Energy Transfer Equity, L.P. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. The filing covers Energy Transfer Equity, L.P. (ETE) and consolidated subsidiaries, including ETP, Regency and, from March 26, 2012, Southern Union.
Business context and results
ETE owns interests in energy partnerships and natural-gas businesses spanning pipelines, gathering and processing, NGL services, storage and regulated utility operations. The quarter included two major portfolio changes: ETP contributed its propane business to AmeriGas in January, and ETE acquired Southern Union on March 26. ETP also acquired a 50% interest in Citrus, which owns Florida Gas Transmission.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $1.689 billion | $1.989 billion |
| Gross margin | $666.9 million (39.5% of revenue) | $787.7 million (39.6%) |
| Operating income | $182.6 million (10.8% of revenue) | $364.2 million (18.3%) |
| Net income | $961.3 million | $199.1 million |
| Net income attributable to partners | $166.4 million | $88.6 million |
| Basic and diluted earnings per limited partner unit | $0.73 | $0.40 |
| Cash from operating activities | $79.4 million | $358.1 million |
| Capital expenditures | $594.5 million | $279.6 million |
Financial position, liquidity and distributions
- At March 31, cash and cash equivalents were $293.1 million; total assets were $32.8 billion.
- Total debt obligations were $17.50 billion, up from $11.37 billion at December 31, 2011. Long-term debt, excluding current maturities, was $17.39 billion. Management reported compliance with applicable debt covenants.
- Reported revolving-credit availability included $200 million at the parent, $2.28 billion at ETP and approximately $638.5 million at Regency. Southern Union had a $700 million revolving facility; $165 million was outstanding.
- Cash from operations fell despite higher net income, largely because earnings included a $1.056 billion noncash gain on the propane-business contribution; the cash-flow reconciliation also reflected a $115.0 million debt-extinguishment loss and working-capital changes.
- ETE declared a quarterly distribution of $0.625 per unit. ETP’s quarterly rate was $0.89375 and Regency’s was $0.46.
Material changes and unusual items
- ETE acquired Southern Union for approximately $3.01 billion in cash and 56.98 million ETE common units valued at approximately $2.35 billion. Southern Union contributed only its results from March 26 through March 31: $39.7 million of revenue and a $38.5 million net loss. The purchase-price allocation remained preliminary.
- ETP’s propane-business contribution generated a $1.056 billion gain and $1.384 billion of cash proceeds; ETP also received AmeriGas units. ETE’s reported net income therefore includes a significant one-time gain.
- ETE’s revenue declined by $300.0 million year over year, principally reflecting the propane-business deconsolidation. ETP gross margin declined by $160.7 million, including a $210.5 million reduction from propane, partly offset by growth in NGL transportation and services.
- Operating income decreased by $181.7 million. Other significant items included $62.2 million of bridge-loan fees related to the Southern Union transaction and a $115.0 million loss on ETP debt extinguishment.
- Regency net income rose to $28.9 million from $14.3 million, including a $15.6 million one-time producer payment. Higher gathering and processing volumes also lifted gross margin.
Outlook, risks and contingencies
- ETP estimated remaining-2012 growth capital expenditures of $700–$800 million for midstream and intrastate operations and $1.1–$1.2 billion for NGL operations; estimated maintenance spending was $90–$100 million.
- Regency estimated 2012 growth capital expenditures of $775–$825 million and maintenance spending of approximately $30 million. Southern Union estimated remaining-2012 growth spending of $200–$250 million and maintenance spending of $180–$200 million.
- On April 30, 2012, ETP announced a proposed $5.3 billion acquisition of Sunoco, expected to close in the second half of 2012 subject to shareholder and regulatory approvals. The filing discusses financing, integration, execution, litigation and distribution risks; the deal was not completed as of the filing.
- Recorded legal-contingency accruals were $28.3 million, and environmental liabilities were $31.9 million. Matters discussed include New Mexico air-quality enforcement proposals, a Massachusetts regulatory complaint concerning environmental-cost recoveries, and pipeline-related proceedings. The filing says outcomes and potential costs in some matters cannot be reliably estimated.
- Commodity-price and interest-rate movements, acquisition integration, access to financing, environmental and pipeline-safety regulation, and derivative-market reforms may affect results, liquidity and distributions. Management stated that Southern Union’s internal-control evaluation was underway and expected to continue through 2012; disclosure controls were deemed effective as of March 31.
Investor verification priorities
- Separate recurring operating performance and cash generation from the $1.056 billion propane-contribution gain and other transaction-related charges.
- Review the final Southern Union purchase-price allocation, acquired-business performance and integration costs, given the preliminary allocation and limited post-acquisition results in this quarter.
- Assess the increase in debt, financing costs, maturity profile and available borrowing capacity, including funding needs for announced capital spending and the proposed Sunoco acquisition.
- Track whether projected capital expenditures, project contributions and operating cash flows support distributions at ETE, ETP and Regency.
- Monitor the Sunoco transaction’s approvals, financing, litigation and integration risks, as well as the disclosed legal, environmental and regulatory matters.