01—Abstract
Summary
Summary of the 10-K filed March 1, 2013. Cited figures are marked; the original filing is the authoritative source.
Energy Transfer Equity, L.P.
(NYSE: ETE) reported fiscal 2012 results that were transformed by a series of large acquisitions. Total revenues rose to $16.96 billiona from $8.19 billion, operating income rose to $1.36 billion from $1.24 billion, and income from continuing operations jumped to $1.38 billion from $531 million. Much of the reported net income of $1.27 billion was inflated by a one-time $1.06 billion gain on the deconsolidation of the propane business contributed to AmeriGas.
Total assets nearly doubled to $48.9 billion and long-term debt grew to $21.4 billionb, reflecting the Southern Union merger, the Sunoco merger and the Holdco transaction completed during 2012. Basic income from continuing operations per limited partner unit declined to $1.17 from $1.39, despite the larger asset base, because of higher interest costs, depreciation, and the dilution from new units issued. For investors, the key point is that ETE's cash flow is entirely dependent on distributions from its subsidiaries, Energy Transfer Partners (ETP) and Regency Energy Partners, along with its 60% interest in Holdco (Southern Union and Sunoco).
The Partnership's distribution to unitholders was $0.625c per quarter in 2012, with a declared distribution of $0.635 for the fourth quarter, and total distributions declared were $704 million for 2012. Management expects 2013 growth capital expenditures of $2.06 to $2.36 billion across consolidated subsidiaries, and plans to simplify the organization during 2013 and 2014. Several pending transactions, including the sale of Southern Union's Missouri Gas Energy and New England Gas divisions for $1.035 billion and the contribution of SUGS to Regency, are expected to close during 2013.
Investors should weigh substantial risks disclosed in the filing: a heavy reliance on ETP and Regency for cash flow, leverage that has increased materially, incentive distribution rights that disproportionately affect ETE's distributions if subsidiary payouts fall, conflicts of interest with affiliated general partners, litigation tied to the Southern Union and Sunoco mergers, and exposure to MTBE contamination claims at Sunoco. The company is also exposed to natural gas and NGL price volatility, and its interstate pipelines face FERC rate-case and tariff challenges.
02—Key points
Key Highlights
- Total revenues increased about 107% to $16.96 billion in 2012 from $8.19 billion in 2011, driven primarily by the consolidation of Southern Union (from March 26, 2012) and Sunoco (from October 5, 2012).
- Net income of $1.27 billion includes a one-time $1.06 billion gain on deconsolidation of ETP's Propane Business; income from continuing operations was $1.38 billion, up from $531 million.
- Basic income from continuing operations per limited partner unit fell to $1.17 from $1.39, reflecting higher interest expense ($1.02 billion vs. $740 million), higher depreciation ($871 million vs. $586 million) and more units outstanding.
- Total assets rose to $48.9 billion from $20.9 billion, and long-term debt rose to $21.4 billion from $10.9 billion, following the Southern Union ($3.01 billion cash plus 57 million ETE units) and Sunoco (approximately $2.6 billion cash plus 55 million ETP units) acquisitions.
- Quarterly distribution per ETE common unit was $0.625 throughout 2012, with a $0.635 distribution declared in January 2013; total 2012 distributions declared were $704 million.
- 2013 growth capital expenditures across consolidated subsidiaries are expected at $2.06–$2.36 billion, versus $3.52 billion spent in 2012, including Mont Belvieu fractionation and Eagle Ford/Permian expansions.
- Pending transactions expected to close in 2013 include the $1.035 billion sale of Southern Union's Missouri Gas Energy and New England Gas divisions and the contribution of SUGS to Regency (consideration includes $570 million cash and 37.6 million Regency units).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Energy Transfer LP kept $0.02.
- Revenue$16.96B100.0%
- Cost of revenue−$13.09B77.2%
- Gross profit$3.88B22.8%
- Operating costs−$2.52B14.8%
- Operating income$1.36B8.0%
- Interest, other & tax−$1.06B6.2%
- Net income$304.0M1.8%
Where FY2012 revenue went
$16.96B- Cost of revenue: $13.09B, 77% of revenue
- Net income: $304.0M, 1.8% of revenue
- SG&A: $527.0M, 3.1% of revenue
- Other operating costs: $1.99B, 12% of revenue
- Interest, other & tax: $1.06B, 6.2% of revenue
Kept 1.8% as net incomeNet income $304.0M · 1.8%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed March 1, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $16.96B$8.19B | +107.1% |
| Cost of Revenue | $13.09B$5.17B | +153.2% |
| Gross Profit | $3.88B$3.02B | +28.3% |
| SG&A Expenses | $527.00M$253.00M | +108.3% |
| Operating Expenses | $15.60B$6.95B | +124.4% |
| Operating Income | $1.36B$1.24B | +9.9% |
| Interest Expense | $1.02B$740.00M | +37.6% |
| Net Income | $304.00M$310.00M | −1.9% |
05—Questions
Frequently Asked Questions
Why did net income rise so sharply in 2012 if the business performance was more modest?
Net income of $1.27 billion includes a $1.06 billion non-cash gain from deconsolidating ETP's propane operations when they were contributed to AmeriGas in January 2012. Excluding this one-time gain and related items, the underlying earnings improvement was more modest. Income from continuing operations of $1.38 billion also benefited from the consolidation of newly acquired businesses, but those were partly offset by higher interest and depreciation costs.
How dependent is ETE on its subsidiaries for cash?
Almost entirely. ETE's cash flows consist of distributions from ETP (including its general partner interest and incentive distribution rights), Regency (similar interests), and its 60% interest in Holdco. In 2012 these distributions totaled $775 million, of which $639 million came from ETP. The filing warns that a reduction in ETP or Regency distributions would disproportionately reduce ETE's receipts because of the incentive distribution rights structure.
What are the main risks to the distribution to ETE unitholders?
Key risks include leverage (total debt of $22 billion at year-end, with covenants at ETP, Regency and the Parent Company), natural gas and NGL price volatility, competition, regulatory risk at FERC and state regulators, environmental and safety liabilities, MTBE litigation at Sunoco, pending merger-related lawsuits, and potential conflicts of interest with affiliated general partners. ETE also has limited control over subsidiary cash reserves and distribution decisions.
What strategic changes is management planning for 2013 and beyond?
Management said its focus is on integrating and optimizing the diversified asset portfolio acquired in 2011–2012, and it expects to simplify the corporate structure during 2013 and 2014. It also flagged possible transactions among ETE, ETP, Regency and their affiliates to optimize assets. Growth projects include a second Mont Belvieu fractionator and expansions in the Eagle Ford and Permian basins, and the company is studying a possible Lake Charles LNG export facility of up to 2.0 Bcf/d.
06—Continue