Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-32740

ENERGY TRANSFER EQUITY, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware   30-0108820
(state or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer
Identification No.)

3738 Oak Lawn Avenue, Dallas, Texas 75219

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (214) 981-0700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
      (Do not check if a smaller
reporting company)
  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

At August 6, 2009, the registrant had units outstanding as follows:

Energy Transfer Equity, L.P.     222,898,248 Common Units

 

 

 


Table of Contents

FORM 10-Q

INDEX TO FINANCIAL STATEMENTS

Energy Transfer Equity, L.P. and Subsidiaries

 

         Page

PART I     FINANCIAL INFORMATION

  

ITEM 1.

 

    FINANCIAL STATEMENTS (Unaudited)

  
 

Condensed Consolidated Balance Sheets –
June 30, 2009 and December 31, 2008

   1
 

Condensed Consolidated Statements of Operations –
Three and Six Months Ended June 30, 2009 and 2008

   3
 

Condensed Consolidated Statements of Comprehensive Income –
Three and Six Months Ended June 30, 2009 and 2008

   4
 

Condensed Consolidated Statement of Equity –
Six Months Ended June 30, 2009

   5
 

Condensed Consolidated Statements of Cash Flows –
Six Months Ended June 30, 2009 and 2008

   6
 

Notes to Condensed Consolidated Financial Statements

   7

ITEM 2.

 

    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   39

ITEM 3.

 

    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   54

ITEM 4.

 

    CONTROLS AND PROCEDURES

   56

PART II    OTHER INFORMATION

  

ITEM 1.

 

    LEGAL PROCEEDINGS

   57

ITEM 1A.

 

    RISK FACTORS

   57

ITEM 2.

 

    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   57

ITEM 3.

 

    DEFAULTS UPON SENIOR SECURITIES

   57

ITEM 4.

 

    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   57

ITEM 5.

 

    OTHER INFORMATION

   57

ITEM 6.

 

    EXHIBITS

   57

SIGNATURES

   60

 

i


Table of Contents

Forward-Looking Statements

Certain matters discussed in this report, excluding historical information, as well as some statements by Energy Transfer Equity, L.P., (“Energy Transfer Equity” or “the Partnership”) in periodic press releases and some oral statements of Energy Transfer Equity officials during presentations about the Partnership, include certain “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933 (“Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (“Exchange Act”). Statements using words such as “anticipate,” “believe,” “intend,” “project,” “plan,” “continue,” “estimate,” “forecast,” “may,” “will,” or similar expressions help identify forward-looking statements. Although the Partnership believes such forward-looking statements are based on reasonable assumptions and current expectations and projections about future events, no assurance can be given that every objective will be reached.

Actual results may differ materially from any results projected, forecasted, estimated or expressed in forward-looking statements since many of the factors that determine these results are subject to uncertainties and risks, difficult to predict, and beyond management’s control. For additional discussion of risks, uncertainties and assumptions, see “Part II Other Information – Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q as well as the Partnership’s Report on Form 10-K as of December 31, 2008 filed with the Securities and Exchange Commission (“SEC”) on March 2, 2009.

Definitions

The following is a list of certain acronyms and terms generally used in the energy industry and throughout this document:

 

/d    per day
Btu    British thermal unit, an energy measurement
Capacity    Capacity of a pipeline, processing plant or storage facility refers to the maximum capacity under normal operating conditions and, with respect to pipeline transportation capacity, is subject to multiple factors (including natural gas injections and withdrawals at various delivery points along the pipeline and the utilization of compression) which may reduce the throughput capacity from specified capacity levels.
Dth    Million British thermal units (“dekatherm”). A therm factor is used by gas companies to convert the volume of gas used to its heat equivalent, and thus calculate the actual energy used.
Mcf    thousand cubic feet
MMBtu    million British thermal unit
MMcf    million cubic feet
Bcf    billion cubic feet
NGL    natural gas liquid, such as propane, butane and natural gasoline
Tcf    trillion cubic feet
LIBOR    London Interbank Offered Rate
NYMEX    New York Mercantile Exchange
Reservoir    A porous and permeable underground formation containing a natural accumulation of producible natural gas and/or oil that is confined by impermeable rock or water barriers and is separate from other reservoirs.

 

ii


Table of Contents

PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(unaudited)

 

     June 30,
2009
   December 31,
2008
ASSETS      

CURRENT ASSETS:

     

Cash and cash equivalents

   $ 114,361    $ 92,023

Marketable securities

     9,630      5,915

Accounts receivable, net of allowance for doubtful accounts

     388,324      591,257

Accounts receivable from related companies

     32,233      15,142

Inventories

     187,654      272,348

Deposits paid to vendors

     51,987      78,237

Exchanges receivable

     27,596      45,209

Price risk management assets

     4,272      5,423

Prepaid expenses and other current assets

     55,973      75,441
             

Total current assets

     872,030      1,180,995

PROPERTY, PLANT AND EQUIPMENT, net

     9,013,750      8,702,534

ADVANCES TO AND INVESTMENTS IN AFFILIATES

     374,922      10,110

GOODWILL

     764,538      773,283

INTANGIBLES AND OTHER ASSETS, net

     410,069      402,980
             

Total assets

   $ 11,435,309    $ 11,069,902
             

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1


Table of Contents

ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(unaudited)

 

     June 30,
2009
    December 31,
2008
 
LIABILITIES AND EQUITY     

CURRENT LIABILITIES:

    

Accounts payable

   $ 284,097      $ 381,933   

Accounts payable to related companies

     7,094        34,495   

Exchanges payable

     22,793        54,636   

Customer advances and deposits

     73,031        106,679   

Accrued and other current liabilities

     273,507        313,140   

Price risk management liabilities

     60,742        142,432   

Interest payable

     156,154        115,487   

Income taxes payable

     3,880        14,298   

Deferred income taxes

     —          589   

Current maturities of long-term debt

     44,416        45,232   
                

Total current liabilities

     925,714        1,208,921   

LONG-TERM DEBT, less current maturities

     7,265,314        7,190,357   

LONG-TERM PRICE RISK MANAGEMENT LIABILITIES

     80,487        121,710   

DEFERRED INCOME TAXES

     203,588        194,871   

OTHER NON-CURRENT LIABILITIES

     14,571        14,727   

COMMITMENTS AND CONTINGENCIES (Note 15)

    
                
     8,489,674        8,730,586   
                

EQUITY:

    

Partners’ Capital (Deficit):

    

General Partner

     373        155   

Limited Partners:

    

Common Unitholders (222,898,248 and 222,829,956 units authorized, issued and outstanding at June 30, 2009 and December 31, 2008, respectively)

     54,882        (15,762

Accumulated other comprehensive loss

     (57,736     (67,825
                

Total partners’ deficit

     (2,481     (83,432

Noncontrolling interest

     2,948,116        2,422,748   
                

Total equity

     2,945,635        2,339,316   
                

Total liabilities and equity

   $ 11,435,309      $ 11,069,902   
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2


Table of Contents

ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per unit data)

(unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

REVENUES:

        

Natural gas operations

   $ 948,233      $ 2,375,637      $ 2,060,188      $ 4,383,484   

Retail propane

     179,770        249,449        667,677        847,587   

Other

     23,687        28,265        53,799        61,525   
                                

Total revenues

     1,151,690        2,653,351        2,781,664        5,292,596   
                                

COSTS AND EXPENSES:

        

Cost of products sold - natural gas operations

     542,004        1,952,569        1,274,117        3,529,837   

Cost of products sold - retail propane

     78,070        163,962        298,292        556,517   

Cost of products sold - other

     5,919        7,541        12,723        17,436   

Operating expenses

     176,681        197,143        358,454        376,113   

Depreciation and amortization

     79,229        65,476        154,888        127,359   

Selling, general and administrative

     54,756        44,720        112,061        95,465   
                                

Total costs and expenses

     936,659        2,431,411        2,210,535        4,702,727   
                                

OPERATING INCOME

     215,031        221,940        571,129        589,869   

OTHER INCOME (EXPENSE):

        

Interest expense, net of interest capitalized

     (119,559     (90,543     (220,950     (170,997

Equity in earnings (losses) of affiliates

     1,673        (169     2,170        (95

Gains (losses) on disposal of assets

     181        515        (245     (936

Gains (losses) on non-hedged interest rate derivatives

     49,911        27,178        59,962        (4,458

Allowance for equity funds used during construction

     (1,839     15,660        18,588        25,548   

Other, net

     (377     1,567        324        9,519   
                                

INCOME BEFORE INCOME TAX EXPENSE

     145,021        176,148        430,978        448,450   

Income tax expense

     3,263        9,330        9,470        14,474   
                                

NET INCOME

     141,758        166,818        421,508        433,976   

LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

     37,383        46,424        165,597        186,877   
                                

NET INCOME ATTRIBUTABLE TO PARTNERS

     104,375        120,394        255,911        247,099   

GENERAL PARTNER’S INTEREST IN NET INCOME

     322        373        791        765   
                                

LIMITED PARTNERS’ INTEREST IN NET INCOME

   $ 104,053      $ 120,021      $ 255,120      $ 246,334   
                                

BASIC NET INCOME PER LIMITED PARTNER UNIT

   $ 0.47      $ 0.54      $ 1.14      $ 1.11   
                                

BASIC AVERAGE NUMBER OF UNITS OUTSTANDING

     222,898,248        222,829,956        222,898,157        222,829,956   
                                

DILUTED NET INCOME PER LIMITED PARTNER UNIT

   $ 0.47      $ 0.54      $ 1.14      $ 1.10   
                                

DILUTED AVERAGE NUMBER OF UNITS OUTSTANDING

     222,898,248        222,829,956        222,898,157        222,829,956   
                                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


Table of Contents

ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(unaudited)

 

     Three Months Ended June 30,    Six Months Ended June 30,  
     2009    2008    2009    2008  

Net income

   $ 141,758    $ 166,818    $ 421,508    $ 433,976   

Other comprehensive income (loss), net of tax:

           

Reclassification to earnings of gains and losses on derivative instruments accounted for as cash flow hedges

     7,803      12,412      2,158      (8,457

Change in value of derivative instruments accounted for as cash flow hedges

     7,201      23,439      614      (9,776

Change in value of available-for-sale securities

     3,657      3,110      3,708      2,943   
                             
     18,661      38,961      6,480      (15,290

Comprehensive income

     160,419      205,779      427,988      418,686   

Less: Comprehensive income attributable to noncontrolling interest

     40,792      52,663      161,988      177,151   
                             

Comprehensive income attributable to partners

   $ 119,627    $ 153,116    $ 266,000    $ 241,535   
                             

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


Table of Contents

ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2009

(Dollars in thousands)

(unaudited)

 

     General
Partner
    Common
Unitholders
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interest
    Total  

Balance, December 31, 2008

   $ 155      $ (15,762   $ (67,825   $ 2,422,748      $ 2,339,316   

Distributions to ETE partners

     (716     (230,700     —          —          (231,416

Subsidiary distributions

     —          —          —          (182,628     (182,628

Subsidiary issuance of units in public offerings

     143        45,935        —          532,846        578,924   

Tax effect of remedial income allocation from tax amortization of goodwill

     —          —          —          (1,881     (1,881

Non-cash unit-based compensation expense, net of units tendered by employees for tax withholdings

     —          277        —          14,430        14,707   

Non-cash executive compensation expense

     —          12        —          613        625   

Other comprehensive income, net of tax

     —          —          10,089        (3,609     6,480   

Net income

     791        255,120        —          165,597        421,508   
                                        

Balance, June 30, 2009

   $ 373      $ 54,882      $ (57,736   $ 2,948,116      $ 2,945,635   
                                        

The accompanying notes are an integral part of this condensed consolidated financial statement.

 

5


Table of Contents

ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(unaudited)

 

     Six Months Ended June 30,  
     2009     2008  

NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES

   $ 653,488      $ 709,179   
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Cash paid for acquisitions, net of cash acquired

     (6,362     (56,786

Capital expenditures (excluding allowance for equity funds used during construction)

     (512,534     (978,672

Contributions in aid of construction costs

     2,349        42,554   

(Advances to) repayments from affiliates, net

     (364,000     63,534   

Proceeds from the sale of assets

     5,033        16,955   
                

Net cash used in investing activities

     (875,514     (912,415
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from borrowings

     1,622,377        3,558,268   

Principal payments on debt

     (1,535,147     (2,975,286

Subsidiary equity offering, net of issue costs

     578,924        34,965   

Distributions to partners

     (231,416     (221,287

Debt issuance costs

     (7,746     (20,897

Distributions to noncontrolling interests

     (182,628     (160,146
                

Net cash provided by financing activities

     244,364        215,617   
                

INCREASE IN CASH AND CASH EQUIVALENTS

     22,338        12,381   

CASH AND CASH EQUIVALENTS, beginning of period

     92,023        56,557   
                

CASH AND CASH EQUIVALENTS, end of period

   $ 114,361      $ 68,938   
                

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


Table of Contents

ENERGY TRANSFER EQUITY, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular dollar amounts, except per unit data, are in thousands)

(unaudited)

 

1. OPERATIONS AND ORGANIZATION:

The accompanying condensed consolidated balance sheet as of December 31, 2008, which has been derived from audited financial statements, and the unaudited interim financial statements and notes thereto of Energy Transfer Equity, L.P. and its subsidiaries (“the Partnership”, “ETE” or the “Parent Company”) as of June 30, 2009 and for the three and six months ended June 30, 2009 and 2008, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim consolidated financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for complete consolidated financial statements. However, management believes that the disclosures made are adequate to make the information not misleading. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year due to the seasonal nature of the operations, maintenance activities of the Partnership’s subsidiaries and the impact of forward natural gas prices and differentials on certain derivative financial instruments that are accounted for using mark-to-market accounting. Management has evaluated subsequent events through August 10, 2009, the date the financial statements were issued.

The unaudited condensed consolidated financial statements of the Partnership presented herein for the three and six months ended June 30, 2009 and 2008 include the results of operations of ETE, ETE’s controlled subsidiary, Energy Transfer Partners, L.P., a publicly-traded master limited partnership (“ETP”), and ETE’s wholly-owned subsidiaries: Energy Transfer Partners GP, L.P., the General Partner of ETP (“ETP GP”), and Energy Transfer Partners, L.L.C., the General Partner of ETP GP (“ETP LLC”). The results of operations for ETP in turn include the results of operations for ETP’s wholly-owned subsidiaries: La Grange Acquisition, L.P., which conducts business under the assumed name of Energy Transfer Company (“ETC OLP”); Energy Transfer Interstate Holdings, LLC (“ET Interstate”), the parent company of Transwestern Pipeline Company, LLC (“Transwestern”) and ETC Midcontinent Express Pipeline, LLC (“ETC MEP”); Heritage Operating, L.P. (“HOLP”); Heritage Holdings, Inc. (“HHI”); and Titan Energy Partners, L.P. (“Titan”).

LE GP, LLC (“LE GP”), the general partner of ETE, is a Delaware limited liability company which is ultimately owned by the Chief Executive Officer of ETP, a director of ETE (Mr. Ray Davis) and Enterprise GP Holdings, L.P. (“Enterprise” or “EPE”).

In the opinion of management, all adjustments (all of which are normal and recurring) have been made that are necessary to fairly state the Partnership’s consolidated financial position as of June 30, 2009, and the results of their operations and their cash flows for the three and six months ended June 30, 2009 and 2008. The unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto presented in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the SEC on March 2, 2009.

Certain prior period amounts have been reclassified to conform to the 2009 presentation. Other than the reclassifications related to the adoption of Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51 (“SFAS 160”) (see Note 2), these reclassifications had no impact on net income or total equity.

Business Operations

Currently, the Parent Company’s business operations are conducted only though ETP’s subsidiary operating partnerships (collectively referred to as the “Operating Partnerships”). The Parent Company’s principal sources of cash flow are its direct and indirect investments in the limited and general partner interests in ETP.

The Parent Company’s primary cash requirements are for general and administrative expenses, debt service requirements and distributions to its general and limited partners. The Parent Company-only assets and liabilities of ETE are not available to satisfy the debts and other obligations of ETP and its consolidated subsidiaries. In order to fully understand the financial condition of the Partnership on a stand-alone basis, see Note 19 for stand-alone financial information apart from that of the consolidated partnership information included herein.

 

7


Table of Contents

In order to simplify the obligations of the Partnership under the laws of several jurisdictions in which we conduct business, our activities are primarily conducted through ETP’s Operating Partnerships:

 

   

ETC OLP, a Texas limited partnership engaged in midstream and intrastate transportation and storage natural gas operations. ETC OLP owns and operates, through its wholly and majority-owned subsidiaries, natural gas gathering systems, intrastate natural gas pipeline systems and gas processing plants and is engaged in the business of purchasing, gathering, transporting, processing and marketing natural gas and NGLs in the states of Texas, Louisiana, Arizona, New Mexico, Utah and Colorado. Our intrastate transportation and storage operations primarily focus on transporting natural gas through our Oasis pipeline, ET Fuel System, East Texas pipeline and HPL System. Our midstream operations focus on the gathering, compression, treating, conditioning and processing of natural gas, primarily on or through our Southeast Texas System and North Texas System, and marketing activities. We also own and operate natural gas gathering pipelines and conditioning facilities in the Piceance-Uinta Basin of Colorado and Utah.

 

   

ET Interstate, the parent company of Transwestern and ETC MEP, all of which are Delaware limited liability companies engaged in interstate transportation of natural gas. Interstate revenues consist primarily of fees earned from natural gas transportation services and operational gas sales.

 

   

ETC Fayetteville Express Pipeline, LLC (“ETC FEP”), a Delaware limited liability company formed to engage in interstate transportation of natural gas.

 

   

ETC Tiger Pipeline, LLC (“ETC Tiger”), a Delaware limited liability company formed to engage in interstate transportation of natural gas.

 

   

HOLP, a Delaware limited partnership primarily engaged in retail propane operations. Our retail propane operations focus on sales of propane and propane-related products and services. The retail propane customer base includes residential, commercial, industrial and agricultural customers.

 

   

Titan, a Delaware limited partnership also engaged in retail propane operations.

The Partnership, the Operating Partnerships and their subsidiaries are collectively referred to in this report as “we”, “us”, “ETE”, “ETP”, “Energy Transfer” or the “Partnership”. References to “the Parent Company” shall mean Energy Transfer Equity, L.P. on a stand-alone basis.

 

2. ESTIMATES, SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS:

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the accrual for and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The natural gas industry conducts its business by processing actual transactions at the end of the month following the month of delivery. Consequently, the most current month’s financial results for the midstream and intrastate transportation and storage segments are estimated using volume estimates and market prices. Any differences between estimated results and actual results are recognized in the following month’s financial statements. Management believes that the operating results estimated for the three and six months ended June 30, 2009 and 2008 represent the actual results in all material respects.

Some of the other significant estimates made by management include, but are not limited to, the timing of certain forecasted transactions that are hedged, allowances for doubtful accounts, the fair value of derivative instruments, useful lives for depreciation and amortization, purchase accounting allocations and subsequent realizability of intangible assets, fair value measurements used in the goodwill impairment test, market value of inventory, estimates related to our unit-based compensation plans, deferred taxes, assets and liabilities resulting from the regulated ratemaking process, contingency reserves and environmental reserves. Actual results could differ from those estimates.

 

8


Table of Contents

New Accounting Standards and Changes to Significant Accounting Policies

Certain adjustments have been made to prior period information to conform to current period presentation related to our adoption of SFAS 160, which is discussed more fully below.

SFAS 160. SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the condensed consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The adoption of SFAS 160 on January 1, 2009 did not have a significant impact on our financial position or results of operations. However, it did result in certain changes to our financial statement presentation, including the change in classification of noncontrolling interest (minority interest) from liabilities to equity on the condensed consolidated balance sheet.

Upon adoption of SFAS 160, we reclassified $2.42 billion from minority interest liability to noncontrolling interest as a separate component of equity in our condensed consolidated balance sheet as of December 31, 2008. In addition, we reclassified $46.4 million and $186.9 million of minority interest expense to net income attributable to noncontrolling interest in our condensed consolidated statements of operations for the three and six months ended June 30, 2008, respectively. Net income per limited partner unit has not been affected as a result of the adoption of SFAS 160.

Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations, (“SFAS 141R”). On December 4, 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS 141R, which significantly changes the accounting for business combinations. Under SFAS 141R, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. Statement 141R changes the accounting treatment for certain specific items, including:

 

   

Acquisition costs are generally expensed as incurred;

 

   

Noncontrolling interests (previously referred to as “minority interests”) are valued at fair value at the acquisition date;

 

   

In-process research and development is recorded at fair value as an indefinite-lived intangible asset at the acquisition date;

 

   

Restructuring costs associated with a business combination are generally expensed subsequent to the acquisition date; and

 

   

Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date are recorded in income taxes.

SFAS 141R also includes a substantial number of new disclosure requirements. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Our adoption of SFAS 141R on January 1, 2009 did not have an immediate impact on our financial position or results of operations.

Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities - An Amendment of FASB Statement No. 133 (“SFAS 161”). Issued in March 2008, SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities with the intent to provide users of financial statements with an enhanced understanding of (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 only affects disclosure requirements; therefore, our adoption of this statement effective January 1, 2009 did not impact our financial position or results of operations.

 

9


Table of Contents

EITF Issue No. 07-4, Application of the Two Class Method Under FASB Statement No. 128, Earnings Per Share, to Master Limited Partnerships (“MLP”) (“EITF 07-4”). The FASB ratified the final consensus on EITF 07-4 on March 26, 2008. The key elements of the final consensus relate to: (a) the scope of the issue; (b) when Incentive Distribution Rights (“IDRs”) are considered participating securities under the two-class method for Earnings Per Share (“EPS”); (c) the calculation provisions; and (d) the transition and effective date. Our adoption of EITF 07-4 on January 1, 2009 did not have an impact on the calculation of ETE’s earnings per unit.

FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 was issued by the FASB on June 16, 2008. FSP EITF 03-6-1 clarifies that unvested share-based payment awards constitute participating securities, if such awards include nonforfeitable rights to dividends or dividend equivalents. Consequently, awards that are deemed to be participating securities must be allocated earnings in the computation of earnings per share under the two-class method. We adopted FSP EITF 03-6-1 effective January 1, 2009. Based on unvested unit awards outstanding at the time of adoption, application of FSP EITF 03-6-1 did not have a material impact on our computation of earnings per unit.

Emerging Issues Task Force Issue No. 08-6, Equity Method Investment Accounting Considerations (“EITF 08-6”). EITF 08-6 establishes the requirements for initial measurement of an equity method investment, including the accounting for contingent consideration related to the acquisition of an equity method investment. EITF 08-6 also clarifies the accounting for (1) an other-than-temporary impairment of an equity method investment and (2) changes in level of ownership or degree of influence with respect to an equity method investment. Our adoption of EITF 08-6 on January 1, 2009 did not have a material impact on our financial condition or results of operations.

Statement of Financial Accounting Standards Staff Position (“FSP”) SFAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-2 deferred the effective date of Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”) for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), such as impaired nonfinancial assets and certain assets and liabilities acquired in business combinations. Our adoption of FSP 157-2 on January 1, 2009 did not impact our financial condition or results of operations.

Statement of Financial Accounting Standards No. 165, Disclosures about Subsequent Events (“SFAS 165”). In May 2009, the FASB issued SFAS 165 which incorporates requirements for recording and disclosing subsequent events into the accounting standards; those requirements had previously existed only in the auditing standards. The requirements in SFAS 165 are consistent with the practices that had previously been applied, but SFAS 165 also requires disclosure with respect to the date through which subsequent events are evaluated. Under SFAS 165, we are required to evaluate subsequent events through the date that our financial statements are issued. The adoption of SFAS 165 does not change our current practices with respect to evaluating, recording and disclosing subsequent events; therefore, our adoption of this statement during the second quarter had no impact on our financial position or results of operations.

Statement of Financial Accounting Standards No. 168, The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). In June 2009, the FASB issued SFAS 168 which establishes the FASB Accounting Standards Codification™ (the “Codification”). The Codification reorganizes existing accounting pronouncements but does not change GAAP. The new structure is organized into approximately 90 accounting topics and is further organized into subtopics, sections and subsections. Once the Codification becomes effective, all non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. Although the Codification will not have an impact on our accounting policies or our financial position or results of operations, it will change the way that we reference accounting standards in our financial statements beginning with financial statements we will issue for the quarter ending September 30, 2009.

 

10


Table of Contents
3. CASH, CASH EQUIVALENTS AND SUPPLEMENTAL CASH FLOW INFORMATION:

Cash and cash equivalents include all cash on hand, demand deposits, and investments with original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

We place our cash deposits and temporary cash investments with high credit quality financial institutions. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit.

Net cash provided by operating activities is comprised of the following:

 

     Six Months Ended June 30,  
     2009     2008  

Net Income

   $ 421,508      $ 433,976   

Reconciliation of net income to net cash provided by operating activities:

    

Depreciation and amortization

     154,888        127,359   

Amortization of finance costs charged to interest

     8,314        4,079   

Provision for loss on accounts receivable

     2,825        2,802   

Non-cash unit-based compensation expense

     14,760        11,970   

Non-cash executive compensation expense

     625        625   

Deferred income taxes

     7,682        (557

Losses on disposal of assets

     245        936   

Allowance for equity funds used during construction

     (18,588     (25,548

Distribution in excess of (less than) equity in earnings of affiliates, net

     (430     3,309   

Other non-cash

     (658     —     

Changes in operating assets and liabilities, net of effects of acquisitions:

    

Accounts receivable

     200,132        (232,767

Accounts receivable from related companies

     (16,897     1,298   

Inventories

     84,695        185,710   

Deposits paid to vendors

     26,250        (18,110

Exchanges receivable

     17,613        (29,503

Prepaid expenses and other current assets

     20,590        (10,835

Intangibles and other assets

     (2,043     (1,333

Accounts payable

     (108,183     309,768   

Accounts payable to related companies

     (27,595     (22,457

Exchanges payable

     (31,843     28,481   

Customer advances and deposits

     (33,793     7,253   

Accrued and other current liabilities

     25,417        (71,113

Income taxes payable

     (10,418     4,662   

Interest payable

     40,639        8,752   

Other non-current liabilities

     (155     2,277   

Price risk management assets and liabilities, net

     (122,092     (11,855
                

Net cash provided by operating activities

   $ 653,488      $ 709,179   
                

 

11


Table of Contents

Non-cash investing and financing activities and supplemental cash flow information are as follows:

 

     Six Months Ended June 30,
     2009    2008

NON-CASH INVESTING ACTIVITIES:

     

Investment in Calpine Corporation received in exchange for accounts receivable

   $ —      $ 14,879
             

Capital expenditures accrued

   $ 90,268    $ 173,776
             

Gain from subsidiary issuance of common units (recorded in partners’ capital)

   $ 46,078    $ 6,759
             

NON-CASH FINANCING ACTIVITIES:

     

Long-term debt assumed and non-compete agreement notes payable issued in acquisitions

   $ —      $ 3,948
             

SUPPLEMENTAL CASH FLOW INFORMATION:

     

Cash paid for interest, net of interest capitalized

   $ 178,469    $ 172,194
             

Cash paid for income taxes

   $ 14,073    $ 9,218
             

 

4. ACCOUNTS RECEIVABLE:

Accounts receivable consisted of the following:

 

     June 30,
2009
    December 31,
2008
 

Midstream and intrastate transportation and storage

   $ 293,367      $ 415,507   

Interstate transportation

     30,121        29,309   

Propane

     73,299        155,191   

Less - allowance for doubtful accounts

     (8,463     (8,750
                

Total, net

   $ 388,324      $ 591,257   
                

The activity in the allowance for doubtful accounts during the six months ended June 30, 2009 consisted of the following:

 

Balance, December 31, 2008

   $ 8,750   

Accounts receivable written off, net of recoveries

     (3,112

Provision for loss on accounts receivable

     2,825   
        

Balance, June 30, 2009

   $ 8,463   
        

 

5. INVENTORIES:

Inventories consisted of the following:

 

     June 30,
2009
   December 31,
2008

Natural gas and NGLs, excluding propane

   $ 124,614    $ 184,727

Propane

     39,951      63,967

Appliances, parts and fittings and other

     23,089      23,654
             

Total inventories

   $ 187,654    $ 272,348
             

During the three months ended March 31, 2009, we recorded a lower of cost or market adjustment of $44.6 million for natural gas inventory to reflect market values, which were less than the weighted-average cost. No lower of cost or market adjustments were recorded for the three months ended June 30, 2009 or the six months ended June 30, 2008.

 

12


Table of Contents

We utilize commodity derivatives to manage price volatility associated with our natural gas inventory. During the three months ended June 30, 2009, we began designating commodity derivatives as fair value hedges for accounting purposes. Subsequent to the designation of those fair value hedging relationships, the designated hedged inventory has been recorded at fair value on our condensed consolidated balance sheet, and changes in its fair value have been recorded in cost of products sold in our condensed consolidated statement of operations. At June 30, 2009, $123.5 million of our natural gas inventory was recorded at fair value.

 

6. GOODWILL, INTANGIBLES AND OTHER ASSETS:

Components and useful lives of intangibles and other assets were as follows:

 

     June 30, 2009     December 31, 2008  
     Gross Carrying
Amount
   Accumulated
Amortization
    Gross Carrying
Amount
   Accumulated
Amortization
 

Amortizable intangible assets:

          

Non-compete agreements (3 to 15 years)

   $ 40,305    $ (26,698   $ 40,301    $ (24,374

Customer lists (3 to 30 years)

     153,268      (46,651     144,337      (39,730

Contract rights (6 to 15 years)

     23,015      (4,691     23,015      (3,744

Other (10 years)

     477      (373     2,677      (2,244
                              

Total amortizable intangible assets

     217,065      (78,413     210,330      (70,092
                              

Non-amortizable intangible assets - Trademarks

     75,503      —          75,667      —     
                              

Total intangible assets

     292,568      (78,413     285,997      (70,092
                              

Other assets:

          

Financing costs (3 to 30 years)

     82,358      (28,936     74,611      (23,508

Regulatory assets

     105,789      (7,720     98,560      (5,941

Other long-term assets

     44,423      —          43,353      —     
                              

Total intangibles and other assets

   $ 525,138    $ (115,069   $ 502,521    $ (99,541
                              

Aggregate amortization expense of intangible and other assets was as follows:

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2009    2008    2009    2008

Reported in depreciation and amortization

   $ 4,983    $ 4,321    $ 9,692    $ 8,620
                           

Reported in interest expense

   $ 2,799    $ 2,322    $ 5,429    $ 4,356
                           

Estimated aggregate amortization expense for the next five years is as follows:

 

Years Ending December 31:

    

2010

   $ 29,666

2011

     27,257

2012

     21,822

2013

     16,014

2014

     15,000

We review amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such a review should indicate that the carrying amount of amortizable intangible assets is not recoverable, we reduce the carrying amount of such assets to fair value. We review goodwill and non-amortizable intangible assets for impairment annually, or more frequently if circumstances dictate. Our annual impairment test is performed as of December 31 for our interstate segment and as of August 31 for all others. No impairment of intangible assets was required for the three and six months ended June 30, 2009 or 2008. In December 2008, we recorded an impairment of the entire goodwill balance of $11.4 million related to the Canyon Gathering System. No goodwill impairment losses were recorded during the three and six months ended June 30, 2009 or 2008.

 

13


Table of Contents

A decrease in goodwill of $8.7 million was recorded during the three months ended March 31, 2009 in connection with purchase price allocation adjustments related to prior acquisitions of propane businesses by ETP.

 

7. ACCRUED AND OTHER CURRENT LIABILITIES:

Accrued and other liabilities consisted of the following:

 

     June 30,
2009
   December 31,
2008

Accrued wages and benefits

   $ 66,064    $ 65,754

Accrued capital expenditures

     90,268      153,230

Taxes other than income taxes

     52,898      20,772

Other

     64,277      73,384
             

Total accrued and other current liabilities

   $ 273,507    $ 313,140
             

 

8. INVESTMENTS IN AFFILIATES:

Midcontinent Express Pipeline LLC

ETP is party to an agreement with Kinder Morgan Energy Partners, L.P. (“KMP”) for a 50/50 joint development of Midcontinent Express pipeline (“MEP”). Construction of the approximately 500-mile pipeline was completed and natural gas transportation service commenced August 1, 2009 on the pipeline from Delhi, Louisiana, to an interconnect with the Transco interstate natural gas pipeline in Butler, Alabama. Interim service began on the pipeline from Bennington, Oklahoma, to Delhi in April 2009. In July 2008, MEP completed an open season with respect to a capacity expansion of MEP from the original planned capacity of 1.5 Bcf/d to a total capacity of 1.8 Bcf/d for the main segment of the pipeline from north Texas to an interconnect location with the Columbia Gas Transmission Pipeline near Waverly, Louisiana. The additional 300 MMcf/d of capacity was fully subscribed as a result of this open season. The planned expansion of capacity will be added through the installation of additional compression on this segment of the pipeline and is pending approval from the Federal Energy Regulatory Commission (the “FERC”).

On January 9, 2009, MEP filed an amended application to revise its initial transportation rates to reflect an increase in projected costs for the project; the amended application was approved by the FERC on March 25, 2009.

Fayetteville Express Pipeline LLC

ETP is party to an agreement with KMP for a 50/50 joint development of the Fayetteville Express pipeline, an approximately 187-mile natural gas pipeline that will originate in Conway County, Arkansas, continue eastward through White County, Arkansas and terminate at an interconnect with Trunkline Gas Company in Quitman County, Mississippi. FEP, the entity formed to construct, own and operate this pipeline, filed with the FERC on June 15, 2009 to request a certificate of public convenience and necessity pursuant to Section 7(c) of the Natural Gas Act and related authorizations. The pipeline is expected to have an initial capacity of 2.0 Bcf/d. Pending necessary regulatory approvals, the pipeline project is expected to be in service by early 2011. FEP has secured binding 10-year commitments for transportation of approximately 1.85 Bcf/d. The new pipeline will interconnect with Natural Gas Pipeline Company of America (“NGPL”) in White County, Arkansas, Texas Gas Transmission in Coahoma County, Mississippi and ANR Pipeline Company in Quitman County, Mississippi. NGPL is operated and partially owned by Kinder Morgan, Inc. Kinder Morgan, Inc. owns the general partner of KMP. Pursuant to our agreement with KMP related to this project, we and KMP are each obligated to fund 50% of the equity necessary to construct the project.

 

14


Table of Contents

Capital Contributions to Affiliates

During the six months ended June 30, 2009, we contributed $333.0 million to MEP and $31.0 million to FEP. With respect to MEP, capital expenditures were previously funded under a $1.4 billion credit facility (reduced to $1.3 billion due to the bankruptcy of Lehman Brothers). As this facility became substantially drawn during the first quarter of 2009, we and KMP have made and will continue to make capital contributions to MEP to fund capital expenditures until the project is completed. We expect that our capital contributions to MEP during the last six months of 2009 will be between $320.0 million and $340.0 million, which includes amounts to fund remaining expenditures for the project and an additional capital contribution to reduce the indebtedness of MEP to a level expected to be needed to obtain long-term financing for MEP, on a stand-alone basis without guarantees from ETP or KMP, on acceptable terms. With respect to FEP, we expect that our capital contributions will be between $160.0 million and $180.0 million during the last six months of 2009 to fund expenditures for the project. FEP intends to pursue financing (expected to be severally guaranteed by ETP and KMP), which, if arranged during the last six months of 2009, would reduce the level of expected capital contributions this year as capital expenditures for the project would be funded at the project level; however, the availability of such financing at agreeable terms remains uncertain.

 

9. FAIR VALUE MEASUREMENTS:

The carrying amounts of accounts receivable and accounts payable approximate their fair value. Price risk management assets and liabilities are recorded at fair value. Based on the estimated borrowing rates currently available to us and our subsidiaries for long-term loans with similar terms and average maturities, the aggregate fair value and carrying amount of long-term debt at June 30, 2009 was $7.49 billion and $7.31 billion, respectively. At December 31, 2008, the aggregate fair value and carrying amount of long-term debt was $6.41 billion and $7.24 billion, respectively.

The following table summarizes the fair value of our financial assets and liabilities as of June 30, 2009 and December 31, 2008, based on inputs used to derive their fair values in accordance with SFAS 157:

 

           Fair Value Measurements at
June 30, 2009 Using
          Fair Value Measurements at
December 31, 2008 Using
 

Description

   Fair Value
Total
    Quoted Prices in
Active Markets for
Identical Assets and
Liabilities
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
    Fair Value
Total
    Quoted Prices in
Active Markets for
Identical Assets and
Liabilities
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
 

Assets:

              

Marketable securities

   $ 9,630      $ 9,630    $ —        $ 5,915      $ 5,915    $ —     

Inventories

     123,460        123,460      —          —          —        —     

Commodity derivatives

     9,492        7,038      2,454        111,513        106,090      5,423   

Interest rate swap derivatives

     1,818        —        1,818        —          —        —     

Liabilities:

              

Commodity derivatives

     (196     —        (196     (43,336     —        (43,336

Interest rate swap derivatives

     (141,034     —        (141,034     (220,806     —        (220,806
                                              

Total

   $ 3,170      $ 140,128    $ (136,958   $ (146,714   $ 112,005    $ (258,719
                                              

During the three months ended June 30, 2009, we began designating certain commodity derivatives that are utilized to manage price volatility associated with our natural gas inventory as fair value hedges. Prior to April 2009, our natural gas inventory was recorded at weighted-average cost and therefore was not included in the table above. We consider the fair value of our hedged natural gas inventory to be a Level 1 valuation because it is stored at delivery points with active markets for which published prices are available.

 

15


Table of Contents
10. INCOME TAXES:

The components of the federal and state income tax expense (benefit) of our taxable subsidiaries are summarized as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

Current expense (benefit):

        

Federal

   $ (481   $ 5,369      $ (5,107   $ 4,846   

State

     3,404        5,362        6,896        8,641   
                                

Total

     2,923        10,731        1,789        13,487   

Deferred expense (benefit):

        

Federal

     1,027        (947     7,693        1,162   

State

     (687     (454     (12     (175
                                

Total

     340        (1,401     7,681        987   
                                

Total income tax expense

   $ 3,263      $ 9,330      $ 9,470      $ 14,474   
                                

Effective tax rate

     2.3     5.3     2.2     3.2
                                

The effective tax rate differs from the statutory rate due primarily to Partnership earnings that are not subject to federal and state income taxes at the Partnership level.

 

11. INCOME PER LIMITED PARTNER UNIT:

A reconciliation of net income and weighted average units used in computing basic and diluted net income per unit is as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

Basic Net Income per Limited Partner Unit:

        

Limited Partners’ interest in net income

   $ 104,053      $ 120,021      $ 255,120      $ 246,334   
                                

Weighted average Limited Partner units

     222,898,248        222,829,956        222,898,157        222,829,956   
                                

Basic net income per Limited Partner unit

   $ 0.47      $ 0.54      $ 1.14      $ 1.11   
                                

Diluted Net Income per Limited Partner Unit:

        

Limited Partners’ interest in net income

   $ 104,053      $ 120,021      $ 255,120      $ 246,334   

Dilutive effect of Unit Grants

     (86     (139     (371     (550
                                

Diluted net income available to Limited Partners

   $ 103,967      $ 119,882      $ 254,749      $ 245,784   
                                

Weighted average Limited Partner units

     222,898,248        222,829,956        222,898,157        222,829,956   
                                

Diluted net income per Limited Partner unit

   $ 0.47      $ 0.54      $ 1.14      $ 1.10   
                                

 

12. DEBT OBLIGATIONS:

Revolving Credit Facilities and Term Loans

Parent Company Facilities

The Parent Company has a $1.45 billion Term Loan Facility and a Term Loan Maturity Date of November 1, 2012 (the “Parent Company Credit Agreement”). The Parent Company Credit Agreement also includes a $500.0 million Secured Revolving Credit Facility (the “Parent Company Revolving Credit Facility”) available through February 8, 2011. The Parent Company Revolving Credit Facility includes a Swingline loan option with a maximum borrowing of $10.0 million and a daily rate based on LIBOR.

The total outstanding amount borrowed under the Parent Company Credit Agreement and the Parent Company Revolving Credit Facility as of June 30, 2009 was $1.57 billion. The total amount available under the Parent Company’s debt facilities as of June 30, 2009 was $377.5 million. The Parent Company Revolving Credit Facility also contains an accordion feature which will allow the Parent Company, subject to bank syndication’s approval, to expand the facility’s capacity up to an additional $100.0 million.

 

16


Table of Contents

The maximum commitment fee payable on the unused portion of the Parent Company Revolving Credit Facility is based on the applicable Leverage Ratio which is currently at Level I or 0.300%. Loans under the Parent Company Revolving Credit Facility bear interest at Parent Company’s option at either, (a) the Eurodollar rate plus the applicable margin or (b) base rate plus the applicable margin. The applicable margins are a function of the Parent Company’s leverage ratio that corresponds to levels set forth in the agreement. The applicable Term Loan bears interest at (a) the Eurodollar rate plus 1.75% per annum and (b) with respect to any Base Rate Loan, at Prime Rate plus 0.25% per annum. As of June 30, 2009, the weighted average interest rate was 2.67% for the amounts outstanding on the Parent Company Senior Secured Revolving Credit Facility and the Parent Company $1.45 billion Senior Secured Term Loan Facility.

The Parent Company Credit Agreement is secured by a lien on all tangible and intangible assets of the Parent Company and its subsidiaries, including its ownership of 62,500,797 ETP Common Units, the Parent Company’s 100% interest in ETP LLC and ETP GP with indirect recourse to ETP GP’s 2% General Partner interest in ETP and 100% of ETP GP’s outstanding IDRs in ETP, which the Parent Company holds through its ownership of ETP GP.

ETP Credit Facility

The ETP Credit Facility provides for $2.0 billion of revolving credit capacity that is expandable to $3.0 billion (subject to obtaining the approval of the administrative agent and securing lender commitments for the increased borrowing capacity). The ETP Credit Facility matures on July 20, 2012, unless we elect the option of one-year extensions (subject to the approval of each such extension by the lenders holding a majority of the aggregate lending commitments). Amounts borrowed under the ETP Credit Facility bear interest at a rate based on either a Eurodollar rate or a prime rate. The indebtedness under the ETP Credit Facility is prepayable at any time at the Partnership’s option without penalty. The commitment fee payable on the unused portion of the ETP Credit Facility varies based on our credit rating and the fee is 0.11% based on our current rating with a maximum fee of 0.125%.

As of June 30, 2009, there was no balance outstanding on the ETP Credit Facility and taking into account letters of credit of approximately $59.8 million, $1.94 billion was available for future borrowings.

HOLP Credit Facility

HOLP has a $75.0 million Senior Revolving Facility (the “HOLP Credit Facility”) available to HOLP through June 30, 2011, which may be expanded to $150.0 million. Amounts borrowed under the HOLP Credit Facility bear interest at a rate based on either a Eurodollar rate or a prime rate. The commitment fee payable on the unused portion of the facility varies based on the Leverage Ratio, as defined in the credit agreement for the HOLP Credit Facility, with a maximum fee of 0.50%. The agreement includes provisions that may require contingent prepayments in the event of dispositions, loss of assets, merger or change of control. All receivables, contracts, equipment, inventory, general intangibles, cash concentration accounts of HOLP and the capital stock of HOLP’s subsidiaries secure the HOLP Credit Facility. At June 30, 2009, there was no outstanding balance in revolving credit loans and $1.0 million in outstanding letters of credit. The amount available as of June 30, 2009 was $74.0 million.

ETP Senior Notes

2009 ETP Notes

In April 2009, ETP completed a public offering of $350.0 million aggregate principal amount of 8.50% Senior Notes due 2014 and $650.0 million aggregate principal amount of 9.00% Senior Notes due 2019 (collectively the “2009 ETP Notes”). The offering of the 2009 ETP Notes closed on April 7, 2009 and ETP used net proceeds of approximately $993.6 million to repay borrowings under the ETP Credit Facility and for general partnership purposes. Interest will be paid semi-annually.

The 2009 ETP Notes are unsecured obligations of the Partnership and the obligation of the Partnership to repay the 2009 ETP Notes is not guaranteed by any of the Partnership’s subsidiaries. As a result, the 2009 ETP Notes effectively rank junior to any future indebtedness of ours or our subsidiaries that is both secured and unsubordinated to the extent of the value of the assets securing such indebtedness, and the 2009 ETP Notes effectively rank junior to all indebtedness and other liabilities of our existing and future subsidiaries.

 

17


Table of Contents

Covenants Related to Our Credit Agreements

We were in compliance with all requirements, tests, limitations, and covenants related to our debt agreements at June 30, 2009.

 

13. PARTNERS’ CAPITAL:

Under the terms of ETE’s partnership agreement, the limited partners’ potential liability is limited to their investment in the Partnership. The general partner of ETE manages and controls the business and affairs of the Partnership. The limited partners of ETE are not involved in the management and control of ETE.

Common Units Issued

The change in Common Units during the six months ended June 30, 2009 is as follows:

 

     Number of
Units

Balance, December 31, 2008

   222,829,956

Issuance of restricted Common Units under long-term incentive plan

   68,292
    

Balance, June 30, 2009

   222,898,248
    

Sale of Common Units by Subsidiary

The Parent Company accounts for the difference between the carrying amount of its investment in ETP and the underlying book value arising from issuance of units by ETP (excluding unit issuances to the Parent Company) as a capital transaction. If ETP issues units at a price less than the Parent Company’s carrying value per unit, the Parent Company assesses whether the investment in ETP has been impaired, in which case a provision would be reflected in the statement of operations. The Parent Company did not recognize any impairment related to the issuance of ETP Units during the three and six months ended June 30, 2009.

In January 2009, ETP closed a public offering of 6,900,000 Common Units at $34.05 per ETP Common Unit. Net proceeds of approximately $225.9 million from the offering were used to repay outstanding borrowings under the ETP Credit Facility.

In April 2009, ETP closed a public offering of 9,775,000 ETP Common Units at $37.55 per ETP Common Unit. The proceeds of approximately $352.4 million, net of underwriting discounts and commissions, were used by ETP to fund capital expenditures and capital contributions to joint venture entities related to pipeline construction projects as well as for general partnership purposes. The units were registered under the Securities Act pursuant to a Registration Statement on Form S-3ASR.

During the six months ended June 30, 2009, the Parent Company recorded the difference of $15.6 million between the carrying amount of the Partnership’s investment in ETP and its share of the underlying book value after giving effect to the above January 2009 transaction as a capital transaction based on the Partnership’s ownership in ETP’s limited partner interests being diluted from 41.09% to 39.31%. In addition, the Parent Company recorded the difference of $30.5 million between the carrying amount of the Partnership’s investment in ETP and its share of the underlying book value after giving effect to the above April 2009 transaction as a capital transaction based on the Partnership’s ownership in ETP’s limited partner interests being diluted from 39.31% to 37.03%. The capital transactions are reflected in the Partnership’s condensed consolidated balance sheet at June 30, 2009 as an increase in limited partners’ capital. No deferred taxes were recorded and the transactions had no effect on the Partnership’s income.

 

18


Table of Contents

Parent Company Quarterly Distributions of Available Cash

Our distribution policy is consistent with the terms of our Partnership Agreement, which requires that we distribute all of our available cash quarterly. The Parent Company’s only cash-generating assets currently consist of distributions from ETP related to limited and general partnership interests, including IDRs in ETP. We currently have no independent operations outside of our interests in ETP.

On February 19, 2009, the Parent Company paid a cash distribution for the three months ended December 31, 2008 of $0.51 per Common Unit, or $2.04 annualized, an increase of $0.12 per Common Unit on an annualized basis to Unitholders of record at the close of business on February 6, 2009.

On May 19, 2009, the Parent Company paid a cash distribution for the three months ended March 31, 2009 of $0.525 per Common Unit, or $2.10 annualized, an increase of $0.06 per Common Unit on an annualized basis to Unitholders of record at the close of business on May 8, 2009.

On July 28, 2009, the Parent Company declared a cash distribution for the three months ended June 30, 2009 of $0.535 per Common Unit, or $2.14 annualized, an increase of $0.04 per Common Unit on an annualized basis. This distribution will be paid on August 19, 2009 to Unitholders of record at the close of business on August 7, 2009.

ETP’s Quarterly Distributions of Available Cash

ETP is required by its partnership agreement to distribute all cash on hand at the end of each quarter, less appropriate reserves determined by the board of directors of its general partner.

On February 13, 2009, ETP paid a per unit cash distribution related to the three months ended December 31, 2008 of $0.89375 per Common Unit ($3.575 per Limited Partner Unit annualized) to Unitholders of record at the close of business on February 6, 2009. ETP paid distributions of $83.9 million in the aggregate for ETP GP’s 2% general partner interest in the Partnership and its IDRs for the three months ended December 31, 2008.

On May 15, 2009, ETP paid a per unit cash distribution related to the three months ended March 31, 2009 of $0.89375 per Common Unit ($3.575 per Limited Partner Unit annualized) to Unitholders of record at the close of business on May 8, 2009. ETP paid distributions of $89.0 million in the aggregate for ETP GP’s 2% general partner interest in the Partnership and its IDRs for the three months ended March 31, 2009.

The total amount of distributions the Parent Company received from ETP during the six months ended June 30, 2009 relating to its limited partner interests, general partner interests and IDRs of ETP are as follows:

 

Limited Partner Interest

   $ 111,720

General Partner Interest

     9,442

Incentive Distribution Rights

     163,424
      

Total distributions received from ETP

   $ 284,586
      

On July 28, 2009, ETP declared a cash distribution for the three months ended June 30, 2009 of $0.89375 per Common Unit, or $3.575 annualized. This distribution will be paid on August 14, 2009 to Unitholders of record at the close of business on August 7, 2009.

The total amount of ETP distributions declared related to the six months ended June 30, 2009 are as follows (all from Available Cash from ETP’s operating surplus):

 

Limited Partners -

  

Common Units

   $ 301,738

Class E Units

     6,242

General Partner -

  

2% Ownership

     9,721

Incentive Distribution Rights

     168,310
      
   $ 486,011
      

 

19


Table of Contents

Based on ETP’s current quarterly distributions of $0.89375 per unit, the Parent Company would be entitled to receive a quarterly cash distribution of approximately $144.9 million (or $579.5 million on an annualized basis), which consists of $4.8 million from the indirect ownership of the 2% general partner interest in ETP, $84.2 million from the indirect ownership of the IDRs in ETP and $55.9 million from the Common Units of ETP.

Accumulated Other Comprehensive Income

The following table presents the components of accumulated other comprehensive income (loss) (“AOCI”), net of tax:

 

     June 30,
2009
    December 31,
2008
 

Net gain (loss) on commodity related derivatives

   $ (864   $ 8,735   

Net loss on interest rate derivatives

     (56,524     (68,896

Unrealized losses on available-for-sale securities

     (2,275     (5,983

Noncontrolling interest

     1,927        (1,681
                

Total AOCI, net of tax

   $ (57,736   $ (67,825
                

 

14. UNIT-BASED COMPENSATION PLANS:

We recognized non-cash compensation expense related to the unit-based compensation plans of ETP and ETE of $7.8 million and $3.9 million for the three months ended June 30, 2009 and 2008, respectively. We recognized non-cash compensation expense related to the unit-based compensation plans of ETP and ETE of $14.8 million and $12.0 million for the six months ended June 30, 2009 and 2008, respectively.

ETE Long-Term Incentive Plan

As of June 30, 2009, a total of 65,000 unvested units are outstanding under the ETE Long-Term Incentive Plan to employees with vesting over a five-year period at 20%. These awards include rights to distributions paid on unvested units. As of June 30, 2009, a total of $0.8 million remains to be recognized as compensation expense during the vesting period related to these employee awards.

As of June 30, 2009, a total of 5,028 restricted units granted to ETE Directors are outstanding under the ETE Long-Term Incentive Plan.

ETP Unit-Based Compensation Plans

ETP Employee Grants

The following table shows the activity of the ETP awards during the six months ended June 30, 2009:

 

     Three-Year
Performance Vesting (1)
   Five-Year
Service Vesting (2)
   Other (3)    Total
     Number of
Units
    Weighted
Average
Fair Value
Per Unit
   Number of
Units
    Weighted
Average
Fair Value
Per Unit
   Number of
Units
   Weighted
Average
Fair Value
Per Unit
   Number of
Units
    Weighted
Average
Fair Value
Per Unit

Unvested awards as of December 31, 2008

   150,852      $ 43.96    1,205,430      $ 35.87    8,976    $ 43.48    1,365,258      $ 36.81

Awards granted

   —          —      35,850        34.60    —        —      35,850        34.60

Awards vested

   (2,036     43.96    (50,670     38.27    —        —      (52,706     38.49

Awards forfeited

   (3,336     43.96    (23,531     36.51    —        —      (26,867     37.44
                                                  

Unvested awards as of June 30, 2009

   145,480      $ 43.96    1,167,079      $ 35.71    8,976    $ 43.48    1,321,535      $ 36.67
                                  

 

(1) Includes awards subject to performance objectives and continued employment.

 

20


Table of Contents
(2) Includes awards for which vesting is subject to continued employment.

 

(3) Includes special grants and awards issued with other vesting conditions.

As of June 30, 2009, a total of 4,785,940 ETP Common Units remain available to be awarded under ETP’s equity incentive plans.

ETP recognized non-cash compensation expense related to employee grants under its unit-based compensation plans of $5.8 million and $5.5 million for the three months ended June 30, 2009 and 2008, respectively. ETP recognized non-cash compensation expense related to employee grants under its unit-based compensation plans of $10.8 million and $11.4 million for the six months ended June 30, 2009 and 2008, respectively. The total expected non-cash compensation expense to be recognized related to ETP’s unvested employee awards as of June 30, 2009 is:

 

Years Ending December 31:

    

2009 (remainder)

   $ 9,009

2010

     10,038

2011

     5,896

2012

     3,089

2013

     1,010

ETP Director Grants

There were no new ETP director grants or awards vested during the six months ended June 30, 2009.

ETP recognized non-cash compensation expense related to director grants under its unit-based compensation plans of $0.04 million and $0.03 million for the three months ended June 30, 2009 and 2008, respectively. ETP recognized non-cash compensation expense related to director grants under its unit-based compensation plans of $0.08 million and $0.07 million for the six months ended June 30, 2009 and 2008, respectively.

Related Party Awards

During 2007 and 2008, a partnership (McReynolds Energy Partners, L.P.), the general partner of which is owned and controlled by our President, awarded to certain officers of ETP certain rights related to units of ETE previously issued by ETE to such officer. As of June 30, 2009, rights related to 695,000 unvested ETE units remained outstanding. In June 2008, 240,000 unit awards were forfeited due to the resignation of an officer of ETP. For the three months ended June 30, 2009, we recognized non-cash compensation expense of $1.8 million. For the three months ended June 30, 2008, we recognized non-cash compensation expense of $1.0 million related to these awards and reversed $2.7 million of previously recognized compensation cost related to the forfeiture of these awards, for a net benefit of $1.7 million. For the six months ended June 30, 2009 and 2008, we recognized non-cash compensation expense of $3.7 million and $0.5 million, respectively, related to these awards.

 

15. REGULATORY MATTERS, COMMITMENTS, CONTINGENCIES AND ENVIRONMENTAL LIABILITIES:

Regulatory Matters

Approval from the FERC is pending on our current pipeline construction projects, including MEP and FEP, as discussed in Note 8, and the Tiger Pipeline. We initiated public review of the Tiger pipeline pursuant to the FERC’s National Environmental Policy Act (“NEPA”) pre-filing review process in March 2009.

On September 29, 2006, Transwestern filed revised tariff sheets under Section 4(e) of the Natural Gas Act (“NGA”) proposing a general rate increase to be effective on November 1, 2006. In April 2007, the FERC approved a Stipulation and Agreement of Settlement that resolved the primary components of the rate case. Transwestern’s tariff rates and fuel rates are now final for the period of the settlement. Transwestern is required to file a new rate case no later than October 1, 2011.

 

21


Table of Contents

The Phoenix project, as filed with the FERC on September 15, 2006, includes the construction and operation of approximately 260 miles of 36-inch or larger diameter pipeline extending from Transwestern’s existing mainline in Yavapai County, Arizona to delivery points in the Phoenix, Arizona area and certain looping on Transwestern’s existing San Juan Lateral with approximately 25 miles of 36-inch diameter pipeline. On November 15, 2007, the FERC issued an order granting Transwestern its Certificate of Public Convenience and Necessity (“Order”). Pursuant to the Order, Transwestern filed its initial Implementation Plan on November 14, 2007 and accepted the Order on November 19, 2007. The San Juan Lateral portion of the project was placed in service effective July 2008 and the pipeline to the Phoenix area was placed in service effective March 2009.

Guarantees

We have guaranteed 50% of the obligations of MEP under its $1.4 billion senior revolving credit facility (the “MEP Facility”), with the remaining 50% of MEP Facility obligations guaranteed by KMP. Subject to certain exceptions, our guarantee may be proportionately increased or decreased if our ownership percentage of MEP increases or decreases. The MEP Facility is unsecured and matures on February 28, 2011. The MEP Facility is syndicated among multiple financial institutions. As a result of the Lehman Brothers bankruptcy in 2008, the MEP Facility has effectively been reduced by the Lehman Brothers affiliate’s commitment of approximately $100.0 million. However, the MEP Facility is not in default, and the commitments of the other lending banks remain unchanged.

As of June 30, 2009, MEP had $1.19 billion of outstanding borrowings and $33.3 million of letters of credit issued under the MEP Facility. Our contingent obligations with respect to our 50% guarantee of MEP’s outstanding borrowings and letters of credit were $595.4 million and $16.6 million, respectively, as of June 30, 2009.

Commitments

In the normal course of our business, we purchase, process and sell natural gas pursuant to long-term contracts and enter into long-term transportation and storage agreements. Such contracts contain terms that are customary in the industry. We have also entered into several propane purchase and supply commitments, which are typically one year agreements with varying terms as to quantities, prices and expiration dates. We also have a contract to purchase not less than 90.0 million gallons per year that expires in 2015. We believe that the terms of these agreements are commercially reasonable and will not have a material adverse effect on our financial position or results of operations.

We have certain non-cancelable leases for property and equipment that require fixed monthly rental payments and expire at various dates through 2020. Rental expense under these operating leases has been included in operating expenses in the accompanying statements of operations and totaled approximately $5.5 million and $7.2 million for the three months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008, rental expense totaled approximately $11.5 million and $15.4 million, respectively, for operating leases.

As discussed in Note 8, we also have commitments to make capital contributions to our joint ventures.

Litigation and Contingencies

We may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. Natural gas and propane are flammable, combustible gases. Serious personal injury and significant property damage can arise in connection with their transportation, storage or use. In the ordinary course of business, we are sometimes threatened with or named as a defendant in various lawsuits seeking actual and punitive damages for product liability, personal injury and property damage. We maintain liability insurance with insurers in amounts and with coverage and deductibles management believes are reasonable and prudent, and which are generally accepted in the industry. However, there can be no assurance that the levels of insurance protection currently in effect will continue to be available at reasonable prices or that such levels will remain adequate to protect us from material expenses related to product liability, personal injury or property damage in the future.

FERC/CFTC and Related Matters. On July 26, 2007, the FERC issued to us an Order to Show Cause and Notice of Proposed Penalties (the “Order and Notice”) that contains allegations that ETP violated FERC rules and regulations. The FERC alleged that ETP engaged in manipulative or improper trading activities in the Houston Ship Channel, primarily on two dates during the fall of 2005 following the occurrence of Hurricanes Katrina and Rita, as well as on eight other occasions from December 2003 through August 2005, in order to benefit financially from our commodities derivatives positions and from certain of our index-priced physical gas purchases in the

 

22


Table of Contents

Houston Ship Channel. The FERC alleged that during these periods ETP violated the FERC’s then-effective Market Behavior Rule 2, an anti-market manipulation rule promulgated by the FERC under authority of the NGA. The FERC alleges that ETP violated this rule by artificially suppressing prices that were included in the Platts Inside FERC Houston Ship Channel index, published by McGraw-Hill Companies, on which the pricing of many physical natural gas contracts and financial derivatives are based. In its Order and Notice, the FERC also alleged that ETP manipulated daily prices at the Waha and Permian Hubs in west Texas on two dates. In its Order and Notice, the FERC specified that it was seeking $69.9 million in disgorgement of profits, plus interest, and $82.0 million in civil penalties relating to these market manipulation claims. The FERC specified that it was also seeking to revoke, for a period of 12 months, ETP’s blanket marketing authority for sales of natural gas in interstate commerce at market-based prices. If the FERC is successful in revoking ETP’s blanket marketing authority, ETP’s sales of natural gas at market-based prices would be limited to sales to retail customers (such as utilities and other end-users) and sales from its own production, and any other sales of natural gas by ETP would be required to be made at contract prices that would be subject to individual FERC approval.

ETP’s Oasis pipeline transports interstate natural gas pursuant to Natural Gas Policy Act (“NGPA”) Section 311 authority and is subject to the FERC-approved rates, terms and conditions of service. The Order and Notice alleged that the Oasis pipeline violated NGPA regulations from January 26, 2004 through June 30, 2006 by granting undue preference to its affiliates for interstate NGPA Section 311 pipeline service to the detriment of similarly situated non-affiliated shippers and by charging in excess of the FERC-approved maximum lawful rate for interstate NGPA Section 311 transportation. The FERC specified that it was seeking approximately $15.5 million in civil penalties and disgorgement of overcharges related to these claims against Oasis. On May 15, 2008, the FERC ordered a hearing to be conducted by a FERC administrative law judge with respect to the Oasis claims. The hearing related to the Oasis claims was scheduled to commence in December 2008 with the administrative law judge’s initial decisions due by May 11, 2009; however, on November 18, 2008, the administrative law judge presiding over the Oasis claims granted ETP’s motion for summary disposition of the claim that Oasis unduly discriminated in favor of affiliates regarding the provision of Section 311(a)(2) interstate transportation service. ETP subsequently entered into an agreement with the Enforcement Staff to settle all of the claims related to Oasis. Pursuant to this agreement, Oasis will not pay any civil penalties to the FERC or make any other payments. On January 5, 2009, this agreement was submitted under seal to FERC by the presiding administrative law judge, for FERC’s approval as an uncontested settlement of all Oasis claims. On February 27, 2009, the settlement agreement was approved by the FERC in its entirety and without modification, and the terms of the settlement were made public. The FERC’s order is now final and non-appealable. We believe the Oasis settlement, as approved by the FERC, will not have a material adverse effect on our business, financial condition or results of operations.

On August 27, 2007, ETP filed a request for rehearing of the Order and Notice. On December 20, 2007, the FERC issued an order denying rehearing and directed the FERC Enforcement Staff to file a brief recommending disposition of issues by order or by evidentiary hearing. ETP filed its response to the Order and Notice with the FERC on October 9, 2007, which response refuted the FERC’s claims and requested a dismissal of the FERC proceeding. On February 14, 2008, the Enforcement Staff of the FERC filed a brief recommending that the FERC refer various matters relating to its market manipulation allegations for an evidentiary hearing before a FERC administrative law judge. The Enforcement Staff also recommended that the FERC pursue market manipulation claims related to ETP’s trading activities in October 2005 for November 2005 monthly deliveries, a period not previously covered by FERC’s allegations in the Order and Notice, and that ETP be assessed an additional civil penalty of $25.0 million and be required to disgorge approximately $7.3 million of alleged unjust profits related to this additional month. On March 31, 2008, ETP responded to the Enforcement Staff’s brief.

On May 15, 2008, the FERC ordered a hearing to be conducted by a FERC administrative law judge with respect to the FERC’s market manipulation claims. In this order, the FERC set for hearing the Enforcement Staff’s claims for the additional month in 2005, bringing the total amount of civil penalties and disgorgement of profits sought by the FERC relating to its market manipulation claims to approximately $181.9 million, excluding interest. The hearing related to the market manipulation claims was scheduled to commence in July 2009 with the administrative law judge’s initial decision due by January 7, 2010; however, as discussed below, the procedural schedule (including the commencement of the hearing) has been postponed to August 12, 2009. The FERC also ordered that, following the completion of the hearings, the administrative law judges make initial findings with respect to whether ETP engaged in market manipulation in violation of the NGA and FERC regulations. The FERC reserved for itself the issues of possible civil penalties, revocation of ETP’s blanket market certificate and whether ETP would disgorge any unjust profits. Following the issuance of the administrative law judge’s initial decision related to the market manipulation claims, the FERC would then issue an order with respect to each of these matters. On May 23, 2008, ETP requested rehearing and stay of the FERC’s May 15, 2008 order establishing hearing, and ETP renewed those requests on June 26, 2008.

 

23


Table of Contents

On August 7, 2008, the FERC denied rehearing of its May 15, 2008 order. On August 8, 2008, ETP filed a petition with the U.S. Court of Appeals for the Fifth Circuit to review and set aside the FERC’s May 15 and August 7, 2008 orders on the grounds that ETP is entitled to adjudicate the FERC’s claims in federal district court pursuant to the NGA and the NGPA. On August 28, 2008, ETP filed an amended petition seeking review of the Order and Notice and the December 20, 2007 order denying rehearing. The Fifth Circuit dismissed ETP’s petition without reaching the merits on April 28, 2009. On June 12, 2009, ETP sought rehearing and rehearing en banc of the Court’s April 28, 2009 order. On July 1, 2009, the Fifth Circuit denied our requests for rehearing. On July 10, 2009, the chief administrative law judge issued an order suspending the procedural schedule and all hearing-related matters with respect to the FERC’s market manipulation claims until August 12, 2009 in light of settlement discussions occurring between us and Enforcement Staff.

It is our position that ETP’s trading and transportation activities during the periods at issue complied in all material aspects with applicable law and regulations, and we intend to contest these cases vigorously. However, the laws and regulations related to alleged market manipulation are vague, subject to broad interpretation, and offer little guiding precedent, while at the same time the FERC holds substantial enforcement authority.

In addition to the FERC legal action, third parties have asserted claims and may assert additional claims against us and ETP alleging damages related to these matters. In this regard, several natural gas producers and a natural gas marketing company have initiated legal proceedings in Texas state courts against us and ETP for claims related to the FERC claims. These suits contain contract and tort claims relating to alleged manipulation of natural gas prices at the Houston Ship Channel and the Waha Hub in West Texas, as well as the natural gas price indices related to these markets and the Permian Basin natural gas price index during the period from December 2003 through December 2006, and seek unspecified direct, indirect, consequential and exemplary damages. One of the suits against us and ETP contains an additional allegation that we and ETP transported gas in a manner that favored our affiliates and discriminated against the plaintiff, and otherwise artificially affected the market price of gas to other parties in the market. We have moved to compel arbitration and/or contested subject-matter jurisdiction in some of these cases. In one of these cases, the Texas Supreme Court ruled on July 3, 2009 that the state district court erred in ruling that a plaintiff was entitled to pre-arbitration discovery and therefore remanded to the state district court with a direction to rule on our original motion to compel arbitration pursuant to the terms of the arbitration clause in a natural gas contract between us and the plaintiff. This plaintiff has filed a motion with the Texas Supreme Court requesting a rehearing of the ruling.

We have also been served with a complaint from an owner of royalty interests in natural gas producing properties, individually and on behalf of a putative class of similarly situated royalty owners, working interest owners and producer/operators, seeking arbitration to recover damages based on alleged manipulation of natural gas prices at the Houston Ship Channel. We filed an original action in Harris County state court seeking a stay of the arbitration on the ground that the action is not arbitrable, and the state court granted our motion for summary judgment on that issue. This action is currently on appeal before the First Court of Appeals, Houston.

A consolidated class action complaint has been filed against ETP in the United States District Court for the Southern District of Texas. This action alleges that ETP engaged in intentional and unlawful manipulation of the price of natural gas futures and options contracts on the NYMEX in violation of the Commodity Exchange Act (“CEA”). It is further alleged that during the class period December 29, 2003 to December 31, 2005, ETP had the market power to manipulate index prices, and that it used this market power to artificially depress the index prices at major natural gas trading hubs, including the Houston Ship Channel, in order to benefit its natural gas physical and financial trading positions, and that ETP intentionally submitted price and volume trade information to trade publications. This complaint also alleges that ETP violated the CEA by knowingly aiding and abetting violations of the CEA. The plaintiffs state that this allegedly unlawful depression of index prices by ETP manipulated the NYMEX prices for natural gas futures and options contracts to artificial levels during the class period, causing unspecified damages to the plaintiffs and all other members of the putative class who sold natural gas futures or who purchased and/or sold natural gas options contracts on NYMEX during the class period. The plaintiffs have requested certification of their suit as a class action and seek unspecified damages, court costs and other appropriate relief. On January 14, 2008, ETP filed a motion to dismiss this suit on the grounds of failure to allege facts sufficient to state a claim. On March 20, 2008, the plaintiffs filed a second consolidated class action complaint. In response to this new pleading, on May 5, 2008, ETP filed a motion to dismiss the complaint. On March 26, 2009, the court issued an order dismissing the complaint, with prejudice, for failure to state a claim. The plaintiffs have since moved for reconsideration, and briefing on that motion is now complete.

 

24


Table of Contents

On March 17, 2008, a second class action complaint was filed against ETP in the United States District Court for the Southern District of Texas. This action alleges that ETP engaged in unlawful restraint of trade and intentional monopolization and attempted monopolization of the market for fixed-price natural gas baseload transactions at the Houston Ship Channel from December 2003 through December 2005 in violation of federal antitrust law. The complaint further alleges that during this period ETP exerted monopoly power to suppress the price for these transactions to non-competitive levels in order to benefit its own physical natural gas positions. The plaintiff has, individually and on behalf of all other similarly situated sellers of physical natural gas, requested certification of its suit as a class action and seeks unspecified treble damages, court costs and other appropriate relief. On May 19, 2008, ETP filed a motion to dismiss this complaint. On March 26, 2009, the court issued an order dismissing the complaint. The court found that the plaintiffs failed to state a claim on all causes of action and for anti-trust injury but granted leave to amend. On April 23, 2009, the plaintiffs filed a motion for leave to amend to assert a claim for common law fraud and attached a proposed amended complaint as an exhibit. ETP opposed the motion and cross-moved to dismiss. On August 7, 2009, the court denied the plaintiff’s motion and granted our motion to dismiss the complaint.

We are expensing the legal fees, consultants’ fees and other expenses relating to these matters in the periods in which such expenses are incurred. In addition, our existing accruals for litigation and contingencies include an accrual related to these matters. However, it is possible that the amount we become obliged to pay as a result of the final resolution of these matters, whether on a negotiated settlement basis or otherwise, will exceed the amount of our existing accrual related to these matters. In accordance with applicable accounting standards, we will review the amount of our accrual related to these matters as developments related to these matters occur and we will adjust our accrual if we determine that it is probable that the amount we may ultimately become obliged to pay as a result of the final resolution of these matters is greater than the amount of our existing accrual for these matters. As our accrual amounts are non-cash, any cash payment of an amount in resolution of these matters would likely be made from cash from operations or borrowings, which payments would reduce our cash available to service our indebtedness either directly or as a result of increased principal and interest payments necessary to service any borrowings incurred to finance such payments. If these payments are substantial, we may experience a material adverse impact on our results of operations and our liquidity.

In re Natural Gas Royalties Qui Tam Litigation. MDL Docket No. 1293 (D. WY), Jack Grynberg, an individual, has filed actions against a number of companies, including Transwestern, now transferred to the U.S. District Court for the District of Wyoming, for damages for mis-measurement of gas volumes and Btu content, resulting in lower royalties to mineral interest owners. On October 20, 2006, the District Judge adopted in part the earlier recommendation of the Special Master in the case and ordered the dismissal of the case against Transwestern. Transwestern believes that its measurement practices conformed to the terms of its FERC Gas Tariff, which were filed with and approved by the FERC. As a result, Transwestern believes that is has meritorious defenses to these lawsuits (including FERC-related affirmative defenses, such as the filed rate/tariff doctrine, the primary/exclusive jurisdiction of the FERC, and the defense that Transwestern complied with the terms of its tariffs) and will continue to vigorously defend against them, including any appeal which may be taken from the dismissal of the Grynberg case. A hearing was held on April 24, 2007 regarding Transwestern’s Supplemental Brief for Attorneys’ fees which was filed on January 8, 2007 and the issues are submitted and are awaiting a decision. Grynberg moved to have the cases he appealed remanded to the district court for consideration in light of a recently-issued Supreme Court case. The defendants/appellees opposed the motion. The Tenth Circuit motions panel referred the remand motion to the merits panel to be carried with the appeals. Grynberg’s opening brief was filed on or about July 31, 2007. Appellee’s opposition brief was filed on or about November 21, 2007. Appellee Transwestern filed its separate response brief on January 11, 2008 and Grynberg’s reply brief was filed in June 2008 and the hearing on all briefs was held in September 2008. On March 17, 2009, the Tenth Circuit affirmed the District Court’s dismissal. We do not believe the outcome of this case will have a material adverse effect on our financial position, results of operations or cash flows.

Houston Pipeline Cushion Gas Litigation. At the time of the HPL System acquisition, AEP Energy Services Gas Holding Company II, L.L.C., HPL Consolidation LP and its subsidiaries (the “HPL Entities”), their parent companies and American Electric Power Corporation (“AEP”), were engaged in ongoing litigation with Bank of America (“B of A”) that related to AEP’s acquisition of HPL in the Enron bankruptcy and B of A’s financing of cushion gas stored in the Bammel Storage Facility (“Cushion Gas”). This litigation is referred to as the “Cushion Gas Litigation”. Under the terms of the Purchase and Sale Agreement and the related Cushion Gas Litigation Agreement, AEP and its subsidiaries that were the sellers of the HPL Entities retained control of the Cushion Gas Litigation and have agreed to indemnify ETC OLP and the HPL Entities for any damages arising from the Cushion Gas Litigation and the loss of use of the Cushion Gas, up to a maximum of the amount paid by ETC OLP for the HPL Entities and the working gas inventory (approximately $1.00 billion in the aggregate). The Cushion Gas

 

25


Table of Contents

Litigation Agreement terminates upon final resolution of the Cushion Gas Litigation. In addition, under the terms of the Purchase and Sale Agreement, AEP retained control of additional matters relating to ongoing litigation and environmental remediation and agreed to bear the costs of or indemnify ETC OLP and the HPL Entities for the costs related to such matters. On December 18, 2007, the United States District Court for the Southern District of New York held that B of A is entitled to receive monetary damages from AEP and the HPL Entities of approximately $347.3 million less the monetary amount B of A would have incurred to remove 55 Bcf of natural gas from the Bammel Storage Facility. AEP is appealing the court decision. Based on the indemnification provisions of the Cushion Gas Litigation Agreement, ETP does not expect that it will be liable for any portion of this court award.

Other Matters. In addition to those matters described above, we or our subsidiaries are a party to various legal proceedings and/or regulatory proceedings incidental to our businesses. For each of these matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, the likelihood of an unfavorable outcome and the availability of insurance coverage. If we determine that an unfavorable outcome of a particular matter is probable, can be estimated and is not covered by insurance, we make an accrual for the matter. For matters that are covered by insurance, we accrue the related deductible. As new information becomes available, our estimates may change. The impact of these changes may have a significant effect on our results of operations in a single period.

The outcome of these matters cannot be predicted with certainty and it is possible that the outcome of a particular matter will result in the payment of an amount in excess of the amount accrued for the matter. As our accrual amounts are non-cash, any cash payment of an amount in resolution of a particular matter would likely be made from cash from operations or borrowings. If cash payments to resolve a particular matter substantially exceed our accrual for such matter, we may experience a material adverse impact on our results of operations, cash available for distribution and our liquidity.

As of June 30, 2009 and December 31, 2008, accruals of approximately $21.0 million were recorded as accrued and other current liabilities and other non-current liabilities on our condensed consolidated balance sheets for our contingencies and current litigation matters, excluding accruals related to environmental matters and matters covered by insurance.

Environmental Matters

Our operations are subject to extensive federal, state and local environmental laws and regulations that require expenditures for remediation at operating facilities and waste disposal sites. Although we believe our operations are in substantial compliance with applicable environmental laws and regulations, risks of additional costs and liabilities are inherent in the natural gas pipeline and processing business, and there can be no assurance that significant costs and liabilities will not be incurred. Moreover, it is possible that other developments, such as increasingly stringent environmental laws, regulations and enforcement policies thereunder, and claims for damages to property or persons resulting from the operations, could result in substantial costs and liabilities. Accordingly, we have adopted policies, practices and procedures in the areas of pollution control, product safety, occupational health, and the handling, storage, use and disposal of hazardous materials to prevent material environmental or other damage, and to limit the financial liability, which could result from such events. However, some risk of environmental or other damage is inherent in the natural gas pipeline and processing business, as it is with other entities engaged in similar businesses.

Transwestern conducts soil and groundwater remediation at a number of its facilities. Some of the clean up activities include remediation of several compressor sites on the Transwestern system for historical contamination by polychlorinated biphenyls (“PCBs”) and the costs of this work are not eligible for recovery in rates. The total accrued future estimated cost of remediation activities expected to continue through 2018 is $8.9 million. Transwestern received FERC approval for rate recovery of projected soil and groundwater remediation costs not related to PCBs effective April 1, 2007.

Transwestern continues to incur certain costs related to PCBs that might have migrated through its pipelines into customers’ facilities in the past. Transwestern, as part of ongoing arrangements with customers, continues to incur costs associated with containing and removing the PCBs. Costs of these remediation activities were minimal for both the three and six months ended June 30, 2009. Future costs cannot be reasonably estimated because remediation activities are undertaken as potential claims are made by customers and former customers, and

 

26


Table of Contents

accordingly, no accrual has been established for these costs at June 30, 2009. However, such future costs are not expected to have a material impact on our financial position, results of operations or cash flows.

Environmental regulations were recently modified for the U.S. Environmental Protection Agency’s (the “EPA”) Spill Prevention, Control and Countermeasures (“SPCC”) program. We are currently reviewing the impact to our operations and expect to expend resources on tank integrity testing and any associated corrective actions as well as potential upgrades to containment structures. Costs associated with tank integrity testing and resulting corrective actions cannot be reasonably estimated at this time, but we believe such costs will not have a material adverse effect on our financial position, results of operations or cash flows.

In July 2001, HOLP acquired a company that had previously received a request for information from the EPA regarding potential contribution to a widespread groundwater contamination problem in San Bernardino, California, known as the Newmark Groundwater Contamination. Although the EPA has indicated that the groundwater contamination may be attributable to releases of solvents from a former military base located within the subject area that occurred long before the facility acquired by HOLP was constructed, it is possible that the EPA may seek to recover all or a portion of groundwater remediation costs from private parties under the Comprehensive Environmental Response, Compensation, and Liability Act (commonly called Superfund). We have not received any follow-up correspondence from the EPA on the matter since our acquisition of the predecessor company in 2001. Based upon information currently available to HOLP, it is believed that HOLP’s liability if such action were to be taken by the EPA would not have a material adverse effect on our financial condition or results of operations.

Petroleum-based contamination or environmental wastes are known to be located on or adjacent to six sites on which HOLP presently has, or formerly had, retail propane operations. These sites were evaluated at the time of their acquisition. In all cases, remediation operations have been or will be undertaken by others, and in all six cases, HOLP obtained indemnification rights for expenses associated with any remediation from the former owners or related entities. We have not been named as a potentially responsible party at any of these sites, nor have our operations contributed to the environmental issues at these sites. Accordingly, no amounts have been recorded in our condensed consolidated balance sheets. Based on information currently available to us, such projects are not expected to have a material adverse effect on our financial condition or results of operations.

Environmental exposures and liabilities are difficult to assess and estimate due to unknown factors such as the magnitude of possible contamination, the timing and extent of remediation, the determination of our liability in proportion to other parties, improvements in cleanup technologies and the extent to which environmental laws and regulations may change in the future. Although environmental costs may have a significant impact on the results of operations for any single period, we believe that such costs will not have a material adverse effect on our financial position.

As of June 30, 2009 and December 31, 2008, an accrual on an undiscounted basis of $12.9 million and $13.3 million, respectively, was recorded in our condensed consolidated balance sheets as accrued and other current liabilities and other non-current liabilities to cover environmental liabilities related to certain matters assumed in connection with the HPL System acquisition, the Transwestern acquisition and the potential environmental liabilities for three sites that were formerly owned by Titan or its predecessors.

Based on information available at this time and reviews undertaken to identify potential exposure, we believe the amount reserved for all of the above environmental matters is adequate to cover the potential exposure for clean-up costs.

Our pipeline operations are subject to regulation by the U.S. Department of Transportation under the Pipeline Hazardous Materials Safety Administration (“PHMSA”), pursuant to which the PHMSA has established requirements relating to the design, installation, testing, construction, operation, replacement and management of pipeline facilities. Moreover, the PHMSA, through the Office of Pipeline Safety, has promulgated a rule (the “IMP Rule”) requiring pipeline operators to develop integrity management programs to comprehensively evaluate their pipelines, and take measures to protect pipeline segments located in what the rule refers to as “high consequence areas”. Activities under these integrity management programs involve the performance of internal pipeline inspections, pressure testing or other effective means to assess the integrity of these regulated pipeline segments, and the regulations require prompt action to address integrity issues raised by the assessment and analysis. For the three months ended June 30, 2009 and 2008, $11.6 million and $4.0 million, respectively, of capital costs and $5.6 million and $7.1 million, respectively, of operating and maintenance costs have been incurred for pipeline integrity testing. For the six months ended June 30, 2009 and 2008, $15.3 million and $5.5 million, respectively, of capital

 

27


Table of Contents

costs and $9.0 million and $10.7 million, respectively, of operating and maintenance costs have been incurred for pipeline integrity testing. Integrity testing and assessment of all of these assets will continue, and the potential exists that results of such testing and assessment could cause us to incur even greater capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operation of its pipelines.

 

16. PRICE RISK MANAGEMENT ASSETS AND LIABILITIES:

Commodity Price Risk

We are exposed to market risks related to the volatility of natural gas, NGL and propane prices. To manage the impact of volatility from these prices, we utilize various exchange-traded and over-the-counter (“OTC”) commodity financial instrument contracts. These contracts consist primarily of futures and swaps and are recorded at fair value in the condensed consolidated balance sheets. In general, we use derivatives to eliminate market exposure and price risk within our segments as follows:

 

   

Derivatives are utilized in our midstream segment in order to mitigate price volatility in our marketing activities and manage fixed price exposure incurred from contractual obligations.

 

   

We use derivative financial instruments in connection with our natural gas inventory at the Bammel Storage Facility by purchasing physical natural gas and then selling financial contracts at a price sufficient to cover its carrying costs and provide a gross profit margin. We also use derivatives in our intrastate transportation and storage segment to hedge the sales price of retention gas and hedge location price differentials related to the transportation of natural gas.

 

   

Our propane segment permits customers to guarantee the propane delivery price for the next heating season. As we execute fixed sales price contracts with our customers, we may enter into propane futures contracts to fix the purchase price related to these sales contracts, thereby locking in a gross profit margin. Additionally, we may use propane futures contracts to secure the purchase price of our propane inventory for a percentage of our anticipated propane sales.

We have a risk management policy that specifies the manner in which derivative financial instruments are employed and monitored in connection with underlying asset, liability and/or anticipated transactions. Furthermore, on a bi-weekly basis, management reviews the creditworthiness of the derivative counterparties to manage against the risk of default.

The market prices used to value our financial derivatives and related transactions have been determined using independent third party prices, readily available market information, broker quotes and appropriate valuation techniques.

Non-trading Activities

If we designate a derivative financial instrument as a cash flow hedge and it qualifies for hedge accounting, the change in the fair value is deferred in AOCI until the underlying hedged transaction occurs. Any ineffective portion of a cash flow hedge’s change in fair value is recognized each period in earnings. Gains and losses deferred in AOCI related to cash flow hedges remain in AOCI until the underlying physical transaction occurs, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. For financial derivative instruments that do not qualify for hedge accounting, the change in fair value is recorded in cost of products sold in the condensed consolidated statements of operations.

We expect losses of $2.3 million related to commodity derivatives to be reclassified into earnings over the next twelve months related to amounts currently reported in AOCI. The amount ultimately realized, however, will differ as commodity prices change and the underlying physical transaction occurs.

If we designate a hedging relationship as a fair value hedge, we record the changes in fair value of the hedged asset or liability in cost of products sold in our condensed consolidated statement of operations. This amount is offset by the changes in fair value of the related hedging instrument. Any ineffective portion or amount excluded from the assessment of hedge ineffectiveness is also included in the cost of products sold in the condensed consolidated statement of operations.

 

28


Table of Contents

We use futures and basis swaps, designated as fair value hedges, to hedge our natural gas inventory stored in our Bammel storage facility. Changes in the spreads between the forward natural gas prices designated as fair value hedges and the physical Bammel inventory spot price result in unrealized margins until the underlying physical gas is withdrawn and the related designated derivatives are settled. Once the gas is withdrawn and the designated derivatives are settled, the previously unrealized gains/losses associated with these positions are realized.

We attempt to maintain balanced positions in our non-trading activities to protect ourselves from the volatility in the energy commodities markets; however, net unbalanced positions can exist. Long-term physical contracts are tied to index prices. System gas, which is also tied to index prices, is expected to provide most of the gas required by our long-term physical contracts. When third-party gas is required to supply long-term contracts, a hedge is put in place to protect the margin on the contract. Financial contracts, which are not tied to physical delivery, are expected to be offset with financial contracts to balance our positions. To the extent open commodity positions exist, fluctuating commodity prices can impact our financial position and results of operations, either favorably or unfavorably.

Trading Activities

As of July 2008, we no longer engage in the trading of commodity derivative instruments that are not substantially offset by physical or other commodity derivative positions. As a result, we no longer have any material exposure to market risk from such activities. The derivative contracts that were previously entered into for trading purposes were recognized in the condensed consolidated balance sheets at fair value, and changes in the fair value of these derivative instruments are recognized in revenue in the condensed consolidated statements of operations on a net basis. There were no gains or losses associated with trading activities during the three and six months ended June 30, 2009. Trading activities, including trading of physical gas and financial derivative instruments, resulted in net losses of approximately $26.1 million for the year-to-date period ended July 31, 2008.

The following table details the outstanding commodity-related derivatives:

 

June 30, 2009

       
     Commodity    Notional
Volume
    Maturity

Mark to Market Derivatives

       

Basis Swaps IFERC/NYMEX (MMBtu)

   Gas    50,700,000      2009-2011

Swing Swaps IFERC (MMBtu)

   Gas    (44,095,000   2009-2010

Fixed Swaps/Futures (MMBtu)

   Gas    4,567,500      2009-2011

Forwards/Swaps (Gallons)

   Propane/Ethane    15,078,000      2009-2010

Fair Value Hedging Derivatives

       

Basis Swaps IFERC/NYMEX (MMBtu)

   Gas    (31,117,500   2009-2010

Fixed Swaps/Futures (MMBtu)

   Gas    (31,990,000   2009-2010

Hedged Item - Inventory

   Gas    31,990,000      2009-2010

Cash Flow Hedging Derivatives

       

Basis Swaps IFERC/NYMEX (MMBtu)

   Gas    460,000      2009

Fixed Swaps/Futures (MMBtu)

   Gas    460,000      2009

Forward/Swaps (Gallons)

   Propane/Ethane    18,858,000      2009-2010

December 31, 2008

       
     Commodity    Notional
Volume
    Maturity

Mark to Market Derivatives

       

Basis Swaps IFERC/NYMEX (MMBtu)

   Gas    15,720,000      2009-2011

Swing Swaps IFERC (MMBtu)

   Gas    (58,045,000   2009

Fixed Swaps/Futures (MMBtu)

   Gas    (20,880,000   2009-2010

Forwards/Swaps (Gallons)

   Propane    47,313,002      2009

Cash Flow Hedging Derivatives

       

Basis Swaps IFERC/NYMEX (MMBtu)

   Gas    (9,085,000   2009

Fixed Swaps/Futures (MMBtu)

   Gas    (9,085,000   2009

 

29


Table of Contents

Interest Rate Risk

We are exposed to market risk for changes in interest rates. We manage a portion of our current and future interest rate exposures by utilizing interest rate swaps, certain of which are accounted for as cash flow hedges.

We have the following interest rate swaps outstanding as of June 30, 2009:

 

   

Forward starting swaps with a notional amount of $500.0 million to pay an average fixed rate of 3.99% and receive a floating rate based on LIBOR. These swaps settle in December 2009;

 

   

Interest rate swaps with a notional amount of $300.0 million to pay an average fixed rate of 5.20% and receive a floating rate based on LIBOR. These swaps settle in May 2016;

 

   

Interest rate swaps with a notional amount of $500.0 million to pay a fixed rate of 4.57% and receive a floating rate based on LIBOR. These swaps settle in November 2012 with a cancellable option in November 2010; and,

 

   

Interest rate swaps with a notional amount of $700.0 million to pay an average fixed rate of 4.84% and receive a floating rate based on LIBOR. These swaps settle in November 2012.

In April 2009, the Partnership terminated forward starting swaps with notional amounts of $100.0 million and $150.0 million for an insignificant amount.

Derivative Summary

The following table provides a balance sheet overview of the Partnership’s derivative assets and liabilities as of June 30, 2009 and December 31, 2008:

 

         Fair Value of Derivative Instruments  
         Asset Derivatives    Liability Derivatives  
    

Balance Sheet Location

   June 30,
2009
   December 31,
2008
   June 30,
2009
    December 31,
2008
 

Derivatives designated as hedging instruments under SFAS 133:

          

Commodity Derivatives (margin deposits)

  Deposits Paid to Vendors    $ 17,424    $ 10,665    $ (5,547   $ (1,504

Commodity Derivatives

  Price Risk Management Assets/Liabilities      1,457      918      (93     (119

Interest Rate Swap Derivatives

  Price Risk Management Assets/Liabilities      —        —        (61,687     (71,042
                                

Total derivatives designated as hedging instruments

   $ 18,881    $ 11,583    $ (67,327   $ (72,665
                                

Derivatives not designated as hedging instruments under SFAS 133:

          

Commodity Derivatives (margin deposits)

  Deposits Paid to Vendors    $ 20,809    $ 432,614    $ (25,648   $ (335,685

Commodity Derivatives

  Price Risk Management Assets/Liabilities      1,172      17,244      (278     (55,954

Interest Rate Swap Derivatives

  Price Risk Management Assets/Liabilities      1,818      —        (79,346     (149,765
                                

Total derivatives not designated as hedging instruments

   $ 23,799    $ 449,858    $ (105,272   $ (541,404
                                

Total derivatives

   $ 42,680    $ 461,441    $ (172,599   $ (614,069
                                

We disclose the non-exchange traded financial derivative instruments as price risk management assets and liabilities on our consolidated balance sheets at fair value with amounts classified as either current or long-term depending on the anticipated settlement date.

We utilize master-netting agreements and have maintenance margin deposits with certain counterparties in the OTC market and with clearing brokers. Payments on margin deposits are required when the value of a derivative exceeds our pre-established credit limit with the counterparty. Margin deposits are returned to us on the settlement date for non-exchange traded derivatives. We exchange margin calls on a daily basis for exchange traded transactions. Since the margin calls are made daily with the exchange brokers, the fair value of the financial derivative instruments are deemed current and netted in deposits paid to vendors in the condensed consolidated balance sheets. The Partnership had net deposits with counterparties of $52.0 million and $78.2 million as of June 30, 2009 and December 31, 2008, respectively, reflected as deposits paid to vendors in our condensed consolidated balance sheets.

 

30


Table of Contents

The following tables detail the effect of the Partnership’s derivative assets and liabilities in the condensed consolidated statements of operations for the periods presented:

 

    

Location of Gain/(Loss) Reclassified from
AOCI into Income (Effective and
Ineffective Portion)

   Change in Value
Recognized in OCI
on Derivatives
(Effective Portion)
    Amount of Gain/(Loss)
Reclassified from
AOCI into Income
(Effective Portion)
    Amount of Gain/
(Loss) Recognized
in Income on
Ineffective Portion
of Derivatives
 
         Three Months Ended
June 30,
    Three Months Ended
June 30,
    Three Months Ended
June 30,
 
         2009     2008     2009     2008     2009    2008  

Derivatives in SFAS 133 cash flow hedging relationships:

             

Commodity Derivatives

  Cost of Products Sold    $ 1,336      $ (1,312   $ (928   $ (9,689   $ —      $ (16

Interest Rate Swap Derivatives

  Interest Expense      5,363        24,712        (6,875     (2,714     —        —     
                                                 

Total

     $ 6,699      $ 23,400      $ (7,803   $ (12,403   $ —      $ (16
                                                 
         Six Months Ended
June 30,
    Six Months Ended
June 30,
    Six Months Ended
June 30,
 
         2009     2008     2009     2008     2009    2008  

Derivatives in SFAS 133 cash flow hedging relationships:

             

Commodity Derivatives

  Cost of Products Sold    $ (50   $ (7,573   $ 9,549      $ 21,183      $ —      $ (8,336

Interest Rate Swap Derivatives

  Interest Expense      162        (2,282     (11,707     (4,253     —        2   
                                                 

Total

     $ 112      $ (9,855   $ (2,158   $ 16,930      $ —      $ (8,334
                                                 

 

    

Location of Gain/(Loss) Recognized

in Income on Derivatives

   Amount of Gain/(Loss) Recognized in Income on
Derivatives representing hedge ineffectiveness
and amount excluded from the assessment of
effectiveness
 
         Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2009    2008     2009    2008  

Derivatives in SFAS 133 fair value hedging relationships:

          

Commodity Derivatives (including hedged items)

 

Cost of Products Sold

   $ 12,498    $ —        $ 12,498    $ —     
                                

Total

     $ 12,498    $ —        $ 12,498    $ —     
                                
    

Location of Gain/(Loss) Recognized

in Income on Derivatives

   Amount of Gain/(Loss) Recognized in
Income on Derivatives
 
         Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2009    2008     2009    2008  

Derivatives not designated as hedging instruments under SFAS 133:

          

Commodity Derivatives

  Cost of Products Sold    $ 5,138    $ (38,732   $ 56,576    $ (83,578

Trading Commodity Derivatives

  Revenue      —        9,139        —        8,446   

Interest Rate Swap Derivatives

 

Gains (Losses) on Non-hedged Interest

Rate Derivatives

     49,911      27,178        59,962      (4,458
                                

Total

     $ 55,049    $ (2,415   $ 116,538    $ (79,590
                                

Credit Risk

We maintain credit policies with regard to our counterparties that we believe minimize our overall credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit ratings), collateral requirements under certain circumstances and the use of standardized agreements that allow for netting of positive and negative exposure associated with a single counterparty.

Our counterparties consist primarily of financial institutions, major energy companies and local distribution companies. This concentration of counterparties may impact our overall exposure to credit risk, either positively or negatively in that the counterparties may be similarly affected by changes in economic, regulatory or other

 

31


Table of Contents

conditions. Based on our policies, exposures, credit and other reserves, management does not anticipate a material adverse effect on financial position or results of operations as a result of counterparty performance.

For financial instruments, failure of a counterparty to perform on a contract could result in our inability to realize amounts that have been recorded on our condensed consolidated balance sheets and recognized in net income or other comprehensive income.

 

17. RELATED PARTY TRANSACTIONS:

We made the following sales to and purchases from affiliates of Enterprise GP Holdings L.P. (“Enterprise”):

 

         Three Months Ended June 30,    Six Months Ended June 30,
         2009     2008    2009     2008

Enterprise
Transactions

 

Product

   Volumes
(in thousands)
    Dollars     Volumes
(in thousands)
   Dollars    Volumes
(in thousands)
   Dollars     Volumes
(in thousands)
   Dollars

Propane Operations:

                    

Sales

 

Propane (Gallons)

   7,770      $ 5,226      3,150    $ 5,050    16,800    $ 11,508      12,180    $ 18,240
 

Derivative Activity

   —          —        —        453    —        —        —        2,376

Purchases

 

Propane (Gallons)

   44,623      $ 36,348      27,473    $ 78,857    159,220    $ 138,274      168,595    $ 278,383
 

Derivative Activity

   —          4,657      —        —      —        37,949      —        —  

Natural Gas Operations:

                    

Sales

 

NGLs (Gallons)

   124,983      $ 85,014      8,591    $ 14,754    240,838    $ 151,199      15,977    $ 24,913
 

Natural Gas (MMBtu)

   2,843        6,360      1,430      13,817    4,098      16,049      3,032      26,678
 

Fees

   —          (783   —        1,486    —        (2,174   —        3,158

Purchases

 

Natural Gas Imbalances

   (1,270   $ (559   2,775    $ 7,608    251    $ 499      1,981    $ 2,920
 

Natural Gas (MMBtu)

   894        3,066      7,738      32,201    3,596      15,614      5,329      51,973
 

Fees

   —          181      —        257    —        233      —        512

Accounts receivable from and accounts payable to related companies as of June 30, 2009 and December 31, 2008 relate primarily to activities in the normal course of business.

Titan purchases substantially all of its propane requirements from Enterprise pursuant to an agreement that expires in 2010. As of June 30, 2009 and December 31, 2008, Titan had forward mark-to-market derivatives for approximately 15.1 million and 45.2 million gallons of propane at a fair value asset of $0.9 million and a fair value liability of $40.1 million, respectively, with Enterprise. In addition, as of June 30, 2009, Titan had forward derivatives accounted for as cash flow hedges of 18.8 million gallons of propane at a fair value asset of $1.3 million with Enterprise.

ETC OLP and Enterprise transport natural gas on each other’s pipelines, share operating expenses on jointly-owned pipelines and ETC OLP sells natural gas to Enterprise. Our propane operations routinely buy and sell product with Enterprise. The following table summarizes the related party balances with Enterprise on our condensed consolidated balance sheets:

 

     June 30,
2009
    December 31,
2008
 

Natural Gas Operations:

    

Accounts receivable

   $ 30,551      $ 11,558   

Accounts payable

     866        567   

Imbalance payable

     (1,194     (547

Propane Operations:

    

Accounts receivable

   $ 742      $ 111   

Accounts payable

     5,166        33,308   

 

32


Table of Contents

Accounts receivable from related companies excluding Enterprise consist of the following:

 

     June 30,
2009
   December 31,
2008

MEP

   $ 137    $ 2,805

McReynolds Energy

     —        202

Energy Transfer Technologies, Ltd.

     11      16

Others

     792      450
             

Total accounts receivable from related companies excluding Enterprise

   $ 940    $ 3,473
             

The Chief Executive Officer (“CEO”) of ETP’s General Partner, Mr. Kelcy Warren, voluntarily determined that after 2007, his salary would be reduced to $1.00 plus an amount sufficient to cover his allocated payroll deductions for health and welfare benefits. Mr. Warren also declined future cash bonuses and future equity awards. We recorded non-cash compensation expense and an offsetting capital contribution of $0.6 million ($0.2 million in salary and $0.4 million in accrued bonuses) for the six months ended June 30, 2009 and 2008 as an estimate of the reasonable compensation level for the CEO position.

 

18. REPORTABLE SEGMENTS:

Our financial statements reflect four reportable segments which conduct their business exclusively in the United States of America, as follows:

 

   

natural gas operations:

 

   

intrastate transportation and storage

 

   

interstate transportation

 

   

midstream

 

   

retail propane and other retail propane related operations

Segments below the quantitative thresholds are classified as “other”. The components of the “other” classification have not met any of the quantitative thresholds for determining reportable segments. Management has included the wholesale propane operations in “other” for all periods presented in this report because such operations are not material.

Midstream and intrastate transportation and storage segment revenues and expenses include intersegment and intrasegment transactions, which are generally based on transactions made at market-related rates. Consolidated revenues and expenses reflect the elimination of all material intercompany transactions.

We evaluate the performance of our operating segments based on operating income exclusive of general partnership selling, general and administrative expenses, gains (losses) on disposal of assets, interest expense, equity in earnings (losses) of affiliates and income tax expense (benefit). Certain overhead costs relating to a reportable segment have been allocated for purposes of calculating operating income. We allocate administration expenses from the Partnership to our Operating Partnerships using the Modified Massachusetts Formula Calculation, which is based on factors such as respective segments’ gross margins, employee costs and property and equipment.

 

33


Table of Contents

The expenses subject to allocation are based on estimated amounts and take into consideration actual expenses from previous months and known trends. The difference between the allocation and actual costs is adjusted in the following month. The amounts allocated for the periods presented are as follows:

 

     Three Months Ended June 30,    Six Months Ended June 30,
     2009     2008    2009    2008

Costs allocated from ETP to Operating Partnerships:

          

Midstream and intrastate transportation and storage operations

   $ 4,478      $ 4,688    $ 10,578    $ 8,585

Interstate operations

     1,400        1,353      3,298      2,506

Retail propane and other retail propane related operations

     3,452        2,975      8,106      5,525
                            

Total

   $ 9,330      $ 9,016    $ 21,982    $ 16,616
                            

Costs allocated from Operating Partnerships to ETP:

          

Midstream and intrastate transportation and storage operations

   $ 4,291      $ 2,560    $ 8,176    $ 3,933

Retail propane and other retail propane related operations

     (33     752      412      1,353
                            

Total

   $ 4,258      $ 3,312    $ 8,588    $ 5,286
                            

The following table presents the financial information by segment for the following periods:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

Revenues:

        

Intrastate transportation and storage:

        

Revenues from external customers

   $ 372,674      $ 1,013,862      $ 828,477      $ 1,979,522   

Intersegment revenues

     121,260        858,383        294,108        1,373,564   
                                
     493,934        1,872,245        1,122,585        3,353,086   

Interstate transportation - revenues from external customers

     70,585        59,224        131,934        114,640   

Midstream:

        

Revenues from external customers

     504,973        1,302,551        1,099,776        2,289,322   

Intersegment revenues

     40,795        571,869        77,624        830,862   
                                
     545,768        1,874,420        1,177,400        3,120,184   

Retail propane and other retail propane related - revenues from external customers

     202,272        273,660        718,184        899,375   

All other - revenues from external customers

     1,186        4,054        3,293        9,737   

Eliminations

     (162,055     (1,430,252     (371,732     (2,204,426
                                

Total revenues

   $ 1,151,690      $ 2,653,351      $ 2,781,664      $ 5,292,596   
                                

Cost of products sold:

        

Intrastate transportation and storage

   $ 233,951      $ 1,614,660      $ 616,565      $ 2,815,132   

Midstream

     470,108        1,768,161        1,029,284        2,919,131   

Retail propane and other retail propane related

     82,886        168,282        307,991        566,013   

All other

     1,103        3,221        3,024        7,940   

Eliminations

     (162,055     (1,430,252     (371,732     (2,204,426
                                

Total cost of products sold

   $ 625,993      $ 2,124,072      $ 1,585,132      $ 4,103,790   
                                

Depreciation and amortization:

        

Intrastate transportation and storage

   $ 27,929      $ 22,092      $ 55,032      $ 40,612   

Interstate transportation

     12,837        9,266        23,496        18,566   

Midstream

     18,176        14,474        35,672        29,306   

Retail propane and other retail propane related

     20,174        19,487        40,446        38,573   

All other

     113        157        242        302   
                                

Total depreciation and amortization

   $ 79,229      $ 65,476      $ 154,888      $ 127,359   
                                

 

34


Table of Contents
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2009     2008     2009     2008  

Operating income (loss):

        

Intrastate transportation and storage

   $ 154,859      $ 134,300      $ 296,504      $ 320,079   

Interstate transportation

     31,950        28,491        60,145        57,717   

Midstream

     27,065        64,284        51,218        115,684   

Retail propane and other retail propane related

     4,560        (5,523     168,629        101,432   

All other

     (1,143     (461     (2,035     (592

Selling, general and administrative expenses not allocated to segments

     (2,260     849        (3,332     (4,451
                                

Total operating income

   $ 215,031      $ 221,940      $ 571,129      $ 589,869   
                                

Other items not allocated by segment:

        

Interest expense, net of interest capitalized

   $ (119,559   $ (90,543   $ (220,950   $ (170,997

Equity in earnings (losses) of affiliates

     1,673        (169     2,170        (95

Gains (losses) on disposal of assets

     181        515        (245     (936

Gains (losses) on non-hedged interest rate derivatives

     49,911        27,178        59,962        (4,458

Allowance for equity funds used during construction

     (1,839     15,660        18,588        25,548   

Other, net

     (377     1,567        324        9,519   

Income tax expense

     (3,263     (9,330     (9,470     (14,474
                                
     (73,273     (55,122     (149,621     (155,893
                                

Net income

   $ 141,758      $ 166,818      $ 421,508      $ 433,976   
                                

 

     As of
June 30,
2009
   As of
December 31,
2008

Total assets:

     

Intrastate transportation and storage

   $ 4,931,091    $ 4,911,770

Interstate transportation

     2,896,988      2,487,078

Midstream

     1,707,809      1,674,028

Retail propane and other retail propane related

     1,688,568      1,810,953

All other

     210,853      186,073
             

Total

   $ 11,435,309    $ 11,069,902
             
     Six Months Ended June 30,
     2009    2008

Additions to property, plant and equipment including acquisitions, net of contributions in and of construction costs (accrual basis):

     

Intrastate transportation and storage

   $ 306,096    $ 482,667

Interstate transportation

     63,955      444,858

Midstream

     54,610      136,738

Retail propane and other retail propane related

     33,228      77,147

All other

     3,003      205
             

Total

   $ 460,892    $ 1,141,615
             

 

19. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:

Following are the stand-alone financial statements of the Parent Company as of June 30, 2009 and December 31, 2008 and for the three and six months ended June 30, 2009 and 2008, which are included to provide additional information with respect to the Parent Company’s financial position, results of operations and cash flows on a stand-alone basis:

 

35


Table of Contents

BALANCE SHEETS

(unaudited)

 

     June 30,
2009
    December 31,
2008
 
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 62      $ 62   

Accounts receivable from related companies

     458        459   

Prepaid expenses and other

     1,616        163   
                

Total current assets

     2,136        684   

ADVANCES TO AND INVESTMENTS IN AFFILIATES

     1,712,067        1,662,074   

INTANGIBLES AND OTHER LONG-TERM ASSETS, net

     7,078        8,581   
                

Total assets

   $ 1,721,281      $ 1,671,339   
                
LIABILITIES AND PARTNERS’ DEFICIT     

CURRENT LIABILITIES:

    

Accounts payable

   $ 718      $ 798   

Accounts payable to affiliates

     5,022        3,034   

Accrued interest

     5,807        9,222   

Accrued and other current liabilities

     215        912   

Price risk management liabilities

     59,015        47,453   
                

Total current liabilities

     70,777        61,419   

LONG-TERM DEBT, less current maturities

     1,572,498        1,571,642   

LONG-TERM PRICE RISK MANAGEMENT LIABILITIES

     80,487        121,710   

COMMITMENTS AND CONTINGENCIES

    
                
     1,723,762        1,754,771   

PARTNERS’ CAPITAL (DEFICIT):

    

General Partner

     373        155   

Limited Partner - Common Unitholders (222,898,248 and 222,829,956 units authorized, issued and outstanding at June 30, 2009 and December 31, 2008, respectively)

     54,882        (15,762

Accumulated other comprehensive loss

     (57,736     (67,825
                

Total partners’ deficit

     (2,481     (83,432
                

Total liabilities and partners’ deficit

   $ 1,721,281      $ 1,671,339   
                

 

36


Table of Contents

STATEMENTS OF OPERATIONS

(unaudited)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2009     2008     2009     2008  

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

   $ (1,135   $ (833   $ (2,822   $ (3,335

OTHER INCOME (EXPENSE):

        

Interest expense

     (18,797     (22,123     (38,139     (47,023

Equity in earnings of affiliates

     110,941        116,872        287,534        302,344   

Gains (losses) on non-hedged interest rate derivatives

     13,069        26,824        9,394        (4,213

Other, net

     (275     (334     (628     (655
                                

INCOME BEFORE INCOME TAXES

     103,803        120,406        255,339        247,118   

Income tax (expense) benefit

     572        (12     572        (19
                                

NET INCOME

     104,375        120,394        255,911        247,099   

GENERAL PARTNER’S INTEREST IN NET INCOME

     322        373        791        765   
                                

LIMITED PARTNERS’ INTEREST IN NET INCOME

   $ 104,053      $ 120,021      $ 255,120      $ 246,334   
                                

 

37


Table of Contents

STATEMENTS OF CASH FLOWS

(unaudited)

 

     Six Months Ended June 30,  
     2009     2008  

NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES

   $ 230,641      $ 232,483   
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from borrowings

     34,435        46,339   

Principal payments on debt

     (33,660     (47,242

Distributions to Partners

     (231,416     (221,287
                

Net cash used in financing activities

     (230,641     (222,190
                

INCREASE IN CASH AND CASH EQUIVALENTS

     —          10,293   

CASH AND CASH EQUIVALENTS, beginning of period

     62        42   
                

CASH AND CASH EQUIVALENTS, end of period

   $ 62      $ 10,335   
                

 

38


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Tabular dollar amounts, except per unit data, are in thousands)

The following is a discussion of our historical consolidated financial condition and results of operations, and should be read in conjunction with our historical consolidated financial statements and accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for our previous year ended December 31, 2008 filed with the Securities and Exchange Commission (“SEC”) on March 2, 2009. Our Management’s Discussion and Analysis includes forward-looking statements that are subject to risk and uncertainties. Actual results may differ substantially from the statements we make in this section due to a number of factors that are discussed in “Item 1A. Risk Factors” included in this report and in our Annual Report for the year ended December 31, 2008.

Unless the context requires otherwise, references to “the Partnership”, “we,” “us,” “our,” and “ETE” shall mean Energy Transfer Equity, L.P. and its consolidated subsidiaries, which include Energy Transfer Partners, L.P. (“ETP”), Energy Transfer Partners G.P., L.P. (“ETP GP”), the General Partner of ETP, and ETP GP’s General Partner, Energy Transfer Partners, L.L.C. (“ETP LLC”). References to “the Parent Company” shall mean Energy Transfer Equity, L.P. on a stand-alone basis.

Overview

Currently, our business operations are conducted only through ETP’s Operating Partnerships (collectively referred to as the “Operating Partnerships”), which include ETC OLP, a Texas limited partnership engaged in midstream and intrastate transportation and natural gas storage operations, Energy Transfer Interstate Holdings, LLC (“ET Interstate”), the parent company of Transwestern Pipeline Company, LLC (“Transwestern”), a Delaware limited liability company engaged in interstate transportation of natural gas, and ETC Midcontinent Express Pipeline, LLC (“ETC MEP”), a Delaware limited liability company engaged in interstate transportation of natural gas, and HOLP and Titan, both Delaware limited partnerships engaged in retail propane operations.

Parent Company – Energy Transfer Equity, L.P.

The principal sources of cash flow for the Parent Company are distributions it receives from its direct and indirect investments in limited and general partner interests of ETP. The Parent Company’s primary cash requirements are for general and administrative expenses, debt service and distributions to its partners. The Parent Company-only assets and liabilities are not available to satisfy the debts and other obligations of ETP or the Operating Partnerships.

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 cash distributions to our partners over time by pursuing a business strategy that is currently focused on growing our natural gas midstream and intrastate transportation and storage businesses (including transportation, gathering, compression, treating, processing, storage and marketing) and our propane business through, among other things, pursuing certain construction and expansion opportunities relating to our existing infrastructure and acquiring certain additional businesses or assets. The actual amount of cash we will have available for distribution primarily depends on the amount of cash ETP generates from operations.

During the past several years, ETP has been successful in completing several acquisitions and business combinations, including the combination of the retail propane operations of Heritage Propane Partners, L.P. and the midstream and intrastate transportation and storage operations of ETC OLP in January 2004. Subsequent to this combination, we have made numerous significant acquisitions, with assets totaling $3.87 billion in our natural gas operations and $849.1 million in our propane operations.

In addition to ETP’s acquisitions, we have grown through internal growth projects, consisting primarily of the construction of natural gas transmission pipelines, both intrastate and interstate. From September 1, 2003 through June 30, 2009, we made growth capital expenditures, excluding capital contributions made in connection with the Midcontinent Express pipeline (“MEP”) and Fayetteville Express pipeline (“FEP”) joint ventures, of approximately $4.9 billion, of which more than $4.1 billion was related to natural gas transmission pipelines. We expect our fee-based revenue to increase as a result of the completion of recent pipeline expansions to our existing natural gas system in addition to projects expected to be completed in the next twelve to eighteen months. These projects include MEP, the Texas Independence pipeline, FEP and the Tiger pipeline.

 

39


Table of Contents

ETP’s Operations

Our principal operations are conducted in the following reportable segments (see Note 18 to our unaudited condensed consolidated financial statements):

 

   

Intrastate transportation and storage - Revenue is typically generated from fees charged to customers to reserve firm capacity on or move gas through the pipeline on an interruptible basis. A monetary fee and/or fuel retention are also components of the fee structure. Excess fuel retained after consumption is typically valued based on the published market prices as of the first of the month and sold at market prices. The HPL System also generates revenue from the sale of natural gas to electric utilities, independent power plants, local distribution companies, industrial end-users and other marketing companies. The use of the Bammel storage reservoir allows us to purchase physical natural gas and then sell financial contracts at a price sufficient to cover its carrying costs and provide a gross profit margin, in addition to generating revenue from fee-based contracts to reserve firm storage capacity.

 

   

Interstate transportation - The revenues of this segment consist primarily of fees earned from natural gas transportation services and operational gas sales.

 

   

Midstream - Revenue is primarily generated by the volumes of natural gas gathered, compressed, treated, processed, transported, purchased and sold through our pipelines (excluding the transportation pipelines) and gathering systems as well as the level of natural gas and NGL prices.

 

   

Retail propane - Revenue is generated from the sale of propane and propane-related products and services.

Trends and Outlook

In light of the current conditions in the capital markets, and based on our projected growth capital expenditures and capital contributions to joint venture entities, we have taken significant steps to preserve our liquidity position including, but not limited to, reducing discretionary capital expenditures and continuing to appropriately manage operating and administrative costs. During the six months ended June 30, 2009, ETP received approximately $578.3 million in net proceeds from its January 2009 and April 2009 Common Units offerings and $993.6 million in net proceeds from an offering of $1.0 billion of aggregate principal amount of ETP senior notes in April 2009. As of June 30, 2009, in addition to approximately $114.2 million of cash on hand, ETP had available capacity under the ETP Credit Facility of approximately $1.94 billion. The Parent Company also has a $500.0 million revolving credit facility that expires in February 2011 with available capacity of $377.5 million as of June 30, 2009 and currently has no capital requirements. Based on our current estimates, we expect to utilize these resources, along with cash from ETP’s operations, to fund ETP’s announced growth capital expenditures and working capital needs without us or ETP having the need to access the capital markets until the latter half of 2010; however, we or ETP may issue debt or equity securities prior to that time as we deem prudent to provide liquidity for new capital projects or other partnership purposes.

As noted above and despite the economic challenges and volatile capital markets, ETP has successfully raised approximately $2.2 billion in proceeds from the recent debt and equity offerings since December 1, 2008 which includes approximately $595.7 million in net proceeds from ETP’s December 2008 Senior Notes offering. We believe that the size and scope of our operations, our stable asset base and cash flow profile and our investment grade status will be significant positive factors in our efforts to obtain new debt or equity funding; however, there is no assurance that we or ETP will continue to be successful in obtaining financing under any of the alternatives discussed above if capital markets deteriorate further from current conditions. Furthermore, the terms, size and cost of any one of these financing alternatives could be less favorable and could be impacted by the timing and magnitude of our funding requirements, market conditions and other uncertainties.

Our natural gas transportation and midstream revenues are derived significantly from companies that engage in natural gas exploration and production activities. Prices for natural gas and NGLs have fallen dramatically since July 2008. Many of our customers have been negatively impacted by these recent declines in natural gas prices as well as current conditions in the capital markets, which factors have caused several of our customers to decrease drilling levels and, in some cases, to shut in or consider shutting in natural gas production from some producing wells.

 

40


Table of Contents

In our intrastate and interstate natural gas operations, a significant portion of our revenue is derived from long-term fee-based arrangements pursuant to which our customers pay us capacity reservation charges regardless of the volume of natural gas transported; however, a portion of our revenue is derived from charges based on actual volumes transported in addition to the excess of fuel retention charged to our customers after consumption. As a result, our operating cash flows from our natural gas pipeline operations are not tied directly to natural gas and NGL prices; however, the volumes of natural gas we transport may be adversely affected by reduced drilling activity of our customers, as well as shut in of production from producing wells, as a result of lower natural gas prices. As a portion of our pipeline transportation revenue is based on volumes transported and fuel retention, lower volumes of natural gas transported and lower natural gas prices generally result in lower revenue from our intrastate and interstate natural gas operations. During the first six months of 2009, natural gas spot prices have ranged from $3.09 per MMbtu to $5.25 per MMbtu, and the closing price on the New York Mercantile Exchange on August 7, 2009 for natural gas to be delivered in September 2009 was $3.67 per MMbtu. As a result, drilling activity in our core operating areas has declined and natural gas producers have shut in production from some wells, which in turn has resulted in lower than expected natural gas volumes transported on our intrastate and interstate pipelines. There are no assurances that commodity prices will not decline further, which could result in a further reduction in drilling activities by our customers.

Since certain of our natural gas marketing operations and substantially all of our propane operations involve the purchase and resale of natural gas and NGLs, we expect our revenues and costs of products sold to be lower than prior periods if commodity prices remain at or fall below existing levels. However, we do not expect our margins from these activities to be significantly impacted as we typically purchase the commodity at a lower price than the sales price. Since the prices of natural gas and NGLs have been volatile, there are no assurances that we will ultimately sell the commodity for a profit.

Current economic conditions also indicate that many of our customers may encounter increased credit risk in the near term. We actively monitor the credit status of our counterparties, performing both quantitative and qualitative assessments based on their credit ratings and credit default swaps where applicable, and to date have not had any significant credit losses associated with our transactions. However, given the current volatility in the financial markets, we cannot be certain that we will not experience such losses in the future.

Results of Operations

Parent Company Results

The Parent Company currently has no separate operating activities apart from those conducted by ETP and its Operating Partnerships. The principal sources of cash flow for the Parent Company are its direct and indirect investments in the limited and general partner interests of ETP.

The following table summarizes the key components of the stand-alone results of operations of the Parent Company for the periods indicated:

 

     Three Months Ended June 30,           Six Months Ended June 30,        
     2009     2008     Change     2009     2008     Change  

Equity in earnings of affiliates

   $ 110,941      $ 116,872      $ (5,931   $ 287,534      $ 302,344      $ (14,810

Selling, general and administrative expenses

     (1,135     (833     (302     (2,822     (3,335     513   

Interest expense

     (18,797     (22,123     3,326        (38,139     (47,023     8,884   

Gains (losses) on non-hedged interest rate derivatives

     13,069        26,824        (13,755     9,394        (4,213     13,607   

Other, net

     (275     (334     59        (628     (655     27   

The following is a discussion of the highlights of the Parent Company’s stand-alone results of operations for the periods presented.

Equity in Earnings of Affiliates. Equity in earnings of affiliates represents earnings of the Parent Company related to its investment in limited partner units of ETP, its ownership of ETP GP and its ownership of ETP LLC. The decrease in equity in earnings of affiliates was directly related to the changes in the ETP segment income described below.

Interest Expense. For the three and six month periods, the Parent Company interest expense decreased primarily due to a decrease in the LIBOR rate between the periods.

Gains (losses) on Non-Hedged Interest Rate Derivatives. The Parent Company has interest swaps that are not accounted for as hedges under SFAS 133. Changes in the fair value of these swaps are recorded directly in earnings.

 

41


Table of Contents

The variable portion of these swaps is based on the three month LIBOR and its corresponding forward curve. Increases or decreases in gains (losses) on non-hedged interest rate derivatives are due to changes in these rates. We recorded unrealized gains on our floating-to-fixed interest rate swaps as a result of increases in the relevant floating index rates during the three and six months ended June 30, 2009. In 2008, a decline in the relevant floating index rates in the three months ended March 31, 2008 was partially offset by an increase in the relevant floating index rates during the three months ended June 30, 2008. This resulted in a net unrealized gain for the three months ended June 30, 2008 and a net unrealized loss for the six months ended June 30, 2008.

Consolidated Results

 

     Three Months Ended June 30,     Change     Six Months Ended June 30,     Change  
     2009     2008       2009     2008    

Revenues

   $ 1,151,690      $ 2,653,351      $ (1,501,661   $ 2,781,664      $ 5,292,596      $ (2,510,932

Cost of products sold

     625,993        2,124,072        (1,498,079     1,585,132        4,103,790        (2,518,658
                                                

Gross margin

     525,697        529,279        (3,582     1,196,532        1,188,806        7,726   

Operating expenses

     176,681        197,143        (20,462     358,454        376,113        (17,659

Depreciation and amortization

     79,229        65,476        13,753        154,888        127,359        27,529   

Selling, general and administrative

     54,756        44,720        10,036        112,061        95,465        16,596   
                                                

Operating income

     215,031        221,940        (6,909     571,129        589,869        (18,740

Interest expense, net of interest capitalized

     (119,559     (90,543     (29,016     (220,950     (170,997     (49,953

Equity in earnings (losses) of affiliates

     1,673        (169     1,842        2,170        (95     2,265   

Gains (losses) on disposal of assets

     181        515        (334     (245     (936     691   

Gains (losses) on non-hedged interest rate derivatives

     49,911        27,178        22,733        59,962        (4,458     64,420   

Allowance for equity funds used during construction

     (1,839     15,660        (17,499     18,588        25,548        (6,960

Other, net

     (377     1,567        (1,944     324        9,519        (9,195

Income tax expense

     (3,263     (9,330     6,067        (9,470     (14,474     5,004   
                                                

Net income

   $ 141,758      $ 166,818      $ (25,060   $ 421,508      $ 433,976      $ (12,468
                                                

See the detailed discussion of revenues, cost of products sold, margin and operating expense by operating segment below.

Interest Expense. Interest expense increased for the three and six months principally due to higher levels of borrowings which were used to finance growth capital expenditures primarily in our intrastate transportation and storage and interstate transportation segments.

Gains (Losses) on Non-Hedged Interest Rate Derivatives. The Partnership has interest swaps that are not accounted for as hedges under SFAS 133. Changes in the fair value of these swaps are recorded directly in earnings. The variable portion of these swaps is based on the three month LIBOR and its corresponding forward curve. Increases or decreases in gains (losses) on non-hedged interest rate derivatives are due to changes in these rates. We recorded unrealized gains on our floating-to-fixed interest rate swaps as a result of increases in the relevant floating index rates during the three and six months ended June 30, 2009.

Allowance for Equity Funds Used During Construction. The decrease in AFUDC on equity was due to the completion of the Phoenix project in February 2009.

Other Income, Net. The decrease between the six month periods was primarily due to contributions in aid of construction, which exceeded our project costs during the six months ended June 30, 2008.

Income Tax Expense. The decrease in income tax between the periods was primarily due to decreases in taxable income within our subsidiaries that are taxable corporations.

Segment Operating Results

We evaluate segment performance based on operating income, which we believe is an important performance measure of the core profitability of our operations. This measure represents the basis of our internal financial reporting and is one of the performance measures used by senior management in deciding how to allocate capital resources among business segments.

Detailed descriptions of our business and segments are included in our Annual Report on Form 10-K for our previous fiscal year ended December 31, 2008 filed with the SEC on March 2, 2009.

 

42


Table of Contents

Operating income by segment is as follows:

 

     Three Months Ended June 30,     Change     Six Months Ended June 30,     Change  
     2009     2008       2009     2008    

Intrastate transportation and storage

   $ 154,859      $ 134,300      $ 20,559      $ 296,504      $ 320,079      $ (23,575

Interstate transportation

     31,950        28,491        3,459        60,145        57,717        2,428   

Midstream

     27,065        64,284        (37,219     51,218        115,684        (64,466

Retail propane and other retail propane related

     4,560        (5,523     10,083        168,629        101,432        67,197   

Other

     (1,143     (461     (682     (2,035     (592     (1,443

Unallocated selling, general and administrative expenses

     (2,260     849        (3,109     (3,332     (4,451     1,119   
                                                

Operating income

   $ 215,031      $ 221,940      $ (6,909   $ 571,129      $ 589,869      $ (18,740
                                                

Unallocated Selling, General and Administrative Expenses. Selling, general and administrative expenses are allocated monthly to the Operating Partnerships using the Modified Massachusetts Formula Calculation. The expenses subject to allocation are based on estimated amounts and take into consideration actual expenses from previous months and known trends. The difference between the allocation and actual costs is adjusted in the following month, which results in over or under allocation of these costs due to timing differences.

Intrastate Transportation and Storage

 

     Three Months Ended June 30,          Six Months Ended June 30,       
     2009    2008    Change     2009    2008    Change  

Natural gas MMBtu/d – transported

     13,593,471      10,355,466      3,238,005        13,611,768      9,938,323      3,673,445   

Natural gas MMBtu/d – sold

     812,193      1,582,022      (769,829     876,506      1,639,467      (762,961

Revenues

   $ 493,934    $ 1,872,245    $ (1,378,311   $ 1,122,585    $ 3,353,086    $ (2,230,501

Cost of products sold

     233,951      1,614,660      (1,380,709     616,565      2,815,132      (2,198,567
                                            

Gross margin

     259,983      257,585      2,398        506,020      537,954      (31,934

Operating expenses

     56,918      82,080      (25,162     110,408      140,695      (30,287

Depreciation and amortization

     27,929      22,092      5,837        55,032      40,612      14,420   

Selling, general and administrative

     20,277      19,113      1,164        44,076      36,568      7,508   
                                            

Segment operating income

   $ 154,859    $ 134,300    $ 20,559      $ 296,504    $ 320,079    $ (23,575
                                            

Gross Margin.

Three Months

Intrastate transportation and storage gross margin increased between the three month periods primarily due to the following factors:

 

   

Transportation fees increased approximately $36.4 million primarily due to increased volumes through our transportation pipelines. Overall volumes on our transportation pipelines were higher principally due to increased capacity of our pipeline system as a result of the completion of the Paris Loop, Maypearl to Malone pipeline, Carthage Loop, Southern Shale pipeline, Cleburne to Tolar pipeline and the Katy expansion during 2008 and 2009.

 

   

Our fuel retention revenues are directly impacted by changes in natural gas prices and volumes. Increases in natural gas prices increase our fuel retention revenues and decreases in natural gas prices decrease our fuel retention revenues. Due to the increased transportation volumes discussed above, fuel retention revenues increased approximately $19.3 million compared to the prior period. Natural gas prices for retained fuel decreased from an average of $10.13/MMBtu during the three months ended June 30, 2008 to $3.26/MMBtu during the three months ended June 30, 2009 resulting in a decrease to the retention margin of $76.5 million.

 

   

We experienced a net increase in storage margin of $48.5 million. During the three months ended June 30, 2008, we recognized $10.3 million of losses due to the discontinuation of hedge accounting and $21.3 million of derivative losses related to planned withdrawals from our Bammel storage facility that did not occur. Beginning in April 2009, we elected fair value hedge accounting for certain storage-related transactions. As a result of the election we recognized $12.5 million in unrealized gains during the three months ended June 30,

 

43


Table of Contents
 

2009 due to favorable changes in the relationship between the hedged inventory and the related hedged derivative instrument. We also recognized approximately $2.8 million of gains during the current period primarily due to storage-related derivatives not designated as hedges. Fee-based storage revenue also increased our margin by $1.6 million as compared to the prior period.

 

   

In addition to the above factors, we experienced a reduction in margin of $18.9 million as compared to the prior period principally due to lower natural gas prices, less favorable processing conditions and lower demand from industrial end users and local distribution companies. Additionally, we experienced a net decrease in margin of $9.1 million primarily related to less favorable market conditions between the Waha and Katy/Houston Ship Channel market hubs and east Texas markets.

Six Months

Intrastate transportation and storage gross margin decreased between the six month periods primarily due to the following factors:

 

   

Transportation fees increased approximately $93.4 million primarily due to increased volumes through our transportation pipelines. Overall volumes on our transportation pipelines were higher principally due to increased capacity of our pipeline system as a result of the completion of the Paris Loop, Maypearl to Malone pipeline, Carthage Loop, Southern Shale pipeline, Cleburne to Tolar pipeline and the Katy expansion during 2008 and 2009.

 

   

As mentioned above, our fuel retention revenues are directly impacted by changes in natural gas prices and volumes. Due to the increased transportation volumes discussed above, fuel retention revenues increased approximately $39.9 million compared to the prior period. Natural gas prices for retained fuel decreased from an average of $8.93/MMBtu during the six months ended June 30, 2008 to $3.37/MMBtu during the six months ended June 30, 2009 resulting in a decrease to the retention margin of $123.9 million.

 

   

We experienced a net increase in storage margin of $2.6 million. Several factors contributed to the change. During the six months ended June 30, 2008, we recognized $10.3 million of losses due to the discontinuation of hedge accounting and $21.3 million of derivative losses related to planned withdrawals from Bammel storage facility that did not occur. We also recognized $52.8 million of margin related to 36 Bcf of natural gas sold during the six months ended June 30, 2008. During the six months ended June 30, 2009, we withdrew 11.3 Bcf of natural gas from our Bammel storage facility for a margin of $10.5 million, which included a $44.6 million non-cash lower of cost or market write-down of our natural gas inventory. Beginning in April 2009, we elected fair value hedge accounting for certain storage-related transactions. As a result of the election we recognized $12.5 million in unrealized gains during the six months ended June 30, 2009 due to favorable changes in the relationship between the hedged inventory and the related hedged derivative instrument. Fee-based storage revenue also increased our margin by $0.5 million as compared to the prior period.

 

   

In addition to the above factors, we experienced a reduction in margin of $31.8 million as compared to the prior period principally due to lower natural gas prices, less favorable processing conditions and lower demand from industrial end users and local distribution companies. Additionally, we experienced a net decrease in margin of $15.8 million as compared to the prior period primarily related to unfavorable market conditions between the Waha and Katy/Houston Ship Channel market hubs and east Texas markets.

Operating Expenses.

Three Months

Intrastate transportation and storage operating expenses decreased between the three month periods primarily due to a decrease in consumption expense of $30.2 million, which was principally caused by lower natural gas prices between periods, and a decrease in electricity costs of approximately $2.5 million. Offsetting the decrease was an increase in ad valorem taxes of $3.3 million and increased pipeline maintenance expenses of $3.8 million.

Six Months

Intrastate transportation and storage operating expenses decreased between the six month periods primarily due to a decrease in consumption expense of $46.6 million, which was principally caused by lower natural gas prices between periods. Offsetting the decrease were increases in ad valorem taxes of $13.1 million and pipeline maintenance expenses of $4.5 million.

 

44


Table of Contents

Depreciation and Amortization.

Three Months

Intrastate transportation and storage depreciation and amortization expense increased between the three month periods primarily due to the completion of pipeline expansion projects.

Six Months

Intrastate transportation and storage depreciation and amortization expense increased between the six month periods primarily due to the completion of pipeline expansion projects.

Selling, General and Administrative.

Three Months

Intrastate transportation and storage selling, general and administrative expenses increased between the three month periods primarily due to an increase in professional fees of $1.3 million.

Six Months

Intrastate transportation and storage selling, general and administrative expenses increased between the six month periods primarily due to increased employee-related expenses (including allocated overhead expenses) of approximately $2.2 million and increased professional fees of $5.3 million.

Interstate Transportation

 

     Three Months Ended June 30,          Six Months Ended June 30,     
     2009    2008    Change     2009    2008    Change

Natural gas MMBtu/d - transported

     1,683,298      1,768,406      (85,108     1,715,252      1,693,882      21,370

Natural gas MMBtu/d - sold

     24,294      13,396      10,898        19,695      12,240      7,455

Revenues

   $ 70,585    $ 59,224    $ 11,361      $ 131,934    $ 114,640    $ 17,294

Operating expenses

     17,344      14,630      2,714        32,709      25,850      6,859

Depreciation and amortization

     12,837      9,266      3,571        23,496      18,566      4,930

Selling, general and administrative

     8,454      6,837      1,617        15,584      12,507      3,077
                                          

Segment operating income

   $ 31,950    $ 28,491    $ 3,459      $ 60,145    $ 57,717    $ 2,428
                                          

Revenues.

Three Months

Interstate revenues increased between the three month periods by approximately $15.1 million primarily as a result of the completion of the San Juan Lateral in July 2008 and the completion of the Phoenix project in February 2009, offset by a $3.7 million decrease in operational sales primarily due to decreased natural gas prices between the periods. Transported volumes decreased as compared to the prior period primarily as a result of less favorable spreads between the San Juan and Permian Basins during the three months ended June 30, 2009.

Six Months

Interstate revenues increased between the six month periods by approximately $24.5 million due to increased transported natural gas volumes primarily as a result of the completion of the San Juan Lateral in July 2008 and the completion of the Phoenix project in February 2009, offset by a $7.2 million decrease in operational sales primarily due to decreased natural gas prices between the periods.

Operating Expenses.

Three Months

Interstate operating expenses increased between the three month periods primarily due to an increase in ad valorem taxes of approximately $1.0 million resulting from increased property values, and a net increase in other operating expenses of $1.7 million primarily due to pipeline expansions as noted above.

 

45


Table of Contents

Six Months

Interstate operating expenses increased between the six month period primarily due to an increase in ad valorem taxes of approximately $3.9 million resulting from increased property values, an increase of $1.5 million due to higher electric usage required by the increased transportation volumes, and a net increase in other expenses of $1.4 million primarily due to pipeline expansions as noted above.

Depreciation and Amortization.

Three months

Interstate depreciation and amortization expense increased between the three month periods primarily due to incremental depreciation associated with the completion of the San Juan Lateral and Phoenix projects.

Six Months

Interstate depreciation and amortization expense increased between the six month periods primarily due to incremental depreciation associated with the completion of the San Juan Lateral and Phoenix projects.

Selling, General and Administrative.

Three Months

Interstate selling, general and administrative expenses increased between the three month periods primarily due to an increase in employee-related costs.

Six Months

Interstate selling, general and administrative expenses increased between the six month periods due to an increase allocated overhead expenses and professional fees of approximately $1.2 million, with the remainder of the increase being primarily attributed to an increase in employee-related costs.

Midstream

 

     Three Months Ended June 30,          Six Months Ended June 30,       
     2009    2008    Change     2009    2008    Change  

Natural gas MMBtu/d - sold

     916,048      1,518,209      (602,161     1,003,236      1,377,495      (374,259

NGLs Bbls/d - sold

     41,338      28,097      13,241        40,781      29,590      11,191   

Revenues

   $ 545,768    $ 1,874,420    $ (1,328,652   $ 1,177,400    $ 3,120,184    $ (1,942,784

Cost of products sold

     470,108      1,768,161      (1,298,053     1,029,284      2,919,131      (1,889,847
                                            

Gross margin

     75,660      106,259      (30,599     148,116      201,053      (52,937

Operating expenses

     17,011      17,253      (242     34,804      34,131      673   

Depreciation and amortization

     18,176      14,474      3,702        35,672      29,306      6,366   

Selling, general and administrative

     13,408      10,248      3,160        26,422      21,932      4,490   
                                            

Segment operating income

   $ 27,065    $ 64,284    $ (37,219   $ 51,218    $ 115,684    $ (64,466
                                            

Gross Margin.

Three Months

Midstream gross margin decreased between the three month periods primarily due to a decrease in processing margin of approximately $25.4 million principally due to less favorable processing conditions. However, margins from our fee-based revenue remained consistent with the prior period. The increase in NGL volumes sold was principally due to increased capacity to deliver NGL volumes at our Godley plant starting in January 2009. Additionally, gross margin decreased approximately $5.1 million between the three month periods primarily due to a decrease in the volumes of natural gas sold as a result of less favorable market conditions during the 2009 period.

Six Months

Midstream gross margin decreased between the six month periods primarily due to a decrease in processing margin of $60.0 million offset by an increase in fee-based revenue of $7.1 million. The increase from our fee-based revenue was primarily due to our Canyon pipeline assets and the increase in NGL take-away capacity at our Godley plant allowing us to charge additional processing fees. The decrease in processing margins was primarily due to less favorable processing conditions in the 2009 period. The increase in NGL volumes sold was due to increased capacity to deliver NGL volumes at our Godley plant starting in January 2009 and the decrease in the volumes of natural gas sold was primarily due to less favorable market conditions as compared to the prior period.

 

46


Table of Contents

Operating Expenses.

Three Months

Midstream operating expenses decreased between the three month periods primarily due to a decrease in compressor and related expenses of $0.5 million offset by a net increase in other operating expenses of $0.3 million.

Six Months

Midstream operating expenses increased between the six month periods primarily due to an increase in ad valorem taxes of $1.9 million and electricity expenses of $1.1 million. These increases were offset by a decrease in compressor related expenses of $1.9 million and a net decrease of approximately $0.4 million in other operating expenses.

Depreciation and Amortization.

Three Months

Midstream depreciation and amortization expense increased between the three month periods primarily due to incremental depreciation from the continued expansion of our Godley plant.

Six Months

Midstream depreciation and amortization expense increased between the six month periods primarily due to incremental depreciation from the continued expansion of our Godley plant.

Selling, General and Administrative.

Three Months

Midstream selling, general and administrative expenses increased between the three month periods primarily due to increased professional fees of $3.3 million offset by a net decrease in other expenses of approximately $0.1 million.

Six Months

Midstream selling, general and administrative expenses increased between the six month periods primarily due to an increase in professional fees of $4.7 million and a net increase of approximately $1.0 million in other expenses. This increase was offset by a net decrease in employee related expenses (including allocated overhead expenses) of approximately $1.2 million.

Retail Propane and Other Retail Propane Related

 

     Three Months Ended June 30,           Six Months Ended June 30,       
     2009    2008     Change     2009    2008    Change  

Retail propane gallons (in thousands)

     92,153      97,309        (5,156     310,633      331,723      (21,090

Retail propane revenues

   $ 179,770    $ 249,449      $ (69,679   $ 667,677    $ 847,587    $ (179,910

Other retail propane related revenues

     22,502      24,211        (1,709     50,507      51,788      (1,281

Retail propane cost of products sold

     78,070      163,962        (85,892     298,292      556,517      (258,225

Other retail propane related cost of products sold

     4,816      4,320        496        9,699      9,496      203   
                                             

Gross margin

     119,386      105,378        14,008        410,193      333,362      76,831   

Operating expenses

     84,294      82,043        2,251        178,470      173,350      5,120   

Depreciation and amortization

     20,174      19,487        687        40,446      38,573      1,873   

Selling, general and administrative

     10,358      9,371        987        22,648      20,007      2,641   
                                             

Segment operating income

   $ 4,560    $ (5,523   $ 10,083      $ 168,629    $ 101,432    $ 67,197   
                                             

Volumes.

Retail propane volumes decreased primarily due to the continued effects of customer conservation, by the impact of the economic recession and, to a lesser extent, the decline in new home construction. Volumes also decreased due to weather that was approximately 2% and 7% warmer during the three and six months ended June 30, 2009 as compared to the same periods in 2008. These decreases were partially offset by the volume increases from acquisitions made since June 30, 2008.

 

47


Table of Contents

Gross Margin.

Three Months

Total gross margin increased between the three month periods primarily due to our ability to maintain a slower pace of decreasing selling prices despite a significant decrease in the wholesale market price of propane. Our average cost per gallon of propane was approximately 50.4% lower during the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. Gross margins were also favorably impacted by a net change of $6.7 million in realized gains related to the settlement of mark-to-market contracts during the three months ended June 30, 2009. These net realized gains were partially offset by a net change of $1.8 million in unrealized losses from mark-to-market accounting for our financial instruments. The three months ended June 30, 2009 excludes $1.3 million of net unrealized gains recorded in Accumulated Other Comprehensive Income (“AOCI”) as a result of designation of cash flow hedging relationships in April 2009, which will be recognized in the condensed consolidated statements of operations when the forward or forecasted propane sales transaction occurs.

Six Months

Total gross margin increased between the six month periods primarily due to our ability to maintain a slower pace of decreasing selling prices despite a significant decrease in the wholesale market price of propane and the impact of mark-to-market accounting of our financial instruments. Our average cost per gallon of propane was approximately 43.4% lower during the six months ended June 30, 2009. To hedge a significant portion of our propane sales commitments, we utilize financial instruments as purchase commitments to lock in the margins. Prior to April 2009, these financial instruments were not designated as hedges for accounting purposes, and changes in market value were recorded in cost of products sold in the condensed consolidated statements of operations. During the six months ended June 30, 2009, our propane margins were positively impacted by sales made to retail customers with whom we had previously entered into sales commitments, while the settlement of financial instruments related to those sales resulted in the realization of $41.6 million of losses that had previously been recognized in 2008. The six months ended June 30, 2009 excludes $1.3 million of net unrealized gains recorded in AOCI as a result of designation of cash flow hedging relationships in April 2009, which will be recognized in the condensed consolidated statements of operations when the forward or forecasted propane sales transaction occurs.

Operating Expenses.

Three Months

The primary factors that affected our operating expenses for the three months ended June 30, 2009 were an increase in our operational employee incentive program of $2.1 million, an increase in employee wages and benefits of $2.0 million due to more favorable results achieved during the three months ended June 30, 2009 as compared to the prior period and an increase related to additional employees from acquisitions completed after June 30, 2008. Propane operating expenses also increased slightly due to the additional operating expenses from acquisitions made since June 30, 2008; however, these increases were offset by cost control initiatives from our operations and by a decrease of $3.4 million in the vehicle fuel used for delivery to customers due to the significant decline in fuel prices between the periods.

Six Months

The primary factors that affected our operating expenses for the six months ended June 30, 2009 were an increase in our operational employee incentive program of $8.2 million, an increase in employee wages and benefits of $4.2 million due to more favorable results achieved during the six months ended June 30, 2009 as compared to the prior period and an increase related to additional employees from acquisitions completed after June 30, 2008. Propane operating expenses also increased slightly due to the additional operating expenses from acquisitions made since June 30, 2008; however, these increases were largely offset by cost control initiatives from our operations and by a decrease of $6.3 million in the vehicle fuel used for delivery to customers due to the significant decline in fuel prices between the periods.

Depreciation and Amortization Expense.

The increase in depreciation and amortization expense for both the three and six month periods was primarily related to assets added through acquisitions made after June 30, 2008.

 

48


Table of Contents

Selling, General and Administrative Expenses.

The increase in selling, general and administrative expenses between comparable periods was primarily due to increased administrative expense allocations of $1.3 million and $3.5 million for the three and six month periods, respectively, offset by the reduction in other non-recurring expenses incurred during the prior periods.

LIQUIDITY AND CAPITAL RESOURCES

Parent Company Only

The Parent Company currently has no separate operating activities apart from those conducted by ETP and its Operating Partnerships. The principal sources of cash flow for the Parent Company are its direct and indirect investments in the limited and general partner interests of ETP. The amount of cash that ETP can distribute to its partners, including the Parent Company, each quarter is based on earnings from ETP’s business activities and the amount of available cash, as discussed below. The Parent Company also has a $500.0 million revolving credit facility that expires in February 2011 with available capacity of $377.5 million as of June 30, 2009 and currently has no capital requirements.

The Parent Company’s primary cash requirements are for general and administrative expenses, debt service requirements and distributions to its general and limited partners. The Parent Company currently expects to fund its short-term needs for such items with its distributions from ETP.

ETP

ETP’s ability to satisfy its obligations and pay distributions to its Unitholders will depend on its future performance, which will be subject to prevailing economic, financial, business and weather conditions, and other factors, many of which are beyond management’s control.

ETP currently believes that its business has the following future capital requirements:

 

   

growth capital expenditures for our midstream and intrastate transportation and storage segments primarily for the construction of new pipelines and compression, for which we expect to spend between $100.0 million and $120.0 million during the last six months of 2009;

 

   

growth capital expenditures for our interstate transportation segment, excluding capital contributions to the MEP and FEP projects as discussed below, for the construction of new pipelines and pipeline expansions for our interstate operations, for which we expect to spend between $140.0 million and $160.0 million during the last six months of 2009;

 

   

capital contributions to MEP and FEP as follows:

 

   

With respect to MEP, capital expenditures were previously funded under a $1.4 billion credit facility at MEP (reduced to $1.3 billion due to the bankruptcy of Lehman Brothers); however, as this facility became substantially drawn during the first quarter of 2009, we and KMP have made and will continue to make capital contributions to MEP to fund capital expenditures until the project is completed. We expect that our capital contributions to MEP during the last six months of 2009 will be between $320.0 million and $340.0 million, which includes amounts to fund remaining expenditures for the project and an additional capital contribution to reduce the indebtedness of MEP to a level expected to be needed to obtain long-term financing for MEP, on a stand-alone basis without guarantees from ETP or KMP, on acceptable terms.

 

   

With respect to FEP, we expect that our capital contributions will be between $160.0 million and $180.0 million during the last six months of 2009 to fund expenditures for the project. FEP intends to pursue financing (expected to be severally guaranteed by ETP and KMP), which, if arranged during the last six months of 2009, would reduce the level of expected capital contributions this year as capital expenditures for the project would be funded at the project level; however, the availability of such financing at agreeable terms remains uncertain;

 

   

growth capital expenditures for our retail propane segment of between $10.0 million and $20.0 million during the last six months of 2009;

 

   

maintenance capital expenditures of between $50.0 million and $60.0 million during the last six months of 2009; and

 

49


Table of Contents
   

acquisitions, including the potential acquisition of new pipeline systems and propane operations.

We generally fund our capital requirements with cash flows from operating activities and, to the extent that they exceed cash flows from operating activities, with proceeds of borrowings under existing credit facilities, long-term debt, the issuance of additional Common Units or a combination thereof.

In light of the current conditions in the capital markets, and based on our projected growth capital expenditures and capital contributions to joint venture entities, we and ETP have taken significant steps to preserve our liquidity position including, but not limited to, reducing discretionary capital expenditures and continuing to appropriately manage operating and administrative costs. During the six months ended June 30, 2009, ETP received approximately $578.3 million in net proceeds from its January 2009 and April 2009 Common Units offerings and $993.6 million in net proceeds from an offering of $1.0 billion of aggregate principal amount of ETP senior notes in April 2009. As of June 30, 2009, in addition to approximately $114.2 million of cash on hand, ETP had available capacity under the ETP Credit Facility of approximately $1.94 billion. Based on our current estimates, we expect to utilize these resources, along with cash from ETP’s operations, to fund ETP’s announced growth capital expenditures and working capital needs without us or ETP having the need to access the capital markets until the latter half of 2010; however, we or ETP may issue debt or equity securities prior to that time as we deem prudent to provide liquidity for new capital projects or other partnership purposes.

The assets used in ETP’s natural gas operations, including pipelines, gathering systems and related facilities, are generally long-lived assets and do not require significant maintenance capital expenditures other than those expenditures necessary to maintain the service capacity of ETP’s existing assets. The assets utilized in ETP’s propane operations do not typically require lengthy manufacturing process time or complicated, high technology components. Accordingly, ETP does not have any significant financial commitments for maintenance capital expenditures in its businesses. From time to time ETP experiences increases in pipe costs due to a number of reasons, including but not limited to, replacing pipe caused by delays from mills, limited selection of mills capable of producing large diameter pipe timely, higher steel prices and other factors beyond our control. However, ETP includes these factors into its anticipated growth capital expenditures for each year.

Cash Flows

Our internally generated cash flows may change in the future due to a number of factors, some of which we cannot control. These include regulatory changes, the price for our products and services, the demand for such products and services, margin requirements resulting from significant changes in commodity prices, operational risks, the successful integration of our acquisitions and other factors.

Operating Activities – Six months ended June 30, 2009 as compared to the six months ended June 30, 2008. Cash provided by operating activities during 2009 was $653.5 million as compared to $709.2 million for 2008. Net income was $421.5 million and $434.0 million for 2009 and 2008, respectively. The difference between net income and the net cash provided by operating activities consisted of changes in operating assets and liabilities of $62.3 million and $150.2 million, partially offset by non-cash activity of $169.7 million and $125.0 million for 2009 and 2008, respectively.

The non-cash activity in 2009 and 2008 consisted primarily of depreciation and amortization of $154.9 million and $127.4 million, amortization of finance costs charged to interest of $8.3 million and $4.1 million and non-cash compensation expense of $15.4 million and $12.6 million for 2009 and 2008, respectively. In addition, the allowance for equity funds used during construction was $18.6 million and $25.5 million for 2009 and 2008, respectively.

Various factors affect the changes in operating assets and liabilities such as the timing of accounts receivable collections, payments on accounts payable, the timing of the purchase and sale of propane and natural gas inventories, and the timing of advances and deposits received from customers.

Investing Activities – Six months ended June 30, 2009 as compared to the six months ended June 30, 2008. Cash used in investing activities during 2009 was $875.5 million as compared to $912.4 million for 2008. Total 2009 capital expenditures (excluding the allowance for equity funds used during construction) were $512.5 million, including changes in accruals of $66.0 million. This compares to total 2008 capital expenditures (excluding the allowance for equity funds used during construction) of $978.7 million, including changes in accruals of $151.7 million. In addition, in 2009 we made advances to our joint ventures of $364.0 million. In 2008, we paid $56.8 million in cash for acquisitions. These amounts were offset by a $63.5 million net reimbursement during the first quarter of 2008 from MEP to ETP for previous advances to MEP.

 

50


Table of Contents

Growth capital expenditures for 2009, before changes in accruals, were $330.7 million for our midstream and intrastate transportation and storage segments, $46.8 million for our interstate transportation segment, and $24.7 million for our retail propane segment and all other. We also incurred $44.3 million of maintenance capital expenditures, of which $27.8 million related to our midstream and intrastate transportation and storage segments, $5.8 million related to our interstate segment and $10.7 million related to our retail propane segment.

Growth capital expenditures for 2008, before changes in accruals, were $632.6 million for our midstream and intrastate transportation and storage segments, $422.9 million for our interstate transportation segment, and $24.2 million for our retail propane segment and all other. We also incurred $50.6 million in maintenance expenditures, of which $29.1 million related to our midstream and intrastate transportation and storage segments, $6.6 million related to our interstate transportation segment and $14.9 million related to our retail propane segment.

Financing Activities – Six months ended June 30, 2009 as compared to the six months ended June 30, 2008. Cash provided by financing activities during 2009 was $244.4 million as compared to $215.6 million for 2008. In 2009, we received $578.9 million in net proceeds from Common Unit offerings of ETP as compared to $35.0 million in 2008 (see Note 13 to our condensed consolidated financial statements). Net proceeds from ETP’s offerings were used to repay outstanding borrowings under the ETP Credit Facility, to fund capital expenditures and to fund capital contributions to joint ventures related to pipeline construction projects. During 2009, we had a net increase in our debt level of $87.2 million as compared to a net increase in our debt level of $583.0 million for 2008. In addition, we paid distributions of $231.4 million to our partners in 2009 as compared to $221.3 million in 2008 and paid distributions to noncontrolling interests of $182.6 million in 2009 as compared to $160.1 million in 2008.

In 2009, the net increase in debt was primarily due to borrowings to fund capital expenditures and to fund capital contributions to joint ventures, partially offset by the use of proceeds from our Common Unit offerings. We also issued ETP Senior Notes (see Note 12 to our condensed consolidated financial statements) for net proceeds of $993.6 million which were used to repay outstanding borrowings under the ETP Credit Facility and for general partnership purposes.

In 2008, we received $1.48 billion in net proceeds from the issuance of ETP Senior Notes, which were used to repay principal and interest on our credit facilities, to fund our growth capital expenditures and for general partnership purposes.

Financing and Sources of Liquidity

In January 2009, ETP issued 6,900,000 Common Units representing limited partner interests at $34.05 per ETP Common Unit in a public offering. Net proceeds of approximately $225.9 million from the offering were used to repay outstanding borrowings under the ETP Credit Facility.

In April 2009, ETP completed the issuance of $350.0 million aggregate principal amount of 8.50% ETP Senior Notes due 2014 and $650.0 million aggregate principal amount of 9.00% ETP Senior Notes due 2019. The proceeds of approximately $993.6 million were used to repay borrowings under the ETP Credit Facility and for general partnership purposes.

In April 2009, ETP also issued 9,775,000 Common Units representing limited partner interests at $37.55 per ETP Common Unit in a public offering. The proceeds of approximately $352.4 million, net of underwriting discounts and commissions, were used to fund capital expenditures and capital contributions to joint venture entities related to pipeline construction projects as well as for general partnership purposes.

 

51


Table of Contents

Description of Indebtedness

Our outstanding indebtedness was as follows:

 

     June 30,
2009
    December 31,
2008
 

Parent Company Indebtedess

    

Senior Secured Term Loan Facility

   $ 1,450,000      $ 1,450,000   

Senior Secured Revolving Credit Facility

     122,498        121,642   

ETP Indebtedness

    

ETP Senior Notes

     5,050,000        4,050,000   

Transwestern Senior Unsecured Notes

     520,000        520,000   

HOLP Senior Secured Notes

     168,684        181,410   

Revolving Credit Facilities

     —          912,000   

Other long-term debt

     11,724        14,014   

Unamortized discounts

     (13,176     (13,477
                

Total Debt

   $ 7,309,730      $ 7,235,589   
                

The terms of our indebtedness and that of our Operating Partnerships are described in more detail in our Annual Report on Form 10-K as of December 31, 2008, filed with the SEC on March 2, 2009.

Revolving Credit and Short-Term Debt Facilities

The Parent Company has a $1.45 billion Term Loan Facility with a Term Loan Maturity Date of November 1, 2012 (the “Parent Company Credit Agreement”). The Parent Company Credit Agreement also includes a $500.0 million Secured Revolving Credit Facility (the “Parent Company Revolving Credit Facility”) available through February 8, 2011. The Parent Company Revolving Credit Facility includes a Swingline loan option with a maximum borrowing of $10.0 million and a daily rate based on LIBOR.

The total outstanding amount borrowed under the Parent Company Credit Agreement and the Parent Company Revolving Credit Facility as of June 30, 2009 includes $1.0 million in swingline loans. The total amount available under the Parent Company’s debt facilities as of June 30, 2009 was approximately $377.5 million. The Parent Company Revolving Credit Facility also contains an accordion feature which will allow the Parent Company, subject to lender approval, to expand the facility’s capacity up to an additional $100.0 million.

The maximum commitment fee payable on the unused portion of the Parent Company Revolving Credit Facility is based on the applicable Leverage Ratio which is currently at Level I or 0.300%. Loans under the Parent Company Revolving Credit Facility bear interest at Parent Company’s option at either (a) the Eurodollar rate plus the applicable margin or (b) base rate plus the applicable margin. The applicable margins are a function of the Parent Company’s leverage ratio that corresponds to levels set-forth in the agreement. The applicable Term Loan bears interest at (a) the Eurodollar rate plus 1.75% per annum and (b) with respect to any Base Rate Loan, at Prime Rate plus 0.25% per annum. At June 30, 2009, the weighted average interest rate was 2.67% for the amounts outstanding on the Parent Company Senior Secured Revolving Credit Facility and the Parent Company $1.45 billion Senior Secured Term Loan Facility.

The Parent Company Credit Agreement is secured by a lien on all tangible and intangible assets of the Parent Company and its subsidiaries, including its ownership of 62,500,797 ETP Common Units, the Parent Company’s 100% interest in ETP LLC and ETP GP with indirect recourse to ETP GP’s 2% General Partner interest in ETP and 100% of ETP GP’s outstanding Incentive Distribution Rights (“IDRs”) in ETP, which the Parent Company holds through its ownership of ETP GP.

ETP Credit Facility

The ETP Credit Facility provides for $2.0 billion of revolving credit capacity that is expandable to $3.0 billion (subject to obtaining the approval of the administrative agent and securing lender commitments for the increased borrowing capacity). The ETP Credit Facility matures on July 20, 2012, unless we elect the option of one-year extensions (subject to the approval of each such extension by the lenders holding a majority of the aggregate lending commitments). Amounts borrowed under the ETP Credit Facility bear interest at a rate based on either a Eurodollar rate or a prime rate. The indebtedness under the ETP Credit Facility is prepayable at any time at the Partnership’s option without penalty. The commitment fee payable on the unused portion of the ETP Credit Facility varies based on our credit rating; the fee is 0.11% based on our current rating with a maximum fee of 0.125%.

 

52


Table of Contents

As of June 30, 2009, there was no balance outstanding on the ETP Credit Facility and taking into account letters of credit of approximately $59.8 million, $1.94 billion was available for future borrowings.

HOLP Credit Facility

HOLP has a $75.0 million Senior Revolving Facility (the “HOLP Credit Facility”) available to HOLP through June 30, 2011, which may be expanded to $150.0 million. Amounts borrowed under the HOLP Credit Facility bear interest at a rate based on either a Eurodollar rate or a prime rate. The commitment fee payable on the unused portion of the facility varies based on the Leverage Ratio, as defined, in the credit agreement for the HOLP Credit Facility, with a maximum fee of 0.50%. The agreement includes provisions that may require contingent prepayments in the event of dispositions, loss of assets, merger or change of control. All receivables, contracts, equipment, inventory, general intangibles, cash concentration accounts of HOLP and the capital stock of HOLP’s subsidiaries secure the HOLP Credit Facility. There were outstanding letters of credit of $1.0 million on the HOLP Credit Facility at June 30, 2009. The amount available as of June 30, 2009 was $74.0 million.

Other

We have guaranteed 50% of the obligations of MEP under its $1.4 billion senior revolving credit facility (the “MEP Facility”), with the remaining 50% of the MEP Facility obligations guaranteed by KMP. Subject to certain exceptions, our guarantee may be proportionately increased or decreased if our ownership percentage of MEP increases or decreases. The MEP Facility is unsecured and matures on February 28, 2011. The MEP Facility is syndicated among multiple financial institutions. As a result of the Lehman Brothers bankruptcy in 2008, the MEP Facility has effectively been reduced by the Lehman Brothers affiliate’s commitment of approximately $100.0 million. However, the MEP Facility is not in default, and the commitments of the other lending banks remain unchanged.

As of June 30, 2009, MEP had $1.19 billion of outstanding borrowings and $33.3 million of letters of credit issued under the MEP Facility. Our contingent obligations with respect to our 50% guarantee of MEP’s outstanding borrowings and letters of credit were $595.4 million and $16.6 million, respectively, as of June 30, 2009.

Cash Distributions

Cash Distributions Paid by the Parent Company <