Energy Transfer Equity, L.P. (ETE) — FY 2010 Form 10-K
Entity and period: The supplied filing is for Energy Transfer Equity, L.P., not Energy Transfer Partners, L.P. It covers the fiscal year ended December 31, 2010; “2010 Q4” is not a standalone reporting period in this annual filing. ETE is a holding partnership whose principal cash sources are distributions from Energy Transfer Partners (ETP) and Regency Energy Partners (Regency). ETE began consolidating Regency on May 26, 2010, so 2010 and 2009 consolidated results are not directly comparable.
Business context and major developments
ETE owns general partner interests, incentive distribution rights (IDRs), and limited partner units in ETP and Regency. ETP operates natural gas gathering, transportation, storage, processing and marketing businesses, as well as a large retail propane business. Regency provides natural gas gathering, treating, processing, compression and transportation services.
- In May 2010, ETE acquired control of Regency through transactions involving Regency’s general partner and IDRs, Regency units, and ETP’s interest in the Midcontinent Express Pipeline (MEP).
- ETP placed the Tiger and Fayetteville Express pipelines into service in 2010. Tiger’s initial capacity was 2.0 Bcf/d; its planned 0.4 Bcf/d expansion was authorized in February 2011. Fayetteville Express is a 50/50 joint venture with long-term transportation commitments.
- ETE issued $1.8 billion of 7.5% senior notes due 2020. ETP and Regency also raised capital through unit and debt offerings.
Financial results and liquidity
Amounts below are consolidated unless noted; dollar amounts are in millions. ETE’s consolidated figures include Regency only from the acquisition date in 2010.
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $6,598 | $5,417 |
| Gross margin | $2,487 (37.7% of revenue) | $2,295 (42.4%) |
| Operating income | $1,037 (15.7%) | $1,110 (20.5%) |
| Net income | $337 | $698 |
| Net income attributable to partners | $193 | $442 |
| Basic and diluted net income per ETE unit | $0.86 | $1.98 |
| Cash from operating activities | $1,087 | $723 |
| Cash used in investing activities | $1,830 | $1,346 |
| Cash from financing activities | $761 | $599 |
| Cash and cash equivalents at year-end | $86 | $68 |
| Total debt | $9,381 | $7,792 |
| Current assets / current liabilities | $1,291 / $1,081 | $1,268 / $890 |
Operating cash flow increased substantially, but investing outflows also rose, chiefly reflecting growth spending and acquisitions. Capital expenditures were about $1.51 billion in 2010. Net income declined despite higher revenue: ETE cites higher interest expense, weaker intrastate transportation and storage margins, derivative losses, and a $52.6 million non-cash impairment of ETP’s MEP investment. Revenue and year-over-year earnings comparisons are affected by Regency’s partial-year consolidation and should not be read as same-perimeter growth.
ETE’s year-end debt included $1.8 billion of parent-company notes and debt across ETP, Regency and other subsidiaries. ETP had $402 million drawn on its revolving facility and approximately $1.57 billion available; Regency had $285 million drawn and approximately $599 million available. ETE had no borrowings on its new $200 million revolving facility. The filing reports compliance with debt covenants at December 31, 2010. A 100-basis-point rate increase was estimated to change annual interest expense by $6.9 million on variable-rate debt.
ETE declared distributions of $2.16 per common unit for 2010, unchanged from 2009 on the annual figure shown. The quarterly rate was $0.54; ETE declared the December 2010-quarter distribution at that rate in January 2011. Distributions depend on cash received from ETP and Regency and remain subject to reserves, debt restrictions and the subsidiaries’ performance.
Changes, outlook, risks and unusual items
- Operating trends: ETP’s gross margin was broadly flat year over year. Midstream margins improved with higher processing margins, NGL prices and volumes; intrastate transportation and storage margins fell, including from less favorable price spreads and lower storage margins. Propane margin declined amid lower volumes and adverse mark-to-market effects.
- Outlook: Management expected generally stable prices and volumes in 2011 and anticipated contributions from recently completed and planned projects. ETE stated that it sought to increase distributions over time, principally through higher distributions from ETP and Regency; it did not provide a specific ETE earnings or distribution-growth forecast.
- 2011 ETP spending plans: $500–$550 million for midstream and intrastate growth; $250–$300 million for interstate growth, excluding joint-venture contributions; $25–$35 million for propane growth; $120–$140 million for maintenance; and $200–$230 million of joint-venture capital contributions. Regency had not publicly announced its 2011 capital spending estimate.
- One-time and non-cash items: The Regency acquisition led to purchase-accounting fair-value adjustments, including substantial new goodwill and intangible assets. Regency recorded a $15.7 million net loss on refinancing after redeeming its 8.375% notes and issuing $600 million of 6.875% notes due 2018. ETE paid $168.6 million to terminate interest-rate swaps; $66.4 million of realized hedge losses affected interest expense. The MEP impairment was $52.6 million.
- Regulatory and legal matters: A 2009 FERC settlement resolved the agency’s market-manipulation claims against ETP without an admission or finding of wrongdoing; it required a $5 million payment and a $25 million fund for related third-party claims. The filing describes favorable court outcomes in related proceedings. In February 2011, parties settled the HPL cushion-gas litigation; ETP did not expect liability from the matter under the settlement and indemnity arrangements.
- Environmental and safety exposure: Environmental accruals were $13.8 million at year-end 2010. The filing identifies ongoing remediation, possible tighter air and greenhouse-gas rules, hydraulic-fracturing regulation uncertainty, and pipeline-integrity spending. ETP estimated next-year integrity costs of $12.1 million in capital and $10.4 million in operating and maintenance costs; Regency estimated $0.2 million for 2011.
- Other key risks: Distribution dependence on ETP and Regency; high consolidated debt and refinancing needs; commodity-price, basis and interest-rate volatility; seasonal propane demand and weather; producer, shipper and counterparty concentration; project execution and financing; regulatory rate changes; and MLP tax treatment. The FEP joint venture had $940 million drawn on its facility, with ETP’s 50% guarantee exposure reported as $470 million, not recorded as consolidated debt.
Important facts for investors to verify
- Confirm whether the intended issuer is ETE or ETP; this summary concerns ETE’s 2010 Form 10-K.
- Review Regency’s acquisition accounting and pro forma results when comparing 2010 with 2009; the reported periods have different consolidation scopes.
- Assess the sustainability and coverage of ETE’s $0.54 quarterly distribution, including cash distributions received from each subsidiary, reserves, and debt-covenant constraints.
- Check actual 2011 project spending, completion dates, contracted capacity and realized cash flows against management’s estimates.
- Evaluate debt maturities, refinancing access, variable-rate exposure, and the status of the FEP guarantee and other joint-venture obligations.
- Review subsequent developments in environmental remediation, pipeline integrity, FERC or state regulation, and the MLP tax treatment risks disclosed in the filing.