Business context and reporting period
Energy Transfer Equity, L.P. (ETE) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. ETE’s consolidated businesses included interests in ETP and Regency and, from March 26, 2012, Southern Union. Results are not fully comparable with 2011 because of acquisitions, divestitures and changes in consolidation; Southern Union is included only from its acquisition date.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $2.171bn | $2.084bn | $5.811bn | $6.025bn |
| Operating income | $366.0m | $271.5m | $930.2m | $899.3m |
| Income from continuing operations | $113.3m | $62.2m | $1.152bn | $371.0m |
| Net income (loss), consolidated | $(33.8)m | $60.7m | $1.002bn | $366.4m |
| Net income attributable to partners | $35.2m | $69.1m | $255.1m | $224.0m |
| Net income per limited partner unit | $0.13 | $0.31 | $0.97 | $1.00 |
- Q3 revenue rose about 4%, while nine-month revenue fell about 4%. Segment Adjusted EBITDA increased to $752.4m from $503.2m in Q3 and to $2.061bn from $1.542bn for nine months.
- Q3 consolidated net loss reflected $147.2m of loss from discontinued operations, including a $145m non-cash Canyon asset write-down. Nine-month net income included a $1.057bn gain from deconsolidating the propane business; it also included $122.8m of debt-extinguishment losses and $62.2m of bridge-loan fees.
- Nine-month operating cash flow was $897.2m, versus $1.103bn in 2011. Investing used $3.613bn, including $2.239bn of capital expenditures and cash paid for Southern Union; financing provided $2.762bn. Cash ended the period at $172.1m.
- Total debt was $18.14bn at September 30, up from $11.37bn at year-end 2011; $614.4m was current maturities. The filing reports $4.49bn of floating-rate debt; a 100-basis-point rate increase would add an estimated $44.9m to annual interest expense.
- Current assets were $1.737bn and current liabilities $2.540bn. Available revolving capacity at September 30 included $200m at the parent, $1.98bn at ETP, and about $446m at Regency. Management reported compliance with credit-agreement covenants.
Material changes and management commentary
- ETE acquired Southern Union for approximately $3.01bn cash and 57.0m ETE units. The acquisition expanded its pipeline, storage, gathering, processing and regulated utility businesses; purchase-price allocations remained preliminary.
- ETP contributed its propane business to AmeriGas in January 2012, receiving cash and AmeriGas units and recognizing the large deconsolidation gain noted above. Canyon was sold in October for about $207m.
- After quarter-end, on October 5, ETP completed the Sunoco acquisition and the Holdco transaction. ETP paid about $2.6bn cash and issued about 55.0m units for Sunoco; the transaction also involved ETE contributing Southern Union to Holdco for a 60% interest. These transactions materially change the group structure and future results, but are not reflected as completed transactions in the September 30 balance sheet.
- Management expected ETP to fund near-term growth and working-capital needs with operating cash and its credit facility, while retaining the option to issue debt or equity. ETP estimated remainder-2012 growth capital spending of $550m–$625m across specified businesses, plus $30m–$40m maintenance spending. Regency estimated 2012 growth spending of $790m–$840m and maintenance spending of about $32m.
- ETE’s quarterly distribution was $0.625 per unit; ETP’s was $0.89375 and Regency’s $0.46. ETE relinquished incentive distributions in connection with the Citrus and Holdco transactions, totaling $58.8m of reductions reflected in nine-month distributions.
Risks, contingencies and unusual items
- Commodity and interest-rate derivative valuations can cause earnings volatility; management also cautioned that proposed derivatives regulation could increase collateral needs, costs or counterparty exposure. Commodity price changes and operational risks may affect cash flow and distributions.
- Environmental liabilities accrued were $37.8m at September 30, compared with $13.9m at year-end 2011. Compliance, remediation and pipeline-integrity costs may increase, and some exposures cannot be reasonably estimated.
- Legal matters include Southern Union merger-related damages claims and an ETP derivative suit concerning the Citrus merger and propane contribution. The filing states that outcomes cannot be predicted; the partnership had not accrued for certain claims it considered without merit.
- Southern Union’s regulated operations, seasonal demand, debt covenants and potential collateral requirements under some derivatives are additional considerations. ETE noted that interim results may be affected by seasonality, maintenance and commodity-price movements.
Important facts for investors to verify
- Separate recurring operating performance from the propane gain, Canyon impairment and other acquisition- and financing-related items; review segment results and cash generation.
- Assess the post-quarter Sunoco and Holdco transactions, including funding, issued units, distribution rights and their effect on ETE’s control and cash flows.
- Verify debt maturities, revolving-credit availability, floating-rate exposure and covenant headroom following the transactions.
- Review the status and potential exposure of merger-related litigation, environmental matters and the AmeriGas contingent residual support agreement.
- Check whether planned growth capital spending and the stated distribution rates remain supportable from operating cash flow and available financing.