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 June 30, 2008.
Business Overview: ETE is a Delaware limited partnership whose operations are conducted primarily through its subsidiary, Energy Transfer Partners, L.P. (ETP). The company operates in four reportable segments: Midstream, Intrastate Transportation and Storage, Interstate Transportation, and Retail Propane. ETE owns a 2% general partner interest, 100% of the Incentive Distribution Rights (IDRs), and approximately 44% of the common units of ETP. The company changed its fiscal year-end to the calendar year effective January 1, 2008.
Key Financial Metrics (Six Months Ended June 30, 2008)
| Metric | Value (in thousands) |
|---|---|
| Total Revenues | $5,292,596 |
| Net Income | $247,099 |
| Net Income Attributable to Limited Partners | $246,334 |
| Diluted Net Income Per Unit | $1.10 |
| Operating Cash Flow | $564,647 |
| Capital Expenditures (Growth) | $951,732 (Net of CIAC) |
| Total Debt (Long-term + Current) | $6,485,520 |
| Cash and Cash Equivalents | $68,938 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by $1.52 billion (40%) compared to the six months ended May 31, 2007, driven primarily by higher natural gas prices and increased volumes in the Midstream and Intrastate segments.
- Profitability: Net income increased by $10.7 million (4.5%) to $247.1 million. Operating income rose by $50.8 million to $589.9 million.
- Segment Performance:
- Midstream: Operating income increased $62.4 million due to higher processing margins and the contribution of the Canyon Gathering System acquisition.
- Intrastate Transportation: Operating income increased $27.0 million, driven by higher transportation volumes and fuel retention fees, partially offset by a net decrease in storage margins due to hedge accounting discontinuations.
- Retail Propane: Operating income decreased $25.9 million to $101.4 million, primarily due to seasonality (comparing a non-heating period to a heating period in the prior year) and customer conservation.
- Interest Expense: Increased by $33.0 million to $171.0 million, primarily due to higher levels of borrowings to fund growth capital expenditures, partially offset by lower average interest rates.
Guidance, Outlook, Risks, and Unusual Items
- Trading Activities: Due to market volatility, the Partnership ceased speculative trading of financial derivative instruments not offset by physical positions in July 2008. Trading activities resulted in net losses of approximately $26.1 million year-to-date through July 31, 2008.
- Regulatory and Legal Risks (FERC/CFTC):
- FERC: The FERC has alleged market manipulation and improper trading activities, seeking approximately $200 million in civil penalties and disgorgement of profits. Hearings are scheduled to commence in late 2008 and 2009. The FERC also seeks to revoke the company's blanket marketing authority for 12 months.
- CFTC: ETP entered into a consent order with the CFTC in March 2008, agreeing to pay a $10.0 million penalty and be permanently enjoined from manipulating commodity prices. ETP neither admitted nor denied the allegations.
- Class Actions: Multiple class action lawsuits have been filed alleging manipulation of natural gas prices and antitrust violations. The company intends to contest these vigorously.
- Capital Projects: Significant growth capital expenditures are ongoing, including the Midcontinent Express Pipeline (MEP) joint venture with Kinder Morgan, with an estimated total cost of $1.45 billion. The Phoenix project cost estimate has increased by 10-20% due to right-of-way and construction costs.
- Distributions: ETE declared a quarterly distribution of $0.48 per unit ($1.92 annualized) for the quarter ended June 30, 2008, an increase of $0.16 per unit on an annualized basis.
Investor Verification Checklist
- Regulatory Exposure: Verify the potential financial impact of the FERC and CFTC proceedings, specifically the risk of a $200 million penalty and the revocation of marketing authority.
- Debt Service: Review the company's ability to service its $6.5 billion debt load given the high capital expenditure requirements for pipeline expansions.
- Trading Cessation: Assess the impact of the decision to cease speculative trading on future revenue volatility and margin stability.
- Storage Margins: Monitor the volatility in storage margins, particularly regarding the Bammel storage facility and the discontinuation of hedge accounting.
- Capital Expenditures: Confirm the funding sources for the $1.45 billion MEP project and the $1.0 billion in growth capex incurred in the first half of 2008.