Key Financial Metrics and Liquidity
Note: This filing is a qualitative risk update and does not contain specific revenue, profit, or cash flow statements for the period.
- Financing Requirements (Joint Venture): The proposed ETP Enogex Financing Plan requires a $700 million senior secured revolving credit facility, $700 million in senior unsecured notes (max 9.0% interest), and $800 million in senior unsecured notes from Transwestern Pipeline Company (max 8.0% interest).
- Regulatory Penalties (CFTC): ETP agreed to pay $10.0 million to the CFTC under a consent order (paid in March 2008).
- Regulatory Penalties (FERC): FERC initially sought $70.1 million in disgorgement and $97.5 million in civil penalties. If additional claims are pursued, total penalties and disgorgement could reach approximately $200 million.
- Liquidity Risk: Management states that credit markets have deteriorated, increasing the cost of capital and diminishing availability. There is uncertainty regarding the ability to obtain funding on acceptable terms or at all.
Material Changes and Developments
- Joint Venture Status: The joint venture with OGE is unlikely to close by the March 31, 2009 deadline due to the inability to secure financing on terms specified in the agreement. ETP currently does not intend to waive the financing condition.
- FERC Oasis Pipeline Settlement: In December 2008, ETP reached an agreement in principle to settle all claims related to the Oasis Pipeline. The terms are confidential pending FERC approval. Management does not believe this settlement will have a material adverse effect.
- FERC Market Manipulation Claims: Hearings regarding market manipulation allegations are scheduled to commence in April 2009. FERC may seek to revoke ETP's blanket marketing authority, which accounts for approximately 1.0% of 2008 operating income.
- Customer Impact: Declines in natural gas prices and credit availability have led many customers to reduce drilling capital expenditure budgets for late 2008 and 2009, potentially reducing volumes on ETP's pipeline system.
Outlook, Risks, and Contingencies
Management Commentary and Outlook
Management highlights that global financial markets remain volatile. The inability to secure financing for the OGE joint venture or future expansion projects could hinder growth strategies and force the revision or cancellation of pipeline construction plans. If the joint venture proceeds without adequate financing, ETP may be required to make additional capital contributions.
Material Risks
- Financing Risk: Deterioration in credit markets may prevent ETP from meeting future capital needs or refinancing existing debt.
- Regulatory Risk: Ongoing FERC proceedings could result in significant penalties, disgorgement of profits, or the revocation of marketing authority. Laws and regulations regarding market manipulation are described as vague and subject to broad interpretation.
- Legal Contingencies: Multiple third-party lawsuits (class actions and individual suits) allege price manipulation and antitrust violations, seeking unspecified damages. ETP is unable to predict the final outcome or total liability, though existing accruals may be insufficient.
- Operational Risk: Reduced drilling activity by customers due to lower commodity prices and credit constraints could materially adversely affect operations.
Investor Verification Checklist
- Verify the final terms and FERC approval status of the Oasis Pipeline settlement agreement.
- Monitor the status of the OGE joint venture and the likelihood of termination by the March 31, 2009 deadline.
- Review upcoming FERC hearing schedules (starting April 2009) regarding market manipulation allegations and potential penalties up to $200 million.
- Assess the impact of reduced customer drilling budgets on ETP's future volume and revenue projections.
- Confirm ETP's ability to access credit markets for expansion projects and debt refinancing given current market conditions.