Business Context and Reporting Period
This Form 8-K filing by Energy Transfer Equity, L.P. (ETE) reports material events completed on May 26, 2010. The filing details a series of coordinated transactions involving the acquisition of the general partner of Regency Energy Partners LP, a redemption of ETE units by Energy Transfer Partners, L.P. (ETP), and a contribution of assets to Regency. These transactions were facilitated by an amendment to ETE's existing credit facilities.
Key Financial Metrics and Capital Structure
- Credit Facilities: ETE amended its $500 million senior secured revolving credit facility and $1.45 billion term loan facility. The revolving facility matures on February 8, 2011, and the term loan matures on November 1, 2012.
- Interest Rates: Revolving loans bear interest at the Eurodollar rate plus 1.25% to 2.0% or base rate plus 0% to 0.5%. Term loans bear interest at the Eurodollar rate plus 1.75% or prime rate plus 0.25%.
- Equity Issuance: ETE issued 3,000,000 Series A Convertible Preferred Units at $100 per unit (total stated value $300 million) to acquire Regency's general partner.
- Preferred Unit Economics: The units carry a preferential cash distribution of $2.00 per fiscal quarter. They automatically convert on the fourth anniversary into ETE common units based on issue price, accrued distributions, and a premium (lesser of 10% of issue price or 25% of accretion in ETE common unit price).
- Asset Exchange: ETE contributed membership interests in ETC Midcontinent Express Pipeline III, L.L.C. (ETC III) to Regency in exchange for 26,266,791 Regency common units.
- Redemption: ETP redeemed 12,273,830 ETP common units previously owned by ETE in exchange for ETC III membership interests.
Material Changes Versus Prior Period
The filing does not provide comparative financial performance metrics (revenue, profit, cash flow) for the period. The material changes are structural and transactional:
- Ownership Structure: ETE now owns 100% of the general partner entities of Regency Energy Partners LP, including the 2.0% general partner interest and 100% of incentive distribution rights.
- Debt Covenants: Financial covenants in the credit agreement were revised to incorporate the results of operations and capital structure of Regency and its subsidiaries.
- Collateral: The amended credit agreement now secures obligations with ETE's holdings in Regency, including the 26,266,791 Regency common units and the general partner interests.
- Corporate Governance: Regency Acquirer (an affiliate of GE Energy Financial Services) gained the right to appoint a board observer to the board of directors of ETE's General Partner.
Guidance, Outlook, and Risks
- Future Options: ETE holds an option to acquire the membership interests in ETC Midcontinent Express Pipeline II, L.L.C. (ETC II), which owns a 0.1% interest in the Midcontinent Express Pipeline. This option cannot be exercised until May 27, 2011.
- Purchase Price Adjustments: Consideration for the Redemption and Contribution Transactions is subject to post-closing adjustments based on changes in working capital, long-term debt levels, and capital expenditures of the Midcontinent Express Pipeline from January 1, 2010.
- Redemption Rights: ETE may elect to redeem all Preferred Units beginning on the third anniversary of issuance for cash or common units plus a premium.
- Forced Conversion/Redemption: GE EFS holds rights to force redemption or conversion of Preferred Units upon certain extraordinary events involving ETE or ETP.
- Voting Rights: Preferred Unit holders generally lack voting rights but must approve amendments adversely affecting their rights or increasing the class size.
Investor Verification Checklist
- Verify the final post-closing purchase price adjustments for the Redemption and Contribution Transactions, as these depend on MEP's working capital and debt levels.
- Review the full text of the Amended Credit Agreement (Exhibit 10.1) to understand the specific revised financial covenants incorporating Regency's metrics.
- Monitor the exercise of the option to acquire ETC II interests, which becomes exercisable on May 27, 2011.
- Assess the impact of the $300 million Preferred Unit issuance on ETE's future cash flow obligations ($2.00 per unit per quarter) and potential dilution upon conversion.
- Confirm the status of the board observer appointment by Regency Acquirer and any subsequent governance changes.