Business context and reporting period
Energy Transfer Equity, L.P. (ETE) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The consolidated partnership includes ETP, Regency and, from March 26, 2012, Southern Union. Results are not fully comparable with 2011 because Southern Union was acquired and ETP contributed its propane business to AmeriGas in January 2012. Amounts below are in millions of dollars unless noted.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1,976.3 | $1,974.9 | $3,665.4 | $3,964.0 |
| Operating income | $378.7 | $260.6 | $561.3 | $624.8 |
| Net income | $74.5 | $106.7 | $1,035.8 | $305.7 |
| Net income attributable to partners | $53.5 | $66.3 | $219.9 | $154.9 |
| Basic earnings per limited partner unit | $0.19 | $0.30 | $0.87 | $0.69 |
| Segment Adjusted EBITDA | $727.9 | $479.2 | $1,308.6 | $1,038.6 |
| Cash from operating activities | Not presented quarterly | $424.4 | $698.3 |
Operating margin, calculated as operating income divided by revenue, was approximately 19.2% in Q2 2012 versus 13.2% in Q2 2011, and 15.3% for the first half versus 15.8%. First-half net income included a $1,056.7 million gain on deconsolidation of the propane business; excluding this unusual item, reported net income is not a straightforward measure of underlying period-to-period performance. Q2 net income also included increased interest expense and a $44.7 million loss on non-hedged interest-rate derivatives.
Capital spending was $1,293.9 million in the first half, compared with $794.2 million in 2011. Investing cash outflow was $2,733.2 million, largely reflecting the Southern Union acquisition. Financing cash inflow was $2,399.6 million. Cash and cash equivalents were $217.2 million at June 30, 2012, versus $126.3 million at year-end 2011.
Total debt was $18,073.4 million, up from $11,371.0 million at December 31, 2011; long-term debt, net of current maturities, was $17,959.5 million. Current liabilities were $1,834.6 million and current assets were $1,683.8 million. Revolver availability included $190 million at ETE, approximately $1.98 billion at ETP, approximately $376 million at Regency, and a $700 million Southern Union facility. Management reported compliance with credit-agreement covenants at quarter-end.
Material changes versus the prior comparable period
- Q2 revenue was essentially flat year over year; first-half revenue declined 7.5%, reflecting in part the propane business contribution and changes in the business mix.
- Q2 operating income rose, while first-half operating income declined. Segment Adjusted EBITDA increased in both periods, supported by ETP and Regency growth and Southern Union’s post-acquisition contribution; the acquired Southern Union segments have no corresponding 2011 amounts in the reported results.
- First-half net income rose sharply, primarily because of the nonrecurring propane deconsolidation gain. The gain was substantially offset in operating cash flow reconciliation by its noncash nature.
- Debt increased substantially following the Southern Union acquisition and related financing. ETE issued a $2.0 billion secured term loan; ETP also issued $2.0 billion of senior notes and repurchased approximately $750 million of notes, recording a $122.8 million extinguishment loss for the six-month period.
Outlook, commentary, risks and unusual items
Management expected significant 2012 investment spending. For the remainder of 2012, ETP projected growth capital expenditures of $450–$500 million for midstream and intrastate operations and $700–$800 million for NGL transportation and services, plus $50–$60 million of maintenance spending. Regency forecast approximately $775–$825 million of growth capital expenditures and $28 million of maintenance spending for 2012. Southern Union projected $50–$100 million of growth and $100–$120 million of maintenance capital expenditures for the remainder of 2012. These plans exclude financing and capital needs for the proposed Sunoco acquisition where specified in the filing.
ETP had agreed to acquire Sunoco, with closing then expected in the third or fourth quarter of 2012, subject to shareholder and regulatory approvals. The related Holdco restructuring was conditional on that transaction. ETE and ETP identified risks including financing availability, higher leverage and interest costs, integration challenges, failure to realize expected benefits, and litigation that could delay or prevent closing. The filing estimated ETP pro forma long-term debt, including current maturities, of approximately $15.5 billion after giving effect to the Sunoco merger and Holdco restructuring.
Other risks include commodity-price and derivative-market volatility, interest-rate exposure, counterparty performance, seasonal demand, regulatory requirements and environmental remediation. A 100-basis-point increase in rates was estimated to increase annual interest expense by $43.1 million on $4.31 billion of floating-rate debt. The filing also describes an ETP contingent residual support agreement related to AmeriGas debt; litigation concerning the Southern Union merger and other transactions; environmental enforcement matters, including proposed New Mexico penalties; and a FERC audit of Panhandle. Amounts and outcomes for several contingencies cannot be determined with certainty.
Unusual or transaction-related items included $38.2 million of Southern Union merger costs for the first half, $62.2 million of bridge-loan-related fees upon termination of the facility, the propane deconsolidation gain, debt-extinguishment losses, and mark-to-market derivative gains and losses. The Southern Union purchase-price allocation remained preliminary at June 30, 2012.
Most important facts for investors to verify
- Underlying earnings and distributable cash flow after separating the $1.06 billion propane gain, acquisition effects, derivative marks and financing-related costs.
- Debt repayment capacity, covenant headroom, interest-rate exposure and the availability and cost of funding planned capital spending and the proposed Sunoco transaction.
- Whether the Sunoco merger and Holdco restructuring closed as planned, and their actual effect on ownership, leverage, distributions and consolidated results.
- Final Southern Union purchase accounting, including goodwill, deferred taxes and acquired liabilities.
- Developments and potential exposure in merger-related litigation, environmental matters, regulatory proceedings and the AmeriGas support arrangement.