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| ETE > SEC Filings for ETE > Form 10-K on 1-Mar-2013 | All Recent SEC Filings |
1-Mar-2013
Annual Report
OVERVIEW
Energy Transfer Equity, L.P. directly and indirectly owns equity interests in
ETP and Regency, both publicly traded master limited partnerships engaged in
diversified energy-related services. In addition, we own a 60% interest in
Holdco, as described below.
At December 31, 2012, our equity interests consisted of:
General Partner
Interest (as a % Incentive
of total Distribution
partnership Rights Limited
interest) ("IDRs") Partner Units
ETP 0.9 % 100 % 50,226,967
Regency 1.6 % 100 % 26,266,791
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The Parent Company's principal sources of cash flow have historically derived
from its direct and indirect investments in the limited partner and general
partner interests in ETP and Regency, both of which are publicly traded master
limited partnerships engaged in diversified energy-related services. Effective
with the acquisition of Southern Union in March 2012, the Parent Company also
generated cash flows through its wholly-owned subsidiary, Southern Union until
its contribution of Southern Union to Holdco on October 5, 2012. Subsequent to
October 5, 2012, we also generate cash flows from our direct investment in
Holdco. The Parent Company's primary cash requirements are for distributions to
its partners and holders of the Preferred Units, general and administrative
expenses, debt service requirements and at ETE's election, capital contributions
to ETP and Regency in respect of ETE's general partner interests in ETP and
Regency. The Parent Company-only assets and liabilities are not available to
satisfy the debts and other obligations of subsidiaries.
As a result of the Regency Transactions in May 2010, the Southern Union Merger
in March 2012 and the Holdco Transaction in October 2012, the periods presented
herein do not include activities from Regency, Southern Union or Sunoco prior to
the consummation of the respective mergers and/or transactions.
In order to fully understand the financial condition and results of operations
of the Parent Company on a stand-alone basis, we have included discussions of
Parent Company matters apart from those of our consolidated group.
General
Our primary objective is to increase the level of our distributable cash flow to
our unitholders over time by pursuing a business strategy that is currently
focused on growing our subsidiaries' natural gas and NGL businesses through,
among other things, pursuing certain construction and expansion opportunities
relating to our subsidiaries' existing infrastructure and acquiring certain
strategic operations and businesses or assets. The actual amounts of cash that
we will have available for distribution will primarily depend on the amount of
cash our subsidiaries generate from their operations.
Subsequent to the Holdco Transaction on October 5, 2012, as described above, our
reportable segments changed. Our reportable segments currently consist of the
following:
• Reportable segments of ETP:
? Natural gas operations, including the following:
? natural gas midstream and intrastate transportation and storage
through Southern Union and La Grange Acquisition, L.P., which
conducts business under the assumed name of ETC OLP; and
? interstate natural gas transportation and storage through ET
Interstate and Southern Union. ET Interstate is the parent company
of Transwestern, ETC FEP, ETC Tiger and CrossCountry. Southern Union
is the parent company of Panhandle, which provides transportation
and storage services through the Panhandle, Trunkline and Sea Robin
transmission systems.
? NGL transportation, storage and fractionation services primarily
through Lone Star.
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? Refined product and crude oil operations, including the following:
? refined product and crude oil transportation through Sunoco Logistics; and
? retail marketing of gasoline and middle distillates through Sunoco.
• Investment in Regency, including the consolidated operations of Regency.
• Corporate and Other, including the following:
? activities of the Parent Company;
? the goodwill and property, plant and equipment fair value
adjustments recorded as a result of the 2004 reverse acquisition of
Heritage Propane Partners, L.P.; and
? ETP's corporate and other, which includes the following operating
segments that do not meet the qualitative threshold for separate
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? natural gas compression services through ETC Compression;
? a limited partner interest in AmeriGas;
? a non-operating interest in PES;
? natural gas distribution operations through Southern Union; and
? approximately 30% non-operating interest in a refining joint venture.
Each of the respective general partners of ETP and Regency have separate
operating management and boards of directors. We control ETP and Regency through
our ownership of their respective general partners. ETP also controls Holdco.
Recent Developments
On January 12, 2012, ETP Contributed its propane operations, consisting of HOLP
and Titan (collectively, the "Propane Business") to AmeriGas. ETP received
approximately $1.46 billion in cash and approximately 29.6 million AmeriGas
common units. AmeriGas assumed approximately $71 million of existing HOLP debt.
In connection with the closing of this transaction, ETP entered into a support
agreement with AmeriGas pursuant to which ETP is obligated to provide
contingent, residual support of $1.5 billion of intercompany indebtedness owed
by AmeriGas to a finance subsidiary that in turn supports the repayment of $1.5
billion of senior notes issued by this AmeriGas finance subsidiary to finance
the cash portion of the purchase price.
On March 26, 2012, we acquired all of the outstanding shares of Southern Union
for approximately $3.01 billion in cash and approximately 57 million ETE Common
Units. In connection with the Southern Union Merger on March 26, 2012, ETP
completed its acquisition of CrossCountry, a subsidiary of Southern Union which
owned an indirect 50% interest in Citrus, the owner of FGT. The total merger
consideration was approximately $2.0 billion, consisting of approximately $1.9
billion in cash and approximately 2.25 million ETP Common Units.
On October 5, 2012, ETP completed its merger with Sunoco. Under the terms of the
merger agreement, Sunoco shareholders received a total of approximately 55
million ETP Common Units and approximately $2.6 billion in cash.
Immediately following the closing of the Sunoco merger, ETE contributed its
interest in Southern Union into ETP Holdco Corporation, an ETP-controlled
entity, in exchange for a 60% equity interest in Holdco. In conjunction with
ETE's contribution, ETP contributed its interest in Sunoco to Holdco and
retained a 40% equity interest in Holdco. Prior to the contribution of Sunoco to
Holdco, Sunoco contributed $2.0 billion of cash and its interests in Sunoco
Logistics to ETP in exchange for 90,706,000 ETP Class F Units representing
limited partner interests in ETP. We refer to this as the "Holdco Transaction."
Pursuant to a stockholders agreement between ETE and ETP, ETP controls Holdco.
Consequently, ETP consolidates Holdco (including Sunoco and Southern Union) in
its financial statements subsequent to consummation of the Holdco Transaction.
In December 2012, Southern Union entered into a purchase and sale agreement
pursuant to which subsidiaries of Laclede Gas Company, Inc. have agreed to
acquire the assets of Southern Union's Missouri Gas Energy and New England Gas
Company divisions. Total consideration for the acquisitions will be $1.035
billion, subject to customary closing adjustments, less the assumption of
approximately $19 million of debt. On February 11, 2013, the Laclede Entities
announced that it had entered into
an agreement with Algonquin Power & Utilities Corp (APUC") that will allow a subsidiary of APUC to assume the right of the Laclede Entities to purchase the assets of Southern Union's New England Gas Company division, subject to certain approvals. It is expected that the transactions contemplated by the Purchase and Sale Agreements will close by the end of the third quarter of 2013. On February 27, 2013, Southern Union entered into a definitive contribution agreement to contribute to Regency all of the issued and outstanding membership interest in Southern Union Gathering Company, LLC, and its subsidiaries, including SUGS. The consideration to be paid by Regency in connection with this transaction will consist of (i) the issuance of 31,372,419 Regency common units to Southern Union, (ii) the issuance of 6,274,483 Regency Class F units to Southern Union, (iii) the distribution of $570 million in cash to Southern Union, and (iv) the payment of $30 million in cash to a subsidiary of ETP. The Regency Class F units will have the same rights, terms and conditions as the Regency common units, except that Southern Union will not receive distributions on the Regency Class F units for the first eight consecutive quarters following the closing, and the Regency Class F units will thereafter automatically convert into Regency common units on a one-for-one basis. Upon the closing of the transaction, we will agree to forego all distributions with respect to our IDRs on the Regency common units issued in the transaction for the first eight consecutive quarters following the closing. The transaction is expected to close in the second quarter of 2013.
As we and our subsidiaries have completed several major strategic transactions since 2011 to expand our midstream service capabilities and to geographically diversity our asset platform, our focus is currently on the full integration and optimization of our diversified asset portfolio to enhance unitholder value. We expect to simplify our organization during 2013 and 2014 and possibly beyond. In order to take advantage of numerous asset optimization opportunities, we may consider potential transactions among us and our subsidiaries and/or affiliates.
In addition, we expect to benefit from continued growth among our existing
consolidated subsidiaries. Aggregate growth capital expenditures among our
consolidated subsidiaries totaled $3.52 billion in 2012, and we expect that
amount to be between $2.06 billion and $2.36 billion in 2013. Our announced
growth projects include a second fractionator at Mont Belvieu and expansion in
the Eagle Ford Shale and Permian Basin. Along with the inherent benefits of
greater scale and cash flow diversification that we experience from growth
projects, we also expect to benefit in 2013 from the full-year impacts of the
recent Southern Union and Sunoco acquisitions as well as additional synergies
that may be created as we continue to streamline the organization.
Results of Operations
Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011
(tabular dollar amounts are expressed in millions)
We previously reported net income as a measure of segment performance. We have
revised certain reports provided to our chief operating decision maker to assess
the performance of our business to reflect Segment Adjusted EBITDA. We define
Segment Adjusted EBITDA as earnings before interest, taxes, depreciation,
amortization and other non-cash items, such as non-cash compensation expense,
gains and losses on disposals of assets, the allowance for equity funds used
during construction, unrealized gains and losses on commodity risk management
activities, non-cash impairment charges, loss on extinguishment of debt, gain on
deconsolidation and other non-operating income or expense items. Unrealized
gains and losses on commodity risk management activities includes unrealized
gains and losses on commodity derivatives and inventory fair value adjustments
(excluding lower of cost or market adjustments). Segment Adjusted EBITDA
reflects amounts for unconsolidated affiliates based on the Partnership's
proportionate ownership and amounts for less than wholly owned subsidiaries
based on 100% of the subsidiaries' results of operations.
Based on the change in our segment performance measure, we have adjusted the
presentation of our segment results for the prior years to be consistent with
the current year presentation.
Consolidated Results
Years Ended December 31,
2012 2011 Change
Segment Adjusted EBITDA:
Intrastate Transportation $ 601 $ 667 $ (66 )
Interstate Transportation and Storage 1,013 373 640
Midstream 438 389 49
NGL Transportation and Services 209 127 82
Retail Marketing 109 - 109
Investment in Sunoco Logistics 219 - 219
Investment in Regency 480 422 58
Corporate and Other 36 153 (117 )
Total 3,105 2,131 974
Depreciation and amortization (871 ) (586 ) (285 )
Interest expense, net of interest capitalized (1,018 ) (740 ) (278 )
Bridge loan related fees (62 ) - (62 )
Gain on deconsolidation of Propane Business 1,057 - 1,057
Losses on non-hedged interest rate derivatives (19 ) (78 ) 59
Non-cash unit-based compensation expense (47 ) (42 ) (5 )
Unrealized gains on commodity risk management
activities 10 7 3
LIFO valuation reserve (75 ) - (75 )
Losses on extinguishments of debt (123 ) - (123 )
Proportionate share of unconsolidated affiliates'
interest, depreciation, amortization, non-cash
compensation expense, loss on extinguishment of debt
and taxes (435 ) (114 ) (321 )
Adjusted EBITDA related to discontinued operations (99 ) (23 ) (76 )
Other, net 14 (7 ) 21
Income from continuing operations before income tax
expense 1,437 548 889
Income tax expense 54 17 37
Income from continuing operations 1,383 531 852
Loss from discontinued operations (109 ) (3 ) (106 )
Net income $ 1,274 $ 528 $ 746
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See the detailed discussion of Segment Adjusted EBITDA in the Segment Operating
Results section below.
Depreciation and Amortization. Depreciation and amortization increased primarily
due to the following:
• depreciation and amortization related to Southern Union of $179 million
from March 26, 2012 to December 31, 2012;
• depreciation and amortization related to Sunoco Logistics and Sunoco of $63 million and $32 million, respectively, from October 5, 2012 through December 31, 2012; and
• additional depreciation and amortization recorded from assets placed in service in 2012 and 2011; partially offset by
• the deconsolidation of ETP's Propane Business in January 2012, which had recognized depreciation of $4 million and $82 million for years ended December 31, 2012 and 2011.
Interest Expense, Net of Interest Capitalized. Interest expense increased
primarily due to the following:
• interest expense of $130 million recorded by Southern Union from March 26,
2012 through December 31, 2012;
• interest expense of $14 million and $9 million recorded by Sunoco Logistics and Sunoco, respectively, from October 5, 2012 to December 31, 2012;
• incremental interest expense recorded by ETP primarily due to the issuance of $1.5 billion of senior notes in May 2011 and $2.0 billion of notes in January 2012 to fund acquisitions; and
• an increase of $71 million for the Parent Company primarily related to the Parent Company's $2.0 billion Senior Secured Term Loan which was used to fund a portion of the cash consideration for the Southern Union Merger; partially offset by
• a reduction of interest due to ETP's repurchase of $750 million of its senior notes in January 2012.
Gain on Deconsolidation of Propane Business. ETP recognized a gain on
deconsolidation related to the contribution of its Propane Business to AmeriGas
in January 2012.
Losses on Non-Hedged Interest Rate Derivatives. Losses on non-hedged interest
rate derivatives decreased due to the recognition of losses in 2011 resulting
from significant forward rate decreases during 2011.
LIFO Valuation Reserve. A LIFO valuation reserve was recorded for the inventory
associated with Sunoco's retail marketing operations as a result of commodity
price changes subsequent to the inventory being recorded at fair value in
connection with purchase accounting.
Unrealized Gains (Losses) on Commodity Risk Management Activities. See
additional discussion of the unrealized gains (losses) on commodity risk
management activities included in the discussion of segment results below.
Losses on Extinguishments of Debt. ETP recognized a loss on extinguishment of
debt for the year ended December 31, 2012 in connection with its repurchase of
approximately $750 million in aggregate principal amount of senior notes in
January 2012.
Proportionate Share of Unconsolidated Affiliates' Interest, Depreciation,
Amortization, Non-cash Compensation Expense, Loss on Debt Extinguishment and
Taxes. Amounts reflected for 2012 primarily include our proportionate share of
such amounts related to AmeriGas, Citrus, FEP, HPC and MEP. The 2011 amounts
primarily represented our proportionate share of such amounts and do not include
AmeriGas and Citrus.
Adjusted EBITDA Attributable to Discontinued Operations. Amounts reflect the
operations of Canyon, which was sold in October 2012, and, for the period from
March 26, 2012 to December 31, 2012, Southern Union's distribution operations.
Other, net. Other, net increased in 2012 primarily due to Southern Union's
recognition of a net curtailment gain of $15 million related to its
postretirement benefit plans.
Income Tax Expense. The increase in income tax expense for the year ended
December 31, 2012 compared to the same periods last year were primarily due to
our acquisition of Southern Union in March 2012 which has a higher overall
effective rate as Southern Union is subject to federal and state income taxes.
Supplemental Pro Forma Financial Information
The following unaudited pro forma consolidated financial information of ETP has been prepared in accordance with Article 11 of Regulation S-X and reflects the pro forma impacts of the Sunoco Merger and Holdco Transaction for the year ended December 31, 2012 and 2011, giving effect that each occurred on January 1, 2011. This unaudited pro forma financial information is provided to supplement the discussion and analysis of the historical financial information and should be read in conjunction with such historical financial information. This unaudited pro forma information is for illustrative purposes only and is not necessarily indicative of the financial results that would have occurred if the Sunoco Merger and Holdco Transaction had been consummated on January 1, 2011.
The following table presents the pro forma financial information for the year
ended December 31, 2012:
Southern Union Holdco Pro Forma
ETE Historical Propane Transaction (a) Sunoco Historical (b) Historical (c) Adjustments (d) Pro Forma
REVENUES $ 16,964 $ (93 ) $ 35,258 $ 443 $ (12,174 ) $ 40,398
COSTS AND EXPENSES:
Cost of products sold -
natural gas operations 14,153 (80 ) 33,142 302 (11,193 ) 36,324
Depreciation and
amortization 871 (4 ) 168 49 76 1,160
Selling, general and
administrative 580 (1 ) 459 11 (119 ) 930
Impairment charges - 124 (22 ) 102
Total costs and expenses 15,604 (85 ) 33,893 362 (11,258 ) 38,516
OPERATING INCOME 1,360 (8 ) 1,365 81 (916 ) 1,882
OTHER INCOME (EXPENSE):
Interest expense, net of
interest capitalized (1,080 ) (24 ) (123 ) (50 ) 2 (1,275 )
Equity in earnings of
affiliates 212 19 41 16 5 293
Gain on deconsolidation of
Propane Business 1,057 (1,057 ) - - - -
Gain on formation of
Philadelphia Energy
Solutions - - 1,144 - (1,144 ) -
Loss on extinguishment of
debt (123 ) 115 - - - (8 )
Gains (losses) on
non-hedged interest rate
derivatives (19 ) - - - - (19 )
Impairment charges - - - - - -
Other, net 30 2 118 (2 ) (2 ) 146
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME
TAX EXPENSE (BENEFIT) 1,437 (953 ) 2,545 45 (2,055 ) 1,019
Income tax expense
(benefit) 54 - 956 12 (871 ) 151
INCOME FROM CONTINUING
OPERATIONS $ 1,383 $ (953 ) $ 1,589 $ 33 $ (1,184 ) $ 868
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The following table presents the pro forma financial information for the year
ended December 31, 2011:
Holdco
Propane Southern Union Pro Forma
ETE Historical Transaction (a) Sunoco Historical (b) Historical (c) Adjustments (d) Pro Forma
REVENUES $ 8,190 $ (1,427 ) $ 45,328 $ 1,997 $ (16,528 ) $ 37,560
COSTS AND EXPENSES:
Cost of products sold -
natural gas operations 6,075 (1,174 ) 44,119 1,338 (16,677 ) 33,681
Depreciation and
amortization 586 (78 ) 335 204 (2 ) 1,045
Selling, general and
administrative 292 (47 ) 598 42 (18 ) 867
Impairment charges - - 2,629 - (2,569 ) 60
Total costs and expenses 6,953 (1,299 ) 47,681 1,584 (19,266 ) 35,653
OPERATING INCOME 1,237 (128 ) (2,353 ) 413 2,738 1,907
OTHER INCOME (EXPENSE):
Interest expense, net of
interest capitalized (740 ) (40 ) (172 ) (218 ) 29 (1,141 )
Equity in earnings of
affiliates 117 148 15 99 (158 ) 221
Gains (losses) on
non-hedged interest rate
. . .
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