Energy Transfer LP annual report, FY2011

Business context and reporting period

This filing is Energy Transfer Equity, L.P. (ETE), not a standalone Energy Transfer LP filing. It is the Form 10-K for the fiscal year ended December 31, 2011; the figures below are annual, not Q4-only. ETE is a holding partnership whose cash generation principally depends on its interests in Energy Transfer Partners (ETP) and Regency Energy Partners, including general-partner interests and incentive distribution rights. ETE consolidated Regency beginning May 26, 2010, limiting year-over-year comparability.

Key financial metrics

Metric20112010
Revenue$8.241 billion$6.598 billion
Gross margin$3.058 billion; 37.1% of revenue$2.487 billion; 37.7%
Operating income$1.235 billion; 15.0% of revenue$1.037 billion; 15.7%
Net income$528.2 million$336.6 million
Net income attributable to partners$309.8 million$192.8 million
Basic / diluted net income per unit$1.39 / $1.38$0.86 / $0.86
Cash from operating activities$1.377 billion$1.087 billion
Cash used in investing activities$3.873 billion$1.830 billion
Cash from financing activities$2.536 billion$761.0 million
Year-end cash and cash equivalents$126.3 million$86.3 million
Consolidated debt$11.371 billion$9.381 billion
Total assets / total equity$20.897 billion / $7.389 billion$17.379 billion / $6.248 billion

Year-end current assets were $1.455 billion versus current liabilities of $1.841 billion (current ratio about 0.79). ETP reported approximately $2.16 billion of available revolving capacity and Regency approximately $549 million; ETE’s parent-level facility had $128.5 million available. These facilities and assets are at different entities and are not necessarily interchangeable. ETE-only cash was $18.5 million.

Material changes versus the prior comparable period

  • Revenue rose about 24.9% and net income about 57.0%; however, Regency was consolidated for a full year in 2011 but only from May 26 in 2010.
  • ETP growth reflected the Tiger pipeline and its expansion, higher midstream volumes and fees, favorable NGL prices, and the May 2011 acquisition of LDH through Lone Star. Lone Star contributed $178.8 million of ETP gross margin from acquisition through year-end.
  • Interest expense increased to $739.8 million from $624.9 million, reflecting higher debt, including ETP’s May 2011 note issuance. Non-hedged interest-rate derivative losses were $77.8 million, versus $52.4 million in 2010.
  • Investing outflows increased, including $1.81 billion of capital expenditures and $1.97 billion paid for acquisitions, principally Lone Star. Financing included a $2.00 billion consolidated net increase in debt and $1.90 billion of subsidiary equity proceeds.
  • ETE distributions increased to $2.44 per common unit for 2011 from $2.16 in 2010. The December 2011-quarter distribution, declared in January 2012, was $0.625 per unit, or $2.50 annualized.

Outlook, commentary, risks and unusual items

  • ETE expected to complete its Southern Union Company (SUG) acquisition in the first quarter of 2012. The announced transaction was valued at approximately $9.4 billion, including $5.7 billion in cash and ETE units and $3.7 billion of SUG debt. Management expected accretion, greater geographic diversity, more fee-based revenue and operational synergies; these are expectations, not guaranteed outcomes.
  • ETP’s related Citrus transaction was expected to bring SUG’s 50% interest in Citrus Corp., owner of Florida Gas Transmission, to ETP for approximately $1.895 billion cash and $105 million in ETP units. ETE agreed to relinquish about $220 million of ETP incentive distributions over 16 quarters. A dispute with El Paso over a claimed right of first refusal was in litigation, with trial scheduled for April 2012.
  • ETP, Regency and Lone Star expected aggregate 2012 growth capital expenditures of $2.6–$2.9 billion, compared with $1.8 billion in 2011. ETP separately estimated 2012 growth spending of $800–$900 million for midstream/intrastate operations and $1.3–$1.5 billion for NGL operations; Regency estimated $335 million for operating segments and $385–$435 million of joint-venture contributions, plus maintenance spending. These estimates overlap in part and should not be added together without checking scope.
  • In January 2012 ETP contributed its propane business to AmeriGas for $1.46 billion cash and about 29.6 million AmeriGas units; AmeriGas assumed about $71 million of HOLP debt. ETP also provided contingent residual support tied to $1.5 billion of AmeriGas intercompany debt. ETP’s 2012 notes issuance was conditioned on completion of the Citrus acquisition, with a 101% redemption obligation if specified conditions were not met by April 17, 2012.
  • Key risks include leverage and refinancing needs, the ability of ETP and Regency to sustain distributions, commodity-price and basis exposure, customer and producer concentration, project execution and funding, regulatory changes, pipeline integrity and environmental obligations, and counterparty performance. A 100-basis-point rate increase was estimated to raise annual interest expense by $7.2 million on floating-rate debt.
  • Environmental accruals were $13.7 million at year-end, including $5.7 million for Transwestern remediation expected to continue through 2025. Litigation and contingency accruals were approximately $18.2 million. Management stated it was in compliance with debt covenants at year-end.
  • Grant Thornton issued an unqualified opinion on the consolidated financial statements and internal controls. The 2011 internal-control assessment excluded newly acquired Lone Star Holdings, which represented $2.21 billion of assets and $361.5 million of third-party revenue from May 2 through year-end.

Most important facts for investors to verify

  1. Whether the SUG and Citrus transactions closed on schedule, their final funding mix and terms, and the outcome of the El Paso litigation.
  2. How much of the reported growth in revenue, earnings and cash flow reflects acquisitions and consolidation timing rather than organic performance.
  3. Whether projected 2012 capital spending is funded without excessive additional debt or equity dilution, and whether projects achieve expected returns.
  4. Debt maturities, covenant headroom, actual available liquidity by legal entity, and ETP’s contingent AmeriGas support obligation.
  5. Distribution coverage and the sustainability of ETE’s, ETP’s and Regency’s distributions amid capital needs and debt service.
  6. Commodity derivative exposures, margin-call liquidity requirements, and the effect of market-price changes on earnings and cash flow.
  7. Actual costs and any changes in scope for pipeline integrity work, environmental remediation and other legal contingencies.