Filed pursuant to Rule 424(b)(3)

Registration No. 333-164414

SUBJECT TO COMPLETION, DATED SEPTEMBER 15, 2010

 

PRELIMINARY PROSPECTUS SUPPLEMENT

(To Prospectus dated January 20, 2010)

 

$1,000,000,000

 

Energy Transfer Equity, L.P.

     % Senior Notes due 2020

 

 

 

 

We are offering $1,000,000,000 aggregate principal amount of our     % Senior Notes due 2020. Interest on the notes will accrue from          , 2010 and will be payable semi-annually on           and           of each year, beginning on          , 2011. The notes will mature on          , 2020.

 

We may redeem some or all of the notes at any time at a price equal to 100% of the principal amount of the notes plus a make-whole premium and accrued and unpaid interest, if any, to the redemption date.

 

The notes initially will be secured on a first priority, equal and ratable basis with the loans under our senior secured revolving credit facility and our senior secured term loan facility by a lien on all assets that from time to time secure our obligations under those facilities, subject to certain exceptions and permitted liens and subject to the terms of an intercreditor agreement. The liens securing the notes will be released in full if the liens securing our senior secured term loan facility are released, after which the notes will be unsecured. If the indebtedness under our senior secured term loan facility is discharged concurrently with the closing of this offering, the notes will be unsecured when issued. The notes will be our senior obligations, ranking equally in right of payment with our other existing and future unsubordinated debt and senior to any of our future subordinated debt.

 

If we experience a Change of Control together with a Rating Decline, each as defined herein, we must offer to repurchase the notes at an offer price in cash equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. See “Description of Notes — Covenants.”

 

The obligations to make payments of principal, premium, if any, and interest on the notes are solely our obligations. The notes will initially not be guaranteed by any of our subsidiaries, including Energy Transfer Partners, L.P. and Regency Energy Partners LP.

 

None of the Securities and Exchange Commission, any state securities commission or any other U.S. regulatory authority has approved or disapproved of the securities nor have any of the foregoing authorities passed upon or endorsed the merits of this offering or the accuracy or adequacy of this prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.

 

Investing in the notes involves risks. See “Risk Factors” beginning on page S-20 of this prospectus supplement and the other risks identified in the documents incorporated by reference herein for information regarding risks you should consider before investing in the notes.

 

 

 

The underwriters expect to deliver the notes to purchasers in book-entry form only through The Depository Trust Company on or about          , 2010.

 

Joint Book-Running Managers

 

Co-Managers

 

The date of this prospectus supplement is September   , 2010.

 

TABLE OF CONTENTS

 

Prospectus Supplement

 

 

ABOUT THIS PROSPECTUS SUPPLEMENT

 

We provide information to you about the notes in two separate documents that offer varying levels of detail:

 

 

Generally, when we refer to this “prospectus,” we are referring to both documents combined.

 

You should rely only on the information contained in this prospectus supplement, the accompanying prospectus, any free writing prospectus prepared by us or on our behalf and the documents we have incorporated by reference. We have not authorized anyone else to give you different information. We are not offering the notes in any jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus supplement or in the accompanying prospectus is accurate as of any date other than the date on the front of those documents. If the description of this offering varies between this prospectus supplement and the accompanying prospectus, you should rely on the information in this prospectus supplement. You should not assume that any information contained in the documents incorporated by reference in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the respective dates of those documents. Our business, financial condition, results of operations and prospects may have changed since those dates.

 

None of Energy Transfer Equity, L.P., the underwriters or any of their respective representatives is making any representation to you regarding the legality of an investment in the notes by you under applicable laws. You should consult with your own advisors as to the legal, tax, business, financial and related aspects of an investment in the notes.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We file annual, quarterly, and current reports, proxy statements and other information with the SEC. You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site that contains information we file electronically with the SEC, which you can access over the Internet at http://www.sec.gov.

 

Our home page is located at http://www.energytransfer.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the SEC are available free of charge through our web site as soon as reasonably practicable after those reports or filings are electronically filed or furnished to the SEC. Information on our web site or any other web site is not incorporated by reference in this prospectus supplement and does not constitute a part of this prospectus supplement.

 

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

 

We are incorporating by reference in this prospectus supplement and the accompanying prospectus information we file with the SEC, which means that we are disclosing important information to you by referring you to those documents. The information we incorporate by reference is an important part of this prospectus supplement and the accompanying prospectus, and later information that we file with the SEC automatically will update and supersede this information. We incorporate by reference in this prospectus supplement and the accompanying prospectus the documents listed below excluding any information in those documents that is deemed by the rules of the SEC to be furnished and not filed, until we close this offering:

 

 

 

You may obtain any of the documents incorporated by reference in this prospectus supplement or the accompanying prospectus from the SEC through the SEC’s web site at the address provided above. You also may request a copy of any document incorporated by reference in this prospectus supplement and the accompanying prospectus (including exhibits to those documents specifically incorporated by reference in this document), at no cost, by visiting our internet web site at the address provided above or by writing or calling us at the address set forth below.

 

Energy Transfer Equity, L.P.

3738 Oak Lawn Avenue

Dallas, Texas 75219

Attention: Sonia Aubé

Telephone: (214) 981-0700

 

FORWARD-LOOKING STATEMENTS

 

This prospectus supplement, the accompanying prospectus and the documents we incorporate by reference contain forward-looking statements that are based on our beliefs and those of our general partner, as well as assumptions made by and information currently available to us. These forward-looking statements are identified as any statement that does not relate strictly to historical or current facts. When used in this prospectus supplement, words such as “anticipate,” “project,” “expect,” “plan,” “goal,” “forecast,” “intend,” “could,” “believe,” “may,” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements. Although we and our general partner believe that the expectations on which such forward-looking statements are based are reasonable, neither we nor our general partner can give assurances that such expectations will prove to be correct. Forward-looking statements are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated, projected or expected. Among the key risk factors that may have a direct bearing on our results of operations, cash flow and financial condition and our ability to make scheduled payments on or to refinance our debt obligations are:

 

 

 

You should not put undue reliance on any forward-looking statements. When considering forward-looking statements, please review the risks described under “Risk Factors” in this prospectus supplement.

 

PROSPECTUS SUPPLEMENT SUMMARY

		General Partner				Incentive
		Interest				Distribution Rights				Common Units
ETP			1.8	%			100	%			50,226,967
Regency			2.0	%			100	%			26,266,791

	•	an approximate 1.8% general partner interest, which we hold through our ownership interests in ETP GP;
	•	100% of the incentive distribution rights in ETP, which we hold through our ownership interests in ETP GP; and

	•	approximately 50.2 million ETP common units, representing an approximate 26% limited partner interest in ETP.

	•	13.0% of all incremental cash distributed in a fiscal quarter after $0.275 has been distributed in respect of each common unit of ETP for that quarter;
	•	23.0% of all incremental cash distributed in a fiscal quarter after $0.3175 has been distributed in respect of each common unit of ETP for that quarter; and
	•	the maximum sharing level of 48.0% of all incremental cash distributed in a fiscal quarter after $0.4125 has been distributed in respect of each common unit of ETP for that quarter.

		Six Months
		Ended								Years Ended
		June 30,								December 31,
		2010				2009				2009				2008
Limited Partner Interests		$	100,750			$	111,720			$	223,440			$	221,878
General Partner Interest			9,754				9,721				19,505				17,322
Incentive Distribution Rights			184,751				168,310				350,486				298,575
Total distributions received from ETP(1)(2)		$	295,255			$	289,751			$	593,431			$	537,775

(1)		Represents cash distributions received in respect of each of the quarters included within the period, including distributions paid in respect of the last quarter of such period after the end of such quarter and excluding distributions paid during the first quarter of such period in respect of the prior quarter.
(2)		The distributions paid by ETP for the periods prior to May 26, 2010, the date of the closing of the Regency Transactions, do not reflect the reduction in the number of ETP common units held by us as a result of the Regency Transactions and the associated reduction in distributions payable in respect of the incentive distribution rights.

	•	In April 2007, ETP completed its 243-mile pipeline from Cleburne in north Texas to Carthage in east Texas, which we refer to as the Cleburne to Carthage pipeline, to expand its capacity to transport natural gas produced from the Barnett Shale and the Bossier Sands to its Texoma pipeline and other pipeline interconnections. The Cleburne to Carthage pipeline is primarily a 42-inch diameter natural gas pipeline. In December 2007, ETP completed two natural gas compression projects that added approximately 90,000 horsepower on the Cleburne to Carthage pipeline, increasing its natural gas deliverability at the Carthage Hub to more than 2.0 Bcf/d.
	•	In April 2008, ETP completed its approximately 150-mile Southeast Bossier 42-inch natural gas pipeline, which we refer to as the Southeast Bossier pipeline. This pipeline connects ETP’s Cleburne to Carthage pipeline and its East Texas pipeline to its Texoma pipeline. The Southeast Bossier pipeline has an initial throughput capacity of 900 million cubic feet per day, or MMcf/d, that can be increased to 1.3 Bcf/d with the addition of compression. The Southeast Bossier pipeline increases ETP’s takeaway capacity from the Barnett Shale and Bossier Sands and provides increased market access for natural gas produced in these areas.
	•	In July 2008, ETP completed its 36-inch Paris Loop natural gas pipeline expansion project in north Texas. This 135-mile pipeline initially provided ETP with an additional 400 MMcf/d of capacity out of the Barnett Shale, which increased to 900 MMcf/d in May 2009. The Paris Loop originates near Eagle Mountain Lake in northwest Tarrant County, Texas and connects to ETP’s Houston Pipe Line system near Paris, Texas.
	•	In August 2008, ETP completed an expansion of its Cleburne to Carthage pipeline from the Texoma pipeline interconnect to the Carthage Hub through the installation of 32 miles of 42-inch pipeline. This expansion, which we refer to as the Carthage Loop, added 500 MMcf/d of pipeline capacity from Cleburne to the Carthage Hub. In September 2009, ETP increased the capacity of the Carthage Loop to 1.1 Bcf/d by adding compression to this pipeline.
	•	In August 2008, ETP completed the first segment of its 36-inch Maypearl to Malone natural gas pipeline expansion project. This 25-mile pipeline extends from Maypearl, Texas to Malone, Texas, and provides an additional 600 MMcf/d of capacity out of the Fort Worth Basin.
	•	In January 2009, ETP completed its Southern Shale natural gas pipeline project, which consists of 31 miles of 36-inch pipeline that originates in southern Tarrant County, Texas and delivers natural gas to its Maypearl to Malone pipeline expansion project. The Southern Shale pipeline provides an additional 700 MMcf/d of takeaway capacity from the Barnett Shale.

	•	In January 2009, ETP completed its 36-inch Cleburne to Tolar natural gas pipeline expansion project. This 20-mile pipeline extends from Cleburne, Texas to Tolar, Texas and provides an additional 400 MMcf/d of takeaway capacity from the Barnett Shale.
	•	In February 2009, ETP completed its 56-mile Katy Expansion pipeline project. This 36-inch expansion project increased the capacity of its existing ETC Katy natural gas pipeline in southeast Texas by more than 400 MMcf/d.
	•	In August 2009, ETP completed its Texas Independence Pipeline, which consists of 143 miles of 42-inch pipeline originating near Maypearl, Texas and ending near Henderson, Texas. This pipeline connects ETP’s ET Fuel System and North Texas System with its East Texas pipeline. The Texas Independence Pipeline expands ETP’s ET Fuel System’s throughput capacity by an incremental 1.1 Bcf/d and, with the addition of compression, the capacity may be expanded to 1.75 Bcf/d.
	•	In June 2010, ETP announced plans to construct a 63-mile natural gas pipeline that will originate in Shelby County, Texas, and terminate in Nacogdoches County, Texas. This project will consist of 20- and 24-inch pipe and will have an initial capacity of 645 MMcf/d. The pipeline will interconnect with two interstate pipelines in addition to ETP’s Houston Pipe Line system. Partial service is expected to begin in the third quarter of 2010, with full in-service capabilities by the fourth quarter of 2010.

	•	ETP believes that the size and scope of its operations, its stable asset base and cash flow profile, and its investment grade status will be significant positive factors in its efforts to obtain new debt or equity financing in light of current market conditions.
	•	ETP’s experienced management team has an established reputation as highly-effective, strategic operators within its operating segments. In addition, ETP’s management team is motivated to effectively and efficiently manage its business operations through performance-based incentive compensation programs and through ownership of a substantial equity position in us and therefore benefits from incentive distribution payments ETP makes to ETP GP.

	•	a 2.0% general partner interest, which we hold through our ownership interests in Regency GP and Regency LLC;
	•	100% of the incentive distribution rights in Regency, which we hold through our ownership interests in Regency GP; and
	•	approximately 26.3 million Regency common units, representing an approximate 19% limited partner interest in Regency.

	•	13% of all incremental cash distributed in a fiscal quarter after $0.4025 has been distributed in respect of each common unit of Regency for that quarter;
	•	23% of all incremental cash distributed in a fiscal quarter after $0.4375 has been distributed in respect of each common unit of Regency for that quarter; and
	•	the maximum sharing level of 48% of all incremental cash distributed in a fiscal quarter after $0.525 has been distributed in respect of each common unit of Regency for that quarter.

	•	we acquired a 100% equity interest in Regency GP and Regency LLC, the general partner entities of Regency, from an affiliate of GE EFS in exchange for 3,000,000 Series A Convertible Preferred Units having an aggregate liquidation preference of $300.0 million;
	•	we acquired the equity interests in an entity that owns a 49.9% membership interest in MEP and an option to acquire the equity interests in an entity that owns a 0.1% membership interest in MEP, which is exercisable on May 27, 2011, which we refer to as the Option, from ETP in exchange for the redemption by ETP of approximately 12.3 million ETP common units owned by us; and
	•	we contributed the equity interests in the entity that owns a 49.9% membership interest in MEP along with our rights under the Option to a subsidiary of Regency in exchange for approximately 26.3 million newly issued Regency common units.

(1)		Includes approximately 560,000 common units owned by management of ETP.
(2)		Includes unamortized discounts and fair value adjustments.
(3)		Does not include the outstanding debt of joint ventures of ETP and Regency. See “Capitalization” and “Description of Other Indebtedness.”

Issuer		Energy Transfer Equity, L.P.
Notes Offered		We are offering $1,000,000,000 aggregate principal amount of     % Senior Notes due 2020.
Maturity		, 2020.
Interest Rate		Interest on the notes will accrue at the per annum rate of     %.
Interest Payment Dates		Interest on the notes will accrue from the issue date of the notes and be payable semi-annually on           and          of each year, beginning on          , 2011.
Ranking		Unless the collateral release event described below has occurred, our obligations under the notes will be secured on a first priority, equal and ratable basis with our obligations under our senior secured revolving credit facility, which we refer to as the revolving credit facility, and our senior secured term loan facility, which we refer to as the term loan facility, by a lien on substantially all assets that from time to time secure our obligations under those facilities, subject to certain exceptions and permitted liens. Initially, the collateral for the notes and our credit facilities will consist primarily of all of the common units of ETP and Regency that are owned by us and the equity interests we own in our restricted subsidiaries. Our restricted subsidiaries own all of the incentive distribution rights related to ETP and Regency and the general partner interests in ETP and Regency. The liens securing the notes will be subject to the terms of an intercreditor agreement, under which the collateral agent for the lenders under our revolving credit facility, referred to as the revolving bank collateral agent, will generally be entitled to sole control of all decisions and actions, including foreclosure, with respect to the collateral, even if an event of default under the notes has occurred, and neither the holders of notes nor the trustee will generally be entitled to independently exercise remedies with respect to the collateral. In addition, the revolving bank collateral agent will be entitled, without the consent of holders of notes or the trustee, to amend the terms of the security documents securing the notes (subject to certain limitations) and to release the liens of the secured parties on any part of the collateral at any time.
		All of the liens securing the notes may be released, at our election, if all outstanding indebtedness under our term loan facility is discharged or if all liens on the collateral securing our obligations under the term loan facility are released. We refer to such a release as the “collateral release event.” After the collateral release event, the notes will be unsecured and will effectively rank junior to our secured indebtedness to the extent of the value of collateral securing such indebtedness. If the indebtedness under our term

		loan facility is discharged concurrently with the closing of this offering, the notes will be unsecured when issued. We expect our revolving credit facility to continue to be secured by a substantial portion of our assets following the occurrence of the collateral release event.
		The notes will be our senior obligations. The notes will rank equally in right of payment with all of our other existing and future senior indebtedness and senior to any of our subordinated indebtedness. Assuming we had completed this offering on June 30, 2010, after giving effect to the application of the use of proceeds of this offering, we would have had approximately $700.5 million of indebtedness outstanding that would rank equally in right of payment to the notes as of that date. See “Description of Notes — Ranking” and “— Security for the Notes.”
		The notes initially will not be guaranteed by any of our subsidiaries. However, if at any time following the issue date of the notes, any of our subsidiaries guarantees or becomes a co-obligor with respect to any indebtedness, or if at any time following the issue date of the notes any Restricted Subsidiary of ETE otherwise incurs any indebtedness, then such subsidiary or Restricted Subsidiary, as the case may be, will also guarantee the notes on terms provided for in the indenture; provided, however, that prior to November 2, 2012, ETE GP Acquirer LLC and ETE Services Company, LLC may guarantee our obligations in respect of the credit facility without guaranteeing our obligations with respect to the notes. With respect to the assets of our subsidiaries that do not guarantee the notes, including ETP and Regency, the notes will effectively rank junior to all existing and future obligations of those subsidiaries. As of September 8, 2010, our subsidiaries, including ETP, Regency and their respective subsidiaries, had outstanding approximately $7.14 billion of indebtedness that would effectively rank senior to the notes with respect to the assets of those subsidiaries.
Optional Redemption		We may redeem the notes in whole, at any time, or in part, from time to time, prior to maturity, at a redemption price that includes accrued and unpaid interest and a make-whole premium. See “Description of Notes — Optional Redemption.”
Covenants		We will issue the notes under an indenture with U.S. Bank National Association, as trustee. The covenants in the indenture include a limitation on liens, a limitation on transactions with affiliates and a restriction on sale-leaseback transactions. The covenants will generally not apply to ETP, Regency and their respective subsidiaries. Each covenant is subject to a number of important exceptions, limitations and qualifications that are described in “Description of Notes — Covenants.”
Mandatory Offer to Repurchase		If we experience a change of control together with a rating decline, each as defined in the indenture, we must offer to repurchase the notes at an offer price in cash equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. See “Description of Notes — Covenants.”

Use of Proceeds		We anticipate using approximately $142.1 million of the net proceeds of this offering to repay all of the outstanding indebtedness under our revolving credit facility and approximately $741.9 million of the net proceeds of this offering to repay a portion of the indebtedness outstanding under our term loan facility. In addition, we anticipate using the remaining approximately $99.0 million of the net proceeds of this offering to fund the estimated cost to terminate interest rate swap agreements relating to these outstanding borrowings. See “Use of Proceeds” and “Description of Other Indebtedness.”
Governing Law		The indenture and the notes provide that they will be governed by, and construed in accordance with, the laws of the state of New York.
Risk Factors		Investing in the notes involves risks. See “Risk Factors” beginning on page S-20 of this prospectus supplement and the other risks identified in the documents incorporated by reference herein for information regarding risks you should consider before investing in the notes.
Original Issue Discount		The notes may be issued with original issue discount, or OID, for U.S. federal income tax purposes. If the notes are issued with OID, then such OID will accrue from the date of issuance of the notes and will be included as interest income in a U.S. holder’s gross income for U.S. federal income tax purposes in advance of receipt of the cash payments to which such income is attributable, regardless of such holder’s method of tax accounting. See “Certain United States Federal Income Tax Considerations — Tax Consequences to U.S. Holders — Stated Interest and OID on the Notes.”

																		Four Months
		Six Months Ended								Years Ended								Ended				Year Ended
		June 30,								December 31,								December 31,				August 31,
		2010				2009				2009				2008				2007				2007
		(unaudited)
Statement of Operations Data:
Revenues:
Investment in ETP		$	3,139,687			$	2,781,917			$	5,417,295			$	9,293,868			$	2,349,510			$	6,792,037
Investment in Regency			102,980				—				—				—				—				—
Other			(2,157	)			(253	)			—				(501	)			(168	)			—
Total revenues			3,240,510				2,781,664				5,417,295				9,293,367				2,349,342				6,792,037
Gross margin			1,171,285				1,196,532				2,295,239				2,355,287				675,688				1,713,831
Depreciation and amortization			184,816				154,888				325,024				274,372				75,406				191,383
Operating income			518,289				571,129				1,110,398				1,098,903				316,651				809,336
Interest expense, net of interest capitalized			(250,734	)			(220,950	)			(468,420	)			(357,541	)			(103,375	)			(279,986	)
Income before income tax expense			192,867				430,978				707,100				683,562				192,758				563,359
Income tax expense			9,264				9,470				9,229				3,808				9,949				11,391
Net income attributable to noncontrolling interest			51,558				165,597				255,398				304,710				90,132				232,608
Net income attributable to partners			132,045				255,911				442,473				375,044				92,677				319,360
Balance Sheet Data (at period end):
Current assets		$	1,084,534			$	872,030			$	1,267,959			$	1,180,995			$	1,403,796			$	1,050,578
Total assets			16,361,954				11,435,309				12,160,509				11,069,902				9,462,094				8,183,089
Current liabilities			1,183,068				925,714				889,745				1,208,921				1,241,433				932,815
Long-term debt, less current maturities			8,776,173				7,265,314				7,750,998				7,190,357				5,870,106				5,198,676
Total equity			5,630,258				2,945,635				3,220,251				2,339,316				2,091,156				1,835,300
Other Financial Data:
Cash flow provided by operating activities		$	801,936			$	653,488			$	723,461			$	1,143,720			$	208,635			$	1,006,320
Cash flow used in investing activities			(786,185	)			(875,514	)			(1,345,756	)			(2,015,585	)			(995,943	)			(2,158,090	)
Cash flow provided by financing activities			183				244,364				598,587				907,331				766,515				1,202,916
Capital expenditures:
Maintenance (accrual basis)			43,855				44,283				102,652				140,968				48,998				89,226
Growth (accrual basis)			600,944				402,240				530,333				1,921,679				604,371				998,075
Cash (received in) paid for acquisitions			129,390				6,362				(30,367	)			84,783				337,092				90,695
Ratio of earnings to fixed charges			1.67				2.81				2.39				2.74				2.58				2.75

																		Four Months
		Six Months Ended								Years Ended								Ended				Year Ended
		June 30,								December 31,								December 31,				August 31,
		2010				2009				2009				2008				2007				2007
		(unaudited)
Statement of Operations Data:
Equity in earnings of affiliates		$	221,740			$	287,534			$	526,383			$	551,835			$	168,547			$	435,247
Selling, general and administration expense			(17,415	)			(2,822	)			(4,970	)			(6,453	)			(2,875	)			(8,496	)
Interest expense			(36,916	)			(38,139	)			(74,049	)			(91,822	)			(37,071	)			(104,405	)
(Losses) Gains on non-hedged interest rate derivatives			(35,177	)			9,394				(5,620	)			(77,435	)			(27,670	)			(1,952	)
Other, net			(212	)			(628	)			79				(1,056	)			(8,128	)			(405	)
Net income			132,045				255,911				442,473				375,044				92,677				319,360
Balance Sheet Data (at period end):
Current assets		$	2,895			$	2,136			$	1,446			$	684			$	11,694			$	25,783
Total assets			2,228,837				1,721,281				1,718,948				1,671,339				1,630,940				1,537,875
Current liabilities			198,939				70,777				71,513				61,419				27,978				10,507
Long-term debt, less current maturities			1,450,000				1,572,498				1,573,951				1,571,642				1,572,643				1,571,500
Cash Flow Data:
Cash flow provided by operating activities		$	233,100			$	230,641			$	468,969			$	436,819			$	77,360			$	239,777
Cash flow from investing activities			3,016				—				—				—				—				—
Cash flow provided by (used in) financing activities			(236,116	)			(230,641	)			(468,969	)			(436,799	)			(85,919	)			968,689
Distributable Cash Flow:
Cash distributions related to period expected from ETP associated with:
Limited partner interests		$	100,750			$	111,720			$	223,440			$	221,878			$	70,313			$	199,221
General partner interest			9,754				9,721				19,505				17,322				5,110				13,676
Incentive distribution rights			184,751				168,310				350,486				298,575				85,775				222,353
Total distributions related to period expected from ETP			295,255				289,751				593,431				537,775				161,198				435,250
Cash distributions related to period expected from Regency associated with:
Limited partner interests		$	11,689			$	—			$	—			$	—			$	—			$	—
General partner interest			1,105				—				—				—				—				—
Incentive distribution rights			915				—				—				—				—				—
Total cash distribution expected from Regency			13,709				—				—				—				—				—
Pro rata cash settlement related to Regency Transactions:
Received from ETP related to 12,273,830 ETP common units redeemed		$	10,451			$	—			$	—			$	—			$	—			$	—
Paid to Regency related to 26,266,791 Regency common units			(7,436	)			—				—				—				—				—
Net pro rata cash settlement for period from April 1, 2010 through May 25, 2010		$	3,015			$	—			$	—			$	—			$	—			$	—
Total cash distributions expected from ETP and Regency including pro rata cash settlement			311,979				289,751				593,431				537,775				161,198				435,250
ETE related expenses			(17,161	)			(2,603	)			(3,678	)			(7,007	)			(11,288	)			(10,343	)
Interest expense, net of amortization of financing costs, interest income, and realized gains and losses on interest rate derivatives			(53,160	)			(44,888	)			(95,337	)			(97,654	)			(34,748	)			(100,933	)
Distributable Cash Flow		$	241,658			$	242,260			$	494,416			$	433,114			$	115,162			$	323,974

																		Four Months
		Six Months Ended								Years Ended								Ended				Year Ended
		June 30,								December 31,								December 31,				August 31,
		2010				2009				2009				2008				2007				2007
Reconciliation of Net income to Distributable Cash Flow:
Net income		$	132,045			$	255,911			$	442,473			$	375,044			$	92,677			$	319,360
Adjustments to derive Distributable Cash Flow:
Equity in income of unconsolidated affiliates			(221,740	)			(287,534	)			(526,383	)			(551,835	)			(168,547	)			(435,247	)
Distributions related to period expected from ETP			295,255				289,751				593,431				537,775				161,198				435,251
Distributions related to period expected from Regency			13,709				—				—				—				—				—
Net pro rata cash settlement related to Regency Transactions			3,015				—				—				—				—				—
Amortization included in interest			2,153				4,162				6,309				5,076				1,006				2,630
Unrealized (gains) losses on non-hedged interest rate swaps			16,764				(20,307	)			(21,965	)			66,231				28,805				1,952
Other non-cash			457				277				551				823				23				28
Distributable Cash Flow		$	241,658			$	242,260			$	494,416			$	433,114			$	115,162			$	323,974

																		Four Months
		Six Months Ended								Years Ended								Ended				Year Ended
		June 30,								December 31,								December 31,				August 31,
		2010				2009				2009				2008				2007				2007
Reconciliation of Cash flow provided by operating activities to Distributable Cash Flow:
Cash flow provided by operating activities		$	233,100			$	230,641			$	468,969			$	436,819			$	77,360			$	239,777
Adjustments to derive Distributable Cash Flow:
Distributions related to period expected from ETP			295,255				289,751				593,431				537,775				161,198				435,251
Distributions related to period expected from Regency			13,709				—				—				—				—				—
Cash distributions received from ETP			(301,206	)			(281,205	)			(574,775	)			(535,342	)			(110,878	)			(360,602	)
Net pro rata cash settlement related to Regency Transactions			3,015				—				—				—				—				—
Deferred income taxes			(858	)			573				645				—				—				—
Net changes in operating assets and liabilities			(1,357	)			2,500				6,146				(6,138	)			(12,518	)			9,548
Distributable Cash Flow		$	241,658			$	242,260			$	494,416			$	433,114			$	115,162			$	323,974

		Successor					Predecessor
		Period from
		Acquisition
		(May 26,					Period from				Six Months
		2010) to					January 1,				Ended				Years Ended
		June 30,					2010 to				June 30,				December 31,
		2010					May 25, 2010				2009				2009				2008				2007
Statement of Operations Data:
Revenues:
Gas sales		$	48,103				$	232,063			$	254,793			$	481,400			$	1,126,760			$	744,681
NGL sales			28,766					166,362				107,261				262,652				409,476				347,737
Gathering, transportation and other fees			22,884					116,061				142,079				273,770				286,507				100,644
Net realized and unrealized gain from derivatives			(130	)				(716	)			26,970				41,577				(21,233	)			(34,266	)
Other			3,357					15,477				12,417				30,098				62,294				31,442
Total revenues			102,980					529,247				543,520				1,089,497				1,863,804				1,190,238
Depreciation and amortization			10,995					46,084				54,125				109,893				102,566				55,074
Operating (loss) income			(1,152	)				19,936				185,579				224,636				163,973				59,364
Interest expense, net			(8,109	)				(36,459	)			(33,795	)			(77,996	)			(63,243	)			(52,016	)
Income (loss) before income tax expense			(4,650	)				(4,542	)			153,963				139,394				101,062				(12,600	)
Income tax (benefit) expense			245					404				(416	)			(1,095	)			(266	)			931
Net income attributable to noncontrolling interest			(29	)				(406	)			(100	)			(91	)			(312	)			(305	)
Net income attributable to Regency			(4,924	)				(5,352	)			154,279				140,398				101,016				(13,836	)

		Successor					Predecessor
		Period from
		Acquisition
		(May 26,					Period from				Six Months
		2010) to					January 1,				Ended				Years Ended
		June 30,					2010 to				June 30,				December 31,
		2010					May 25, 2010				2009				2009				2008				2007
Balance Sheet Data (at period end):
Current assets		$	166,077								$	158,827			$	178,776			$	236,403			$	179,893
Total assets			4,595,292									2,477,284				2,533,414				2,458,639				1,278,410
Current liabilities			154,365									128,506				161,308				216,950				198,258
Long-term debt, net			1,276,640									1,185,385				1,014,299				1,126,229				481,500
Total partners’ capital and non-controlling interest			3,026,579									1,148,520				1,243,010				1,099,413				563,293
Other Financial Data:
Net cash flows (used in) provided by operating activities		$	(16,207	)			$	89,421			$	69,271			$	143,960			$	181,298			$	79,529
Net cash flows (used in) provided by investing activities			(46,935	)				(148,450	)			(36,003	)			(156,165	)			(948,629	)			(157,933	)
Net cash flows provided by (used in) financing activities			44,454					72,186				(24,592	)			21,433				734,959				99,443
Capital expenditures:
Growth			77,271	(a)								81,349				136,260				354,727				78,305
Maintenance			7,858	(a)								7,933				20,170				18,247				7,734

(a)		Includes capital expenditures incurred during the period from January 1, 2010 through May 25, 2010.

 

In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to our structure as a limited partnership, our industry and our partnership could materially impact our future performance and results of operations. We have provided below a list of these risk factors that should be reviewed when considering an investment in the notes. These are not all the risks we face and other factors currently considered immaterial or unknown to us may impact our future operations.

 

Risks Related to the Notes

 

The notes will be effectively subordinated to liabilities and indebtedness of our subsidiaries.

 

We do not own any operating assets. Our principal assets consist of approximately 50.2 million common units of ETP and 26.3 million common units of Regency in addition to the incentive distribution rights and general partner interests of ETP and Regency. We own these incentive distribution rights and general partner interests through wholly owned subsidiaries. Initially, none of our subsidiaries will guarantee our obligations with respect to the notes. Creditors of our subsidiaries that do not guarantee the notes will have claims with respect to the assets of those subsidiaries that rank effectively senior to claims of the holders of the notes. In the event of any distribution or payment of assets of such subsidiaries in any dissolution, winding up, liquidation, reorganization or other bankruptcy proceeding, the claims of those creditors must be satisfied prior to making any such distribution or payment to us in respect of our direct or indirect equity interests in such subsidiaries. Accordingly, after satisfaction of the claims of such creditors, there may be little or no amounts left available to make payments in respect of the notes. Also, there are federal and state laws that could invalidate any guarantee of our subsidiary or subsidiaries that guarantee the notes. If that were to occur, the claims of creditors of a guaranteeing subsidiary would also rank effectively senior to the notes, to the extent of the assets of that subsidiary. Furthermore, such subsidiaries are not prohibited under the indenture from incurring additional indebtedness.

 

None of ETP, Regency or any of their respective subsidiaries will guarantee the payment of the notes, and our ability to pay principal and interest on the notes is dependent upon ETP and Regency having sufficient cash available for distributions on their respective common units and incentive distribution rights after satisfaction of the debt obligations of ETP, Regency and their respective subsidiaries.

 

None of ETP, Regency or any of their respective subsidiaries will guarantee our obligations with respect to the notes. Our ability to pay principal and interest on the notes is dependent upon our receipt of cash distributions from ETP and Regency in respect of our ETP and Regency common units and incentive distribution rights, which cash distributions are subject to the priority rights of creditors of ETP, Regency and their respective subsidiaries. Accordingly, creditors of ETP, Regency and their respective subsidiaries will have claims, with respect to the assets of ETP, Regency and their respective subsidiaries, that rank effectively senior to the notes. In the event of any distribution or payment of assets of ETP, Regency and their respective subsidiaries in any dissolution, winding up, liquidation, reorganization or other bankruptcy proceeding, the claims of the creditors of ETP, Regency and their respective subsidiaries must be satisfied prior to ETP or Regency making any such distribution to us in respect of our direct or indirect equity interests in ETP or Regency. Accordingly, after satisfaction of the claims of such creditors, there may be little or no amounts distributed to us to make payments in respect of the notes. As of September 8, 2010, the notes would have been effectively subordinated to approximately $7.14 billion of outstanding indebtedness of ETP, Regency and their respective subsidiaries. Furthermore, none of ETP, Regency or any of their respective subsidiaries are subject to any provisions of the indenture, and therefore the indenture does not prohibit ETP, Regency or any of their respective subsidiaries from incurring additional indebtedness.

 

We will have a substantial amount of indebtedness following this offering, which may adversely affect our ability to operate our business, remain in compliance with debt covenants and make payments on our indebtedness, including the notes.

 

We have significant debt obligations. If we are unable to meet our debt obligations, we may need to consider refinancing or amending credit agreements or debt indentures or adopting alternative strategies to

reduce or delay expenditures or seeking additional equity capital. Assuming we had completed this offering on June 30, 2010, after giving effect to the notes offered hereby and the use of proceeds therefrom, we would have had indebtedness of approximately $9.1 billion. In addition, our subsidiaries, including ETP, Regency and their respective subsidiaries, had outstanding approximately $7.14 billion of indebtedness as of September 8, 2010 that would effectively rank senior to the notes with respect to the assets of those subsidiaries.

 

Our substantial debt could have important consequences to you. For example, it could make it more difficult for us to satisfy our obligations with respect to the notes, increase our vulnerability to general adverse economic and industry conditions, and limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity. In addition, the indenture governing the notes, the agreements governing our revolving and term loan facilities and any of our future debt agreements may contain financial and other restrictive covenants that will limit our ability to decide how to operate our business. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness.

 

There may not be sufficient collateral to pay all or any of the notes.

 

Our indebtedness and other obligations under our revolving and term loan credit facilities and the notes (unless the collateral release event has occurred) are, and certain other secured indebtedness that we may incur in the future will be, secured by a first-priority lien on certain of our assets. No fair market value appraisals of any collateral have been prepared in connection with this offering of the notes. The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral. By its nature, some or all of the collateral may be illiquid and may have no readily ascertainable market value. Although a public trading market exists for the portion of the collateral represented by the common units of ETP and Regency, the market may not be sufficiently liquid for you to realize that value. The value of the assets pledged as collateral for the notes could be impaired in the future as a result of changing economic conditions, competition or other future trends.

 

In addition, the collateral securing the notes is subject to liens permitted under the terms of the indenture and the intercreditor agreement, whether arising on or after the date the notes were issued. To the extent that third parties hold prior liens, such third parties may have rights and remedies with respect to the property subject to such liens that, if exercised, could adversely affect the value of the collateral securing the notes. The indenture will not require that we maintain the current level of collateral or maintain a specific ratio of indebtedness to asset values.

 

In the event of a foreclosure, liquidation, bankruptcy or similar proceeding, no assurance can be given that the proceeds from any sale or liquidation of the collateral will be sufficient to pay our senior secured debt obligations, including the notes, in full or at all. Accordingly, there may not be sufficient collateral to pay all or any of the amounts due on the notes. Any claim for the difference between the amount, if any, realized by holders of the notes from the sale of the collateral securing the notes and the obligations under the notes will rank equally in right of payment with all of our unsecured senior indebtedness and other obligations, including trade payables.

 

The collateral securing the Notes may be diluted under certain circumstances.

 

The revolving and term loan facilities will permit us to incur additional debt up to applicable maximum debt threshold amounts. Any additional debt secured by the collateral pursuant to the revolving and term loan facilities would dilute the value of the rights the holders of the notes have in the collateral.

 

Under certain circumstances, the collateral securing the notes may be released, and the notes will thereafter become unsecured.

 

There are circumstances other than repayment or discharge of the notes under which the collateral securing the notes will be released automatically, without your consent, including:

 

 

 

If the collateral securing the notes is released or the notes are unsecured when issued, the notes will rank effectively junior to any of our secured indebtedness to the extent of the collateral value of that secured indebtedness.

 

The provisions of the intercreditor agreement relating to the collateral securing the notes will limit the rights of holders of the notes with respect to that collateral, even during an event of default.

 

Under the intercreditor agreement, the controlling agent will generally be entitled to sole control of all decisions and actions, including foreclosure, with respect to collateral, even if an event of default under the notes has occurred, and neither the holders of the notes nor the trustee will generally be entitled to independently exercise remedies with respect to the collateral. In addition, the controlling agent will be entitled, without the consent of holders of the notes or the trustee, to amend the terms of the security documents securing the notes (subject to certain limitations) and to release the liens of the secured parties on any part of the collateral at any time. See “Description of Notes — Security for the Notes — Intercreditor Agreement.”

 

Your interest in the collateral may be adversely affected by the failure to record or perfect security interests in certain collateral.

 

Applicable law requires that security interests in certain property and rights acquired after the grant of a general security interest can only be perfected at the time such property and rights are acquired and identified. The liens on the collateral securing the notes may not be perfected if the collateral agent is not able to take the actions necessary to perfect any of these liens on or prior to the date of the indenture governing the notes. In addition, even though it may constitute an event of default under the indenture governing the notes, a third-party creditor could gain priority over one or more liens on the collateral securing the notes by recording an intervening lien or liens. Although the indenture will contain customary further assurances covenants, the trustee will not monitor the future acquisition of property and rights that constitute collateral, or take any action to perfect security interests in such acquired collateral.

 

Our credit ratings may not reflect all the risks of your investments in the notes.

 

Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the notes. These credit ratings may not reflect the potential impact of risks relating to structure or marketing of the notes. Agency ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization. Each agency’s rating should be evaluated independently of any other agency’s rating.

 

Bankruptcy laws may limit your ability to realize value from a sale of the collateral securing the notes.

 

The right of any collateral agent to foreclose upon and sell the collateral securing the notes upon the occurrence of an event of default under the indenture could be restricted under the United States Bankruptcy Code, or the Bankruptcy Code, if a bankruptcy case is commenced by or against us before the collateral agent has repossessed and disposed of the collateral. Upon the commencement of a case for relief under Chapter 11 of the Bankruptcy Code, a secured creditor, such as the collateral agent, is prohibited from repossessing its security from a debtor in a bankruptcy case or from disposing of security repossessed from the debtor without bankruptcy court approval. Furthermore, the Bankruptcy Code permits a debtor to continue to retain and to use the collateral (and the proceeds, products, rents or profits of such collateral) even though the debtor is in default under the applicable debt instruments, so long as the secured creditor is afforded “adequate protection” of its interest in the collateral. The meaning of the term “adequate protection” may vary according to circumstances, but it is

intended in general to protect the value of the secured creditor’s interest in the collateral and may include cash payments or the granting of additional security if and at such times as the bankruptcy court in its discretion determines that the value of the secured creditor’s interest in the collateral is declining during the pendency of the bankruptcy case. A bankruptcy court may determine that a secured creditor may not require compensation for a diminution in the value of its collateral if the value of the collateral exceeds the amount of debt it secures.

 

In light of the lack of a precise definition of the term “adequate protection” and the broad discretionary powers of bankruptcy courts, it is impossible to predict:

 

 

Any disposition of the collateral during a bankruptcy case would also require permission from the bankruptcy court. Furthermore, in the event a bankruptcy court determines that the value of the collateral is not sufficient to repay all amounts due under the notes, the holders of the notes would hold secured claims to the extent of the value of the collateral to which the holders of the notes are entitled and unsecured claims with respect to such shortfall. The Bankruptcy Code only permits the payment and accrual of post-petition interest, costs and attorneys’ fees to a secured creditor during a debtor’s bankruptcy case to the extent the value of its collateral is determined by the bankruptcy court to exceed the aggregate outstanding principal amount of the obligations secured by the collateral.

 

We may incur substantially more debt, which could further exacerbate the risks related to our indebtedness.

 

Assuming we had completed this offering on June 30, 2010, after giving effect to the notes offered hereby and the use of proceeds therefrom, we would have had approximately $9.1 billion of indebtedness outstanding. In addition, as of September 8, 2010, our subsidiaries, including ETP, Regency and their respective subsidiaries, had outstanding approximately $7.14 billion of indebtedness outstanding. We and our subsidiaries, including ETP and Regency, may incur substantial additional indebtedness in the future, including pursuant to our revolving credit facility. The terms of the indenture do not prohibit us from doing so. If we incur any additional indebtedness, including trade payables, that ranks equally with the notes, the holders of that debt will be entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of our partnership. This may have the effect of reducing the amount of proceeds paid to you. If new debt is added to our current debt levels, the related risks that we now face could intensify. See “Description of Notes” and “Description of Other Indebtedness.”

 

We may not be able to repurchase the notes upon a change of control.

 

Upon the occurrence of a change of control triggering event, we will be required to offer to repurchase all outstanding notes at 101% of their principal amount plus accrued and unpaid interest. We may not be able to repurchase the notes upon a change of control triggering event because we may not have sufficient funds. Further, we may be contractually restricted under the terms of our revolving credit facility or other future senior indebtedness from repurchasing all of the notes tendered by holders upon a change of control. Accordingly, we may not be able to satisfy our obligations to purchase your notes unless we are able to refinance or obtain waivers under our credit facilities. Our failure to repurchase the notes upon a change of control would cause a default under the indenture and a cross-default under our revolving credit facility. Our revolving credit facility provides that a change of control, as defined in such agreement, will be a default that permits lenders to accelerate the maturity of borrowings thereunder and, if such debt is not paid, to enforce security interests in the collateral securing such debt, thereby limiting our ability to raise cash to purchase the notes, and reducing the practical benefit of the offer to purchase provisions to the holders of the notes. Any of our future debt agreements may contain similar provisions.

In addition, the change of control provisions in the indenture may not protect you from certain important corporate events, such as a leveraged recapitalization (which would increase the level of our indebtedness), reorganization, restructuring, merger or other similar transaction.

 

The notes may be issued with original issue discount, in which case you generally will be required to accrue income before you receive cash attributable to the original issue discount on the notes. Additionally, in the event we enter into bankruptcy, you may not have a claim for all or a portion of any unamortized amount of the original discount on the notes.

 

The notes may be issued with original issue discount, or OID, for U.S. federal income tax purposes. If the notes are issued with OID and if you are a U.S. holder (as defined below), you generally will be required to accrue OID on a current basis as ordinary income and pay tax accordingly, even before you receive cash attributable to that income and regardless of your method of tax accounting. For further discussion of the computation and reporting of OID, see “Certain United States Federal Income Tax Considerations — Tax Consequences to U.S. Holders— Stated Interest and OID on the Notes.”

 

Additionally, a bankruptcy court may not allow a claim for all or a portion of any unamortized amount of OID on the notes.

 

Your ability to transfer the notes at a time or price you desire may be limited by the absence of an active trading market, which may not develop.

 

The notes are a new issue of securities for which there is no established public market. Although we have registered the offer and sale of the notes under the Securities Act of 1933, as amended, we do not intend to apply for the listing of the notes on any securities exchange or for the quotation of the notes in any automated dealer quotation system. In addition, although the underwriters have informed us that they intend to make a market in the notes, as permitted by applicable laws and regulations, they are not obligated to make a market in the notes, and they may discontinue their market-making activities at any time without notice. An active market for the notes may not develop or, if developed, may not continue. In the absence of an active trading market, you may not be able to transfer the notes within the time or at the price you desire.

 

Risks Inherent in an Investment in Us

 

Our only assets are our partnership interests, including the incentive distribution rights, in ETP and Regency and, therefore, our cash flow is dependent upon the ability of ETP and Regency to make distributions in respect of those partnership interests.

 

We do not have any significant assets other than our partnership interests in ETP and Regency. As a result, our ability to make required payments on the notes depends on the performance of ETP, Regency and their respective subsidiaries and ETP’s and Regency’s ability to make cash distributions to us, which is dependent on the results of operations, cash flows and financial condition of ETP and Regency.

 

The amount of cash that ETP and Regency can distribute to their partners, including us, each quarter depends upon the amount of cash they generate from their operations, which will fluctuate from quarter to quarter and will depend on, among other things:

 

 

 

In addition, the actual amount of cash that ETP and Regency will have available for distribution will also depend on other factors, such as:

 

 

ETE does not have any control over many of these factors, including the level of cash reserves established by the board of directors of ETP’s and Regency’s respective general partners. Accordingly, we cannot guarantee that ETP or Regency will have sufficient available cash to pay a specific level of cash distributions to its partners.

 

Furthermore, you should be aware that the amount of cash that ETP and Regency have available for distribution depends primarily upon cash flow, including cash flow from financial reserves and working capital borrowings, and is not solely a function of profitability, which will be affected by non-cash items. As a result, ETP and Regency may make cash distributions during periods when they record net losses and may not make cash distributions during periods when they record net income. Please read “Risks Related to the Businesses of ETP and Regency” for a discussion of further risks affecting ETP’s and Regency’s ability to generate distributable cash flow.

 

A reduction in ETP’s or Regency’s distributions will disproportionately affect the amount of cash distributions to which we are entitled, which may adversely impact our ability to make required payments on the notes.

 

Our indirect ownership of 100% of the incentive distribution rights in ETP, through our ownership of equity interests in ETP GP, the holder of the incentive distribution rights, entitles us to receive our pro rata share of specified percentages of total cash distributions made by ETP as it reaches established target cash distribution levels. We currently receive our pro rata share of cash distributions from ETP based on the highest incremental percentage, 48%, to which ETP GP is entitled pursuant to its incentive distribution rights in ETP. A decrease in the amount of distributions by ETP to less than $0.4125 per common unit per quarter would reduce ETP GP’s percentage of the incremental cash distributions above $0.3175 per common unit per quarter from 48% to 23%. As a result, any such reduction in quarterly cash distributions from ETP would have the effect of disproportionately reducing the amount of all distributions that we receive from ETP based on our

ownership interest in the incentive distribution rights in ETP as compared to cash distributions we receive from ETP on our general partner interest in ETP and our ETP common units.

 

Similarly, at the historical level of Regency distributions prior to the completion of the Regency Transactions, Regency GP received its pro rata share of incremental cash distributions from Regency at the 23% level pursuant to its incentive distribution rights in Regency. A decrease in the amount of distributions by Regency to less than $0.4375 per common unit per quarter would have reduced Regency GP’s percentage of the incremental cash distributions above $0.4025 per common unit per quarter from 23% to 13%. As a result, following the completion of the Regency Transactions and our acquisition of the equity interests in Regency GP any such reduction in quarterly cash distributions from Regency would have the effect of disproportionately reducing the amount of all distributions that we receive from Regency based on our ownership interest in the incentive distribution rights of Regency as compared to cash distributions we receive from Regency on our general partner interest in Regency and our Regency common units.

 

The consolidated debt level and debt agreements of ETP and Regency and those of their subsidiaries may limit the distributions we receive from ETP and Regency, our future financial and operating flexibility and our ability to make required payments on the notes.

 

As of June 30, 2010, ETP had approximately $6.1 billion of consolidated debt outstanding, excluding the credit facilities of its joint ventures, which it guarantees in part, and Regency had approximately $1.3 billion of consolidated debt outstanding. ETP’s and Regency’s levels of indebtedness affect their operations in several ways, including, among other things:

 

 

We do not have the same flexibility as other types of organizations to accumulate cash, which may limit cash available to service the notes or to repay them at maturity.

 

Unlike a corporation, our partnership agreement requires us to distribute, on a quarterly basis, 100% of our available cash to our unitholders of record and our general partner. Available cash is generally all of our cash on hand as of the end of a fiscal quarter, adjusted for cash distributions and net changes to reserves. Our general partner will determine the amount and timing of such distributions and has broad discretion to establish and make additions to our reserves or the reserves of our operating subsidiaries in amounts it determines in its reasonable discretion to be necessary or appropriate:

 

 

 

Although our payment obligations to our unitholders are subordinate to our payment obligations to you, the value of our units may decrease with decreases in the amount we distribute per unit. Accordingly, if we experience a liquidity problem in the future, the value of our units may decrease and we may not be able to issue equity to recapitalize.

 

We may not be able to generate sufficient cash to service all of our indebtedness, including the notes and our indebtedness under our credit facilities, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness, including the notes. We cannot assure you that we would be able to take any of these actions, that these actions would be successful and permit us to meet our scheduled debt service obligations or that these actions would be permitted under the terms of our existing or future debt agreements, including our credit agreement and the indenture that will govern the notes. In the absence of such cash flows and capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our credit facilities restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them, and any proceeds may not be adequate to meet any debt service obligations then due. See “Description of Other Indebtedness” and “Description of Notes.”

 

ETP and Regency are not prohibited from competing with us.

 

Neither our partnership agreement nor the partnership agreements of ETP or Regency prohibit ETP or Regency from owning assets or engaging in businesses that compete directly or indirectly with us. Additionally, ETP’s partnership agreement prohibits us from engaging in the retail propane business in the United States. In addition, ETP or Regency may acquire, construct or dispose of any assets in the future without any obligation to offer us the opportunity to purchase or construct any of those assets.

 

Increases in interest rates could materially adversely affect our business, results of operations, cash flows and financial condition.

 

In addition to our exposure to commodity prices, we have significant exposure to increases in interest rates. As of June 30, 2010, we had approximately $2.3 billion of variable rate debt outstanding, including

outstanding borrowings under ETP’s and Regency’s revolving credit facilities of $29.3 million and $655.7 million, respectively. We also had the following interest rate swaps outstanding as of June 30, 2010:

 

 

The credit and risk profile of our general partner and its owners could adversely affect our credit ratings and profile.

 

The credit and business risk profiles of our general partner or indirect owners of our general partner may be factors in credit evaluations of us as a master limited partnership due to the significant influence of our general partner and indirect owners over our business activities, including our cash distributions, acquisition strategy and business risk profile. Another factor that may be considered is the financial condition of our general partner and its owners, including the degree of their financial leverage and their dependence on cash flow from us to service their indebtedness.

 

If we cease to manage and control ETP or Regency in the future, we may be deemed to be an investment company under the Investment Company Act of 1940.

 

If we cease to manage and control ETP or Regency and are deemed to be an investment company under the Investment Company Act of 1940, or the Investment Company Act, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the Securities and Exchange Commission or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage and require us to add additional directors who are independent of us or our affiliates.

 

Moreover, treatment of us as an investment company would prevent our qualification as a partnership for federal income tax purposes, in which case we would be treated as a corporation for federal income tax purposes. For further discussion of the importance of our treatment as a partnership for federal income tax purposes and the implications that would result from our treatment as a corporation in any taxable year, please read the risk factor below entitled “Our tax treatment depends on our continuing status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us, ETP or Regency as a corporation for federal income tax purposes or if we, ETP or Regency become subject to a material amount of entity-level taxation for state tax purposes, it would substantially reduce the amount of cash available for payment of principal and interest on the notes.”

If ETP GP or Regency GP withdraws or is removed as ETP’s or Regency’s general partner, as applicable, then we would lose control over the management and affairs of ETP or Regency, the risk that we would be deemed an investment company under the Investment Company Act would be exacerbated and our indirect ownership of the general partner interests and 100% of the incentive distribution rights in ETP or Regency could be cashed out or converted into ETP or Regency common units, as applicable, at an unattractive valuation.

 

Under the terms of ETP’s or Regency’s respective partnership agreements, ETP GP or Regency GP, as applicable, will be deemed to have withdrawn as general partner if, among other things, it:

 

 

In addition, ETP GP and Regency GP can be removed as general partner if that removal is approved by unitholders holding at least 662/3% of ETP’s or Regency’s respective outstanding common units (including units held by ETP GP or Regency GP and their respective affiliates). Currently, ETP GP and its affiliates own approximately 27% of ETP’s outstanding common units, and Regency GP and its affiliates own approximately 19% of Regency’s outstanding common units.

 

If ETP GP or Regency GP withdraws from being ETP’s or Regency’s respective general partner in compliance with ETP’s or Regency’s partnership agreement, as applicable, or is removed from being ETP’s or Regency’s respective general partner under circumstances not involving a final adjudication of actual fraud, gross negligence or willful and wanton misconduct, it may require the successor general partner to purchase its general partner interests, incentive distribution rights and limited partner interests in ETP or Regency, as applicable, for fair market value. If ETP GP or Regency GP withdraws from being ETP’s or Regency’s respective general partner in violation of ETP’s or Regency’s partnership agreement, as applicable, or is removed from being ETP’s or Regency’s respective general partner in circumstances where a court enters a judgment that cannot be appealed finding it liable for actual fraud, gross negligence or willful or wanton misconduct in its capacity as ETP’s or Regency’s respective general partner, and the successor general partner does not exercise its option to purchase the general partner interests, incentive distribution rights and limited partner interests in ETP or Regency, as applicable, for fair market value, then the general partner interests and incentive distribution rights in ETP or Regency, as applicable, could be converted into limited partner interests pursuant to a valuation performed by an investment banking firm or other independent expert. Under any of the foregoing scenarios, ETP GP or Regency GP would lose control over the management and affairs of ETP or Regency, as applicable, thereby increasing the risk that we would be deemed an investment company subject to regulation under the Investment Company Act. In addition, our indirect ownership of the general partner interests and 100% of the incentive distribution rights in ETP and Regency, to which a significant portion of the value of our common units is currently attributable, could be cashed out or converted into ETP or Regency common units, as applicable, at an unattractive valuation.

 

An impairment of goodwill and intangible assets could reduce our earnings.

 

At June 30, 2010, our consolidated balance sheet reflected $1.54 billion of goodwill and $933.2 million of intangible assets. Goodwill is recorded when the purchase price of a business exceeds the fair market value of the tangible and separately measurable intangible net assets. Accounting principles generally accepted in the United States require us to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. Long-lived assets such as intangible assets with finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If we determine that any of our goodwill or intangible assets

were impaired, we would be required to take an immediate charge to earnings with a correlative effect on partners’ equity and balance sheet leverage as measured by debt to total capitalization.

 

ETP or Regency may issue additional common units, which may increase the risk that ETP or Regency will not have sufficient available cash to maintain or increase its per unit distribution level.

 

The partnership agreements of each of ETP and Regency allow ETP and Regency, respectively, to issue an unlimited number of additional limited partner interests. The issuance of additional common units or other equity securities by ETP or Regency will have the following effects:

 

 

The payment of distributions on any additional units issued by ETP or Regency may increase the risk that ETP or Regency, as applicable, may not have sufficient cash available to maintain or increase its per unit distribution level, which in turn may impact the available cash that we have to meet our obligations, including obligations under the notes.

 

Our tax treatment depends on our continuing status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us, ETP or Regency as a corporation for federal income tax purposes or if we, ETP or Regency become subject to a material amount of entity-level taxation for state tax purposes, it would substantially reduce the amount of cash available for payment of principal and interest on the notes.

 

Despite the fact that we, ETP and Regency are each limited partnerships under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. If we are so treated, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and we would likely pay additional state income taxes as well. If ETP or Regency were treated as a corporation for federal income tax purposes for any taxable year for which the statute of limitations remains open or for any future taxable year, it would pay federal income tax on its taxable income at the corporate tax rate. In general, distributions to us would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to us. As a result, there would be a material reduction in our anticipated cash flow. In either case, our cash available for payment of principal and interest on the notes would be substantially reduced.

 

Moreover, current law may change, causing us, ETP or Regency to be treated as a corporation for federal income tax purposes or otherwise subjecting us, ETP or Regency to entity-level taxation. For example, members of Congress have recently considered substantive changes to the existing federal income tax laws that would have affected certain publicly traded partnerships. For example, in response to recent public offerings of interests in the management operations of private equity funds and hedge funds, the U.S. House of Representatives has passed, and the U.S. Senate is considering, legislation that may eliminate partnership tax treatment for certain publicly traded partnerships and recharacterize certain types of income received from partnerships. In addition, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity-level taxation through the implementation of state income, franchise or other forms of taxation. We, ETP or Regency are unable to predict whether any of these changes, or other proposals, will ultimately be enacted.

Risks Related to Conflicts of Interest

 

Although we control ETP and Regency through our ownership of their respective general partners, ETP’s general partner owes fiduciary duties to ETP and ETP’s unitholders, and Regency’s general partner owes fiduciaries duties to Regency and Regency’s unitholders, which may conflict with our interests.

 

Conflicts of interest exist and may arise in the future as a result of the relationships between us and our affiliates, on the one hand, and ETP, Regency and their respective limited partners, on the other hand. The directors and officers of ETP’s and Regency’s general partners have fiduciary duties to manage ETP and Regency, respectively, in a manner beneficial to us. At the same time, the general partners have fiduciary duties to manage ETP and Regency, respectively, in a manner beneficial to ETP, Regency and their respective limited partners. The board of directors of ETP’s general partner and Regency’s general partner will resolve any such conflict and have broad latitude to consider the interests of all parties to the conflict. The resolution of these conflicts may not always be in our best interest.

 

For example, conflicts of interest with ETP or Regency may arise in the following situations:

 

 

The fiduciary duties of our general partner’s officers and directors may conflict with those of ETP’s or Regency’s respective general partners.

 

Conflicts of interest may arise because of the relationships among ETP, Regency, their general partners and us. Our general partner’s directors and officers have fiduciary duties to manage our business in a manner beneficial to us and our unitholders. Some of our general partner’s directors are also directors and officers of ETP’s general partner or Regency’s general partner, and have fiduciary duties to manage the respective businesses of ETP and Regency in a manner beneficial to ETP, Regency and their respective unitholders. The resolution of these conflicts may not always be in our best interest or that of our unitholders.

 

Affiliates of our general partner are not prohibited from competing with us.

 

Our partnership agreement provides that our general partner will be restricted from engaging in any business activities other than acting as our general partner and those activities incidental to its ownership of interests in us. Except as provided in our partnership agreement, affiliates of our general partner are not prohibited from engaging in other businesses or activities, including those that might be in direct competition with us. Enterprise GP Holdings L.P. currently has a 40.6% non-controlling equity interest in our general partner and owns approximately 17.6% of our outstanding common units. Enterprise GP Holdings L.P. and its subsidiaries own and operate a North American midstream energy business that competes with us, ETP and Regency with respect to ETP’s and Regency’s respective natural gas midstream businesses.

Potential conflicts of interest may arise among our general partner, its affiliates and us. Our general partner and its affiliates have limited fiduciary duties to us, which may permit them to favor their own interests to the detriment of us.

 

Conflicts of interest may arise among our general partner and its affiliates, on the one hand, and us, on the other hand. As a result of these conflicts, our general partner may favor its own interests and the interests of its affiliates over our interests. These conflicts include, among others, the following:

 

 

Our partnership agreement limits our general partner’s fiduciary duties to us and restricts the remedies available for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example, our partnership agreement:

 

 

Risks Related to the Businesses of ETP and Regency

 

Since our cash flows consist exclusively of distributions from ETP and Regency, risks to the businesses of ETP and Regency are also risks to us. We have set forth below risks to the businesses of ETP and Regency, the occurrence of which could have a negative impact on their respective financial performance and decrease the amount of cash distributed to us.

 

ETP and Regency are exposed to the credit risk of their respective customers, and an increase in the nonpayment and nonperformance by their respective customers could reduce their respective ability to make distributions to their unitholders, including to us.

 

The risks of nonpayment and nonperformance by ETP’s and Regency’s respective customers are a major concern in their respective businesses. Participants in the energy industry have been subjected to heightened scrutiny from the financial markets in light of past collapses and failures of other energy companies. ETP and Regency are subject to risks of loss resulting from nonpayment or nonperformance by their respective customers. The current tightening of credit in the financial markets may make it more difficult for customers to obtain financing and, depending on the degree to which this occurs, there may be a material increase in the nonpayment and nonperformance by ETP’s and Regency’s customers. Any substantial increase in the nonpayment and nonperformance by ETP’s or Regency’s customers could have a material adverse effect on ETP’s or Regency’s respective results of operations and operating cash flows.

 

ETP is exposed to claims by third parties related to the claims that were previously brought against ETP by the Federal Energy Regulatory Commission, or FERC.

 

On July 26, 2007, the FERC issued to ETP an Order to Show Cause and Notice of Proposed Penalties, which we refer to as 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 its commodities derivatives positions and from certain of its index-priced physical gas purchases in the 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 Natural Gas Act, or NGA. The FERC alleged 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. The FERC also alleged that one of ETP’s intrastate pipelines violated various FERC regulations, by, among other things, granting undue preferences in favor of an affiliate. 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.

 

In February 2008, the FERC’s 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 the 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 August 26, 2009, ETP entered into a settlement agreement with the FERC’s Enforcement Staff with respect to the pending FERC claims against it and on September 21, 2009, the FERC approved the settlement agreement without modification. The agreement resolves all outstanding FERC claims against ETP and provides that ETP make a $5.0 million payment to the federal government and establish a $25.0 million fund for the purpose of settling related third-party claims based on or arising out of the market manipulation allegation against ETP by those third parties that may elect to make a claim against this fund, including

existing litigation claims as well as any new claims that may be asserted against this fund. Pursuant to the settlement agreement, the FERC made no findings of fact or conclusions of law. In addition, the settlement agreement specifies that by executing the settlement agreement ETP does not admit or concede to the FERC or any third party any actual or potential fault, wrongdoing or liability in connection with its alleged conduct related to the FERC claims. The settlement agreement also requires ETP to maintain specified compliance programs and to conduct independent annual audits of such programs for a two-year period.

 

In September 2009, the FERC appointed an administrative law judge, or ALJ, to establish a process for potential claimants to make claims against the $25.0 million fund, to determine the validity of any such claims and to make a recommendation to the FERC relating to the application of this fund to any potential claimants. Pursuant to the process established by the ALJ, a number of parties submitted claims against this fund and, subsequent thereto, the ALJ made various determinations with respect to the validity of these claims and the methodology for making payments from the fund to claimants. In June 2010, each claimant that had been allocated a payment amount from the fund by the ALJ was required to make a determination as to whether to accept the ALJ’s recommended payment amount from the fund, and all such claimants accepted their allocated payment amounts. In connection with accepting the allocated payment amount, each such claimant was required to waive and release all claims against ETP related to this matter. The claims of third parties that did not accept a payment from the fund are not affected by the ALJ’s fund allocation process.

 

Taking into account the release of claims pursuant to the ALJ fund allocation process discussed above that were the subject of pending legal proceedings, ETP remains a party in three legal proceedings that assert 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 these legal proceedings involves a complaint filed in February 2008 by 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. ETP 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 ETP’s motion for summary judgment on that issue. The plaintiff appealed this determination to the First Court of Appeals, Houston, Texas. Both parties submitted briefs related to this appeal, and oral arguments to this appeal were made before the First Court of Appeals on June 9, 2010. On June 24, 2010, the First Court of Appeals issued an opinion affirming the judgment of the lower court granting ETP’s motion for summary judgment. No motion for rehearing was timely filed.

 

In October 2007, a consolidated 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 intentional and unlawful manipulation of the price of natural gas futures and options contracts on the New York Mercantile Exchange, or NYMEX, in violation of the Commodity Exchange Act, or CEA. It is further alleged that during the class period from December 29, 2003 to December 31, 2005, ETP had the market power to manipulate index prices, and that ETP 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. On April 9, 2009, the plaintiffs moved for reconsideration of

the order dismissing the complaint, and on August 26, 2009, the court denied the plaintiffs’ motion for reconsideration. On September 24, 2009, the plaintiffs filed a Notice of Appeal with the United States Court of Appeals for the Fifth Circuit. Both parties submitted briefs related to the motion for reconsideration, and oral arguments on this motion were made before the Fifth Circuit on April 28, 2010. On June 23, 2010, the Fifth Circuit issued an opinion affirming the lower court’s order dismissing the plaintiff’s complaint. No petition for rehearing was timely filed.

 

In March 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 antitrust injury, but granted leave to amend. On April 23, 2009, the plaintiffs filed a motion for leave to amend to assert only one of the prior antitrust claims and to add 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 ETP’s motion to dismiss the complaint. On September 18, 2009, the plaintiff filed a Notice of Appeal with the United States Court of Appeals for the Fifth Circuit appealing only the common law fraud claim. Both parties submitted briefs related to the judgment regarding the common law fraud claim, and oral arguments were made before the Fifth Circuit on April 27, 2010. We are awaiting a decision from the Fifth Circuit.

 

ETP is expensing the legal fees, consultants’ fees and other expenses relating to these matters in the periods in which such costs are incurred. ETP records accruals for litigation and other contingencies whenever required by applicable accounting standards. Based on the terms of the settlement agreement with the FERC described above, ETP made the $5.0 million payment and established the $25.0 million fund in October 2009. ETP expects the after-tax cash impact of the settlement to be less than $30.0 million due to tax benefits resulting from the portion of the payment that is used to satisfy third party claims, which ETP expects to realize in future periods. Although this payment covers the $25.0 million required by the settlement agreement to be applied to resolve third-party claims, including the existing third-party litigation described above, it is possible that the amount ETP becomes obliged to pay to resolve third-party litigation related to these matters, whether on a negotiated settlement basis or otherwise, will exceed the amount of the payment related to those matters. In accordance with applicable accounting standards, ETP will review the amount of its accrual related to these matters as developments related to these matters occur and ETP will adjust its accrual if it determines that it is probable that the amount it may ultimately become obliged to pay as a result of the final resolution of these matters is greater than the amount of its accrual for these matters. As its 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 ETP’s cash available to service its 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, ETP may experience a material adverse impact on its results of operations and its liquidity.

 

The profitability of certain activities in midstream and intrastate transportation and storage operations is largely dependent upon natural gas commodity prices, price spreads between two or more physical locations and market demand for natural gas and NGLs, which are factors beyond ETP’s or Regency’s control and have been volatile.

 

Income from midstream and intrastate transportation and storage operations is exposed to risks due to fluctuations in commodity prices. In the past, the prices of natural gas and NGLs have been extremely volatile, and ETP and Regency expect this volatility to continue. For example, during the year ended

December 31, 2009, the NYMEX settlement price for the prompt month contract ranged from a high of $6.14 per million Btu, or MMBtu, to a low of $2.84 per MMBtu. Additionally, a composite of the Mt. Belvieu average NGLs price based upon ETP’s average NGLs composition during the year ended December 31, 2009 ranged from a high of approximately $1.17 per gallon to a low of approximately $0.57 per gallon.

 

The markets and prices for natural gas and NGLs depend upon factors beyond ETP’s and Regency’s control. These factors include demand for oil, natural gas and NGLs, which fluctuate with changes in market and economic conditions, and other factors, including:

 

 

The use of derivative financial instruments could result in material financial losses by ETP and Regency.

 

From time to time, ETP and Regency have sought to limit a portion of the adverse effects resulting from changes in natural gas and other commodity prices and interest rates by using derivative financial instruments and other risk management mechanisms. To the extent that either ETP or Regency hedges its commodity price and interest rate exposures, it foregoes the benefits it would otherwise experience if commodity prices or interest rates were to change favorably. In addition, even though monitored by management, ETP’s and Regency’s derivatives activities can result in losses. Such losses could occur under various circumstances, including if a counterparty does not perform its obligations under the derivative arrangement, the hedge is imperfect, commodity prices move unfavorably related to ETP’s or Regency’s physical or financial positions, or internal hedging policies and procedures are not followed.

 

ETP’s and Regency’s success depends upon their ability to continually contract for new sources of natural gas supply.

 

In order to maintain or increase throughput levels on ETP’s and Regency’s gathering and transportation pipeline systems and asset utilization rates at their treating and processing plants, ETP and Regency must continually contract for new natural gas supplies and natural gas transportation services. ETP and Regency may not be able to obtain additional contracts for natural gas supplies for their natural gas gathering systems, and they may be unable to maintain or increase the levels of natural gas throughput on their transportation pipelines. The primary factors affecting ETP’s and Regency’s ability to connect new supplies of natural gas to their gathering systems include its success in contracting for existing natural gas supplies that are not committed to other systems and the level of drilling activity and production of natural gas near ETP’s and Regency’s gathering systems or in areas that provide access to its transportation pipelines or markets to which their systems connect. The primary factors affecting ETP’s and Regency’s ability to attract customers to their transportation pipelines consist of their access to other natural gas pipelines, natural gas markets, natural gas-fired power plants and other industrial end-users and the level of drilling and production of natural gas in areas connected to these pipelines and systems.

 

Fluctuations in energy prices can greatly affect production rates and investments by third parties in the development of new oil and natural gas reserves. Drilling activity and production generally decrease as oil and natural gas prices decrease. ETP and Regency have no control over the level of drilling activity in their areas

of operation, the amount of reserves underlying the wells and the rate at which production from a well will decline, sometimes referred to as the “decline rate.” In addition, ETP and Regency have no control over producers or their production decisions, which are affected by, among other things, prevailing and projected energy prices, demand for hydrocarbons, the level of reserves, geological considerations, governmental regulation and the availability and cost of capital.

 

A substantial portion of ETP’s and Regency’s assets, including their gathering systems and their processing and treating plants, are connected to natural gas reserves and wells for which the production will naturally decline over time. Accordingly, ETP’s and Regency’s cash flows will also decline unless they are able to access new supplies of natural gas by connecting additional production to these systems.

 

ETP’s and Regency’s transportation pipelines are also dependent upon natural gas production in areas served by their pipelines or in areas served by other gathering systems or transportation pipelines that connect with their transportation pipelines. A material decrease in natural gas production in ETP’s and Regency’s areas of operation or in other areas that are connected to ETP’s or Regency’s areas of operation by third-party gathering systems or pipelines, as a result of depressed commodity prices or otherwise, would result in a decline in the volume of natural gas ETP and Regency handle, which would reduce their respective revenues and operating income. In addition, ETP’s and Regency’s future growth will depend, in part, upon whether they can contract for additional supplies at a greater rate than the natural decline rate in their currently connected supplies.

 

ETP and Regency may not be able to fully execute their growth strategies if they encounter increased competition for qualified assets.

 

Each of ETP and Regency have a strategy that contemplates growth through the development and acquisition of a wide range of midstream and other energy infrastructure assets while maintaining a strong balance sheet. These strategies include constructing and acquiring additional assets and businesses to enhance their ability to compete effectively and diversify their respective asset portfolios, thereby providing more stable cash flow. ETP and Regency regularly consider and enter into discussions regarding, and are currently contemplating, the acquisition of additional assets and businesses, stand-alone development projects or other transactions that ETP and Regency believe will present opportunities to realize synergies and increase cash flow.

 

Consistent with their acquisition strategies, management of each of ETP and Regency is continuously engaged in discussions with potential sellers regarding the possible acquisition of additional assets or businesses. Such acquisition efforts may involve ETP or Regency management’s participation in processes that involve a number of potential buyers, commonly referred to as “auction” processes, as well as situations in which ETP or Regency believes it is the only party or one of a very limited number of potential buyers in negotiations with the potential seller. We cannot assure you that ETP’s or Regency’s current or future acquisition efforts will be successful or that any such acquisition will be completed on favorable terms.

 

In addition, each of ETP and Regency is experiencing increased competition for the assets it purchases or contemplates purchasing. Increased competition for a limited pool of assets could result in ETP or Regency losing to other bidders more often or acquiring assets at higher prices, both of which would limit ETP’s or Regency’s ability to fully execute its growth strategy. Inability to execute their respective growth strategies may materially adversely impact ETP’s or Regency’s results of operations.

 

If ETP and Regency do not make acquisitions on economically acceptable terms, their future growth could be limited.

 

ETP’s and Regency’s results of operations and their ability to grow and to increase distributions to unitholders will depend in part on their ability to make acquisitions that are accretive to their respective distributable cash flow.

 

ETP and Regency may be unable to make accretive acquisitions for any of the following reasons, among others:

 

 

 

Furthermore, even if ETP or Regency consummates acquisitions that it believes will be accretive, those acquisitions may in fact adversely affect its results of operations or result in a decrease in distributable cash flow per unit. Any acquisition involves potential risks, including the risk that ETP or Regency may:

 

 

If ETP and Regency consummate future acquisitions, their respective capitalization and results of operations may change significantly. As ETP and Regency determine the application of their funds and other resources, you will not have an opportunity to evaluate the economics, financial and other relevant information that ETP and Regency will consider.

 

If ETP and Regency do not continue to construct new pipelines, their future growth could be limited.

 

During the past several years, ETP and Regency have constructed several new pipelines, and ETP and Regency are currently involved in constructing additional pipelines. ETP’s and Regency’s results of operations and their ability to grow and to increase distributable cash flow will depend, in part, on their ability to construct pipelines that are accretive to their respective distributable cash flow. ETP or Regency may be unable to construct pipelines that are accretive to distributable cash flow for any of the following reasons, among others:

 

 

Furthermore, even if ETP or Regency constructs a pipeline that it believes will be accretive, the pipeline may in fact adversely affect its results of operations or fail to achieve results projected prior to commencement of construction.

Expanding ETP’s and Regency’s business by constructing new pipelines and treating and processing facilities subjects ETP and Regency to risks.

 

One of the ways that ETP and Regency have grown their respective businesses is through the construction of additions to existing gathering, compression, treating, processing and transportation systems. The construction of a new pipeline or the expansion of an existing pipeline, by adding additional compression capabilities or by adding a second pipeline along an existing pipeline, and the construction of new processing or treating facilities, involve numerous regulatory, environmental, political and legal uncertainties beyond ETP’s and Regency’s control and require the expenditure of significant amounts of capital to be financed through borrowings, the issuance of additional equity or from operating cash flow. If ETP or Regency undertake these projects, they may not be completed on schedule or at all or at the budgeted cost. For example, ETP currently has several major expansion and new build projects planned or underway, including the Fayetteville Express pipeline and the Tiger pipeline. A variety of factors outside ETP’s or Regency’s control, such as weather, natural disasters and difficulties in obtaining permits and rights-of-way or other regulatory approvals, as well as the performance by third-party contractors has resulted in, and may continue to result in, increased costs or delays in construction. Cost overruns or delays in completing a project could have a material adverse effect on ETP’s or Regency’s results of operations and cash flows. Moreover, revenues may not increase immediately following the completion of particular projects. For instance, if ETP or Regency builds a new pipeline, the construction will occur over an extended period of time, but ETP or Regency, as applicable, may not materially increase its revenues until long after the project’s completion. In addition, the success of a pipeline construction project will likely depend upon the level of natural gas exploration and development drilling activity and the demand for pipeline transportation in the areas proposed to be serviced by the project as well as ETP’s and Regency’s abilities to obtain commitments from producers in these areas to utilize the newly constructed pipelines. In this regard, ETP and Regency may construct facilities to capture anticipated future growth in natural gas production in a region in which such growth does not materialize. As a result, new facilities may be unable to attract enough throughput or contracted capacity reservation commitments to achieve ETP’s or Regency’s expected investment return, which could adversely affect its results of operations and financial condition.

 

ETP and Regency depend on certain key producers for a significant portion of their supplies of natural gas. The loss of, or reduction in, any of these key producers could adversely affect ETP’s or Regency’s respective business and operating results.

 

ETP and Regency rely on a limited number of producers for a significant portion of their natural gas supplies. These contracts have terms that range from month-to-month to life of lease. As these contracts expire, ETP and Regency will have to negotiate extensions or renewals or replace the contracts with those of other suppliers. ETP and Regency may be unable to obtain new or renewed contracts on favorable terms, if at all. The loss of all or even a portion of the volumes of natural gas supplied by these producers and other customers, as a result of competition or otherwise, could have a material adverse effect on ETP’s and Regency’s business, results of operations, and financial condition.

 

ETP and Regency depend on key customers to transport natural gas through their pipelines.

 

ETP and Regency rely on a limited number of major shippers to transport certain minimum volumes of natural gas on their respective pipelines, and Regency maintains contracts for compression services with a limited number of key customers. The failure of the major shippers on ETP’s or Regency’s pipelines or of other key customers to fulfill their contractual obligations could have a material adverse effect on the cash flow and results of operations of us, ETP or Regency if ETP or Regency, as applicable, was not able to replace these customers under arrangements that provide similar economic benefits as these existing contracts.

 

Federal, state or local regulatory measures could adversely affect the business and operations of ETP’s and Regency’s midstream and intrastate assets.

 

Midstream and intrastate transportation and storage operations are generally exempt from FERC regulation under the NGA, but FERC regulation still significantly affects ETP’s and Regency’s businesses and

the market for their products. The rates, terms and conditions of some of the transportation and storage services ETP provides on the HPL System, the East Texas pipeline, the Oasis pipeline and the ET Fuel System are subject to FERC regulation under Section 311 of the Natural Gas Policy Act, or NGPA; similarly, FERC regulates the rates, terms and conditions of services with regard to Section 311 service provided by RIGS. Under Section 311, rates charged for transportation and storage must be fair and equitable. Amounts collected in excess of fair and equitable rates are subject to refund with interest, and the terms and conditions of service, set forth in the pipeline’s statement of operating conditions, are subject to FERC review and approval. Should FERC determine not to authorize rates equal to or greater than its currently approved rates, ETP or Regency may suffer a loss of revenue. Failure to observe the service limitations applicable to storage and transportation service under Section 311, failure to comply with the rates approved by FERC for Section 311 service, and failure to comply with the terms and conditions of service established in the pipeline’s FERC-approved statement of operating conditions could result in an alteration of jurisdictional status and/or the imposition of administrative, civil and criminal penalties.

 

FERC has adopted new market-monitoring and annual and quarterly reporting regulations, which regulations are applicable to many intrastate pipelines as well as other entities that are otherwise not subject to FERC’s NGA jurisdiction, such as natural gas marketers. These regulations are intended to increase the transparency of wholesale energy markets, to protect the integrity of such markets, and to improve FERC’s ability to assess market forces and detect market manipulation. These regulations may result in administrative burdens and additional compliance costs for ETP and Regency.

 

The expansion phase of RIGS in North Louisiana was placed in service on January 27, 2010. On January 28, 2010, Regency filed and implemented revised, maximum rates with FERC, which new rates were designed to reflect, on a system-wide basis, the costs of and contracts for the use of the expanded RIGS system. The rate case reflected a substantial increase in the rate base of RIGS, as well as increased costs, including return and income taxes, arising from the Haynesville Expansion Project and Red River Lateral.

 

On June 15, 2010, Regency filed an uncontested offer of settlement proposing to resolve all issues related to RIGS’ January 28, 2010 rate filing. Among other things, the offer of settlement would allow RIGS to place the revised maximum rates in effect on February 1, 2010 and to avoid any refund obligations. RIGS’ shippers are subject, in large part, to fixed or capped contract rates and as such may be largely unaffected by any increases in RIGS’ maximum rates. The proposed settlement, which was made subject to a shortened comment period, was not protested or made the subject of adverse comments by any party. The uncontested offer of settlement was accepted by FERC by order issued June 24, 2010.

 

Although the FERC order accepting the Regency’s offer of settlement constitutes a final agency action it is still subject to possible rehearing and judicial appeal. It is thus still possible that FERC may undertake a comprehensive review of the new rates and Regency’s operations and terms of service. FERC has the statutory authority to require a refund, with interest, of Regency’s rates from February 1, 2010. The timing and outcome of this proceeding thus remains uncertain. If FERC requires adjustments, including potential refunds, to the revised transportation rate, or if any contract rates to which Regency has agreed are below the maximum rates it otherwise could charge, Regency’s cash flows and ability to make distributions may be adversely affected. Such results could have a material adverse affect on HPC, the owner of Regency, and Regency’s results of operations and business through its ownership interest in HPC.

 

ETP and Regency hold transportation contracts with interstate pipelines that are subject to FERC regulation. As shippers on an interstate pipeline, ETP and Regency are subject to FERC requirements related to use of the interstate capacity. Any failure on ETP’s or Regency’s part to comply with the FERC’s regulations or orders could result in the imposition of administrative, civil and criminal penalties.

 

ETP’s intrastate transportation and storage operations are subject to state regulation in Texas, Louisiana, Utah and Colorado, the states in which ETP operates these types of natural gas facilities. Regency’s intrastate transportation operations are subject to state regulation in Louisiana, the state in which Regency operates this type of natural gas facility. ETP’s and Regency’s intrastate transportation operations located in Texas are subject to regulation as common purchasers and as gas utilities by the Texas Railroad Commission, or TRRC. The TRRC’s jurisdiction extends to both rates and pipeline safety. The rates ETP charges for transportation

and storage services are deemed just and reasonable under Texas law unless challenged in a complaint. Should a complaint be filed or should regulation become more active, ETP’s business may be adversely affected.

 

ETP’s and Regency’s midstream and intrastate transportation operations are also subject to ratable take and common purchaser statutes in the states in which they have those types of operations. Ratable take statutes generally require gatherers to take, without undue discrimination, natural gas production that may be tendered to the gatherer for handling. Similarly, common purchaser statutes generally require gatherers to purchase without undue discrimination as to source of supply or producer. These statutes have the effect of restricting ETP’s or Regency’s rights as an owner of gathering facilities to decide with whom it contracts to purchase or transport natural gas. Federal law leaves any economic regulation of natural gas gathering to the states, and some of the states in which ETP and Regency operate have adopted complaint-based or other limited economic regulation of natural gas gathering activities. States in which ETP and Regency operate that have adopted some form of complaint-based regulation, like Texas, generally allow natural gas producers and shippers to file complaints with state regulators in an effort to resolve grievances relating to natural gas gathering rates and access. Other state and local regulations also affect ETP’s or Regency’s business.

 

ETP’s storage facilities are also subject to the jurisdiction of the TRRC. Generally, the TRRC has jurisdiction over all underground storage of natural gas in Texas, unless the facility is part of an interstate gas pipeline facility. Because the natural gas storage facilities of the ET Fuel System and HPL System are only connected to intrastate gas pipelines, they fall within the TRRC’s jurisdiction and must be operated pursuant to TRRC permit. Certain changes in ownership or operation of TRRC-jurisdictional storage facilities, such as facility expansions and increases in the maximum operating pressure, must be approved by the TRRC through an amendment to the facility’s existing permit. In addition, the TRRC must approve transfers of the permits. Texas laws and regulations also require all natural gas storage facilities to be operated to prevent waste, the uncontrolled escape of gas, pollution and danger to life or property. Accordingly, the TRRC requires natural gas storage facilities to implement certain safety, monitoring, reporting and record-keeping measures.

 

Violations of the terms and provisions of a TRRC permit or a TRRC order or regulation can result in the modification, cancellation or suspension of an operating permit and/or civil penalties, injunctive relief, or both.

 

The states in which ETP and Regency conduct operations administer federal pipeline safety standards under the Pipeline Safety Act of 1968, or the Pipeline Safety Act, which requires certain pipeline companies to comply with safety standards in constructing and operating the pipelines, and subjects pipelines to regular inspections. Some of ETP’s gathering facilities are exempt from the requirements of the Pipeline Safety Act. In respect to recent pipeline accidents in other parts of the country, Congress and the Department of Transportation have passed or are considering heightened pipeline safety requirements.

 

Failure to comply with applicable laws and regulations could result in the imposition of administrative, civil and criminal remedies.

 

ETP’s and Regency’s interstate pipelines are subject to laws, regulations and policies governing the rates they are allowed to charge for their services.

 

Laws, regulations and policies governing interstate natural gas pipeline rates could affect the ability of ETP’s and Regency’s interstate pipelines to establish rates, to charge rates that would cover future increases in its costs, or to continue to collect rates that cover current costs. NGA-jurisdictional natural gas companies must charge rates that are deemed just and reasonable by FERC. The rates charged by natural gas companies are generally required to be on file with FERC in FERC-approved tariffs. Pursuant to the NGA, existing tariff rates may be challenged by complaint and rate increases proposed by the natural gas company may be challenged by protest. ETP and Regency also may be limited by the terms of negotiated rate agreements from seeking future rate increases, or constrained by competitive factors from charging its FERC-approved maximum just and reasonable rates. Further, rates must, for the most part, be cost-based and FERC may, on a prospective basis, order refunds of amounts collected under rates that have been found by FERC to be in excess of a just and reasonable level.

Transwestern filed a general rate case in September 2006. The rates in this proceeding were settled and are final and no longer subject to refund. Transwestern is not required to file a new general rate case until October 2011. However, shippers (other than shippers that have agreed, as parties to the Stipulation and Agreement, not to challenge Transwestern’s tariff rates through the remaining term of the settlement) have the statutory ability to challenge the lawfulness of tariff rates that have become final and effective. FERC may also investigate such rates absent shipper complaint.

 

Most of the rates to be paid by the initial shippers on the Midcontinent Express pipeline are established pursuant to long-term, negotiated rate transportation agreements. Other prospective shippers on Midcontinent Express pipeline that elect not to pay a negotiated rate for service may opt instead to pay a cost-based recourse rate established by FERC as part of MEP’s certificate of public convenience and necessity. Negotiated rate agreements generally provide a degree of certainty to the pipeline and shipper as to a fixed rate during the term of the relevant transportation agreement, but such agreements can limit the pipeline’s future ability to collect costs associated with construction and operation of the pipeline that might be higher than anticipated at the time the negotiated rate agreement was entered. FERC applications for authorization to construct, own and operate the Fayetteville Express pipeline and the Tiger pipeline were filed on June 15, 2009 and August 31, 2009, respectively. On December 17, 2009, the FERC issued an order granting authorization to construct, own and operated the Fayetteville Express pipeline, subject to certain conditions. FERC granted the requested authority to construct and operate the Tiger pipeline on April 7, 2010. On June 15, 2010, ETC Tiger Pipeline, LLC (ETC Tiger) filed an application to expand the Tiger pipeline. FERC has not yet ruled on this application.

 

Any successful challenge to the rates of ETP’s interstate natural gas companies, whether brought by complaint, protest or investigation, could reduce its revenues associated with providing transportation services on a prospective basis. We and ETP cannot assure you that ETP’s interstate pipelines will be able to recover all of their costs through existing or future rates.

 

The ability of interstate pipelines held in tax-pass-through entities, like ETP and Regency, to include an allowance for income taxes in their regulated rates has been subject to extensive litigation before FERC and the courts, and the FERC’s current policy is subject to future refinement or change.

 

The ability of interstate pipelines held in tax-pass-through entities, like ETP and Regency, to include an allowance for income taxes as a cost-of-service element in their regulated rates has been subject to extensive litigation before FERC and the courts for a number of years. It is currently FERC’s policy to permit pipelines to include in cost-of-service a tax allowance to reflect actual or potential income tax liability on their public utility income attributable to all partnership or limited liability company interests, if the ultimate owner of the interest has an actual or potential income tax liability on such income. Whether a pipeline’s owners have such actual or potential income tax liability will be reviewed by FERC on a case-by-case basis. Under the FERC’s policy, ETP and Regency thus remain eligible to include an income tax allowance in the tariff rates their interstate pipelines charge for interstate natural gas transportation. The application of that policy remains subject to future refinement or change by FERC. With regard to rates charged and collected by Transwestern, the allowance for income taxes as a cost-of-service element in ETP’s tariff rates is generally not subject to challenge prior to the expiration of its settlement agreement in 2011.

 

The interstate pipelines are subject to laws, regulations and policies governing terms and conditions of service, which could adversely affect their business and operations.

 

In addition to rate oversight, FERC’s regulatory authority extends to many other aspects of the business and operations of ETP’s and Regency’s interstate pipelines, including:

 

 

 

Compliance with these requirements can be costly and burdensome. Future changes to laws, regulations and policies in these areas may impair the ability of ETP’s and Regency’s interstate pipelines to compete for business, may impair their ability to recover costs, or may increase the cost and burden of operation.

 

ETP and Regency must on occasion rely upon rulings by FERC or other governmental authorities to carry out certain of their business plans. For example, in order to carry out its plan to construct the Fayetteville Express and Tiger pipelines ETP has had to, among other things, file and support before FERC NGA Section 7(c) applications for certificates of public convenience and necessity to build, own and operate such facilities. Although the FERC has authorized the construction and operation of the Fayetteville Express pipeline, subject to certain conditions, this order is subject to limited rehearing and possible judicial review. The FERC has authorized construction and operation of the Tiger pipeline. However, an application filed by ETP to expand the Tiger pipeline, filed in June 2010, has not yet been ruled upon by FERC. We and ETP cannot guarantee that the FERC will authorize construction and operation of that expansion or any future interstate natural gas transportation project ETP might propose. Moreover, there is no guarantee that, if granted, certificate authority for the Tiger pipeline expansion, or any future interstate projects, will be granted in a timely manner or will be free from potentially burdensome conditions.

 

Similarly, MEP was required to obtain from FERC a certificate of public convenience and necessity to build, own and operate the Midcontinent Express pipeline. Although the FERC has granted such certificate authority, the FERC’s certificate order is currently pending judicial review before the United States Court of Appeals for the District of Columbia Circuit. ETP and Regency cannot guarantee that the court will affirm, in all material respects, the FERC’s July 25, 2008 Midcontinent Express certificate order, or that the FERC will not materially alter the certificate order on any remand that might be ordered by the court. There are also pending requests for rehearing related to certain of the FERC’s post-certification orders related to the Midcontinent Express pipeline project. ETP and Regency cannot guarantee that these post-certification orders will not be altered on rehearing or that these orders will not be subject to judicial review.

 

Failure to comply with all applicable FERC-administered statutes, rules, regulations and orders, could bring substantial penalties and fines. Under the Energy Policy Act of 2005, FERC has civil penalty authority under the NGA to impose penalties for current violations of up to $1.0 million per day for each violation. FERC possesses similar authority under the NGPA.

 

Finally, we, ETP and Regency cannot give any assurance regarding the likely future regulations under which ETP or Regency will operate its interstate pipelines or the effect such regulation could have on its business, financial condition, and results of operations.

 

A change in the characterization of some of ETP’s or Regency’s assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation and cost.

 

The distinction between FERC-regulated transmission service and intrastate transportation or gathering services is the subject of regular litigation at FERC and in the courts and of policy discussions at FERC. The classification and regulation of some of the ETP or Regency gathering facilities or intrastate transportation pipelines may be subject to change based on future determinations by FERC, the courts, or Congress. Such a change could result in increased regulation by FERC, which may cause revenues to decline and operating expenses to increase.

 

ETP’s and Regency’s businesses involve hazardous substances and may be adversely affected by environmental regulation.

 

ETP’s and Regency’s natural gas operations, as well as ETP’s propane operations, are subject to stringent federal, state, and local environmental laws and regulations governing the discharge of materials into the

environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of permits for ETP’s and Regency’s operations, result in capital expenditures to manage, limit, or prevent emissions, discharges, or releases of various materials from ETP’s and Regency’s pipelines, plants, and facilities, and impose substantial liabilities for pollution resulting from ETP’s and Regency’s operations. Several governmental authorities, such as the U.S. Environmental Protection Agency, or the EPA, have the power to enforce compliance with these laws and regulations and the permits issued under them and frequently mandate difficult and costly remediation measures and other actions. Failure to comply with these laws, regulations, and permits may result in the assessment of administrative, civil, and criminal penalties, the imposition of remedial obligations, and the issuance of injunctive relief.

 

ETP and Regency may incur substantial environmental costs and liabilities because of the underlying risk inherent to its operations. Environmental laws provide for joint and several strict liability for cleanup costs incurred to address discharges or releases of petroleum hydrocarbons or wastes on, under, or from ETP’s and Regency’s properties and facilities, many of which have been used for industrial activities for a number of years, even if such discharges were caused by ETP’s or Regency’s respective predecessors. Private parties, including the owners of properties through which ETP’s and Regency’s gathering systems pass or facilities where their petroleum hydrocarbons or wastes are taken for reclamation or disposal, may also have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property damage. For example, the accrued future estimated cost of remediation activities relating to ETP’s Transwestern pipeline operations is approximately $8.5 million, and such activities are expected to continue through 2018. Similarly, as of June 30, 2010, Regency had escrowed approximately $1.0 million of a former operator’s funds to secure that operator’s obligations to complete remediation of a few sites now operated or leased by Regency.

 

Changes in environmental laws and regulations occur frequently, and changes that result in significantly more stringent and costly waste handling, emission standards, or storage, transport, disposal or remediation requirements could have a material adverse effect on ETP’s and Regency’s operations or financial position. For example, the EPA in 2008 lowered the federal ozone standard from 0.08 parts per million to 0.075 parts per million, which will require the environmental agencies in states with areas that do not currently meet this standard to adopt new rules to further reduce NOx and other ozone precursor emissions. The EPA recently proposed to lower the standard even further, to somewhere between 0.060 and 0.070 pm. ETP and Regency have previously been able to satisfy the more stringent NOx emission reduction requirements that affect its compressor units in ozone non- attainment areas at reasonable cost, but there is no guarantee that the changes ETP or Regency may have to make in the future to meet the new ozone standard or other evolving standards will not require it to incur costs that could be material to its operations.

 

Climate change legislation or regulations restricting emissions of “greenhouse gases” could result in increased operating costs and reduced demand for the natural gas and other hydrocarbon products that ETP and Regency transport, store or otherwise handle in connection with their transportation, storage and midstream services.

 

On December 15, 2009, the EPA published its findings that emissions of carbon dioxide, methane and other greenhouse gases present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. These findings allow the EPA to adopt and implement regulations that would restrict emissions of greenhouse gases under existing provisions of the federal Clean Air Art. Accordingly, the EPA recently adopted two sets of regulations addressing greenhouse gas emissions under the Clean Air Act. The first limits emissions of greenhouse gases from motor vehicles beginning with the 2012 model year. EPA has asserted that these final motor vehicle greenhouse gas emission standards trigger Clean Air Act construction and operating permit requirements for stationary sources, commencing when the motor vehicle standards take effect on January 2, 2011. On June 3, 2010, EPA published its final rule to address the permitting of greenhouse gas emissions from stationary sources under the Prevention of Significant Deterioration (“PSD”) and Title V permitting programs. This rule “tailors” these permitting programs to apply to certain stationary sources of greenhouse gas emissions in a multi-step process, with the largest sources first subject to permitting. It is widely expected that facilities required to obtain PSD permits for their greenhouse gas

emissions will be required to also reduce those emissions according to “best available control technology” standards for greenhouse gases that have yet to be developed. Any regulatory or permitting obligation that limits emissions of greenhouse gases could require ETP and Regency to incur costs to reduce emissions of greenhouse gases associated with their operations and also could adversely affect demand for the natural gas and other hydrocarbon products that ETP and Regency transport, store, process, or otherwise handle in connection with their services.

 

In addition, on October 30, 2009, the EPA published a final rule requiring the reporting of greenhouse gas emissions from specified large greenhouse gas sources in the United States on an annual basis, beginning in 2011 for emissions occurring after January 1, 2010. Recently, in April 2010, the EPA proposed to expand its greenhouse gas reporting rule to include onshore oil and natural gas production, processing, transmission, storage, and distribution facilities. If the proposed rule is finalized as proposed, reporting of greenhouse gas emissions from such facilities, including many of ETP’s and Regency’s facilities, would be required on an annual basis, with reporting beginning in 2012 for emissions occurring in 2011.

 

In June 2009, the United States House of Representatives passed the “American Clean Energy and Security Act of 2009,” or “ACESA,” which would establish an economy-wide cap on emissions of greenhouse gases in the United States and would require most sources of greenhouse gas emissions to obtain and hold “allowances” corresponding to their annual emissions of greenhouse gases. By steadily reducing the number of available allowances over time, ACESA would require a 17% reduction in greenhouse gas emissions from 2005 levels by 2020 and just over an 80% reduction of such emissions by 2050. Legislation to reduce emissions of greenhouse gases by comparable amounts is currently pending in the United States Senate, and more than one-third of the states have already taken legal measures to reduce emissions of greenhouse gases, primarily through the planned development of greenhouse gas emission inventories and /or regional greenhouse gas cap and trade programs. The passage of legislation that limits emissions of greenhouse gases from the equipment and operations of ETP and Regency could require ETP and Regency to incur costs to reduce the greenhouse gas emissions from their own operations, and it could also adversely affect demand for their transportation, storage, and midstream services.

 

Some have suggested that one consequence of climate change could be increased severity of extreme weather, such as increased hurricanes and floods. If such effects were to occur, the operations of ETP and Regency could be adversely affected in various ways, including damages to their facilities from powerful winds or rising waters, or increased costs for insurance. Another possible consequence of climate change is increased volatility in seasonal temperatures. The market for ETP’s propane and ETP’s and Regency’s natural gas is generally improved by periods of colder weather and impaired by periods of warmer weather, so any changes in climate could affect the market for the fuels that ETP and Regency produce. Despite the use of the term “global warming” as a shorthand for climate change, some studies indicate that climate change could cause some areas to experience temperatures substantially colder than their historical averages. As a result, it is difficult to predict how the market for ETP’s and Regency’s fuels could be affected by increased temperature volatility, although if there is an overall trend of warmer temperatures, it would be expected to have an adverse effect on the business of ETP and Regency.

 

Federal and state legislative and regulatory initiatives relating to hydraulic fracturing could slow ETP’s and Regency’s customers’ development of shale gas supplies.

 

Congress is considering legislation to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and natural gas industry in the hydraulic fracturing process. Hydraulic fracturing is an important and commonly used process in the completion of unconventional natural gas wells in shale formations. This process involves the injection of water, sand and chemicals under pressure into rock formations to stimulate natural gas production. Sponsors of these bills, which are pending in the Energy and Commerce Committee and the Environmental and Public Works Committee of the House of Representatives and Senate, respectively, have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that chemicals used in the fracturing process had adversely affected groundwater. If adopted, these bills also would establish additional federal permitting and regulatory requirements that could lead to operational

delays or increased operating costs. In addition, the EPA recently announced that it was beginning a comprehensive research study on the potential impacts that hydraulic fracturing may have on water quality and public health. Consequently, even if the introduced bills are not enacted, the EPA’s study could spur further action at a later date towards federal legislation and regulation of hydraulic fracturing activities. Legislative and regulatory initiatives have also arisen in several states, including New York and Pennsylvania. By slowing the pace of natural gas development, the imposition of additional regulatory requirements on hydraulic fracturing could affect the financial performance of ETP’s and Regency’s existing and planned pipeline systems, particularly those serving the Barnett and Haynesville areas or other shale gas plays.

 

Any reduction in the capacity of, or the allocations to, ETP’s and Regency’s shippers in interconnecting, third-party pipelines could cause a reduction of volumes transported in ETP’s and Regency’s pipelines, which would adversely affect revenues and cash flow.

 

Users of ETP’s and Regency’s pipelines are dependent upon connections to and from third-party pipelines to receive and deliver natural gas and NGLs. Any reduction in the capacities of these interconnecting pipelines due to testing, line repair, reduced operating pressures, or other causes could result in reduced volumes being transported in ETP’s and Regency’s pipelines. Similarly, if additional shippers begin transporting volumes of natural gas and NGLs over interconnecting pipelines, the allocations to existing shippers in these pipelines would be reduced, which could also reduce volumes transported in ETP’s and Regency’s pipelines. Any reduction in volumes transported in ETP’s and Regency’s pipelines would adversely affect their revenues and cash flow.

 

ETP and Regency encounter competition from other midstream, transportation and storage companies and propane companies.

 

ETP and Regency compete with similar enterprises in each of their areas of operations. Some of their competitors are large oil, natural gas, gathering and processing and natural gas pipeline companies that have greater financial resources and access to supplies of natural gas. In addition, ETP’s and Regency’s customers who are significant producers or consumers of NGLs may develop their own processing facilities in lieu of using those of ETP or Regency. Similarly, competitors may establish new connections with pipeline systems that would create additional competition for services that ETP and Regency provide to their customers. ETP’s and Regency’s ability to renew or replace existing contracts with their customers at rates sufficient to maintain current revenues and cash flows could be adversely affected by the activities of their competitors.

 

The Transwestern, Midcontinent Express and Gulf States pipelines (and upon completion the Fayetteville Express and Tiger pipelines) compete with other interstate and intrastate pipeline companies in the transportation and storage of natural gas. The principal elements of competition among pipelines are rates, terms of service and the flexibility and reliability of service. Natural gas competes with other forms of energy available to ETP’s and Regency’s customers and end-users, including electricity, coal and fuel oils. The primary competitive factor is price. Changes in the availability or price of natural gas and other forms of energy, the level of business activity, conservation, legislation and governmental regulations, the capability to convert to alternate fuels and other factors, including weather and natural gas storage levels, affect the levels of natural gas transportation volumes in the areas served by ETP’s and Regency’s pipelines.

 

ETP’s propane business competes with a number of large national and regional propane companies and several thousand small independent propane companies. Because of the relatively low barriers to entry into the retail propane market, there is potential for small independent propane retailers, as well as other companies that may not currently be engaged in retail propane distribution, to compete with ETP’s retail outlets. As a result, ETP is always subject to the risk of additional competition in the future. Generally, warmer-than-normal weather further intensifies competition. Most of ETP’s retail propane branch locations compete with several other marketers or distributors in their service areas. The principal factors influencing competition with other retail propane marketers are: