01—Abstract
Summary
Summary of the 10-K filed February 28, 2011. Cited figures are marked; the original filing is the authoritative source.
Energy Transfer Equity, L.P.
(NYSE: ETE) reported its 2010 10-K, filed February 28, 2011, as a holding company whose only cash-generating assets are its general partner interests, incentive distribution rights (IDRs), and limited partner units in Energy Transfer Partners (ETP) and Regency Energy Partners (Regency). The defining event of 2010 was the May 26, 2010 Regency Transactions, which gave ETE control of Regency and caused its consolidated results to include Regency from that date. Consolidated revenues rose to $6.60 billiona from $5.42 billion, while operating income fell to $1.04 billion from $1.11 billion and net income attributable to partners was $192.8 million, or $0.86 per limited partner unit, versus $1.98 in 2009.
Earnings declined mainly because ETP's segment net income fell to $617 millionb from $792 million, and because of about $168.6 million in cash paid to terminate interest rate swaps and higher interest expense of $625 million. For investors, the key tension is between growing distributions and a heavier balance sheet. Total assets grew to $17.4 billion and long-term debt to $9.3 billion, largely from the $1.8 billion of 7.5% Parent Company senior notes issued in September 2010 and ETP's and Regency's debt and equity issuances.
Management maintained the quarterly distribution at $0.54c per unit ($2.16 annualized), and the Parent Company's distributions from ETP and Regency rose to $627.8 million in 2010. The filing shows the Parent Company's cash flow depends almost entirely on ETP and Regency's ability to pay distributions, and a large share of the IDR value is leveraged to their unit distributions. ETP guidance for 2011 calls for $750 million to $850 million in growth capex plus $200 million to $230 million in joint venture contributions.
Risk factors emphasize concentration in midstream and intrastate pipeline operations, commodity price and propane weather exposure, rising leverage, and tax risk, since the partnership's status depends on continued treatment as a partnership for federal income tax purposes. Management also disclosed that the Tiger and Fayetteville Express pipelines were completed ahead of schedule and below budget, and that the Haynesville and Marcellus gathering build-outs and the Tiger expansion were underway.
02—Key points
Key Highlights
- Regency Transactions (May 26, 2010) gave ETE control of Regency, adding about $716.6 million of Regency revenue from that date and consolidating Regency's results, which lifted total revenue to $6.60 billion (up 22% from $5.42 billion).
- Net income attributable to partners fell to $192.8 million from $442.5 million, and basic and diluted income per limited partner unit dropped to $0.86 from $1.98, mainly because ETP's segment net income declined to $617.2 million from $791.5 million.
- Total debt of approximately $9.38 billion at year-end 2010 includes $1.8 billion of 7.5% ETE Senior Notes due 2020, issued in September 2010 to refinance the parent's credit facilities and term loan; the company paid $168.6 million to terminate interest rate swaps.
- The quarterly distribution was maintained at $0.54 per unit ($2.16 annualized), with a declaration for Q4 2010 announced January 27, 2011; total distributions declared by the Parent Company were $483.0 million in 2010.
- ETP completed the Tiger pipeline (initial capacity 2.0 Bcf/d, with a 0.4 Bcf/d expansion approved by FERC in February 2011) and the Fayetteville Express pipeline (2.0 Bcf/d, 50/50 joint venture with Kinder Morgan), both ahead of schedule and below original cost estimates.
- ETE's only cash-generating assets are 50.2 million ETP common units, the 1.8% ETP general partner interest with 100% of ETP IDRs (highest tier at 48%), and 26.3 million Regency common units with 100% of Regency IDRs. Distributions received from ETP and Regency totaled $627.8 million in 2010.
- Risk factors highlight partnership tax status, Investment Company Act exposure, the leverage of ETP and Regency (about $6.44 billion and $1.14 billion of consolidated debt, respectively), and a $687.3 million variable-rate debt position sensitive to interest rates.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Energy Transfer LP kept $0.03.
- Revenue$6.56B100.0%
- Cost of revenue−$4.07B62.1%
- Gross profit$2.49B37.9%
- Operating costs−$1.44B22.0%
- Operating income$1.04B15.9%
- Interest, other & tax−$851.0M13.0%
- Net income$193.0M2.9%
Where FY2010 revenue went
$6.56B- Cost of revenue: $4.10B, 63% of revenue
- Other operating costs: $1.18B, 18% of revenue
- Interest, other & tax: $851.0M, 13% of revenue
- Net income: $193.0M, 2.9% of revenue
- SG&A: $233.0M, 3.6% of revenue
Kept 2.9% as net incomeNet income $193.0M · 2.9%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 28, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $6.56B$5.42B | +21.0% |
| Cost of Revenue | $4.10B$3.12B | +31.4% |
| Gross Profit | $2.49B$2.30B | +8.3% |
| SG&A Expenses | $233.00M$178.92M | +30.2% |
| Operating Expenses | $5.51B$4.31B | +28.0% |
| Operating Income | $1.04B$1.11B | −6.0% |
| Interest Expense | $625.00M$468.42M | +33.4% |
| Net Income | $193.00M$442.47M | −56.4% |
05—Questions
Frequently Asked Questions
What drove the decline in ETE's 2010 earnings per unit even though revenue grew?
Revenue grew because the Regency Transactions added consolidated Regency results from May 26, 2010, and ETP's propane and midstream segments grew. Earnings fell for several reasons: ETP's segment net income dropped by $174 million, mainly from lower intrastate storage and transportation margins and a $52.6 million impairment of the MEP investment; Parent Company interest expense rose to $167.7 million, including $66.4 million of realized hedge losses and $102.2 million of non-hedged swap terminations; and Parent Company losses on non-hedged interest rate derivatives reached $53.4 million. Net income attributable to partners fell to $192.8 million from $442.5 million.
How safe is the $2.16 annual distribution, given the company's debt levels?
The distribution has been held at $0.54 per quarter since September 2010 and was increased from $0.525 in early 2009. Coverage depends entirely on ETP and Regency distributions to the parent, which were $627.8 million in 2010 versus $483 million paid to ETE unitholders. Two risks stand out: the parent's own debt service on the $1.8 billion senior notes and term obligations, and the fact that IDR payouts become disproportionately sensitive if ETP or Regency distributions decline (a drop below $0.4125 per ETP unit would reduce ETE's IDR share from 48% to 23%). Management states the distribution rises when subsidiary distributions rise, but the filing does not guarantee future increases.
What was the Regency Transactions' cost and structure?
ETE acquired the general partner interest and 100% of IDRs in Regency in exchange for 3,000,000 Series A Convertible Preferred Units with a $300.0 million liquidation preference, issued to an affiliate of GE Energy Financial Services. In a separate exchange, ETP redeemed about 12.3 million ETP common units held by ETE in return for a 49.9% interest in Midcontinent Express Pipeline, which ETE then contributed to Regency for 26.3 million Regency common units. The purchase price was recorded at $305.0 million, and goodwill of $789.8 million was recognized.
What are the biggest risks ETE investors should understand from this filing?
Key risks include: (1) Cash flow dependence on ETP and Regency, which have their own debt and must continue making distributions; (2) leverage, with ETP and Regency carrying about $7.6 billion of combined debt and the parent carrying $1.8 billion of 7.5% notes; (3) interest rate exposure of $687.3 million in variable-rate debt, where a 100 basis point change equates to about $6.9 million of annual interest expense; (4) commodity price volatility in natural gas and NGLs and weather-driven propane demand; (5) tax risk, because treatment as a partnership for federal income tax is essential and a corporate or entity-level state tax treatment would sharply reduce distributable cash; and (6) the ETE general partner is controlled by Kelcy Warren and Ray Davis, and Unitholders have limited influence over management.
What growth is expected in 2011?
ETP guided for $500 million to $550 million of midstream and intrastate growth capex, $250 million to $300 million of interstate growth capex, $25 million to $35 million of propane growth capex, and $120 million to $140 million of maintenance capex. ETP also expects $200 million to $230 million of joint venture contributions. Management expects prices and volumes to be relatively stable in 2011 and anticipates favorable impacts from 2010 projects, including the Tiger expansion (to 2.4 Bcf/d, with the 0.4 Bcf/d expansion expected in the second half of 2011) and the Eagle Ford and Marcellus Shale projects. Regency had not announced its 2011 capex plan.
06—Continue