Energy Transfer Equity, L.P. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. The filing reports consolidated results for Energy Transfer Equity (ETE), including controlled subsidiaries Energy Transfer Partners (ETP) and Regency Energy Partners. ETE obtained control of Regency in May 2010, so Q1 2010 comparisons exclude Regency and are not like-for-like.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $1.989 billion | $1.872 billion |
| Gross margin | $787.7 million | $647.1 million |
| Operating income | $364.2 million | $338.9 million |
| Net income | $199.1 million | $204.1 million |
| Net income attributable to partners | $88.6 million | $112.8 million |
| Basic and diluted net income per limited partner unit | $0.40 | $0.50 |
| Cash from operating activities | $358.1 million | $475.0 million |
- Revenue increased 6.3%; gross margin increased 21.7%. Gross margin was about 39.6% of revenue, compared with 34.6% in Q1 2010. Operating margin was about 18.3%, versus 18.1%.
- Operating cash flow declined $116.9 million. The filing attributes the comparison in part to lower cash benefit from changes in operating assets and liabilities: a $37.7 million use in 2011 versus a $161.7 million source in 2010.
- Capital expenditures, excluding construction allowances, were $279.6 million, compared with $119.7 million. Investing activities used $290.3 million. Financing activities used $11.1 million, versus $107.2 million provided in the prior-year quarter.
- Cash and equivalents were $143.0 million at March 31, up from $86.3 million at year-end. Current assets were $1.312 billion and current liabilities $1.014 billion. The filing does not present a consolidated current ratio or a single available-liquidity figure.
- Consolidated debt was $9.605 billion, up from $9.381 billion at December 31; reported long-term debt, including current maturities, was approximately $9.605 billion. Fair value of debt was $10.55 billion. ETP had $1.42 billion of revolver availability and Regency approximately $524.5 million. ETE had no borrowings on its $200 million parent revolver. All were in compliance with credit-agreement covenants.
Changes versus the prior comparable period
- Consolidated net income fell $5.0 million, while income attributable to ETE partners fell $24.1 million and per-unit earnings declined from $0.50 to $0.40. Higher interest expense ($167.9 million versus $121.7 million) and a $15.0 million non-cash increase in the fair value carrying amount of ETE preferred units weighed on results.
- Operating income increased $25.3 million. Management cited improved ETP intrastate storage and transportation, midstream activity and Tiger pipeline contributions; retail propane margin declined, primarily due to lower sales volumes associated with weather and customer conservation.
- Regency contributed $14.3 million of net income in Q1 2011 but was not consolidated in Q1 2010. ETP segment net income increased to $247.2 million from $240.1 million. Regency’s reported 2011 segment results are therefore not directly comparable with the prior period.
Outlook, management commentary and notable items
- On May 2, 2011, after quarter-end, a 70%-ETP/30%-Regency joint venture acquired LDH Energy Asset Holdings for approximately $1.97 billion in cash. ETP and Regency funded their shares with approximately $1.38 billion and $591.6 million, respectively. Management expects the NGL storage, fractionation and transportation assets to expand the platform and add fee-based revenue. Initial purchase accounting and pro forma information were not yet available.
- Management estimated ETP’s remaining-2011 growth capital spending at $600–650 million for midstream/intrastate, $160–190 million for interstate and $15–25 million for propane, plus $90–100 million of maintenance spending. ETP expected $250–300 million in remaining-2011 contributions to existing joint ventures, including $50–75 million to Lone Star NGL. Regency expected 2011 growth and maintenance capital spending of approximately $253 million and $14 million, respectively.
- ETE declared a Q1 distribution of $0.56 per common unit, or $2.24 annualized, compared with the prior $0.54 quarterly rate. ETP’s declared quarterly rate was $0.89375 per unit; Regency’s was $0.445 per unit.
- Additional announced plans included a 100,000-barrel-per-day Mont Belvieu fractionator, expected to cost approximately $375 million and enter service in early 2013; a possible NGL pipeline from Jackson County to Mont Belvieu; and a proposed 50/50 crude-oil pipeline joint venture with Enterprise from Cushing to Houston. These are plans, not completed projects.
- Risks include commodity-price and basis volatility, weather and seasonal effects, substantial capital needs and leverage, joint-venture governance and execution, and regulatory and environmental costs. New derivatives regulation could raise hedging costs or liquidity needs. ETP also guaranteed 50% of FEP’s $962.5 million facility borrowings, a contingent obligation of $481.3 million not recorded as debt on ETE’s balance sheet.
- The filing reports a February 2011 settlement of the Houston Pipeline cushion-gas litigation and says ETP does not expect liability in the matter due to AEP’s indemnification. Environmental accruals were $13.0 million; the filing notes that future compliance and remediation costs may be difficult to estimate. Disclosure controls were assessed as effective at March 31, 2011.
Important facts for investors to verify
- How the LDH acquisition was funded, its final purchase-price adjustments, integration progress and subsequent impact on debt, cash flows and fee-based earnings.
- Whether operating cash flow and distribution capacity support ETE’s and its subsidiaries’ declared distributions alongside planned capital spending; the filing does not provide a consolidated distribution-coverage ratio.
- ETP’s and Regency’s actual capital spending, joint-venture funding requirements and remaining revolver availability after the acquisition and subsequent financing activity.
- Exposure to commodity-price movements, interest-rate changes, derivatives collateral requirements and potential regulatory changes, including the contingent FEP guarantee.
- Progress, cost and timing of announced growth projects, and any material changes in litigation, environmental obligations or other contingencies.