01—Abstract
Summary
Summary of the 10-K filed February 22, 2012. Cited figures are marked; the original filing is the authoritative source.
Energy Transfer Equity, L.P.
(NYSE: ETE) reported 2011 results that rose sharply in revenue and scale, but net income attributable to common unitholders was modest, reflecting heavy interest expense, depreciation, and the cost of growing its subsidiaries. Consolidated revenues increased to $8.24 billiona from $6.60 billion, operating income rose to $1.23 billion from $1.04 billion, and net income climbed to $528.2 million from $336.6 million. Growth was driven largely by ETP's Lone Star NGL acquisition (LDH), the full-year consolidation of Regency Energy Partners, and expansion of the Tiger and Eagle Ford-related midstream footprint.
The Parent Company has no operating assets of its own. Its cash flow depends entirely on distributions from its ~50.2 million ETP common units, the general partner interest and 100% of ETP's incentive distribution rights (IDRs), and its 26.3 million Regency common units plus Regency IDRs. Parent-level distributions to ETE unitholders were $0.625b per quarter in Q3 and Q4 2011, and the Q4 2011 distribution declared in January 2012 was held at $0.625.
Leverage is significant: ETE carried roughly $11.4 billionc of consolidated debt at year-end 2011, including $1.8 billion of 7.5% parent senior notes and $71.5 million drawn on its secured revolver. ETP and Regency carry separate, non-recourse debt, and the filing repeatedly notes that parent-only assets are not available to satisfy subsidiary obligations. The key forward catalysts are the pending $9.4 billion acquisition of Southern Union (SUG), expected to close in Q1 2012, and ETP's roughly $1.9 billion purchase of a 50% interest in Citrus Corp. (Florida Gas Transmission), which is subject to a pending El Paso right-of-first-refusal lawsuit.
Financing for the SUG cash component relies on a $3.7 billiond bridge facility being refinanced through a planned $2.3 billion senior secured facility. Investors should weigh the accretion promised by these deals against the higher leverage, the reliance on IDR-driven distribution growth, and the execution and litigation risks flagged in the risk factors.
02—Key points
Key Highlights
- Consolidated revenues rose 25% to $8.24 billion in 2011 from $6.60 billion, and net income rose 57% to $528.2 million from $336.6 million.
- Operating income increased 19% to $1.23 billion, supported by ETP's Lone Star NGL acquisition (closed May 2011 for about $1.98 billion) and the full-year consolidation of Regency.
- Pending SUG Merger valued at $9.4 billion, including $5.7 billion in cash and ETE units and $3.7 billion of assumed SUG debt, with closing expected in Q1 2012 subject to Missouri PSC approval.
- Parent Company cash flow is entirely dependent on distributions from ETP and Regency, including 100% of the ETP IDRs (48% incremental share above $0.4125/unit) and Regency IDRs (up to 48% above $0.525/unit).
- Distribution held at $0.625 per common unit per quarter in late 2011, with a January 2012 declaration of $0.625 for Q4 2011; ETE's distributions paid in 2011 totaled $544.6 million.
- Consolidated debt of about $11.4 billion at December 31, 2011, with ETP carrying roughly $7.8 billion of consolidated debt and Regency about $1.7 billion, both at the subsidiary level.
- Propane business contributed to AmeriGas on January 12, 2012 in exchange for $1.46 billion cash and 29.6 million AmeriGas units, reducing ETP's exposure to retail propane.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Energy Transfer LP kept $0.04.
- Revenue$8.19B100.0%
- Cost of revenue−$5.17B63.1%
- Gross profit$3.02B36.9%
- Operating costs−$1.78B21.8%
- Operating income$1.24B15.1%
- Interest, other & tax−$927.0M11.3%
- Net income$310.0M3.8%
Where FY2011 revenue went
$8.19B- Cost of revenue: $5.17B, 63% of revenue
- Other operating costs: $1.53B, 19% of revenue
- Net income: $310.0M, 3.8% of revenue
- SG&A: $253.0M, 3.1% of revenue
- Interest, other & tax: $927.0M, 11% of revenue
Kept 3.8% as net incomeNet income $310.0M · 3.8%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 22, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $8.19B$6.56B | +24.9% |
| Cost of Revenue | $5.17B$4.10B | +26.0% |
| Gross Profit | $3.02B$2.49B | +21.5% |
| SG&A Expenses | $253.00M$233.00M | +8.6% |
| Operating Expenses | $6.95B$5.51B | +26.1% |
| Operating Income | $1.24B$1.04B | +18.5% |
| Interest Expense | $740.00M$625.00M | +18.4% |
| Net Income | $310.00M$193.00M | +60.6% |
05—Questions
Frequently Asked Questions
How does Energy Transfer Equity generate cash for its unitholders?
ETE has no significant operating assets of its own. It receives cash from its direct holdings of ETP and Regency common units, its general partner interests, and the incentive distribution rights in both ETP and Regency. Its ability to pay distributions therefore depends on ETP's and Regency's ability to pay distributions to their own unitholders, and it carries its own parent-level debt and interest costs.
What is the status of the Southern Union acquisition and how is it being financed?
ETE agreed in July 2011 to acquire Southern Union in a transaction valued at $9.4 billion, with shareholders able to elect $44.25 cash or one ETE unit per share, subject to proration (cash capped at 60%). SUG shareholders approved the deal on December 9, 2011, and closing is expected in Q1 2012 pending Missouri regulatory approval. The cash portion is financed by a $3.7 billion 364-day bridge loan, expected to be replaced by a planned $2.3 billion senior secured facility plus proceeds from ETP's Citrus acquisition.
What are the main risks to ETE's distributions?
Key risks include commodity price and spread volatility affecting ETP and Regency margins, rising leverage and covenant limits at both the parent and subsidiary levels, the pending Citrus-related litigation brought by El Paso (trial scheduled for April 2012), regulatory changes at FERC and state agencies, and the risk that distributions are reduced, which would disproportionately lower the cash flow from IDRs. The filing also highlights that the general partner can be removed only with 66 2/3% unitholder approval, and that ownership concentration gives management significant influence.
Why did net income grow faster than operating income?
Net income rose to $528.2 million from $336.6 million largely because of improved equity earnings from affiliates ($117.2 million versus $65.2 million) and the absence of 2010 losses such as the MEP impairment and the 2010 swap termination costs, which offset higher interest expense of $739.8 million, up from $624.9 million. Lower non-cash charges on Regency preferred units and better other income also contributed.
What drives expected growth in 2012 for ETE's subsidiaries?
ETP, Regency and Lone Star expect aggregate 2012 capital expenditures of $2.6 billion to $2.9 billion, including a Mont Belvieu NGL fractionator, Eagle Ford gathering assets, and Woodford and Barnett Shale projects. Management expects these projects, plus the Citrus acquisition, to increase distributions to ETE through its limited partner, general partner and IDR interests, though the timing and scale depend on subsidiary execution and financing.
06—Continue