Description
Energy Transfer Equity. Director, 10% Owner KELCY L WARREN bought 239,975 shares on 6-28-2012 at $ 39.48
BUSINESS OVERVIEW
Overview
We were formed in September 2002 and completed our initial public offering in February 2006. We are a Delaware limited partnership with common units publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “ETE.”
Unless the context requires otherwise, references to “we,” “us,” “our,” “the Partnership” and “ETE” shall mean Energy Transfer Equity, L.P. and its consolidated subsidiaries, which include Energy Transfer Partners, L.P. (“ETP”); Energy Transfer Partners GP, L.P. (“ETP GP”), the general partner of ETP; Energy Transfer Partners, L.L.C. (“ETP LLC”), ETP GP’s general partner; Regency Energy Partners LP (“Regency”); Regency GP LP (“Regency GP”), the general partner of Regency; and Regency GP LLC (“Regency LLC”), Regency GP’s general partner. References to the “Parent Company” shall mean ETE on a stand-alone basis.
Currently, the Parent Company’s only cash generating assets are its direct and indirect investments in limited partner and general partner interests in ETP and Regency, both of which are publicly traded master limited partnerships engaged in diversified energy-related services.
Propane Operations
On January 12, 2012, ETP contributed its propane operations, consisting of Heritage Operating, L.P. (“HOLP”) and Titan Energy Partners, L.P. (“Titan”) (collectively, the “Propane Business”), to AmeriGas Partners, L.P. (“AmeriGas”). ETP received $1.46 billion in cash and approximately 29.6 million AmeriGas common units in consideration for the contribution of the Propane Business, plus the assumption by AmeriGas of approximately $71 million of existing HOLP debt. This transaction improved ETP's liquidity and allows ETP to focus on its core business in the natural gas and NGL markets. As a result of this transaction, we have not included a discussion of ETP's propane assets or operations in Item 1.
Growth Projects
ETP, Regency and Lone Star's aggregate growth capital expenditures for 2011 were $1.8 billion. In 2012, ETP, Regency and Lone Star expect their aggregate capital expenditures to be between $2.6 billion and $2.9 billion, which includes additional NGL assets including construction of a NGL fractionator at Mont Belvieu, assets in the Eagle Ford Shale, assets in the Woodford and Barnett Shales, in addition to various other growth projects. In addition to these capital expenditures, ETP expects to complete its acquisition of a 50% interest in Citrus in conjunction with our acquisition of SUG, as described above. Along with the inherent benefits of greater scale and cash flow diversification that we experience from growth and acquisitions that occur at ETP and Regency, we also expect to directly benefit through increases in the distributions that we receive through our limited partner, general partner and IDR interests in ETP and Regency.
Ranch Joint Venture
On December 2, 2011, Ranch Westex JV LLC (“Ranch JV”) was formed by Regency, Anadarko Pecos Midstream LLC and Chesapeake West Texas Processing, L.L.C., each owning 33.33% of the joint venture. Ranch JV, upon completion of construction in 2012, will process natural gas delivered from the NGL-rich Bone Spring and Avalon shale formations in West Texas. The project consists of two plants, a 25 MMcf/d refrigeration plant and a 100 MMcf/d cryogenic processing plant. The initial start-up of the refrigeration unit is expected to be in service by the second quarter of 2012, with full facilities available by the fourth quarter of 2012.
Business Strategy
Our current primary business objective is to increase cash available for distributions by actively assisting ETP and Regency in executing their business strategies by assisting in identifying, evaluating and pursuing strategic acquisitions and growth opportunities. In general, we expect that we will allow ETP or Regency the first opportunity to pursue any acquisition or internal growth project that may be presented to us which may be within the scope of ETP and Regency’s operations or business strategies. In the future, we may also support the growth of ETP and Regency through the use of our capital resources which could involve loans, capital contributions or other forms of credit support to ETP and Regency. This funding could be used for the acquisition by ETP or Regency of a business or asset or for an internal growth project. In addition, the availability of this capital could assist ETP or Regency in arranging financing for a project, reducing its financing costs or otherwise supporting a merger or acquisition transaction.
Segment Overview
Our reportable segments consist of our investment in ETP and our investment in Regency. The businesses within these two segments are described below. See Note 14 to our consolidated financial statements for additional financial information about our reportable segments.
Investment in ETP
ETP’s operations include the following:
Intrastate Transportation and Storage Operations
Through ETP’s intrastate transportation and storage operations, it owns and operates approximately 8,300 miles of natural gas transportation pipelines and three natural gas storage facilities located in the state of Texas.
Through Energy Transfer Company (“ETC OLP”), ETP owns the largest intrastate pipeline system in the United States with interconnects to Texas markets and to major consumption areas throughout the United States. ETP’s intrastate transportation and storage operations focuses on the transportation of natural gas to major markets from various prolific natural gas producing areas through connections with other pipeline systems as well as through ETP’s Oasis pipeline, its East Texas pipeline, its natural gas pipeline and storage assets that ETP refers to as the ET Fuel System, and its HPL System, which are described below.
ETP’s intrastate transportation and storage operations are determined primarily by the amount of capacity its customers reserve as well as the actual volume of natural gas that flows through the transportation pipelines. Under transportation contracts, ETP’s customers are charged (i) a demand fee, which is a fixed fee for the reservation of an agreed amount of capacity on the transportation pipeline for a specified period of time and which obligates the customer to pay even if the customer does not transport natural gas on the respective pipeline, (ii) a transportation fee, which is based on the actual throughput of natural gas by the customer, (iii) fuel retention based on a percentage of gas transported on the pipeline, or (iv) a combination of the three, generally payable monthly.
ETP also generates revenues and margin from the sale of natural gas to electric utilities, independent power plants, local distribution companies, industrial end-users and other marketing companies on its HPL System. Generally, ETP purchases natural gas from either the market (including purchases from ETP’s midstream marketing operations) or from producers at the wellhead. To the extent the natural gas comes from producers, it is primarily purchased at a discount to a specified market price and typically resold to customers based on an index price. In addition, ETP’s intrastate transportation and storage operations generate revenues from fees charged for storing customers’ working natural gas in its storage facilities and from margin from managing natural gas for ETP’s own account. The major customers on ETP's intrastate pipelines include Natural Gas Exchange, Inc., EDF Trading North America, Inc., XTO Energy, Inc. and ConocoPhillips.
Interstate Transportation Operations
Through ETP’s interstate transportation operations, it owns and operates approximately 2,880 miles of interstate natural gas pipeline and has a 50% interest in the joint venture that owns the 185-mile Fayetteville Express pipeline.
The results from its interstate transportation operations are primarily derived from the fees ETP earns from natural gas transportation services and, for the Transwestern pipeline, from operational gas sales. The major customers on ETP's interstate pipelines include
Chesapeake Energy Marketing, Inc., EnCana Marketing (USA), Inc. (“EnCana”), Shell Energy North America (US), L.P. and Pacific Summit Energy LLC.
Midstream Operations
Through ETP’s midstream operations, it owns and operates approximately 7,400 miles of in-service natural gas gathering pipelines, two natural gas processing plants, 15 natural gas treating facilities and 11 natural gas conditioning facilities. ETP’s midstream operations focuses on the gathering, compression, treating, blending, processing and marketing of natural gas, and its operations are currently concentrated in major producing basins and shales, including the Austin Chalk trend and Eagle Ford Shale in South and Southeast Texas, the Permian Basin in West Texas and New Mexico, the Barnett Shale in North Texas, the Bossier Sands in East Texas, and the Uinta and Piceance Basins in Utah and Colorado, the Marcellus Shale in West Virginia, and the Haynesville Shale in East Texas and Louisiana. Many of ETP’s midstream assets are integrated with its intrastate transportation and storage assets.
ETP’s midstream operations results are derived primarily from margins ETP earns for natural gas volumes that are gathered, transported, purchased and sold through its pipeline systems and the natural gas and NGL volumes processed at its processing and treating facilities. ETP also markets natural gas on its pipeline systems in addition to other pipeline systems to realize incremental revenue on gas purchased, increase pipeline utilization and provide other services that are valued by its customers. The major customers on ETP's midstream pipelines include Enterprise Products Partners L.P. ("Enterprise") and Chevron Phillips Chemical Company LP.
NGL Transportation and Services Operations
Through ETP's NGL transportation and services operations, it owns and operates an approximately 45-mile NGL pipeline and have a 50% interest in the Liberty pipeline, an approximately 85-mile NGL pipeline. ETP also has a 70% interest in the Lone Star joint venture that owns approximately 1,400 miles of NGL pipelines, three processing plants, one fractionation facility and NGL storage facilities with aggregate working storage capacity of 47 million Bbls. ETP's NGL transportation and services operations, which was created through the acquisition of LDH in May 2011.
NGL transportation revenue is principally generated from fees charged to customers under dedicated contracts or take-or-pay contracts. Under a dedicated contract, the customer agrees to deliver the total output from particular processing plants that are connected to the NGL pipeline. Take-or-pay contracts have minimum throughput commitments requiring the customer to pay regardless of whether a fixed volume is transported. Transportation fees are market-based, negotiated with customers and competitive with regional regulated pipelines.
NGL storage revenues are derived from base storage fees and throughput fees. Base storage fees are based on the volume of capacity reserved, regardless of the capacity actually used. Throughput fees are charged for providing ancillary services, including receipt and delivery, custody transfer, rail/truck loading and unloading fees. Storage contracts may be for dedicated storage or fungible storage. Dedicated storage enables a customer to reserve an entire storage cavern, which allows the customer to inject and withdraw proprietary and often unique products. Fungible storage allows a customer to store specified quantities of NGL products that are commingled in a storage cavern with other customers’ products of the same type and grade. NGL storage contracts may be entered into on a firm or interruptible basis. Under a firm basis contract, the customer obtains the right to store products in the storage caverns throughout the term of the contract; whereas, under an interruptible basis contract, the customer receives only limited assurance regarding the availability of capacity in the storage caverns.
These operations also include revenues earned from processing and fractionating refinery off-gas. Under these contracts ETP receives an Olefins-grade ("O-grade") stream from cryogenic processing plants located at refineries and fractionate the products into their pure components. ETP delivers purity products to customers through pipelines and across a truck rack located at the fractionation complex. In addition to revenues for fractionating the O-grade stream, ETP has percent-of-proceeds and income sharing contracts, which are subject to market pricing of olefins and NGLs. For percent-of-proceeds contracts, ETP retains a portion of the purity NGLs and olefins processed, or a portion of the proceeds from the sales of those commodities, as a fee. When NGLs and olefin prices increase, the value of the portion ETP retains as a fee increases. Conversely, when NGLs and olefin prices decrease, so does the value of the portion ETP retains as a fee. Under ETP's income sharing contracts, it pays the producer the equivalent energy value for their liquids, similar to a traditional keep-whole processing agreement, and then share in the residual income created by the difference between NGLs and olefin prices as compared to natural gas prices. As NGLs and olefins prices increase in relation to natural gas prices, the value of the percent ETP retains as a fee increases. Conversely, when NGLs and olefins prices decrease as compared to natural gas prices, so does the value of the percent it retains as a fee. The major customers on our NGL pipelines include Targa Resources Partners LP, The Williams Companies, Inc. and Louis Dreyfus Highbridge Energy LLC.
Retail Propane Operations
As discussed above, in January 2012 ETP contributed its propane operations to AmeriGas. See further discussion of this transaction in “Recent Developments” above.
All Other
ETP’s other operations include wholesale propane and natural gas compression services.
Investment in Regency
Regency’s operations include the following:
Gathering, Treating and Processing Operations
Regency provides “wellhead-to-market” services to producers of natural gas, which include transporting raw natural gas from the wellhead through gathering systems, processing raw natural gas to separate NGLs and selling or delivering the pipeline-quality natural gas and NGLs to various markets and pipeline systems.
Joint Ventures Operations
Regency owns four investments in joint ventures. See a description of its investments in joint ventures under “Asset Overview – Investment in Regency – Joint Ventures Operations.”
Contract Compression Operations
Regency owns and operates a fleet of compressors used to provide turn-key natural gas compression services for customer specific systems.
Contract Treating Operations
Regency owns and operates a fleet of equipment used to provide treating services, such as carbon dioxide and hydrogen sulfide removal, natural gas cooling, dehydration and BTU management, to natural gas producers and midstream pipeline companies.
Investment in Regency
The following details the assets in Regency’s natural gas operations:
Gathering, Treating and Processing Operations
Regency operates gathering and processing assets in four geographic regions of the United States: North Louisiana, the mid-continent region of the United States, South Texas and West Texas. Regency contracts with producers to gather raw natural gas from individual wells or central receipt points, which may have multiple wells behind them, located near its processing plants, treating facilities and/or gathering systems. Following the execution of a contract, Regency connects wells and central delivery points to its gathering lines through which the raw natural gas flows to a processing plant, treating facility or directly to interstate or intrastate gas transportation pipelines. At its processing plants and treating facilities, Regency removes impurities from the raw natural gas stream and extracts the NGLs. Regency also performs a producer service function, whereby it purchases natural gas from producers at gathering systems and plants and sells this gas at downstream outlets.
All raw natural gas flowing through Regency’s gathering and processing facilities is supplied under gathering and processing contracts having terms ranging from month-to-month to the life of the oil and gas lease.
The pipeline-quality natural gas remaining after separation of NGLs through processing is either returned to the producer or sold, for Regency’s own account or for the account of the producer, at the tailgates of Regency’s processing plants for delivery to interstate or intrastate gas transportation pipelines.
Contract Compression Operations
The natural gas contract compression operations include designing, sourcing, owning, installing, operating, servicing, repairing and maintaining compressors and related equipment for which Regency guarantees its customers 98% mechanical availability for land installations and 96% mechanical availability for over-water installations. Regency focuses on meeting the complex requirements of field-wide compression applications, as opposed to targeting the compression needs of individual wells within a field. These field-wide applications include compression for natural gas gathering and natural gas processing. Regency believes that it improves the stability of its cash flow by focusing on field-wide compression applications because such applications generally involve long-term installations of multiple large horsepower compression units. Regency’s contract compression operations are primarily located in Texas, Louisiana, Arkansas, Pennsylvania and California.
Contract Treating Operations
Regency owns and operates a fleet of equipment used to provide treating services, such as carbon dioxide and hydrogen sulfide removal, natural gas cooling, dehydration and Btu management, to natural gas producers and midstream pipeline companies. Regency’s contract treating operations are primarily located in Texas, Louisiana and Arkansas.
Other Operations
Regency’s other operations comprise of a small regulated pipeline. The regulated pipeline owns and operates an interstate pipeline that consists of 10 miles of pipeline that extends from Harrison County, Texas to Caddo Parish, Louisiana.
Industry Overview
The following is a discussion of the different industries in which our subsidiaries operate. ETP and Regency both have natural gas operations.
The midstream natural gas industry is the link between the exploration and production of natural gas and the delivery of its components to end-use markets. The midstream industry consists of natural gas gathering, compression, treating, processing and transportation and NGL fractionation and transportation, and is generally characterized by regional competition based on the proximity of gathering systems and processing plants to natural gas producing wells.
Natural gas has widely varying quality and composition, depending on the field, the formation or the reservoir from which it is produced. The principal constituents of natural gas are methane and ethane, though most natural gas also contains varying amounts of heavier components, such as propane, butane and natural gasoline that may be removed by a number of processing methods. Most raw materials produced at the wellhead are not suitable for long-haul pipeline transportation or commercial use and must be compressed, transported via pipeline to a central processing facility, and then processed to remove the heavier hydrocarbon components and other contaminants that would interfere with pipeline transportation or the end use of the gas.
Natural gas and crude oil produced at the wellhead contain varying amounts of mixed NGLs. After extraction by a processing plant the mixed NGLs are transported to a facility for fractionation into NGL products such as ethane, propane, butane, and natural gasoline. The NGL products are then delivered to end-users through pipelines, trucks, rail car and barges. End-users of NGL products include petrochemical, refining companies, and end-use propane customers.
Demand for natural gas. Natural gas continues to be a critical component of energy consumption in the United States. According to data released in December 2010 by the Energy Information Administration, total domestic consumption of natural gas is expected to rise to 26.5 Tcf in 2035, compared to 2010 consumption of 24.1 Tcf. The industrial and electricity generation sectors currently account for more than half of natural gas usage in the United States.
Natural gas gathering. The natural gas gathering process begins with the drilling of wells into gas-bearing rock formations. Once a well has been completed, the well is connected to a gathering system. Gathering systems generally consist of a network of small diameter pipelines and, if necessary, compression systems that collect natural gas from points near producing wells and transport it to larger pipelines for further transportation.
Natural gas compression. Gathering systems are operated at design pressures that will maximize the total throughput from all connected wells. Specifically, lower pressure gathering systems allow wells, which produce at progressively lower field pressures as they age, to remain connected to gathering systems and to continue to produce for longer periods of time. As the pressure of a well declines, it becomes increasingly difficult to deliver the remaining production in the ground against a higher pressure that exists in the connecting gathering system. Field compression is typically used to lower the pressure of a gathering system. If field compression is not installed, then the remaining production in the ground will not be produced because it cannot overcome the higher gathering system pressure. In contrast, if field compression is installed, then a well can continue delivering production that otherwise might not be produced.
Natural gas treating. Natural gas has a varied composition depending on the field, the formation and the reservoir from which it is produced. Natural gas from certain formations is higher in carbon dioxide, hydrogen sulfide or certain other contaminants. Treating plants remove carbon dioxide and hydrogen sulfide from natural gas to ensure that it meets pipeline quality specifications.
Natural gas processing. Some natural gas produced by a well does not meet the pipeline quality specifications established by downstream pipelines or is not suitable for commercial use and must be processed to remove the mixed NGL stream. In addition, some natural gas produced by a well, while not required to be processed, can be processed to take advantage of favorable processing margins. Natural gas processing involves the separation of natural gas into pipeline quality natural gas, or residue gas, and a mixed NGL stream.
Natural gas transportation . Natural gas transportation pipelines receive natural gas from other mainline transportation pipelines and gathering systems and deliver the natural gas to industrial end-users, utilities and other pipelines.
NGL transportation. NGL transportation pipelines transport mixed NGLs and other hydrocarbons from natural gas processing facilities to fractionation plants and storage facilities.
NGL storage. NGL storage facilities are used for the storage of mixed NGLs, NGL products and petrochemical products owned by third-parties in storage tanks and underground wells, which allow for the injection and withdrawal of such products at various times of the year to meet demand cycles.
MANAGEMENT DISCUSSION FROM LATEST 10K
OVERVIEW
Energy Transfer Equity, L.P. directly and indirectly owns equity interests in ETP and Regency, both publicly traded master limited partnerships engaged in diversified energy-related services.
Recent Developments
Pending Acquisition
On July 19, 2011, we entered into a transaction to acquire Southern Union Company, a Delaware corporation (“SUG”). This transaction, which we refer to as the SUG Merger, will provide us with direct ownership of assets that are complementary to the assets owned and operated by ETP and Regency. To execute the SUG Merger, we entered into a Second Amended and Restated Plan of Merger (the “SUG Merger Agreement”) with Sigma Acquisition Corporation, a Delaware corporation and our wholly-owned subsidiary (“Merger Sub”), and SUG. The Second Amended Merger Agreement modifies certain terms of the Amended and Restated Agreement and Plan of Merger entered into by us, Merger Sub and SUG on July 4, 2011. Under the terms of the SUG Merger Agreement, Merger Sub will merge with and into SUG, with SUG continuing as the surviving entity and becoming our wholly-owned subsidiary subject to certain conditions to close. Pursuant to the SUG Merger Agreement, we will acquire all of the outstanding shares of SUG in a transaction valued at $9.4 billion , including $5.7 billion in cash and ETE Common Units and $3.7 billion of existing SUG indebtedness. Stockholders of SUG may elect to exchange each share of SUG stock for either $44.25 in cash or 1.00 ETE Common Unit. The maximum cash component is 60% of the aggregate consideration and the common unit component can fluctuate between 40% and 50% . Elections in excess of either the cash or common unit limits will be subject to proration.
As described in more detail below under the caption “Liquidity and Capital Resources — Overview — Parent Company Only,” we have secured $3.7 billion in committed financing from the Bridge Loan Lenders to fund a portion of the cash consideration related to the SUG Merger, which is expected to be replaced by permanent financing with the syndication of a new senior secured credit facility of up to $2.3 billion, and completion of the Citrus Acquisition. On December 9, 2011, the special meeting of the SUG stockholders was held and the SUG stockholders voted to approve the SUG Merger. We and SUG have made filings with the Missouri Public Service Commission and expect to receive its approval of the SUG Merger in the first quarter of 2012. Closing of this business combination is contingent upon several conditions, including regulatory approvals, and we expect the transaction to close in the first quarter of 2012.
On July 19, 2011, ETP entered into an Amended Citrus Merger Agreement pursuant to which it is anticipated that SUG will cause the contribution to ETP of SUG’s 50% interest in Citrus Corp., which owns 100% of the Florida Gas Transmission (“FGT”) pipeline system, in exchange for approximately $1.895 billion in cash and $105 million of ETP Common Units, contemporaneous with the completion of the merger between SUG and us pursuant to the SUG Merger Agreement as described in Note 3 to our consolidated financial statements.
We expect to incur additional general and administrative costs in connection with consummation of this merger.
Propane Operations
On January 12, 2012, ETP contributed its propane operations, consisting of Heritage Operating, L.P. (“HOLP”) and Titan Energy Partners, L.P. (“Titan”) (collectively, the “Propane Business”), to AmeriGas Partners, L.P. (“AmeriGas”). ETP received $1.46 billion in cash and approximately 29.6 million AmeriGas common units in consideration for the contribution of the Propane Business. AmeriGas also assumed of approximately $71 million of existing HOLP debt.
ETP's 2012 Financing Transactions
In January 2012, ETP issued $2.0 billion principal amount of Senior Notes, the proceeds from which it anticipates using to fund the cash potion of the Citrus Acquisition and for general partnership purposes. In January and February 2012, ETP also completed the repurchase of approximately $750 million of its Senior Notes.
Ranch Joint Venture
On December 2, 2011, Ranch Westex JV LLC (“Ranch JV”) was formed by Regency, Anadarko Pecos Midstream LLC and Chesapeake West Texas Processing, L.L.C., each owning 33.33% of the joint venture. Ranch JV, upon completion of construction in 2012, will process natural gas delivered from the NGL-rich Bone Springs and Avalon shale formations in West Texas. The project consists of two plants, a 25 MMcf/d refrigeration plant and a 100 MMcf/d cryogenic processing plant. The initial start-up of the refrigeration unit is expected to be in service by the second quarter of 2012, with full facilities available by the fourth quarter of 2012.
In addition, interest expense for the periods presented reflected distributions on the Preferred Units issued by ETE in connection with the acquisition of a controlling interest in Regency in May 2010. Distributions on Preferred Units were $24 million and $14.4 million for the years ended December 31, 2011 and 2010, respectively.
Equity in Earnings of Affiliates. Equity in earnings of affiliates represents earnings of the Parent Company related to its investments in ETP and Regency. The Parent Company recorded equity in earnings of ETP of $490.3 million and $455.3 million for the years ended December 31, 2011 and 2010, respectively. An analysis of ETP's operating results is included in “Segment Operating Results” below. The Parent Company recorded equity in earnings of Regency of $19.1 million and $0.6 million for the years ended December 31, 2011 and 2010, respectively. Equity in earnings of Regency for 2010 represents only the period subsequent to the Parent Company's acquisition of a controlling interest in Regency in May 2010.
Losses on Non-Hedged Interest Rate Derivatives . In September 2010, the Parent Company terminated its interest swaps that were not accounted for as hedges in connection with its issuance of $1.8 billion of senior notes. Prior to that settlement, changes in the fair value of and cash payments related to these swaps were recorded directly in earnings.
Other, net. Other expenses decreased primarily due to a decrease between periods related to non-cash charges recorded to increase the carrying value of the ETE Preferred Units that were issued by the Parent Company in connection with the acquisition of a controlling interest in Regency in May 2010. The year ended December 31, 2010 included a non-cash charge of $12.7 million and the year ended December 31, 2011 included a non-cash charge of $5.3 million to increase the carrying value of the ETE Preferred Units.
Segment Operating Results
We have two reportable segments, which conduct their business exclusively in the United States of America, as follows:
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Investment in ETP — Reflects the consolidated operations of ETP.
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Investment in Regency — Reflects the consolidated operations of Regency.
We evaluate the performance of our operating segments based on net income. The following tables present the financial information by segment. The amounts reflected as “Corporate and Other” include the Parent Company activity and the goodwill and property, plant and equipment fair value adjustments recorded as a result of the 2004 reverse acquisition of Heritage Propane Partners, L.P.
For additional information regarding our business segments, see “Item 1. Business” of this report and Notes 1 and 14 to our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Parent Company Only
The principal sources of the Parent Company's cash flow are distributions it receives from its direct and indirect investments in limited and general partner interests in ETP and Regency. The amount of cash that ETP and Regency distribute to their respective partners, including the Parent Company, each quarter is based on earnings from their respective business activities and the amount of available cash, as discussed below.
The Parent Company’s primary cash requirements are for general and administrative expenses, debt service requirements, distributions to its partners and holders of the Preferred Units and at ETE’s election, capital contributions to ETP and Regency in respect of ETE’s general partner interests in ETP and Regency. The Parent Company currently expects to fund its short-term needs for such items with its distributions from ETP and Regency. The Parent Company distributes its available cash remaining after satisfaction of the aforementioned cash requirements to its Unitholders on a quarterly basis.
On July 19, 2011, ETE entered into the SUG Merger Agreement. Under the terms of the SUG Merger Agreement, ETE will acquire all of the outstanding shares of SUG in a transaction valued at $9.4 billion at the time of the execution of the SUG Merger Agreement, including $5.7 billion in cash and ETE Common Units and $3.7 billion of existing SUG indebtedness. Pursuant to the SUG Merger Agreement, stockholders of SUG may elect to exchange each share of SUG stock for either $44.25 in cash or 1.00 ETE Common Unit. The maximum cash component is 60% of the aggregate consideration and the common unit component can fluctuate between 40% and 50%. Elections in excess of either the cash or common unit limits will be subject to proration.
ETE intends to finance a portion of the cash component of the SUG Merger consideration with debt financing. In connection with entering into the merger agreement, ETE has entered into a senior bridge term loan credit agreement (the "Bridge Loan Agreement") with the Bridge Lenders, pursuant to which, subject to the conditions set forth therein, the Bridge Lenders have agreed to provide a 364-day Bridge Term Loan Facility in an aggregate principal amount of $3.7 billion. ETE's ability to borrow under the Bridge Loan Agreement is subject to the satisfaction of certain conditions precedent, including the absence of a material adverse affect on SUG having occurred subsequent to December 31, 2010 and the delivery of certain documents requested by the administrative agent (such as financial statements, favorable opinions of counsel and customary corporate authorization documents) and the payment of relevant fees and expenses. ETE may use the proceeds of the loans under the Bridge Loan Agreement to finance the SUG Merger, to repay its remaining indebtedness under the Parent Company Credit Agreement (to the extent repaid on the date of initial borrowing under the Bridge Loan Agreement) and to pay transaction costs related to the consummation of the SUG Merger and the Bridge Loan Agreement.
We intend to pursue other financing sources, including a senior note offering or term loan; however, there is no assurance that such financing will be obtained or at terms more favorable than the Bridger Loan Agreement.
In February 2012, we launched the syndication of a new senior secured credit facility of up to $2.3 billion. We intend to use the net proceeds from the senior secured credit facility, along with proceeds received from ETP in the Citrus Acquisition, to fund the cash portion of the SUG Merger and pay related fees and expenses, including existing borrowings under ETE's revolving credit facility and for general partnership purposes. Upon closing, the new senior secured credit facility, combined with proceeds from the Citrus Acquisition, is expected to replace the previously announced $3.7 billion Bridge Term Facility.
We expect ETP and Regency to utilize their resources, along with cash from their operations, to fund their announced growth capital expenditures and working capital needs; however, the Parent Company may issue debt or equity securities from time to time, as we deem prudent to provide liquidity for new capital projects of our subsidiaries or for other partnership purposes.
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 the control of ETP’s management.
ETP currently believes that its business has the following future capital requirements:
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growth capital expenditures for its midstream and intrastate transportation and storage operations, primarily for construction of new pipelines and compression facilities, for which ETP expects to spend between $800 million and $900 million in 2012;
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growth capital expenditures for its NGL transportation and services operations of between $1.3 billion and $1.5 billion in 2012, for which ETP expects to receive capital contributions from Regency related to their 30% interest in Lone Star of between $350 million and $400 million; and
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maintenance capital expenditures of between $130 million and $140 million in 2012, which include (i) capital expenditures for its intrastate operations for pipeline integrity and for connecting additional wells to its intrastate natural gas systems in order to maintain or increase throughput on existing assets; (ii) capital expenditures for its interstate operations, primarily for pipeline integrity; and (iii) capital expenditures related to NGL transportation and services, which includes amounts ETP expects to be funded by Regency related to its 30% interest in Lone Star.
ETP does not expect to make any growth capital expenditures in 2012 related to its interstate transportation operations.
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. Accordingly, ETP does not have any significant financial commitments for maintenance capital expenditures in its businesses. From time to time it 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 ETP's control. However, ETP includes these factors into its anticipated growth capital expenditures for each year.
As discussed in Note 3 to our consolidated financial statements, ETP entered into the Amended Citrus Merger Agreement on July 19, 2011. In January 2012, ETP issued senior notes to fund substantially all of the cash portion of the purchase price. ETP also intends to issue sufficient additional equity to maintain its investment grade credit rating and to use the proceeds from such equity issuances to repay other indebtedness and fund capital expenditures. In addition, ETP may enter into other acquisitions, including the potential acquisition of new pipeline systems.
ETP generally funds its 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.
ETP Recently amended its revolving credit facility to, among other things, increase the capacity from $2.0 billion to $2.5 billion and extend the maturity date to 2016. As of December 31, 2011 , in addition to approximately $106.8 million of cash on hand, ETP had available capacity under the ETP revolving credit facility (“ETP Credit Facility”) of approximately $2.16 billion . Based on current estimates, ETP expects to utilize capacity under the ETP Credit Facility, along with cash from ETP’s operations, to fund its announced growth capital expenditures and working capital needs through the end of 2012; however, ETP may issue debt or equity securities prior to that time as it deems prudent to provide liquidity for new capital projects, to maintain investment grade credit metrics or other partnership purposes.
Regency
Regency expects to funds its capital requirements with cash flows from its operating activities and, to the extent that they exceed cash flows from operating activities, with proceeds of borrowings under its existing credit facility (the "Regency Credit Facility"), operating lease facilities, asset sales, debt offerings and the issuance of additional common units or a combination thereof. As of December 31, 2011 , in addition to approximately $1.0 million of cash on hand, Regency had available capacity under the Regency Credit Facility of approximately $549.0 million .
Regency currently expects its capital expenditures to be as follows:
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growth capital expenditures of $245 million in 2012 for its gathering and processing operations;
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growth capital expenditures of $70 million in 2012 for its contract compression operations;
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growth capital expenditures of $15 million in 2012 for its contract treating operations;
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capital contributions in relation to its respective ownership interest in joint ventures of between $385million and $435 million in 2012 for its joint venture operations, which includes between $350 million and $400 million to Lone Star and $35 million to Ranch JV;
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capital expenditures of $5 million in 2012 for its corporate and others operations; and
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maintenance capital expenditures, including Regency's proportionate share related to joint ventures, of $28 million in 2012.
Regency may revise the timing of these expenditures as necessary to adapt to economic conditions. Regency expects to fund its growth capital expenditures with borrowings under its revolving credit facility and a combination of debt and equity issuances.
Cash Flows
Our cash flows may change in the future due to a number of factors, some of which we cannot control. These factors include regulatory changes, the price for ETP’s and Regency’s 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.
For the discussion that follows, certain amounts in prior periods have been reclassified to conform to the 2011 presentation.
Operating Activities
Changes in cash flows from operating activities between periods primarily result from changes in earnings (as discussed in “Results of Operations” above), excluding the impacts of non-cash items and changes in operating assets and liabilities. Non-cash items include recurring non-cash expenses, such as depreciation and amortization expense and non-cash compensation expense. The increase in depreciation and amortization expense during the periods presented primarily resulted from construction and acquisition of assets, while changes in non-cash unit-based compensation expense result from changes in the number of units granted and changes in the grant date fair value estimated for such grants. Cash flows from operating activities also differ from earnings as a result of non-cash charges that may not be recurring, such as impairment charges and allowance for equity funds used during construction. The allowance for equity funds used during construction increases in periods when ETP has a significant amount of interstate pipeline construction in progress. Changes in operating assets and liabilities between periods result from factors such as the changes in the value of price risk management assets and liabilities, timing of accounts receivable collection, payments on accounts payable, the timing of purchases and sales of inventories, and the timing of advances and deposits received from customers.
Following is a summary of operating activities by period:
Year Ended December 31, 2011
Cash provided by operating activities in 2011 was $1.38 billion and net income was $528.2 million . The difference between net income and cash provided by operating activities in 2011 consisted of non-cash items totaling $687.2 million and changes in operating assets and liabilities of $158.1 million . The difference between net income and the net cash provided by operating activities also included distributions received from affiliates that exceeded equity in earnings by $3.1 million . The non-cash activity consisted primarily of depreciation and amortization of $611.8 million and non-cash compensation expense of $42.2 million .
Year Ended December 31, 2010
Cash provided by operating activities in 2010 was $1.09 billion and net income was $336.6 million. The difference between net income and cash provided by operating activities in 2010 consisted of non-cash items totaling $552.8 million and changes in operating assets and liabilities of $259.5 million. The difference between net income and the net cash provided by operating activities also included ETP interest rate swap termination proceeds of $26.5 million, ETE payments to terminate interest rate swaps of $168.6 million and distributions received from our affiliates that exceeded our equity in earnings by $80.0 million. The non-cash activity consisted primarily of depreciation and amortization of $431.2 million and an impairment in ETP’s investment of an affiliate of $52.6 million. In addition, non-cash compensation expense was $31.2 million. These amounts are partially offset by the allowance for equity funds used during construction of $28.9 million.
Year Ended December 31, 2009
Cash provided by operating activities in 2009 was $723.5 million and net income was $697.9 million. The difference between net income and cash provided by operating activities in 2009 consisted of non-cash items totaling $371.0 million (principally depreciation and amortization expense of $325.0 million and non-cash compensation of $25.8 million, partially offset by the allowance for equity funds used during construction of $10.6 million), offset by changes in operating assets and liabilities of $348.6 million.
Investing Activities
Cash flows from investing activities primarily consist of cash amounts paid for acquisitions, capital expenditures, and cash contributions to ETP’s and Regency’s joint ventures. Changes in capital expenditures between periods primarily result from increases or decreases in ETP’s or Regency’s growth capital expenditures to fund their respective construction and expansion projects.
Following is a summary of investing activities by period:
Year Ended December 31, 2011
Cash used in investing activities in 2011 of $3.87 billion was comprised primarily of capital expenditures of $1.81 billion (excluding the allowance for equity funds used during construction), including changes in accruals of $97.8 million. ETP invested $1.42 billion for growth capital expenditures and $134.2 million for maintenance capital expenditures during 2011. Regency invested $354 million for growth capital expenditures and $22 million for maintenance capital during 2011. In addition, our subsidiaries paid cash for acquisitions of $1.97 billion , which primarily consisted of the acquisition of Lone Star and made net advances to joint ventures of $149.7 million .
Year Ended December 31, 2010
Cash used in investing activities in 2010 of $1.83 billion was comprised primarily of total capital expenditures of $1.51 billion (excluding the allowance for equity funds used during construction), including changes in accruals of $44.1 million. ETP invested $1.29 billion for growth capital expenditures in 2010 (primarily related to the Tiger pipeline) and $99.3 million for maintenance capital expenditures. Regency invested $152.3 million for growth capital expenditures and $6.9 million for maintenance capital expenditures between May 26, 2010 and December 31, 2010. In addition, Regency paid cash for acquisitions of $191.3 million, ETP paid cash for acquisitions of $177.9 million, and we received $24.0 million in cash from the acquisition of Regency. Regency received $70.2 million in cash for the sale of its East Texas assets. Our subsidiaries made advances to joint ventures of $92.6 million.
Year Ended December 31, 2009
Cash used in investing activities in 2009 of $1.35 billion was comprised primarily of $530.3 million invested for growth capital expenditures (excluding the allowance for equity funds used during construction), including changes in accruals of $115.7 million. Total growth capital expenditures consist of $412.0 million for ETP’s midstream and intrastate transportation and storage operations, $78.9 million for ETP’s interstate operations, and $39.5 million for ETP’s propane operations. We also incurred $102.7 million in maintenance expenditures needed to sustain operations of which $65.0 million related to ETP’s midstream and intrastate operations, $13.2 million related to ETP’s interstate operations, and $24.4 million related to ETP’s propane operations. In addition, ETP made advances to MEP of $664.5 million and received a reimbursement from FEP of all of its contributions, including $9.0 million that it contributed in 2008. As a result of ETP’s acquisition of a natural gas compression equipment business in exchange for ETP Common Units, cash acquired in connection with acquisitions in 2009 exceeded the cash paid by $30.4 million.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
OVERVIEW
We directly and indirectly own equity interests in entities that are engaged in diversified energy-related services.
Recent Developments
Following is a brief discussion of our significant recent developments:
Parent Company
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We completed the acquisition of Southern Union on March 26, 2012 for approximately $3.01 billion in cash and approximately 57.0 million ETE Common Units valued at $2.35 billion at the time of the merger.
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We obtained a $2.0 billion Senior Secured Term Loan as permanent financing to fund a portion of the cash consideration of the Southern Union Merger and pay related fees and expenses, including existing borrowings under our revolving credit facility and for general partnership purposes. We also used a portion of the cash received from ETP in the Citrus Merger (discussed below) to fund the remaining cash portion of the Southern Union Merger.
ETP
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In January 2012, ETP contributed its Propane Business to AmeriGas in exchange for approximately $1.46 billion in cash and approximately 29.6 million AmeriGas Common Units valued at $1.12 billion at the time of the contribution. AmeriGas also assumed approximately $71 million of existing HOLP debt. Consideration received in this transaction was used to fund ETP's tender offer and other purposes, as discussed below.
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In January 2012, ETP issued $2.0 billion principal amount of senior notes, the proceeds from which were used to fund the cash potion of the Citrus Merger described below and for general partnership purposes.
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In February 2012, ETP completed the repurchase of approximately $750 million of its senior notes.
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On March 26, 2012, in connection with the Southern Union Merger, ETP completed its acquisition of CrossCountry, a subsidiary of Southern Union which owns an indirect 50% interest in Citrus, the owner of FGT. The total merger consideration was approximately $2.0 billion , consisting of approximately $1.9 billion in cash and approximately 2.25 million ETP Common Units that are now held by Southern Union. This acquisition provides ETP with access to the Florida market through FGT.
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On April 30, 2012, ETP entered into an agreement to acquire Sunoco in a Common Unit and cash transaction for total consideration of $5.3 billion as discussed below.
Regency
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In March 2012, Regency issued 12,650,000 Regency Common Units through a public offering. The net proceeds of approximately $297.3 million were used to repay borrowings outstanding under the Regency Credit Facility and will be used to redeem 35% in aggregate principal amount of its outstanding Senior Notes due 2016 and pay related premium expenses and interest. Regency expects to complete this redemption in May 2012.
Pending Sunoco Merger
On April 30, 2012, ETP announced its entry into a definitive merger agreement whereby it will acquire Sunoco Inc. in a common unit and cash transaction valued at $5.3 billion based on ETP's closing unit price on April 27, 2012. Under the terms of the merger agreement, Sunoco shareholders would receive, for each Sunoco common share, either $50.00 in cash, 1.049 ETP Common Units or a combination of $25.00 in cash and 0.5245 ETP Common Units. The aggregate cash paid and ETP Common Units issued will be capped so that the cash and ETP Common Units will each represent 50% of the aggregate consideration. Upon closing, Sunoco shareholders are expected to own approximately 20% of ETP's outstanding limited partner interests. This transaction is expected to close in the third or fourth quarter of 2012, subject to approval of Sunoco's shareholders and customary regulatory approvals.
In connection with the transaction, we have agreed to relinquish our right to approximately $210 million of IDRs from ETP that we would otherwise receive over 12 consecutive quarters following the closing of the transaction.
Sunoco owns the general partner interest of Sunoco Logistics, consisting of a 2% ownership interest and IDRs, and 32.4% of the outstanding common units of Sunoco Logistics. Sunoco also generates cash flow from a portfolio of 4,900 retail outlets for the sale of gasoline and middle distillates in the east coast, midwest and southeast areas of the United States.
Sunoco Logistics is a publicly traded limited partnership that owns and operates a logistics business consisting of a geographically diverse portfolio of complementary pipeline, terminalling and crude oil acquisition and marketing assets. The refined products pipelines business consists of approximately 2,500 miles of refined products pipelines located in the northeast, midwest and southwest United States, and equity interests in four refined products pipelines. The crude oil pipeline business consists of approximately 5,400 miles of crude oil pipelines, located principally in Oklahoma and Texas. The terminal facilities business consists of approximately 42 million shell barrels of refined products and crude oil terminal capacity (including approximately 22 million shell barrels of capacity at the Nederland Terminal on the Gulf Coast of Texas and approximately 5 million shell barrels of capacity at the Eagle Point terminal on the banks of the Delaware River in New Jersey). The crude oil acquisition and marketing business involves the acquisition and marketing of crude oil and is principally conducted in Oklahoma and Texas and consists of approximately 190 crude oil transport trucks and approximately 120 crude oil truck unloading facilities.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Parent Company Only
The Parent Company’s principal sources of cash flow have historically derived from its direct and indirect investments in the limited partner and general partner interests in ETP and Regency. Effective with the acquisition of Southern Union, the Parent Company also generates cash flows through Southern Union's wholly-owned subsidiary. The amount of cash that ETP and Regency distribute to their respective partners, including the Parent Company, each quarter is based on earnings from their respective business activities and the amount of available cash, as discussed below. In connection with the Citrus Merger, we have relinquished approximately $220 million of IDRs to be received from ETP over 16 consecutive quarters, approximately $13.8 million per quarter.
The Parent Company’s primary cash requirements are for general and administrative expenses, debt service requirements and distributions to its partners and holders of the Preferred Units. The Parent Company currently expects to fund its short-term needs for such items with its distributions from ETP and Regency. The Parent Company distributes its available cash remaining after satisfaction of the aforementioned cash requirements to its Unitholders on a quarterly basis.
We issued a $2.0 billion Senior Secured Term Loan as permanent financing to fund the cash portion of the Southern Union Merger and pay related fees and expenses, including existing borrowings under our revolving credit facility and for general partnership purposes. We also used a portion of the cash received from ETP in the Citrus Merger (discussed below) to fund the remaining cash portion of the Southern Union Merger.
We expect ETP, Regency and Southern Union to utilize their resources, along with cash from their operations, to fund their announced growth capital expenditures and working capital needs; however, the Parent Company may issue debt or equity securities from time to time, as we deem prudent to provide liquidity for new capital projects of our subsidiaries or for other partnership purposes.
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 the control of ETP’s management.
ETP currently believes that its business has the following future capital requirements, which do not include amounts for ETP's recently announced merger agreement to acquire Sunoco:
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growth capital expenditures for its midstream and intrastate transportation and storage operations, primarily for construction of new pipelines and compression facilities, for which ETP expects to spend between $700 million and $800 million for the remainder of 2012;
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growth capital expenditures for its NGL transportation and services operations of between $1.1 billion and $1.2 billion for the remainder of 2012, for which ETP expects to receive capital contributions from Regency related to their 30% interest in Lone Star of between $300 million and $350 million; and
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maintenance capital expenditures of between $90 million and $100 million for the remainder of 2012, which include (i) capital expenditures for its intrastate operations for pipeline integrity and for connecting additional wells to its intrastate natural gas systems in order to maintain or increase throughput on existing assets; (ii) capital expenditures for its interstate operations, primarily for pipeline integrity; and (iii) capital expenditures related to NGL transportation and services, which includes amounts ETP expects to be funded by Regency related to its 30% interest in Lone Star.
ETP does not expect to make any growth capital expenditures in 2012 related to its interstate transportation operations.
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. Accordingly, ETP does not have any significant financial commitments for maintenance capital expenditures in its businesses. From time to time it 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 in a timely manner, higher steel prices and other factors beyond ETP's control. However, ETP includes these factors in its anticipated growth capital expenditures for each year.
ETP generally funds its capital requirements with cash flows from operating activities, borrowings under its revolving credit facility, the issuance of long-term debt or common units or a combination thereof.
Based on current estimates, ETP expects to utilize capacity under its revolving credit facility, along with cash from ETP’s operations, to fund its announced growth capital expenditures and working capital needs through the end of 2012; however, ETP may issue debt or equity securities prior to that time as it deems prudent to provide liquidity for new capital projects, to maintain investment grade credit metrics or other partnership purposes.
Regency
Regency expects its sources of liquidity to include:
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cash generated from operations;
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borrowings under the Regency Credit Facility;
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distributions received from unconsolidated affiliates;
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debt offerings; and
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issuance of additional partnership units.
Regency expects its growth capital expenditures to be between approximately $775 million and $825 million during 2012 , which includes $275 million for its gathering and processing operations, $70 million for its contract compression operations, $40 million for its contract treating operations, between $385 million and $435 million for its joint ventures (which includes between $350 million and $400 million of contributions to Lone Star) and $5 million for its corporate and other operations. In addition, Regency expects its maintenance capital expenditures to be approximately $30 million during 2012 .
Regency may revise the timing of these expenditures as necessary to adapt to economic conditions. Regency expects to fund its growth capital expenditures with borrowings under its revolving credit facility and a combination of debt and equity issuances.
Southern Union
Cash generated from internal operations constitutes Southern Union's primary source of liquidity. Additional sources of liquidity for working capital purposes include the use of available credit facilities and may include various capital markets and bank debt financings and proceeds from asset dispositions. The availability and terms relating to such liquidity will depend upon various factors and conditions such as Southern Union's combined cash flow and earnings, its resulting capital structure and conditions in the financial markets at the time of such offerings.
As of March 31, 2012, Southern Union expects its growth capital expenditures to be between approximately $200 million and $250 million for the remainder of 2012 primarily for its gathering and processing operations. In addition, Southern Union expects its maintenance capital expenditures to be between $180 million and $200 million for the remainder of 2012.
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 factors include regulatory changes, the price for our operating entities 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 acquisitions and other factors.
Operating Activities
Changes in cash flows from operating activities between periods primarily result from changes in earnings (as discussed in “Results of Operations” above), excluding the impacts of non-cash items and changes in operating assets and liabilities. Non-cash items include recurring non-cash expenses, such as depreciation and amortization expense and non-cash compensation expense. The increase in depreciation and amortization expense during the periods presented primarily resulted from construction and acquisitions of assets, while changes in non-cash compensation expense result from changes in the number of units granted and changes in the grant date fair value estimated for such grants. Cash flows from operating activities also differ from earnings as a result of non-cash charges that may not be recurring such as impairment charges and allowance for equity funds used during construction. The allowance for equity funds used during construction increases in periods when we have significant amount of interstate pipeline construction in progress. Changes in operating assets and liabilities between periods result from factors such as the changes in the value of price risk management assets and liabilities, timing of accounts receivable collection, payments on accounts payable, the timing of purchases and sales of natural gas and propane inventories, and the timing of advances and deposits received from customers.
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011 . Cash provided by operating activities during 2012 was $79.4 million as compared to $358.1 million for 2011 . Net income was $961.3 million and $199.1 million for 2012 and 2011 , respectively. The difference between net income and the net cash provided by operating activities primarily consisted of non-cash items totaling $713.7 million and $175.1 million and changes in operating assets and liabilities of $150.1 million and $37.7 million for 2012 and 2011 , respectively.
The non-cash activity in 2012 consisted primarily of the gain on deconsolidation of Propane Business of $1.06 billion and the loss on extinguishment of debt of $115.0 million which were not reflected in 2011. In addition, depreciation and amortization was $161.2 million and $139.3 million for 2012 and 2011 , respectively, bridge loan related fees were $62.2 million for 2012 and amortization of finance costs charged to interest were $5.4 million and $5.1 million for 2012 and 2011 , respectively.
Cash paid for interest, net of interest capitalized, was $168.0 million and $138.0 million for the three months ended March 31, 2012 and 2011 , respectively.
Investing Activities
Cash flows from investing activities primarily consist of cash amounts paid in acquisitions, capital expenditures, cash contributions to joint ventures, and cash proceeds from the contribution of ETP's Propane Business. Changes in capital expenditures between periods primarily result from increases or decreases in growth capital expenditures to fund construction and expansion projects.
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011 . Cash used in investing activities during 2012 was $2.16 billion as compared to $290.3 million for 2011 . In 2012 , we paid cash for acquisitions of $2.98 billion , which primarily consisted of our acquisition of Southern Union for $2.97 billion . In 2011, we paid cash for acquisitions of $3.1 million . Total capital expenditures (excluding the allowance for equity funds used during construction) for 2012 were $594.5 million , including changes in accruals of $52.5 million. This compares to total capital expenditures (excluding the allowance for equity funds used during construction) for 2011 of $279.6 million , including changes in accruals of $2.5 million.
Financing Activities
Changes in cash flows from financing activities between periods primarily result from changes in the levels of borrowings and equity issuances, which are primarily used to fund acquisitions and growth capital expenditures. Distribution increases between the periods based on increases in distribution rates, increases in the number of common units outstanding at our subsidiaries and increases in the number of our common units outstanding.
ETE Senior Secured Term Loan
We used the net proceeds from our Senior Secured Term Loan, along with proceeds received from ETP in the Citrus Merger, to fund the cash portion of the Southern Union Merger and pay related fees and expenses, including existing borrowings under our revolving credit facility and for general partnership purposes.
Borrowings bear interest, at either the Eurodollar rate plus an applicable margin or the alternative base rate plus an applicable margin. The alternative base rate used to calculate interest on base rate loans will be calculated using the greater of a prime rate, a federal funds effective rate plus 0.50%, and an adjusted one-month LIBOR rate plus 1.00%. The applicable margins are 3.0% for Eurodollar loans and from 2.0% for base rate loans. The effective interest rate on the amount outstanding as of March 31, 2012 was 3.75%.
Southern Union Junior Subordinated Notes
Southern Union has interest rate swap agreements that effectively fix the interest rate applicable to the floating rate on $525 million of the $600 million Junior Subordinated Notes due 2066. The interest rate on the remaining notes is a variable rate based upon the three-month LIBOR rate plus 3.0175%. The balance of the variable rate portion of the Junior Subordinated Notes was $75 million at an effective interest rate of 3.45% at March 31, 2012.
Panhandle Term Loans
In February 2012, Southern Union refinanced LNG Holdings' $455 million term loan due March 2012 with an unsecured three-year term loan facility due February 2015, with LNG Holdings as borrower and PEPL and Trunkline LNG as guarantors and a floating interest rate tied to LIBOR plus a margin based on the rating of PEPL's senior unsecured debt. The effective interest rate of PEPL's term loan was 1.87% at March 31, 2012.
Bridge Term Loan Facility
Upon obtaining permanent financing for the Southern Union Merger in March 2012, we terminated the 364-day Bridge Term Loan Facility. For the three months ended March 31, 2012, bridge loan related fees reflects $62.2 million representing amortization of the related commitment fees and write-off of the unamortized portion upon termination of the facility.
ETP Senior Notes
In January 2012, ETP completed a public offering of $1 billion aggregate principal amount of 5.20% Senior Notes due February 1, 2022 and $1 billion aggregate principal amount of 6.50% Senior Notes due February 1, 2042. ETP used the net proceeds of $1.98 billion from the offering to fund the cash portion of the purchase price of the Citrus Merger and for general partnership purposes. ETP may redeem some or all of the notes at any time and from time to time pursuant to the terms of the indenture subject to the payment of a “make-whole” premium. Interest will be paid semi-annually.
In January 2012, ETP completed a cash tender offer for approximately $750 million aggregate principal amount of specified series of the ETP Senior Notes. The tender offer consisted of two separate offers: an Any and All Offer and a Maximum Tender Offer. The senior notes described below were repurchased under the Any and All Offer and Maximum Tender Offer for a total cost of $885.9 million and a loss on extinguishment of $115.0 million was recorded during the three months ended March 31, 2012.
In the Any and All Offer, ETP offered to purchase, under certain conditions, any and all of its 5.65% Senior Notes due August 1, 2012, at a fixed price. Pursuant to the Any and All Offer, ETP purchased $292 million in aggregate principal amount on January 19, 2012.
In the Maximum Tender Offer, ETP offered to purchase, under certain conditions, certain series of outstanding ETP Senior Notes at a fixed spread over the index rate. Pursuant to this tender offer, on February 7, 2012, ETP purchased $200 million aggregate principal amount of its 9.7% Senior Notes due March 15, 2019, $200 million aggregate principal amount of its 9.0% Senior Notes due April 15, 2019 and $58.1 million aggregate principal amount of its 8.5% Senior Notes due April 15, 2014.
Revolving Credit Facilities
Parent Company Credit Facility. As of March 31, 2012 , we had no outstanding borrowings under the Parent Company Credit Facility and the amount available for future borrowings was $200 million .
ETP Credit Facility. As of March 31, 2012 , ETP had a balance of $190.0 million outstanding under the ETP Credit Facility, and the amount available under the ETP Credit Facility was $2.28 billion , after taking into account letters of credit of $28.3 million . The weighted average interest rate on the total amount outstanding at March 31, 2012 was 1.74% .
Regency Credit Facility. As of March 31, 2012 , Regency had a balance of $250.0 million outstanding under the Regency Credit and the amount available under the Regency Credit Facility was $638.5 million , taking into account letters of credit of $11.5 million . The weighted average interest rate on the total amount outstanding as of March 31, 2012 was 3.09% .
Southern Union Credit Facilities. The Southern Union Credit Facility provides for a $700 million revolving credit facility which matures on May 20, 2016. Borrowings on the Southern Union Credit Facility are available for working capital, other general company purposes and letter of credit requirements. The interest rate and commitment fee under the Southern Union Credit Facility are calculated using a pricing grid, which is based on the credit ratings for Southern Union's senior unsecured notes. The annualized interest rate for the Southern Union Credit Facility was 1.86% as of March 31, 2012.
CONF CALL
Martin Salinas – Chief Financial Officer
Thank you and good morning all. Thanks for joining us today. It has to be a very busy quarter for us and we have a lot to talk about so let’s jump right in. I’ll talk about providing an overview of the ETP and ETE’s financial results for the second quarter and give an update on our pending Southern Union acquisition along with some of our growth initiatives before opening the line for questions.
I’d also like to encourage you to get into our website to access the earnings releases we issued yesterday after the market close. As always during the call I’ll make forward-looking statements within the meaning of Section 21E of the SEC Act of 1934 based on our beliefs as well as certain assumptions and information available to us. As always, I’m joined by Kelcy, Mackie, John McReynolds and other members of our senior management team to answer your questions after our prepared remarks.
Let’s start by reviewing ETP’s second quarter 2011 results. And we’re pleased to report that adjusted EBITDA for the quarter was $388.1 million up approximately 15.6% in the second quarter of last year largely as a result of contributions from our Tiger and SEC pipeline plus the acquisition of LDH Energy's NGL assets, for Q&A Lone Star NGL. As you recall Tiger was placed in service in December of 2010 and SEC was placed in service in January of this year. Both pipelines have contractual ramp-ups of demand fees of the course of the year. So we expect to see continued growth in not only in the third quarter but also in the fourth quarter of this year.
I’d also like to remain everyone that year-over-year growth in our Intrastate segment was offset by the sales of NEP to ETE in May of last year which contributed $12.4 million of adjusted EBITDA to ETP in the second quarter of 2010. Adjusted EBITDA from our other segments as a group was more or less flat year-over-year as modest growth in our Intrastate transportation and Midstream segments was offset by similar decline in our retail propane segment. We also experienced distributable cash flow growth of $23.3 million with distributable cash flow for the quarter of $222.3 million compared to $200 million in the second quarter of last year.
From a distribution rate perspective ETP will pay its unit holders $89.38 or roughly $3.575 on an annualized basis per unit on August the 15th. And based on our how assets are performing the continued execution of placing assets in service not only on time but also within budget and increased distributable cash flows from these projects we’re confident that we’ll increase ETP’s distribution rate in the very near future.
So let’s look at our business segments and I’ll start with our Interstate business. Our Interstate operating income for the quarter was $135.7 million compared to $127.8 million in 2010 and was affected by several factors. First we experienced an increase in transportation fees of $2.9 million over the second quarter of last year due to demand fee increases offset by a decrease in fees earned on interruptible transportation services. The declines in interruptible volumes resulted from the weak basics differentials we continue to experience across Texas.
In addition, margins from sales of our natural gas and other activities increased $2.4 million in the second quarter of 2011, primarily reduced in increase in sales of NGLs offset by lower margins from system optimization activities. We also saw our storage margin recognized under fair value accounting increased $7.6 million primarily driven by unrealized gains on natural gas inventories during the quarter adjusting for non-cash gains and losses on derivatives and inventory between the two periods our storage margin actually decreased $10 million primarily due to lower withdrawal rates, tighter storage spreads this year compared to last year. And as it relates to our storage facilities we had just over 50% of storage capacity roughly 39.5 Bcf contracted under fixed-fee contracts with the remaining contract terms of one to three years. And as of June 30th we had approximately 38.5 Bcf in the ground for our own accounted Bammel for expected withdrawals during the 2011 and 2012 winter season.
Now looking at our Intersate Segment where we achieved operating income $ 49.8 million for the quarter as an increase of 17.6 million from second quarter of last year and was primarily driven by higher transportation revenues from our Tiger pipeline. And as I mentioned earlier we expect to see additional revenue increases from Tiger over the course of the year due to contracted demand fee ramp-ups.
In terms of volumes we saw an increase of 1.2 Bcf a day for the quarter again primarily driven by volume shift in the new Tiger pipeline offset by slightly lower volumes on the Transwestern Pipeline compared to the same period in the prior year. For FET, which is our 50:50 joint-venture with Kinder Morgan we recorded an equity in earnings at $5.2 million and received cash distributions of 8.6 million for the quarter. We also expect to these results increased during the remainder of 2011 and into 2012 as demand fees on FEP increased.
And as it relates to FEP both we and Kinder Morgan made capital contributions totaling $309 million in July of 2011 along with post deed from a $600 million term loan maturing in July of 2012 to repay outstanding and borrowing under FET's credit facility. We then terminated the facility and entered into a $50 million revolver maturing in 2015.
Now, highlighting our Midstream segment where our operating income increased by $18.1 million to $68 million for the quarter compared to 49.9 million in Q2 of 2010. Our inlet volumes in our Godley plant were slightly higher for the quarter to a fixed day construction related shut down at our LaGrange plant resulted in total NGL production being down a little more than 300 barrels per day to approximately $50,800 per day for the quarter.
The robust NGL pricing environment also resulted in higher a concentration of volumes under fee based contracts from our customers which cause of slight decline in equity NGL volumes. Gross margin for our Midstream segment increased 34.3% compared to Q2 of 2010 based on several factors. Increased volumes in our North Texas System resulted in increased fee based revenues of $3.7 million that compared to the same period last year. Additionally, increased volumes resulting from recent acquisitions and other growth capital expenditures located in the Louisiana provided an increase in our fee based margin of$ 5.8 million over the second quarter of 2010.
Our non-fee based gross margin increased $15.2 million primarily due to higher NGL prices. The composite NGL price increase of the three month ended June 30th 2011 to $1.33 per gallon up from $0.98 per gallon in the second quarter of last year. In addition, our recently acquired interest in the Sea Robin processing plant, which is part of the Lone Star JV, provided $0.9million of margin during the quarter. The increase in other Midstream gross margin was related to losses of the $0.6 million from marketing activities compared to losses of $10 million during the same period of last year. In addition we experienced a $3.6 million increase in processing margin for third-party processing capacity utilized.
Now, let’s turn to our NGL Transportation and Services segment which operates to our Lone Star JV and as a remainder Lone Star which is 70% owned by ETP and 30% owned by Regency acquired the assets from LDH Energy on May 2nd of this year. Since closing average NGL transportation volumes have averaged approximately 128,000 barrels per day and NGL fractionation has been about 14800 barrels per day during the period.
Gross margin for the period was $45.6 million and operating income for the period was $27.6 million. I was very pleased with how these assets are performing especially since they are above the economic rebates the deal on. And we have provided a break-out of this segment in our earnings release.
I would also like to point out Lone Star has been validated by ETP so in our adjusted EBITDA and EPS calculations found in our earnings release we’ve made an adjustments to remove Regency 30% non controlling interest in the JV. And in our Propane segment our operating income for Q2 2011 was a loss of $8.7 million compared to a loss of $6.4 million in Q2 of 2010. This is view to year-over-year volume decline of less than 1% and higher overhead expenses. And just as a remainder the retail propane business is seasonal with the majority of earnings falling in the first and fourth quarters of the year.
I’d now like to provide a summary of on our growth CapEx starting with what we incurred during the second quarter. We invested $380.7 million during the quarter $293.1 million was spent in our Midstream Intrastate transportation and storage and NGL segments primarily on our Eagle Ford Shale Projects and approximately $79.3 million was spent in our Interstate segment primarily the expansion of our Tiger pipeline. The remainder was spent in our propane and other segments.
As we turn our attention to the rest of the year we expect to spend between $450 million and $500 million in our Midstream and Intrastate transportation and storage segments $70 to $90 in our Interstate segment $100 million to 150 million in our NGL segment and $10 million to $20 million in our propane segment.
For our total estimated growth CapEx budget between $630 million and $760 million for the remainder of 2011. And I also like to note that spending for our NGL segment includes 100% of Lone Star because Lone Star as I mentioned before it’s fully consolidated in our financial statements. We will receive however capital contributions from Regency for their 30% share of gross CapEx related to Lone Star. That’s roughly $30,000 to $40,000 for 2011.
From a maintenance CapEx perspective we spent $29.4 million in the second quarter of 2011 and expected to spend an additional $60 million to $70 million in the second half of this year. In addition we expect to contribute between $190 million and $210 million to our joint-ventures other than Lone Star.
Before I take to you on Southern Union as well as other growth initiatives we like to highlight ETE’s financial results for the quarter. ETE had distributable cash flow of $115.5 million in the quarter two of 2011 an increase of $2.1 million from the second quarter of last year. Couple of items to point out that impacted ETE’s quarterly results. First, expected cash distributions from ETP and Regency increased 7.2% or $11.3 million when comparing quarter two of this year with quarter two of last year.
Not that ETE is interested in Regency were acquired in May of 2010. ETE also incurred $9 million and acquisition related cost this quarter associated with the pending Southern Union merger. That compares to $12.8 million in cost related to the Regency Transaction incurred in the second quarter of 2010.
In addition interest expense was $12.1 million higher in Q2 of this year versus Q2 of last year primarily due to increase in interest expense resulting from the September 2010 bond offering to refinance ETE’s term B loan revolver borrowings as well as $168 million in interest rate swap breakage cost.
Also, a full quarter’s worth of distributions paid. On Series A units issued to GE with the Regency Transaction occurred in the second quarter of this year compared to the second quarter of last year. Regarding distributions to ETE unit holders on June 30th we announced an increase of $0.65 per common unit from $0.56 per unit since $0.525 per unit on a quarterly basis which will be paid on August of 19th at an increase of 11.6% in the distribution paid last quarter and a almost 16% increase year-over-year.
Now, an update on the pending acquisition of Southern Union by ETE, and as you know ETE and Southern Union announced an amended agreement on July 19 whereby ETE will acquire Southern Union’s outstanding shares for $44.25 per share in cash and ETE common units. Under the terms of the revived agreement Southern Union’s shareholders like to exchange each of their common shares for $44.25 of cash or 1.0 times ETE common units or a combination of the two.
Now the maximum cash component has been set at 60% of the aggregate consideration and the common unit component has been set fixed at 18 plus rate between 40%and 50%. Any elections in excess of either the cash or common unit limits will be subject to proration.
The transactions has been unanimously approved by the Board of Directors of both ETE and Southern Union and ETE has received revised support agreements from Southern Union shareholders in connection with the revised merger agreement representing 14% of Southern Union’s total shares outstanding. We have elected to pre-elect to receive ETE common unit as their consideration set to same proration as all other shareholders.
And in connection with the revised merger agreement ETE has signed an amended agreement to sell Southern Union’s 50% interest to Citrus Corp which owns 100% of the Florida Gas. Transmission pipeline system to ETP for total consideration of $2 billion that consisting of 1.895 billion in cash and $105 million in ETP common units. The obligations of ETE as it relates to Citrus drop down are to be assumed by Southern Union community project closing of ETE Southern Union merger. The proceeds received from ETP will then be used upon a portion and the merger consideration and to repay the existing Southern Union related debt to maintain appropriate investment-grade credit ratings.
We continue to move forward from an approval perspective. We filed an amended S4 last Monday and if you may have seen in our press release issued in Friday the July of 29th the waiting period under HSR has expired. It’s a big step forward for us.
We’ve also filed with Missouri Public Service Commission and we think we are still on track for closing in the first quarter of 2012. Financing to complete the cash portion of the Southern Union merger transaction without even secured and we are well underway on evaluating alternatives for more permanent financing to be put in place at or near closing. And we remain very excited about this transaction and believe it will deliver significant long term value to the Energy transfer family as Southern Union was its more than 15,000 miles of Interstate pipeline and 5500 miles of gathering and processing pipelines will allow us to transport more product to more energy consuming markets thereby strengthening our competitive position and further diversifying our operations and cash flows.
Now, I’d like an update on development from Lone Star. With the acquisition behind us we have turned our attention to addressing the high demand for NGL transportation and processing that were seeing in the marketplace. So that end the JV recently announced plans to build a new 100,000 barrel a day NGL fractionation facility announced our view as well as the new 530 mile NGL pipeline from West Texas Jackson County. The pipeline will have minimum capacity of approximately 130,000 barrels per day and maybe upsized depending on ongoing negotiations. We believe both the fractionator and pipeline are expected to be in service at the first quarter of 2103. We are very excited about the natural gas liquids business potential and expect to see robust demand for the foreseeable future even more so with the Southern Union merger as consummated.
We along with our JV partners at Regency are evaluating several additional growth opportunities and look forward to strategy growth at Lone Star for the next several years. Next, I’d like to briefly update u on our announced Eagle Ford projects. Beginning in October of last year we announced approximately $1.15 billion of investments in the Eagle Ford Shale. The first of are Dos Hermanos and Chisholm pipelines have already been taken in service and taking one of the rich Eagle Ford mainline project is on track to be completed by year-end.
All-in-all we expect to play 500 miles of new pipeline and at least 720 MMcf a day of processing capacity in service line of second quarter of 2013. We expected to see a significant cash flow ramp-up from these projects in the next year or two with projected EBITDA multiples of six to eight times and roughly 1.55 billion in growth CapEx we are investing in the Eagle Ford.
And looking at our Tiger pipeline and I'm excited to report the construction of the 400 MMcf a day expansion has been completed two months ahead of schedule and $20 million under budget and our pipeline service on August 1, once again demonstrating our securability to bring assets and service. And as you recall the expansion project was starting construction in March of this year was original in schedule to go in service in October at a original cost of $180 million.
I would also like to say a few words about the Double E Crude oil JV with Enterprise product partners. But we recently announced a two week extension to our open season at the request of interest of shippers while we don’t want to get into specifics during the first open commitment period because of the regulating nature of the process a number of shippers have demonstrated significant interest in sizable volume descriptions and we’re looking forward to providing you with more detail at the exploration of the open commitment period on or surely after August 12.
And I would like to say a few closing remarks before taking questions. Your are witnessing a transformational period for Energy Transfer and our vast network of assets. With the addition of Southern Union’s assets the acquisition of Lone Star and our investments in the Eagle Ford and Permian basin combined with our existing asset base we will be the premier energy partnership providing a full suite and Midstream services for our customers.
We will be more geographically and operationally diversified with significant source of stable fee based revenues across our various segments. A combined footprint will allow us to derive significant unit holder value in objective we will continue to execute on day-in and day-out.
That wraps up my prepared remarks. Operator, let’s open up the lines for some questions. Thank you everyone.
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Fund Letters
