Business context and reporting period
Entity and period: The supplied filing is Energy Transfer Equity, L.P. (NYSE: ETE), not Energy Transfer LP. It is a Form 10-K for the fiscal year ended December 31, 2012—not a standalone fourth-quarter filing. Amounts below are consolidated and generally in U.S. dollars.
ETE is a holding partnership whose cash generation depends substantially on interests in Energy Transfer Partners (ETP), Regency, and, following the October 2012 Holdco transaction, Holdco. ETP consolidated Southern Union and Sunoco through Holdco. The 2012 results include Southern Union from March 26 and Sunoco and Sunoco Logistics from October 5, so year-over-year comparisons are materially affected by acquisitions.
Financial and operating highlights
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $16.964 billion | $8.190 billion |
| Operating income | $1.360 billion | $1.237 billion |
| Net income | $1.274 billion | $528 million |
| Net income attributable to partners | $304 million | $310 million |
| Limited partners’ net income per unit | $1.13 | $1.39 |
| Segment Adjusted EBITDA | $3.105 billion | $2.131 billion |
| Cash from operating activities | $1.078 billion | $1.378 billion |
| Capital expenditures | $3.271 billion | $1.810 billion |
| Cash and cash equivalents at year-end | $372 million | $126 million |
| Total debt | $22.053 billion | $11.371 billion |
Cost of products sold was $13.088 billion, leaving gross margin of $3.876 billion, or approximately 22.9% of revenue; the comparable 2011 figures were $3.021 billion and approximately 36.9%. Operating margin was approximately 8.0% versus 15.1%. These ratios are not directly comparable because the 2012 mix includes acquired retail and crude/refined-products businesses with different revenue and margin profiles.
Net income included a $1.057 billion gain on deconsolidating the propane business, while cash from operations was reduced by a $551 million net change in operating assets and liabilities. Net income attributable to partners fell slightly despite higher consolidated net income, reflecting noncontrolling interests, acquisitions, and the larger unit base. Continuing-operations income per limited partner unit declined to $1.17 from $1.39.
Year-end current assets were $5.597 billion and current liabilities $5.845 billion (current ratio approximately 0.96). Long-term debt, less current maturities, was $21.440 billion; current maturities were $613 million. The filing reports $1.03 billion of availability under ETP’s revolving facility, $946 million under Regency’s, and $140 million under ETE’s secured revolver, subject to facility terms. The partnership reported covenant compliance at year-end.
ETE declared $2.51 per common unit for 2012; it subsequently declared a fourth-quarter distribution of $0.635 per unit, or $2.54 annualized, paid in February 2013. The filing describes ETE’s distributions as dependent on cash received from subsidiaries and subject to debt service, reserves, and other requirements.
Material changes versus the prior period
- Revenue more than doubled and Segment Adjusted EBITDA increased by $974 million, largely reflecting the Southern Union and Sunoco transactions and a full year of certain previously acquired operations; these changes do not represent purely organic growth.
- Total debt rose by approximately $10.7 billion, while operating cash flow declined by $300 million and capital expenditures increased by approximately $1.5 billion. Acquisition financing, growth spending, and working-capital movements were significant factors.
- Interstate Transportation and Storage Segment Adjusted EBITDA increased to $1.013 billion from $373 million, primarily reflecting Southern Union and the Citrus investment. Retail Marketing and Sunoco Logistics contributed $109 million and $219 million, respectively, with no comparable 2011 segment results.
- Intrastate Transportation and Storage Segment Adjusted EBITDA declined to $601 million from $667 million, amid lower transported volumes, weaker basis differentials, lower natural-gas prices, and contract expirations. Midstream increased to $438 million from $389 million, and NGL Transportation and Services increased to $209 million from $127 million, with the latter comparison including different ownership periods.
- ETE sold its propane operations to AmeriGas for approximately $1.46 billion cash and AmeriGas units, and recognized the deconsolidation gain. ETP also sold Canyon for approximately $207 million; the filing reports a substantial write-down of Canyon assets before or in connection with the sale.
Outlook, risks, contingencies, and unusual items
- Management outlook: Management said its near-term focus was integrating and optimizing the acquired businesses, pursuing organizational simplification during 2013–2014, and seeking synergies. Consolidated subsidiaries’ 2012 growth capital expenditures were $3.52 billion; management estimated $2.06–$2.36 billion for 2013. ETP separately projected $1.53–$1.85 billion of growth spending and $350–$400 million of maintenance spending for 2013. Regency expected $400 million of growth and $35 million of maintenance spending.
- Projects and transactions: The filing describes a proposed crude-oil transportation project, targeting up to 400,000 barrels per day, conditional on customer commitments and regulatory approvals, with service expected in 2015. Lake Charles LNG export capacity of up to 2.0 Bcf/d was under study and commercial negotiation; management did not anticipate significant project capital spending before studies, permits, and approvals were completed. Southern Union agreed to sell its Missouri Gas Energy and New England Gas divisions for approximately $1.035 billion, subject to adjustments and assumed debt; closing was expected by the end of Q3 2013. A February 2013 agreement to contribute SUGS to Regency included cash and unit consideration and was expected to close in Q2 2013.
- Acquisition and financing items: FY 2012 included $62 million of bridge-loan-related fees, $123 million of debt-extinguishment losses, a $75 million LIFO valuation reserve, and $38 million and $28 million of Southern Union- and Sunoco-related merger costs, respectively. ETE had a $2.0 billion senior secured term loan used in connection with the Southern Union transaction. ETP and Sunoco Logistics issued additional senior notes in January 2013 to repay revolving-credit borrowings and for general purposes.
- Liquidity and market risks: Cash from operations did not cover reported capital expenditures in 2012; the business also relied on asset-sale proceeds, borrowings, and subsidiary equity offerings. Risks include high consolidated leverage, refinancing and interest-rate exposure, commodity and basis-price volatility, working-capital needs, and reliance on access to debt and equity markets. A 100-basis-point interest-rate change was estimated to affect annual interest expense by $45 million.
- Legal and environmental matters: Accrued environmental liabilities increased to $212 million from $14 million. Separately, Sunoco estimated up to approximately $200 million of additional reasonably possible environmental remediation losses. Sunoco’s MTBE groundwater litigation could significantly affect results in a future period, although management did not expect a material adverse effect on consolidated financial position. SUGS faced proposed New Mexico air-quality penalties of $1 million and $7 million; settlement discussions were ongoing. The filing also identifies extensive pipeline-safety, environmental, regulatory, and rate-setting risks.
- Support and other obligations: ETP provided contingent residual support relating to $1.5 billion of AmeriGas debt associated with the propane transaction. The filing also reports $63.8 billion of purchase commitments, approximately $61 billion of which related to Philadelphia Energy Solutions production; amounts include variable-price commitments estimated using year-end market prices.
- Reporting and controls: Management and the auditor reported effective internal control over financial reporting, but Sunoco was excluded from management’s year-end internal-control assessment while integration was underway. The auditor’s financial-statement opinion was unqualified.
Most important facts for investors to verify
- Confirm the security and entity: this summary is for Energy Transfer Equity, L.P. (ETE), not a filing identified as Energy Transfer LP.
- Separate organic performance from acquisition effects; compare the unaudited pro forma results cautiously, since the filing says they are illustrative and not necessarily indicative.
- Review debt maturities, revolver availability, covenant headroom, and the effect of post-year-end note offerings on borrowing needs and interest costs.
- Assess whether operating cash flow can support distributions, planned growth spending, maintenance, and debt service; distributions are not guaranteed.
- Track closing and proceeds from the agreed utility-asset sale and SUGS contribution, and confirm the conditions and economics of proposed growth projects.
- Review the assumptions and potential range of environmental, MTBE, and air-quality liabilities, including amounts described as reasonably possible rather than accrued.
- Evaluate how commodity exposure, customer volumes, rate regulation, integration execution, and noncontrolling interests affect sustainable cash flow attributable to ETE unitholders.